[Federal Register: August 26, 2009 (Volume 74, Number 164)]
[Proposed Rules]
[Page 43427-43613]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26au09-22]
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Part III
Federal Reserve System
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12 CFR Part 226
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Truth in Lending; Proposed Rule
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FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Regulation Z; Docket No. R-1367]
Truth in Lending
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Proposed rule; request for public comment.
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SUMMARY: The Board proposes to amend Regulation Z, which implements the
Truth in Lending Act (TILA), and the Official Staff Commentary to the
regulation, following a comprehensive review of TILA's rules for open-
end home-secured credit, or home-equity lines of credit (HELOCs).
The Board proposes changes to the format, timing, and content
requirements for the four main types of HELOC disclosures required by
Regulation Z: disclosures at application; disclosures at account
opening; periodic statements; and change-in-terms notices. The Board
proposes to replace disclosures required at the time that a consumer
applies for a HELOC with a one-page, Board-published summary of basic
information and risks regarding HELOCs. The Board also proposes to move
the timing of disclosures regarding a creditor's HELOC plan from the
time of application to within three business days after application,
and to require the disclosures to include significant transaction-
specific rates and terms.
The Board also proposes to provide additional guidance on when a
creditor may temporarily suspend advances on a HELOC or reduce the
credit limit, and what a creditor's obligations are concerning
reinstating such accounts. In addition, the proposal would limit the
ability of a creditor to terminate a HELOC for payment-related reasons;
a creditor could do so only if the consumer failed to make a required
minimum payment more than 30 days after the due date for that payment.
Changes to disclosure requirements related to suspension of HELOC
advances, reduction of the credit limit, and account terminations are
also proposed.
DATES: Comments must be received on or before December 24, 2009.
ADDRESSES: You may submit comments, identified by Docket No. R-1367, by
any of the following methods:
Agency Web Site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: regs.comments@federalreserve.gov. Include the
docket number in the subject line of the message.
FAX: (202) 452-3819 or (202) 452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue,
NW., Washington, DC 20551.
All public comments are available from the Board's Web site at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper in Room MP-500 of the Board's Martin Building (20th and C
Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Lorna M. Neill, Attorney; John Wood or
Krista Ayoub, Counsel; or Jelena McWilliams, Attorney, Division of
Consumer and Community Affairs, Board of Governors of the Federal
Reserve System, at (202) 452-3667 or 452-2412; for users of
Telecommunications Device for the Deaf (TDD) only, contact (202) 263-
4869.
SUPPLEMENTARY INFORMATION: The Board proposes changes to the format,
timing, and content requirements for the four main types of home equity
line of credit (HELOC) disclosures required by Regulation Z: (1)
Disclosures at application; (2) disclosures at account opening; (3)
periodic statements; and (4) change-in-terms notices. The Board
proposes to replace disclosures required at the time that a consumer
applies for a HELOC with a one-page, Board-published summary of basic
information and risks regarding HELOCs. The Board also proposes to move
the timing of disclosures regarding a creditor's HELOC plan from the
time of application to within three business days after application,
and to require the disclosures to include significant transaction-
specific rates and terms. At the time of account opening, the creditor
would be required to provide a disclosure with formatting similar to
that provided within three business days after application, but with
certain changes such as additional information regarding fees.
Formatting and other changes are proposed for the periodic statement,
such as elimination of the requirement to disclose the effective annual
percentage rate (APR) and a requirement to disclose the total of
interest and fees for both the period and the year to date. HELOC
creditors would be required to give consumers notice of a change in a
HELOC term at least 45 days in advance of the effective date of the
change.
The Board also proposes to provide additional guidance on when a
creditor may temporarily suspend advances on a HELOC or reduce the
credit limit, and what a creditor's obligations are concerning
reinstating such accounts. In addition, the proposal would limit the
ability of a creditor to terminate a HELOC for payment-related reasons;
a creditor could do so only if the consumer failed to make a required
minimum payment more than 30 days after the due date for that payment.
Changes to disclosure requirements related to suspension of HELOC
advances, reduction of the credit limit, and account terminations are
also proposed.
I. Background
A. TILA and Regulation Z
Congress enacted TILA based on findings that economic stability
would be enhanced and competition among consumer credit providers
strengthened by the informed use of credit resulting from consumers'
awareness of the cost of credit. The purposes of TILA are (1) to
provide meaningful disclosure of credit terms to enable consumers to
compare credit terms available in the marketplace more readily and
avoid the uninformed use of credit; and (2) to protect consumers
against inaccurate and unfair credit billing.
TILA's disclosures differ depending on whether consumer credit is
an open-end (revolving) plan or a closed-end (installment) loan. TILA
also contains procedural and substantive protections for consumers.
TILA is implemented by the Board's Regulation Z. An Official Staff
Commentary interprets the requirements of Regulation Z. By statute,
creditors that follow in good faith Board or official staff
interpretations are insulated from civil liability, criminal penalties,
or administrative sanction.
B. TILA and Regulation Z Provisions on Open-end Credit Secured by a
Consumer's Dwelling
In 1989, the Board revised Regulation Z to implement the Home
Equity Loan Consumer Protection Act of 1988 (Home Equity Loan Act)
(Pub. L. 100-709, enacted on Nov. 23, 1988). See 15 U.S.C. 1637a, 1647,
implemented by 54 FR 24670 (June 9, 1989) (1989 HELOC Final
[[Page 43429]]
Rule). The 1989 revisions required creditors to disclose extensive
information about HELOCs to consumers at the time of application and
again when consumers open a HELOC plan. They also imposed substantive
limitations on HELOC creditors--principally by prohibiting changing the
interest rate and other terms except under very limited circumstances.
Since 1989, the Board has revised the HELOC provisions in the
regulation and staff commentary from time to time as necessary,
although the disclosure requirements and substantive limitations have
remained substantially the same. See, e.g., 56 FR 13751 (April 4,
1991); 60 FR 15463 (March 24, 1995); 63 FR 16669 (April 6, 1998); 66 FR
17329 (March 30, 2001); 72 FR 63462 (November 9, 2007).
In January 2009, the Board published final rules regarding open-end
(not home-secured) credit (74 FR 5244 (January 29, 2009)) (January 2009
Regulation Z Rule), which were the result of the Board's comprehensive
review of Regulation Z's open-end (not home-secured) credit rules. At
that time, the Board indicated that it was also reviewing open-end
home-secured credit rules. This proposal reflects the Board's review of
all aspects of Regulation Z and accompanying Official Staff Commentary
related to open-end home-secured credit, or HELOCs. The Board is not at
this time, however, specifically addressing issues related to
rescinding HELOCs, and requests comment in the proposal on any needed
changes to Regulation Z provisions and commentary regarding reverse
mortgages.
C. HELOC Market Trends
Board and other research has tracked a number of changes in the
HELOC market since 1989. One important trend is that HELOCs have become
much more popular with consumers: in 1988, 5.6% of homeowners had
HELOCs; \1\ in 1998, 10.6% of homeowners had HELOCs; and by 2007, the
percentage of homeowners with HELOCs had jumped to 18.4%.\2\ A number
of factors may have contributed to this trend, such as low interest
rates compared with other forms of consumer credit, appreciation in
home values, the deductibility of interest payments on mortgage debt,
and changes in mortgage practices.\3\ The uses of HELOCs have remained
relatively constant, with the highest uses in the areas of home
improvement and debt consolidation.\4\ Beginning in the late 1990s,
consumers increased their use of HELOCs for expenses such as vehicle
purchases, education, and vacations.\5\ Many HELOC consumers today, as
in the past, use their lines as an emergency source of funds.\6\
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\1\ Glenn Canner, Charles Luckett, and Thomas Durken, ``Home
Equity Lending,'' Federal Reserve Bulletin (May 1989).
\2\ Brian Bucks, Arthur Kennickell, Traci Mach, Kevin Moore,
``Changes in U.S. Family Finances from 2004 to 2007: Evidence from
the Survey of Consumer Finances,'' Federal Reserve Bulletin (Feb.
2009) and accompanying tables at http://www.federalreserve.gov/Pubs/
OSS/oss2/2007/scf2007home.html.
\3\ Id.
\4\ Glenn Canner, Charles Luckett, and Thomas Durken, ``Recent
Developments in Home Equity Lending,'' Federal Reserve Bulletin
(April 1998); see also Brian Bucks, Arthur Kennickell, Traci Mach,
Kevin Moore, ``Changes in U.S. Family Finances from 2004 to 2007:
Evidence from the Survey of Consumer Finances,'' Federal Reserve
Bulletin (Feb. 2009) and accompanying tables at http://
www.federalreserve.gov/Pubs/OSS/oss2/2007/scf2007home.html.
\5\ Id.
\6\ Supra note 2.
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As home prices rose in the past decade, more creditors entered the
HELOC market and creditors became more willing to extend HELOCs to
consumers with little equity in their homes.\7\ When the Board
published the 1989 HELOC Final Rule, it was commonly expected that most
HELOC borrowers would, at their maximum credit line limit, retain
around 20 percent of their home equity. See comment 5b(f)(3)(vi)-6. By
the mid-2000s, more creditors were willing to lend HELOCs at a combined
loan-to-value ratio of 100 percent or more, and, despite home value
appreciation, the overall percentage of equity remaining in homes was
appreciably lower than in earlier years.\8\ The Board's Survey of
Consumer Finances indicates that the average outstanding dollar amount
of a HELOC grew from $24,000 in 1998 to $39,000 in 2007.\9\
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\7\ Id.
\8\ Id.
\9\ Id.
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The recent economic downturn, a central component of which has been
declining property values, has dampened the availability of HELOCs and
reversed some of the overall trends in the HELOC market. The Board
believes, however, that a resurgence of these trends may occur once
property values stabilize. The Board expects that factors such as the
flexibility HELOC borrowers have to draw on a line as needed and the
tax deductibility of interest on home-secured debt should continue to
make HELOCs appealing to consumers over the long term.
Finally, in response to the economic challenges of the last few
years, creditors have relied more than in the past on provisions in
Regulation Z that allow them to terminate HELOC plans, suspend advances
on lines, and reduce the credit limit. As a result, many questions
regarding the requirements and limitations of these provisions have
been raised with the Board.
II. Summary of Major Proposed Changes
The Board proposes content, format, and timing changes to the four
main types of HELOC disclosures governed by Regulation Z: (1)
Disclosures at application; (2) disclosures at account opening; (3)
periodic statements; and (4) change-in-terms notices. The proposal also
provides additional guidance and protections, as well as revised
disclosure requirements, related to account terminations, line
suspensions and credit limit reductions, and reinstatement of accounts.
Disclosures at Application. Format, timing, and content changes are
proposed to make the disclosures currently required at application more
meaningful and easy for consumers to use. The proposed changes include:
Eliminating the requirement to provide a multiple-page
disclosure of generic rates and terms of the creditor's HELOC products,
as well as the requirement to provide the Board-published brochure
explaining HELOC products and risks entitled, ``What You Should Know
about Home Equity Lines of Credit.'' (HELOC brochure)
Requiring creditors to provide a new one-page Board
publication summarizing basic information and risks regarding HELOCs
entitled, ``Key Questions to Ask about Home Equity Lines of Credit.''
Replacing the application disclosure of generic rates and
terms with a transaction-specific disclosure that must be given within
three days after application. This disclosure would:
Provide information about rates and fees, payments, and
risks in a tabular format.
Highlight whether the consumer will be responsible for a
balloon payment.
Present payment examples based on both the current rate
available and the maximum possible rate for the HELOC.
Disclosures at Account Opening. The proposal would retain the
existing requirement to provide consumers with transaction-specific
information about rates, terms, payments, and risks at the time of
account opening. To facilitate comparison between terms provided within
three business days after application and terms available at account-
opening, the proposal would prescribe formatting for this information
similar to that of the proposed
[[Page 43430]]
disclosure to be provided within three business days after application.
Periodic Statements. To make disclosures on periodic statements
more understandable, the proposal would revise the format and content
of the periodic statement for HELOCs, largely conforming to the
periodic statement provisions finalized in the January 2009 Regulation
Z Rule for credit cards. The proposed changes include:
Eliminating the disclosure of the effective APR.
Grouping fees and interest charges separately, and
requiring disclosure of separate totals of interest and fees for both
the period and the year to date.
Change-in-Terms Notices. The proposal would revise the format and
content of the change-in-terms notice, largely conforming to the
change-in-terms provisions finalized in the January 2009 Regulation Z
Rule. To improve consumer protection, proposed changes include:
Expanding the circumstances under which advance written
notice of a rate change is required.
Increasing advance notice of a change in a HELOC term from
15 to 45 days in advance of the effective date of the change.
Account Terminations. The proposal would prohibit creditors from
terminating an account for payment-related reasons until the consumer
has failed to make a required minimum periodic payment more than 30
days after the due date for that payment. The Board is requesting
comment on whether a delinquency threshold of more than 30 days or some
other time period is appropriate.
Suspensions and Credit Limit Reductions. The proposal contains a
number of additional consumer protections related to temporary
suspensions of advances and credit limit reductions. The proposed
changes include:
Establishing a new safe harbor for suspending or reducing
a line of credit based on a ``significant'' decline in property value.
For HELOCs with a combined loan-to-value ratio at origination of 90
percent or higher, a five percent decline in the property value would
be ``significant.''
Providing additional guidance regarding the information on
which a creditor may rely to take action based on a material change in
the consumer's financial circumstances, such as the type of credit
report information that would be appropriate to consider.
Reinstatement of Accounts. The proposal contains additional
requirements regarding reinstating accounts that have been temporarily
suspended or reduced. The proposed changes include:
Requiring additional information in notices of suspension
or reduction about consumers' ongoing right to request reinstatement
and creditors' obligation to investigate this request.
Requiring creditors to complete an investigation of a
request for reinstatement within 30 days of receiving a request for
reinstatement and to give a notice of the investigation results to
consumers whose lines will not be reinstated.
III. The Board's Review of Open-End Credit Rules
A. Advance Notices of Proposed Rulemakings
December 2004 ANPR. The Board's current review of Regulation Z's
open-end credit rules was initiated in December 2004 with an advance
notice of proposed rulemaking.\10\ 69 FR 70925 (December 8, 2004). At
that time, the Board announced its intent to conduct its review of
Regulation Z in stages, focusing first on the rules for open-end
(revolving) credit accounts that are not home-secured, chiefly general-
purpose credit cards and retailer credit card plans. The December 2004
ANPR sought public comment on a variety of specific issues relating to
three broad categories: the format of open-end credit disclosures, the
content of those disclosures, and the substantive protections provided
for open-end credit under the regulation. The December 2004 ANPR
solicited comment on the scope of the Board's review, and also
requested commenters to identify other issues that the Board should
address in the review.
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\10\ The review was initiated pursuant to requirements of
section 303 of the Riegle Community Development and Regulatory
Improvement Act of 1994, section 610(c) of the Regulatory
Flexibility Act of 1980, and section 2222 of the Economic Growth and
Regulatory Paperwork Reduction Act of 1996. An announced notice of
proposed rulemaking is published to obtain preliminary information
prior to issuing a proposed rule or, in some cases, deciding whether
to issue a proposed rule.
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October 2005 ANPR. The Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005, Public Law 109-8, enacted on April 20, 2005
(the Bankruptcy Act) primarily amended the federal bankruptcy code, but
also contained several provisions amending TILA. The Bankruptcy Act's
TILA amendments principally deal with open-end credit accounts and
require new disclosures on periodic statements, on credit card
applications and solicitations, and in advertisements.
In October 2005, the Board published a second ANPR to solicit
comment on implementing the Bankruptcy Act amendments (October 2005
ANPR). 70 FR 60235, October 17, 2005. In the October 2005 ANPR, the
Board stated its intent to implement the Bankruptcy Act amendments as
part of the Board's ongoing review of Regulation Z's open-end credit
rules.
B. Notices of Proposed Rulemakings
June 2007 Proposal. The Board published proposed amendments to
Regulation Z's rules for open-end plans that are not home-secured in
June 2007. 72 FR 32948 (June 14, 2007). The goal of the proposed
amendments was to improve the effectiveness of the disclosures that
creditors provide to consumers at application and throughout the life
of an open-end (not home-secured) account. In developing the proposal,
the Board conducted consumer research, in addition to considering
comments received on the two ANPRs. Specifically, the Board retained a
research and consulting firm (ICF Macro) to assist the Board in using
consumer testing to develop proposed model forms. The proposal would
have made changes to format, timing, and content requirements for the
five main types of open-end credit disclosures governed by Regulation
Z: (1) Credit and charge card application and solicitation disclosures;
(2) account-opening disclosures; (3) periodic statement disclosures;
(4) change-in-terms notices; and (5) advertising provisions.
May 2008 Proposal. In May 2008, the Board published revisions to
several disclosures in the June 2007 Proposal (May 2008 Proposal). 73
FR 28866 (May 19, 2008). In developing these revisions the Board
conducted additional consumer testing in consultation with ICF Macro.
In addition, the May 2008 Proposal contained proposed amendments to
Regulation Z that complemented a proposal published by the Board, along
with the Office of Thrift Supervision and the National Credit Union
Administration, to adopt rules prohibiting specific unfair acts or
practices regarding credit card accounts under their authority under
the Federal Trade Commission Act. See 15 U.S.C. 57a(f)(1). 73 FR 28904
(May 19, 2008).
May 2009 Proposal. In May 2009, the Board issued proposals to
clarify provisions of the January 2009 Final Rule (see below). 74 FR
20784 (May 5, 2009). Along with other federal banking agencies, the
Board also issued proposals to clarify provisions of the January 2009
UDAP Final Rule (see below). 74 FR 20804 (May 5, 2009).
[[Page 43431]]
C. Final Rulemakings
January 2009 Final Rule. In January 2009, the Board issued final
rules for open-end credit that is not home-secured (i.e., the January
2009 Regulation Z Rule). The goal of the amendments to Regulation Z was
to improve the effectiveness of the disclosures that creditors provide
to consumers at application and throughout the life of an open-end (not
home-secured) account. The Board adopted changes to format, timing, and
content requirements for the five main types of open-end credit
disclosures governed by Regulation Z: (1) Credit and charge card
application and solicitation disclosures; (2) account-opening
disclosures; (3) periodic statement disclosures; (4) change-in-terms
notices; and (5) advertising provisions. Certain additional protections
for consumers were adopted as well.
January 2009 UDAP Final Rule. In January 2009, the Board and other
federal banking agencies jointly issued rules to prohibit institutions
from engaging in certain acts or practices regarding consumer credit
card accounts. 74 FR 5498 (January 29, 2009).
D. Consumer Testing
A principal goal for the Regulation Z review is to produce revised
and improved disclosures that consumers will be more likely to
understand and use in their decisions, while at the same time not
creating undue burdens for creditors. Currently, Regulation Z requires
HELOC creditors to provide generic disclosures regarding various terms
and features of the creditor's HELOC plans at application, along with a
lengthy, Board-published brochure explaining HELOC products. The
creditor does not have to provide a transaction-specific disclosure for
HELOCs until the consumer opens the account. During the life of the
plan, the creditor is required to provide periodic statements and
change-in-terms notices as applicable.
In 2007, the Board retained ICF Macro, a research and consulting
firm that specializes in designing and testing documents to conduct
consumer testing to help the Board's review of Regulation Z's
disclosures. Beginning in the fall of 2008, ICF Macro worked closely
with the Board to conduct several tests on HELOC disclosures in
different cities throughout the United States. The HELOC testing
consisted of five rounds of one-on-one cognitive interviews. The goals
of these interviews were to learn more about what information consumers
read when they receive HELOC disclosures, to research how easily
consumers can find various pieces of information in these disclosures,
and to test consumers' understanding of certain HELOC-related words and
phrases.
Some of the key methods and findings of the consumer testing are
summarized below. ICF Macro also issued a report of the results of the
testing for HELOCs, which is available on the Board's public Web site:
http://www.federalreserve.gov.
Development and testing of Regulation Z disclosures. The Board
worked with ICF Macro to develop and test several types of disclosures,
including:
A Board publication to be provided at application,
entitled ``Key Questions to Ask about Home Equity Lines of Credit'';
A transaction-specific TILA disclosure to be provided
within three business days of application, but no later than at
account-opening; and
A transaction-specific TILA disclosure to be provided at
the time the consumer opens the account.
The Board revised two additional HELOC disclosures: a periodic
statement and a change-in-terms notice that must be provided after
account opening as applicable. The Board intends to test these two
disclosures during the comment period. In addition, the Board developed
model clauses for proposed notices required in connection with
terminating, suspending or reducing a HELOC, as well as reinstating
suspended or reduced HELOCS, and may test these clauses during the
comment period.
Testing. The primary goal of the Board's consumer testing was to
develop clear and conspicuous model HELOC disclosure forms that would
enable borrowers easily to identify material terms of the plan and to
compare such terms among various plans in order to make informed
decisions about HELOCs. The Board also wanted to gain a better
understanding of what information consumers need to receive early in
the process when shopping for HELOCs, when such information should be
provided, what form it should take, and how it can be integrated into
the overall shopping process to facilitate informed consumer decision-
making regarding HELOCs.
Beginning in the fall of 2008, five rounds of one-on-one cognitive
interviews with a total of 50 participants were conducted in different
cities throughout the United States. The consumer testing groups
comprised participants representing a range of ethnicities, ages,
educational levels, and levels of experience with home equity
borrowing. Each round of testing involved testing a set of model
disclosure forms, including currently required disclosures described
above. Interview participants were asked to review model forms and
provide their reactions, and were then asked a series of questions
designed to test their understanding of the content. Data were
collected on which elements and features of each form were most
successful in providing information clearly and effectively. The
findings from each round of interviews were incorporated in revisions
to the model forms for the following round of testing.
Cognitive interviews on existing disclosures. Participants in the
first two rounds of testing were shown an application disclosure based
on a sample disclosure conforming to the existing HELOC application
disclosure samples in Appendix G of Regulation Z and currently used by
a financial institution. This form provided required information in a
mostly narrative format. The goals of these interviews were to learn
more about what information consumers read when they receive current
disclosures; to research how easily consumers can find various pieces
of information in these disclosures; and to test consumers'
understanding of certain HELOC-related words and phrases.
Participants found this form difficult to read and understand, and
their responses to follow-up questions showed that it was also
difficult for them to identify information in the text. For example,
several participants in the first two rounds of testing became confused
when reviewing the application disclosure because they could not find
their interest rate, and were surprised when told that the rate was not
on the form. Other participants incorrectly assumed that one of the
rates shown in a payment example on the application disclosure was
being offered to them, when in fact that rate was used for illustrative
purposes. When the same information was presented in a tabular format,
participants commented that the information was easier to understand
and had more success answering comprehension questions. As a result,
after the second round of testing, the decision was made to use a
tabular format for all model disclosure forms.
1. Initial design of disclosures for testing. The results from the
first two rounds of testing, and similar findings from testing of
closed-end mortgage disclosures conducted by the Board at the same
time, called into question the usefulness of the current generic
application disclosures for consumers. As a result, three new types of
disclosure were developed and tested:
[[Page 43432]]
(1) A one-page disclosure developed by the Board entitled, ``Key
Questions to Ask about Home Equity Lines of Credit'' (``Key Questions''
document) that summarized the most important information in the HELOC
brochure in a shorter, question-and-answer format found effective with
consumers;
(2) A disclosure to be provided not later than three business days
after application that would include information about the terms and
features of the creditor's HELOC plans currently required at
application, but also transaction-specific information; and
(3) A similar form that would be provided when the consumer opens
the account. The content of the new transaction-specific HELOC
disclosure that would be provided three days after application would be
similar to that of the current application disclosure, except that it
would include information specific to the consumer based on initial
underwriting--most notably, the specific APR and credit limit. The
content of the account opening disclosure would be similar, except that
it would provide additional information about fees.
2. Additional cognitive interviews and revisions to disclosures.
The ``Key Questions'' document tested very well in subsequent rounds;
all participants indicated that they would find it useful, and most
found it very clear and easy-to-read. As a result, the Board is
proposing to require lenders to provide the ``Key Questions'' document
to prospective borrowers instead of the HELOC brochure.
Model forms for the transaction-specific HELOC disclosures to be
provided three days after application were first tested in the third
round and participants overwhelmingly indicated that they would prefer
to receive a transaction-specific disclosure soon after application,
even if it meant that they would not receive a disclosure of terms
before they applied. The remaining two rounds of testing focused on
developing, testing and refining the two transaction-specific
disclosures (i.e., that would be provided within three business days of
application and at account opening), rather than variations of the
generic application disclosure currently required.
Testing results. Specific findings from the consumer testing are
discussed in detail throughout the SUPPLEMENTARY INFORMATION where
relevant.\11\ This section highlights certain key findings.
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\11\ The report by ICF Macro summarizing the findings from the
consumer testing is available on the Board's Web site at http://
www.federalreserve.gov.
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Consumer testing showed that consumers seldom contact more than one
loan originator when looking for a HELOC and generally go to their
current mortgage provider, a prior lender, or a bank with which they
have an existing banking relationship. Consumer testing indicated that
consumers generally do not comprehend how HELOCs work, especially the
draw and repayment periods. Consumer comprehension of the costs and
effects of various terms significantly increased when consumers
reviewed model forms developed by the Board and ICF Macro. Most
participants agreed that they would prefer to receive specific
information about the HELOC terms that would apply to them shortly
after application rather a generic disclosure currently provided to all
borrowers on or with the application. Consumer testing also showed that
consumers prefer to receive a detailed breakdown of fees required to
open the account early in the application process to help them
understand what costs to anticipate in obtaining a HELOC. Thus, the
Board is proposing to replace the generic program disclosure required
at application with disclosures that include key terms specific to the
consumer, such as the APR and credit limit, within three business days
after application.
Most consumers tested found the generic HELOC program disclosures
and HELOC brochure required at application too dense and difficult to
understand. When the same information was presented in plain language,
segregated in a tabular format, participants found the information
easier to understand and had more success answering comprehension
questions. Thus, under the proposal, the revised TILA disclosure would
explain more complicated terms in plain language and present them in a
tabular format.
A large number of participants erroneously concluded that the rate
and payment information shown in the currently required historical
example table showed their exact monthly payments when in fact it
showed how the interest rate and monthly payments fluctuated over the
preceding 15 years based on a $10,000 example. Most participants
identified the interest rate fluctuation as the most important
information in the historical payment example. For these reasons, the
proposed disclosures include a statement providing the high and low
interest rates for the preceding 15 years but do not include the table
showing the interest rate and corresponding monthly payments for each
year.
Creditors typically incorporate disclosures required at the time a
HELOC account is opened into the account agreement. Consumer testing
indicated, however, that consumers commonly do not review their account
agreements, which are often in small print and dense prose. When
consumers were presented with a revised account-opening disclosure
based on the tabular format of the revised early disclosure, their
comprehension of complex terms significantly increased. Thus, the
proposal would require creditors to provide a table summary of key
terms applicable to the account at account opening, with similar
formatting as the disclosure proposed to be provided within three days
after application. Consumer testing showed that setting apart the most
important terms in this way better ensures that consumers are apprised
of those terms. Moreover, the similarity in presentation and structure
of the early and account-opening disclosures enables consumers to focus
on and compare key terms at both stages of the process.
The Board did not test model periodic statement and change-in-terms
notices for HELOCs, but intends to do so during the comment period for
this proposal. The Board worked with ICF Macro, however, to develop
model periodic statements and change-in-terms notices for HELOCs
largely based on the results of consumer testing conducted for credit
cards for the Board's January 2009 Regulation Z rule. Many consumers
more easily noticed the number and amount of fees when the fees were
itemized and grouped together with interest charges. Consumers also
noticed fees and interest charges more readily when they were located
near the disclosure of the transactions on the account. Thus, under the
proposal, creditors would be required to group all charges together and
describe them in a manner consistent with consumers' general
understanding of costs (``interest charge'' or ``fee''), without regard
to whether the charges would be considered ``finance charges,'' ``other
charges'' or neither under the regulation.
Regarding change-in-terms notices, consumer testing for the Board's
January 2009 Regulation Z Rule on credit cards indicated that, much
like the account-opening disclosures, consumers may not typically read
such notices because they are often in small print and dense prose. To
enhance the effectiveness of change-in-terms notices, the proposed
rules would require the creditor to include a table summarizing any
changed terms. Consumer testing indicates that consumers may not
typically look at the notices if they are provided as separate inserts
given with periodic statements.
[[Page 43433]]
Thus, under the proposal, a table summarizing the change would have to
appear on the periodic statement, where consumers are more likely to
notice the changes.
Additional testing during and after comment period. During the
comment period, the Board will work with ICF Macro to conduct
additional testing of model disclosures. After receiving comments from
the public on the proposal and the proposed disclosure forms, the Board
will work with ICF Macro to further revise model disclosures based on
comments received, and to conduct additional rounds of cognitive
interviews to test the revised disclosures. After the cognitive
interviews, quantitative testing will be conducted. The goal of the
quantitative testing is to measure consumers' comprehension of the
newly-developed disclosures relative to existing disclosures and
formats.
E. Other Outreach and Research
Throughout the review process leading to this proposal, the Board
met or conducted conference calls with industry and consumer group
representatives, as well as consulted with other federal banking
agencies. The Board also reviewed HELOC disclosures currently used by
creditors, internal Board research on home equity lending, and surveys
on HELOC usage and trends.\12\
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\12\ Surveys reviewed include: Brian Bucks, Arthur Kennickell,
Traci Mach, Kevin Moore, ``Changes in U.S. Family Finances from 2004
to 2007: Evidence from the Survey of Consumer Finances,'' Federal
Reserve Bulletin (Feb. 2009); Alan Greenspan and James Kennedy,
``Sources and Uses of Equity Extracted from Homes,'' Finance and
Economics Discussion Series, Divisions of Research & Statistics and
Monetary Affairs, Federal Reserve Board (2007-20); Glenn Canner et
al., ``Recent Developments in Home Equity Lending,'' Federal Reserve
Bulletin (April 1998); Consumer Bankers Ass'n, ``Home Equity Loan
Study'' (2005, 2007); and American Bankers Ass'n, ``ABA Home Equity
Lending Survey Report'' (2005).
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F. Reviewing Regulation Z in Stages
Based on the comments received and its own analysis, the Board is
proceeding with a review of Regulation Z in stages. In January 2009,
the Board published final rules regarding open-end (not home-secured)
credit (74 FR 5244 (January 29, 2009) (January 2009 Regulation Z Rule),
which were the result of the Board's comprehensive review of Regulation
Z's open-end (not home-secured) credit rules. At that time, the Board
indicated that it was also reviewing open-end home-secured credit
rules. This proposal reflects the Board's review of all aspects of
Regulation Z and accompanying Official Staff Commentary related to
open-end home-secured credit. The Board is not at this time, however,
specifically addressing issues related to rescinding HELOCs, and
requests comment in the proposal on any needed changes to Regulation Z
provisions and commentary regarding reverse mortgages.
G. Implementation Period
The Board contemplates providing creditors sufficient time to
implement any revisions that may be adopted. The Board seeks comment on
an appropriate implementation period.
IV. The Board's Rulemaking Authority
TILA mandates that the Board prescribe regulations to carry out the
purposes of the act. TILA also specifically authorizes the Board, among
other things, to do the following:
Issue regulations that contain such classifications,
differentiations, or other provisions, or that provide for such
adjustments and exceptions for any class of transactions, that in the
Board's judgment are necessary or proper to effectuate the purposes of
TILA, facilitate compliance with the act, or prevent circumvention or
evasion. 15 U.S.C. 1604(a).
Exempt from all or part of TILA any class of transactions
if the Board determines that TILA coverage does not provide a
meaningful benefit to consumers in the form of useful information or
protection. The Board must consider factors identified in the act and
publish its rationale at the time it proposes an exemption for comment.
15 U.S.C. 1604(f).
Require additional disclosures for HELOC plans. 15 U.S.C.
1637(a)(8), 1637a(a)(14).
In the course of developing the proposal, the Board has considered
information gathered from industry and consumer representatives during
outreach meetings and calls, consultations with other federal banking
agencies, the Board's experience in implementing and enforcing
Regulation Z, and the results obtained from testing various disclosure
options in controlled consumer tests. For the reasons discussed in this
proposal, the Board believes this proposal is appropriate pursuant to
the authorities noted above.
V. Discussion of Major Proposed Revisions
The goal of the proposed revisions is to improve the effectiveness
of the Regulation Z disclosures that must be provided to consumers for
open-end credit transactions secured by the consumer's dwelling, and to
strengthen substantive protections for HELOC consumers. To shop for and
understand the cost of credit, consumers must be able to identify and
understand the key terms of a HELOC, which can be very complex. The
proposed revisions to Regulation Z are intended to provide the most
essential information to consumers when the information would be most
useful to them, as clearly and conspicuously as possible. The proposed
revisions are expected to improve consumers' ability to make informed
credit decisions and enhance competition among HELOC originators. Many
of the changes are based on consumer testing for this proposal and the
Board's overall review of Regulation Z.
In considering the proposed revisions, the Board sought to ensure
that the proposal would not reduce access to credit, and sought to
balance the potential benefits for consumers with the compliance
burdens imposed on creditors. For example, the proposed revisions seek
to provide greater certainty to creditors in identifying what costs
must be disclosed for HELOCs, and how those costs must be disclosed.
More effective disclosures may also reduce confusion and
misunderstanding, which may ease creditors' costs relating to consumer
complaints and inquiries.
A. Disclosures at Application
Regulation Z requires creditors to provide to the consumer two
types of disclosures at the time of application: a set of disclosures
describing various features of a creditor's HELOC plans (the
``application disclosures'') and a home-equity brochure published by
the Board (the ``HELOC brochure''), which provides information about
how HELOCs work. Neither contains transaction-specific information
about the terms of the HELOC dependent on underwriting, such as the APR
or credit limit.
Summary of Proposed Revisions
The proposal would require a creditor to provide to consumers at
application a new one-page document published by the Board entitled,
``Key Questions to Ask about Home Equity Lines of Credit'' (the ``Key
Questions'' document). The Board proposes eliminating the requirement
for creditors to provide the HELOC brochure at application. In
addition, the proposal would replace the application disclosures with
transaction-specific HELOC disclosures (``early HELOC disclosures'')
that must be given within three business days after application (but no
later than account opening).
[[Page 43434]]
``Key Questions'' document. Currently, a creditor is required to
provide to a consumer the HELOC brochure or a suitable substitute at
the time an application for a HELOC is provided to the consumer. The
HELOC brochure is around 20 pages long and provides general information
about HELOCs and how they work, as well as a glossary of relevant terms
and a description of various features that can apply to HELOCs.
The proposal would eliminate the requirement for creditors to
provide to consumers the HELOC brochure with applications. The Board's
consumer testing on HELOC disclosures has shown that consumers are
unlikely to read the HELOC brochure because of its length. Instead, the
proposal would require a creditor to provide the new ``Key Questions''
document that would be published by the Board. This one-page document
is intended to be a simple, straightforward and concise disclosure
informing consumers about HELOC terms and risks that are important to
consider when selecting a home-equity product, including potentially
risky features such as variable rates and balloon payments. The ``Key
Questions'' document was designed based on consumers' preference for a
question-and-answer tabular format, and refined in several rounds of
consumer testing.
B. Disclosures Within Three Days After Application
Regulation Z currently requires the disclosures that must be
provided on or with an application to contain information about the
creditor's HELOC plans, including the length of the draw and repayment
periods, how the minimum required payment is calculated, whether a
balloon payment will be owed if a consumer only makes minimum required
payments, payment examples, and what fees are charged by the creditor
to open, use, or maintain the plan. These disclosures do not include
information dependent on a specific borrower's creditworthiness or the
value of the dwelling, such as a credit limit or the APRs offered to
the consumer, because the application disclosures are provided before
underwriting takes place.
Summary of Proposed Revisions
The Board's consumer testing on HELOC disclosures has shown that,
because the current application disclosures do not contain transaction-
specific information applicable to the consumer, these disclosures may
not provide meaningful information to consumers to enable them to
compare different HELOC products and to make informed decisions about
whether to open an HELOC plan. Thus, the proposal would replace the
application disclosures with transaction-specific ``early HELOC
disclosures'' that must be given within three business days after
application (but no later than account opening), and revise the format
and content of the disclosures to make them more clear and conspicuous.
Content of proposed early HELOC disclosures. The proposal would
require creditors to include several additional disclosures in the
early HELOC disclosures not currently required to be disclosed as part
of the application disclosures, such as (1) the APRs and credit limit
being offered; (2) a statement that the consumer has no obligation to
accept the terms disclosed in the early HELOC disclosures; and (3) if
the creditor has a provision for the consumer's signature, a statement
that a signature by the consumer only confirms receipt of the
disclosure statement. Based on consumer testing conducted by the Board
on HELOC disclosures, the Board believes that these new disclosures
would provide meaningful information to consumers in deciding whether
to open a HELOC plan.
The proposal would not require creditors to provide certain
disclosures currently required to be disclosed as part of the
application disclosures. For example, currently creditors must disclose
a 15-year historical payment example table, a statement that the APR
does not include costs other than interest, and a statement of the
earliest time the maximum rate could be reached. Based on consumer
testing, the Board believes that these disclosures do not provide
meaningful information to consumers in deciding whether to open a HELOC
plan. Other information that consumer testing demonstrated would be
helpful to consumers, however, would be required to be disclosed.
Moreover, the proposal would revise certain information currently
required to be disclosed in the application disclosures. For example,
the application disclosures currently must include several payment
examples based on a $10,000 outstanding balance. Under the proposal,
the Board would require in the early HELOC disclosures payment examples
based on the full credit line. Also, to prevent ``information
overload'' for consumers, the proposal would allow a creditor to
disclose information about only two payment plan options. Based on
consumer testing, the Board believes that the above revisions to the
payment examples, and other revisions to the existing application
disclosures, would effectively provide meaningful information to
consumers in deciding whether to open a HELOC plan.
Format requirements for the proposed early HELOC disclosures. The
proposal would impose stricter format requirements for the proposed
early HELOC disclosures than currently are required for the application
disclosures. The application disclosures may be provided in a narrative
form; under the proposal, the early HELOC disclosures must be provided
in the form of a table with headings, content, and format developed
through multiple rounds of consumer testing. In consumer testing,
participants found information in a structured, tabular format easier
to understand and had more success answering comprehension questions
than when these participants reviewed application disclosures in a
narrative form.
C. Disclosures at Account Opening
Regulation Z requires creditors to disclose costs and terms before
the first transaction is made for a HELOC. The disclosures must specify
the circumstances under which a ``finance charge'' may be imposed and
how it will be determined, including charges such as interest,
transaction charges, minimum charges, each periodic rate of interest
that may be applied to an outstanding balance (e.g., for purchases or
cash advances) as well as the corresponding APR. In addition, creditors
must disclose the amount of certain charges other than finance charges,
such as a late-payment charge. Currently, few format requirements apply
to account-opening disclosures; typically they are interspersed among
other contractual terms in the creditor's account agreement.
Summary of Proposed Revisions
The proposal would revise the account-opening disclosure
requirements in two significant ways. First, the proposal would require
a tabular summary of key terms. Second, the proposal would reform how
and when cost disclosures must be made.
Account-opening summary table. The proposal seeks to make the cost
disclosures provided at account opening more conspicuous and easier to
read. Accordingly, the proposal identifies specific costs and terms
that creditors would be required to summarize in a table. This account
opening table would be substantially similar to the early HELOC
disclosure table that would be provided within three business days
after application, with two major exceptions. First, the account-
opening
[[Page 43435]]
table would show only the payment plan chosen by the consumer, rather
than a maximum of two plans required in the early HELOC disclosures.
Second, the account-opening table would contain transaction fees and
penalty fees not required to be disclosed in the early HELOC disclosure
table. Despite these differences between the two tables, the Board
believes that consumers could use the new table provided at account
opening to compare the terms of their accounts to the early HELOC
disclosure table. Consumers would no longer be required to search for
the information in the credit agreement.
How charges are disclosed. Under the current rules, a creditor must
disclose any ``finance charge'' or ``other charge'' in the written
account-opening disclosures. In addition, the regulation identifies
fees that are not considered to be either ``finance charges'' or
``other charges'' and, therefore, need not be included in the account-
opening disclosures. The distinctions among finance charges, other
charges, and charges that do not fall into either category are not
always clear. Examples of included or excluded charges are in the
regulation and commentary, but these examples cannot provide definitive
guidance in all cases. This uncertainty can pose legal risks for
creditors that act in good faith to comply with the law. Creditors are
subject to civil liability and administrative enforcement for under-
disclosing the finance charge or otherwise making erroneous
disclosures, so the consequences of an error can be significant.
Furthermore, over-disclosure of rates and finance charges is not
permitted by Regulation Z for open-end credit.
The fee disclosure rules also have been criticized as being
outdated and impractical. These rules require creditors to provide fee
disclosures at account opening, which may be months, and possibly
years, before a particular disclosure is relevant to the consumer, such
as when the consumer calls the creditor to request a service for which
a fee is imposed. In addition, an account-related transaction may occur
by telephone, when a written disclosure is not feasible.
The proposed rule is intended to respond to these criticisms while
still giving full effect to TILA's requirement to disclose credit
charges before they are imposed. Accordingly, under the proposal, the
revised rules would (1) specify precisely the charges that creditors
must disclose in writing at account opening (e.g., interest, account-
opening fees, transaction fees, annual fees, and penalty fees such as
for paying late), which would be listed in the summary table, and; (2)
permit creditors to disclose certain optional charges orally or in
writing before the consumer agrees to or becomes obligated to pay the
charge. These proposed changes correspond to amendments adopted in the
January 2009 Regulation Z Rule applicable to open-end (not home-
secured) credit, but would not change current substantive restrictions
on permissible changes in HELOC terms.
D. Periodic Statements
Currently, Regulation Z requires creditors to provide periodic
statements reflecting the account activity for the billing cycle
(typically, one month). In addition to identifying each transaction on
the account, creditors must identify each ``finance charge'' using that
term, and each ``other charge'' assessed against the account during the
statement period. Creditors must disclose the periodic rate that
applies to an outstanding balance and its corresponding APR. Creditors
also must disclose an ``effective'' or ``historical'' APR for the
billing cycle, which includes not just interest but also finance
charges imposed in the form of fees.
Summary of Proposed Revisions
The proposal contains a number of significant revisions to periodic
statement disclosures. First, the Board recommends eliminating the
requirement to disclose the effective APR for HELOCs. Second, creditors
would no longer be required to characterize particular costs on the
periodic statement as ``finance charges.'' Instead, costs would be
described either as ``interest'' or as a ``fee.'' Third, interest
charges and fees imposed as part of the plan must be grouped together
and totals disclosed for the statement period and year to date. To
facilitate compliance, the proposal would include sample forms
illustrating the revisions.
The effective APR. The ``effective'' APR disclosed on periodic
statements reflects the cost of interest and certain other finance
charges imposed during the statement period. For example, for a cash
advance, the effective APR reflects both interest and any flat or
proportional fee assessed for the advance. For the reasons discussed
below, the Board recommends eliminating the requirement to disclose the
effective APR.
In general, creditors believe that the effective APR should be
eliminated. They believe that consumers do not understand the effective
APR, including how it differs from the corresponding (interest rate)
APR, why it is often ``high,'' and which fees the effective APR
reflects. Creditors say that they find it difficult, if not impossible,
to explain the effective APR to consumers who call them with questions
or concerns. They note that callers sometimes believe, erroneously,
that the effective APR signals a prospective increase in their interest
rate, and they may make uninformed decisions as a result. And,
creditors say, even if the consumer does understand the effective APR,
the disclosure does not provide any more information than a disclosure
of the total dollar costs for the billing cycle. Moreover, creditors
say the effective APR is arbitrary and inherently inaccurate,
principally because it amortizes the cost for credit over only one
month (billing cycle) even though the consumer may take several months
(or longer) to repay the debt.
Consumer groups acknowledge that the effective APR is not well
understood, but argue that it nonetheless serves a useful purpose by
showing the higher cost of some credit transactions. They contend the
effective APR helps consumers decide each month whether to continue
using the account, to shop for another credit product, or to use an
alternative means of payment such as a debit card. Consumer groups also
contend that reflecting costs, such as cash advance fees, in the
effective APR creates a ``sticker shock'' and alerts consumers that the
overall cost of a transaction for the cycle is high and exceeds the
advertised corresponding APR. This shock, they say, may persuade some
consumers not to use certain features on the account, such as cash
advances, in the future. In their view, the utility of the effective
APR would be maximized if it reflected all costs imposed during the
cycle (rather than only some costs as is currently the case).
As part of consumer testing conducted by the Board on credit cards
in relation to the January 2009 Regulation Z Rule, consumer awareness
and understanding of the effective APR was evaluated, as well as
whether changes to the presentation of the disclosure could increase
awareness and understanding. The overall results of this testing
demonstrated that most consumers do not correctly understand the
effective APR.
Based on this consumer testing and other factors, the Board
proposes to eliminate the requirement to disclose the effective APR.
Under this proposal, creditors offering HELOCs would be required to
disclose interest and fees in a manner that is more readily
understandable and comparable across
[[Page 43436]]
institutions. The Board believes that this approach can more
effectively further the goals of consumer protection and the informed
use of credit for HELOCs.
Fees and interest costs. Currently, creditors must identify on
periodic statements any ``finance charges'' that have been added to the
account during the billing cycle; creditors typically list these
charges with other transactions, such as purchases or cash advances,
chronologically on the statement. The finance charges must be itemized
by type. Thus, interest charges might be described as ``finance charges
due to periodic rates.'' Charges such as late-payment fees, which are
not ``finance charges,'' are typically disclosed individually and
interspersed among other transactions.
The Board drew on consumer testing for open-end (not home-secured)
credit, the results of which the Board believes apply equally to
HELOCs, to recommend a number of changes to the required HELOC
disclosures related to finance charges. As under rules adopted in the
January 2009 Regulation Z Rule for open-end (not home-secured) credit,
this proposal would require HELOC creditors to group all charges
together and describe them in a manner consistent with consumers'
general understanding of costs (``interest charge'' or ``fee''),
without regard to whether the charges would be considered ``finance
charges,'' ``other charges,'' or neither. If different periodic rates
apply to different types of transactions, creditors would be required
to itemize interest charges for the statement period by type of
transaction (for example, interest on cash advances) or group of
transactions subject to different periodic rates.
In addition, the proposal would require creditors to disclose the
(1) total fees and (2) total interest imposed for the cycle, as well as
year-to-date totals for interest charges and fees. The year-to-date
figures are intended to help consumers understand annualized costs and
the overall cost of their HELOC better than does the effective APR. The
Board intends to conduct consumer testing of periodic statement notices
for HELOCs during the comment period for this proposal.
E. Change-in-Terms Notices
Currently, Regulation Z requires creditors to send, in most cases,
notices 15 days before the effective date of certain changes in the
account terms. Advance notice is not required in all cases; for
example, if an interest rate increases due to a consumer's default or
delinquency, notice has been required, but not in advance of the rate
increase. In addition, no notice (either advance or contemporaneous)
has been required if the specific change is set forth in the account
agreement.
Summary of Proposed Revisions
The Board proposes to revise the change-in-terms rules for HELOCs
to parallel in most respects the revisions adopted for open-end (not
home-secured) credit in the January 2009 Regulation Z Rule, including
the content, timing, and format of such notices. The Proposed revisions
to change-in-terms notice requirements for HELOCs are intended to
improve consumers' awareness about changes to their account terms or
increased rates due to delinquency, default, or other reason disclosed
in the agreement, and to enhance consumers' ability to make alternative
financial choices if necessary.
There are three major components of the proposal regarding change-
in-terms notices. First, the proposal would expand the circumstances in
which consumers receive advance notice of changed terms, including
increased rates. Second, the proposal would provide consumers with
earlier notice--45 days in advance of the effective date of the change
rather than 15 days. Third, the proposal would introduce format
requirements to make the disclosures about changes in terms, including
increased rates, more effective.
Rate increases. Currently, a change-in-terms notice is not required
if the agreement between the consumer and the creditor specifically
sets forth the change and the specific triggering event. In the January
2009 Regulation Z Rule, the Board expressed concern that the imposition
of penalty rates might come as a costly surprise to consumers who are
not aware of, or do not understand, what behavior constitutes a default
under the credit agreement. The Board also stated that it believed that
consumers would be the most likely to notice and be motivated to act to
avoid the imposition of the penalty rate if they receive a specific
notice alerting them of an imminent rate increase, rather than a
general disclosure stating the circumstances when a rate might
increase.
The Board believes that the same reasoning applies in the case of
HELOCs, although the circumstances under which a penalty rate may be
imposed on a HELOC are more restricted than for credit cards. The HELOC
proposal would also require advance notice of any increased rates due
to a triggering event specified in the agreement, such as loss of an
employee preferred rate because the consumer leaves the creditor's
employ.
Timing. The Board proposes that the requirement for notice 15 days
in advance of the effective date of a change be changed to require
notice 45 days in advance, for the same reasons the Board adopted this
requirement for open-end (not home-secured) credit. As discussed in the
January 2009 Regulation Z Rule, shorter notice periods, such as 30 days
or one billing cycle, may not provide consumers with sufficient time to
shop for and possibly obtain alternative financing, or to make other
financial adjustments. The 45-day advance notice requirement refers to
when the change-in-terms notice must be sent, but it may take several
days for the consumer to receive the notice. As a result, the Board
believes that the 45-day advance notice requirement would give
consumers, in most cases, at least one calendar month after receiving a
change-in-terms notice to seek alternative financing or otherwise to
mitigate the impact of an unexpected change in terms.
The Board is soliciting comment on whether it may be more difficult
to seek alternative financing or otherwise mitigate the impact of a
change in terms for HELOCs than for credit cards. The Board is also
soliciting comment on whether, because changes in terms are more
narrowly restricted for HELOCs than for credit card accounts, the
impact on consumers of term changes for HELOCs is likely to be less
severe than for credit cards and thus whether the proposed time period
is likely adequate.
Format. Few format requirements apply to change-in-terms
disclosures. As with account-opening disclosures, creditors commonly
intersperse change-in-terms notices with other amendments to the
account agreement, and both are provided in pamphlets in small print
and dense prose. Consumer testing conducted for the January 2009
Regulation Z Rule suggests that consumers tend to set aside change-in-
terms notices when they are presented as a separate pamphlet inserted
in the periodic statement. Testing also revealed that consumers are
more likely to identify the changes to their account correctly if the
changes in terms are summarized in a tabular format.
The Board therefore proposes that if a changed term is one that
must be provided in the account-opening summary table, creditors must
also provide that change in a summary table to enhance the
effectiveness of the change-in-terms notice. Further, if a notice
enclosed with a periodic statement discusses a change to a term that
must be disclosed in the account-opening summary table, or announces
[[Page 43437]]
that a default rate will be imposed on the account, a table summarizing
the impending change would have to appear on the periodic statement.
The Board intends to conduct consumer testing of change-in-terms
notices with a tabular format during the comment period for this
proposal.
F. Additional Protections
Account Terminations. Regulation Z currently permits a creditor to
terminate a HELOC for several reasons, including when the consumer has
``fail[ed] to meet the repayment terms of the agreement for any
outstanding balance.'' The proposal would revise this provision to
provide that a creditor may not terminate a HELOC plan for payment-
related reasons unless the consumer has failed to make a required
minimum periodic payment more than 30 days after the due date for that
payment. The Board is requesting comment on whether a delinquency
threshold of more than 30 days is appropriate, or whether some other
time period would better achieve the purposes of TILA.
The proposal is principally intended to protect consumers from so-
called ``hair-trigger'' terminations based on minor payment
infractions. Overall, the proposal is intended to strike a more
equitable balance between creditors' authority to protect themselves
against risk (and, for depositories, to ensure their safety and
soundness) and effective protection of HELOC consumers from constraints
on their credit privileges that do not correspond with reasonable
expectations.
Suspensions and credit limit reductions based on a significant
decline in the property value. Regulation Z permits a creditor
temporarily to suspend advances or reduce a credit line on a HELOC if
``the value of the dwelling that secures the plan declines
significantly below the dwelling's appraised value for purposes of the
plan.'' The commentary provides a ``safe harbor'' standard for
determining whether a decline is significant: specifically, a decline
in value is significant if it results in the initial difference between
the credit limit and the available equity (the ``equity cushion'')
diminishing by 50 percent.
Concerns have been expressed to the Board that the existing safe
harbor may not be a viable standard for the higher combined loan-to-
value (CLTV) HELOCs made in recent years. For loans nearing or
exceeding 100 percent CLTV when originated, for example, a decline in
value of a few dollars could result in more than a 50 percent decline
in the creditor's equity cushion, because the equity cushion was zero
or close to zero at origination. For these higher CLTV loans in
particular, creditors have indicated uncertainty about how to determine
whether a decline in value is ``significant.'' For their part, consumer
advocates have expressed concerns that the lack of guidance on the
proper application of the safe harbor allows creditors to take action
based on nominal declines in value.
To address these concerns, the proposal would revise the staff
commentary to delineate two ``safe harbors'' on which creditors could
rely to determine whether a decline in property value is
``significant'':
First, for plans with a CLTV at origination of 90 percent
or higher, a five (5) percent reduction in the property value on which
the HELOC terms were based would constitute a significant decline in
value.
Second, for plans with a CLTV at origination of under 90
percent, the existing safe harbor would be retained, under which a
decline in the value of the property securing the plan is significant
if, as a result of the decline, the creditor's equity cushion is
reduced by 50 percent.
Suspensions and credit limit reductions based on a material change
in the consumer's financial circumstances. Regulation Z permits a
creditor to suspend advances or reduce the credit limit of a HELOC when
``the creditor reasonably believes that the consumer will be unable to
fulfill the repayment obligations of the plan because of a material
change in the consumer's financial circumstances.'' Some creditors
appear uncertain about when action is permissible under this provision,
and many have requested more detailed guidance. Consumer advocates have
expressed dissatisfaction with the guidance on this provision as well,
voicing concerns that the lack of clear guidance may enable some
creditors to take action when consumers are fully capable of meeting
their repayment obligations.
The proposal is intended to protect consumers by ensuring that
creditors exercise prudent judgment in relying on this provision.
Revised commentary would clarify that evidence of a material change in
financial circumstances may include credit report information showing
late payments or nonpayments on the part of the consumer, such as
delinquencies, defaults, or derogatory collections or public records
related to the consumer's failure to pay other obligations. The
proposed commentary would clarify that any payment failures relied on
to show a material change in the consumer's financial circumstances
would need to have occurred within a reasonable time from the date of
the creditor's review of the consumer's credit performance. A six-month
safe harbor for this ``reasonable time'' is proposed.
The proposed commentary would retain the existing commentary's
guidance stating that evidence supporting a creditor's reasonable
believe that a consumer is ``unable'' to meet the repayment terms may
include the consumer's nonpayment of debts other than the HELOC. Under
the proposal, these payment failures would have to have occurred within
a reasonable time from the date of the creditor's review of the
consumer's credit performance, with a proposed six-month safe harbor.
The Board is requesting comment on whether late payments of 30 days or
fewer would be adequate evidence of a failure to pay a debt for
purposes of this provision, and whether and under what circumstances
credit score declines alone might satisfy the requirements of this
provision.
Reinstatement of accounts. Regulation Z requires creditors to
reinstate credit privileges once no circumstances permitting a freeze
or credit limit reduction under the statute or regulation exist.
Recently, due to declining property values and for other reasons,
HELOCs have been suspended and credit limits reduced more often than in
the past. Consumer groups and other federal agencies have raised
concerns about whether consumers are properly informed about the
creditor's obligation to reinstate credit lines and consumers' rights
to request reinstatement, and the Board independently researched the
reinstatement practices of several creditors. As a result, the Board
has determined that additional guidance is appropriate. The proposed
changes are intended to ensure that consumers have a meaningful
opportunity to request reinstatement and to have this request
investigated. Major proposed revisions include the following:
Requiring additional information in notices of suspension
or reduction about consumers' ongoing right to request reinstatement
and creditors' obligation to investigate this request.
Requiring creditors to complete an investigation of a
request within 30 days of receiving the request and to provide notice
of the results to consumers whose credit privileges will not be
restored.
Requiring creditors to cover the costs associated with
investigating the first reinstatement request by the consumer.
VI. Section-by-Section Analysis
Other than in the section-by-section analysis of Sec. 226.5b,
unless otherwise
[[Page 43438]]
indicated, references to the ``current'' or ``existing'' regulation and
staff commentary refer to the version of Regulation Z and staff
commentary finalized in the January 2009 Regulation Z Rule. The
regulation text and commentary in the January 2009 Regulation Z Rule
will not go into effect until July 1, 2010, and certain changes to both
the substance and effective date of these have been made by the Credit
Card Accountability, Responsibility and Disclosure Act of 2009 (Credit
Card Act), Public Law 111-24, enacted on May 22, 2009. The Board
determined, however, that it is appropriate for this proposed
rulemaking to refer to rules that have been finalized and will go into
effect in the near future, rather than the version of Regulation Z and
the commentary now in effect but that will soon be obsolete. The
section-by-section analysis of Sec. 226.5b and references to Sec.
226.5b refer to the version of Regulation Z and accompanying staff
commentary currently in effect.
Section 226.2 Definitions and Rules of Construction
2(a)(6) Definition of Business Day
Currently, Sec. 226.2(a)(6) contains two definitions of ``business
day.'' Under the general definition, a ``business day'' is a day on
which the creditor's offices are open to the public for carrying on
substantially all of its business functions. However, for some purposes
a more precise definition applies; ``business day'' means all calendar
days except Sundays and specified federal legal public holidays for
purposes of determining when disclosures are received under Sec. Sec.
226.15(e), 226.19(a)(1)(ii), 226.23(a), and 226.31(c)(1) and (2). The
Board also recently adopted the more precise definition for purposes of
the presumption in Sec. 226.19(a)(2) that consumers receive corrected
disclosures three business days after they are mailed and for other
timing determinations. See 74 FR 23289 (May 19, 2009). As discussed
more fully below in the section-by-section analysis under proposed
Sec. Sec. 226.5b(e) and 226.9(j)(2), the Board is proposing to use the
more precise definition of business day in providing presumptions of
when consumers receive mailed disclosures required under proposed
Sec. Sec. 226.5b(b) and 226.9(j)(1).
Section 226.4 Finance Charge
Various provisions of TILA and Regulation Z specify how and when
the cost of consumer credit expressed as a dollar amount, the ``finance
charge,'' is to be disclosed. The rules for determining which charges
make up the finance charge are set forth in TILA Section 106 and
Regulation Z Sec. 226.4. 15 U.S.C. 1605. In the January 2009
Regulation Z Rule, the Board made several revisions to Sec. 226.4.
Some of the revisions, such as those relating to transaction charges
imposed by credit card issuers for obtaining cash advances from
automated teller machines (ATMs) or making purchases in foreign
currencies or foreign countries, affect all open-end credit, including
HELOCs as well as open-end (not home-secured) credit. Other revisions
made in the January 2009 rule affect only open-end (not home-secured)
credit.
Charges for Credit Insurance or Debt Cancellation or Suspension
Coverage
In the case of charges for credit insurance, debt cancellation
coverage, and debt suspension coverage, some of the revisions affect
all open-end credit, while others affect only open-end (not home-
secured) credit. The Board is now proposing to revise Sec. 226.4 as it
applies to HELOCs in a manner generally paralleling the latter category
of revisions, as discussed further below.
In addition to the proposed revisions to Sec. 226.4 discussed in
this HELOC proposal, the Board is separately proposing a number of
other revisions to Sec. 226.4 and other sections of Regulation Z,
regarding finance charge, credit insurance, and debt cancellation or
suspension coverage, in its proposal regarding closed-end mortgage
lending under Regulation Z, published today elsewhere in this Federal
Register. Some of these proposed revisions would affect HELOCs as well
as closed-end mortgage loans. These other proposals are discussed
below; for a detailed discussion, see the Board's separate Federal
Register notice. The proposed regulatory text and proposed staff
commentary for Sec. 226.4, as well as other affected sections, appear
in the Board's separate Federal Register notice.
Premiums or other charges for credit life, accident, health, or
loss-of-income insurance are finance charges if the insurance or
coverage is ``written in connection with'' a credit transaction. 15
U.S.C. 1605(b); Sec. 226.4(b)(7). Creditors may exclude from the
finance charge premiums for credit insurance if they disclose the cost
of the insurance and the fact that the insurance is not required to
obtain credit. In addition, the statute requires creditors to obtain an
affirmative written indication of the consumer's desire to obtain the
insurance, which, as implemented in Sec. 226.4(d)(1)(iii), requires
creditors to obtain the consumer's initials or signature. 15 U.S.C.
1605(b). In 1996, the Board expanded the scope of the rule to include
plans involving charges or premiums for debt cancellation coverage. See
Sec. 226.4(b)(10) and (d)(3). 61 FR 49237 (September 19, 1996.)
The January 2009 Regulation Z Rule amended the regulation to treat
debt suspension coverage in the same way as debt cancellation coverage.
Debt suspension is the creditor's agreement to suspend, on the
occurrence of a specified event, the consumer's obligation to make the
minimum payment(s) that would otherwise be due. During the suspension
period, interest may continue to accrue or it may be suspended as well,
depending on the plan. Thus, under Sec. 226.4(b)(10), charges for debt
suspension coverage written in connection with a credit transaction are
finance charges, unless excluded under Sec. 226.4(d)(3). However, to
exclude the cost of debt suspension coverage from the finance charge,
creditors are also required to inform consumers, as applicable, that
the obligation to pay loan principal and interest is only suspended,
and that interest will continue to accrue during the period of
suspension. These revisions apply to all open-end plans (both HELOCs
and open-end (not home-secured) credit), as well as to closed-end
credit transactions.
Insurance or coverage sold after opening of an account. One of the
revisions made in the January 2009 Regulation Z Rule affecting only
open-end (not home-secured) credit involves the meaning of the phrase
``written in connection with a credit transaction.'' Prior to the
January 2009 rule, credit insurance or debt cancellation or suspension
coverage sold after consummation of a closed-end credit transaction or
after the opening of an open-end plan and upon a consumer's request was
considered not to be ``written in connection with the credit
transaction,'' and, therefore, a charge for such insurance or coverage
was not a finance charge. See comment 4(b)(7) and (8)-2. The Board
stated in its 2007 proposal for open-end (not home-secured) credit (72
FR 32945 (June 14, 2007) (June 2007 Regulation Z Proposal) that it
believed this approach remained sound for closed-end transactions,
which typically consist of a single transaction with a single advance
of funds. However, in an open-end plan, where consumers can engage in
credit transactions after the opening of the plan, a creditor may have
a greater opportunity to influence a consumer's decision whether or not
to purchase credit insurance or debt cancellation or suspension
coverage than in the case of closed-end credit. Accordingly, the
[[Page 43439]]
disclosure and consent requirements are important in open-end plans,
even after the opening of the plan, to ensure that the consumer is
fully informed about the offer of insurance or coverage and that the
decision to purchase it is voluntary. Therefore, the Board adopted in
the January 2009 Regulation Z Rule amendments to comment 4(b)(7) and
(8)-2, to state that insurance purchased after an open-end (not home-
secured) plan is opened is considered to be written ``in connection
with a credit transaction.'' New comment 4(b)(10)-2 provides the same
treatment to purchases of debt cancellation or suspension coverage.
Therefore, purchases of voluntary insurance or debt cancellation or
suspension coverage after account opening trigger disclosure and
consent requirements. This amendment does not apply to HELOCs; the
Board stated that it intended to consider this issue when the home-
equity credit plan rules are reviewed in the future.
The Board proposes to apply the same rule to HELOCs. Thus, comments
4(b)(7) and (8)-2 and 4(b)(10)-2 would be amended to state that credit
insurance or debt cancellation or suspension coverage purchase after
any open-end plan is opened is considered to be written in connection
with a credit transaction, and therefore charges for such insurance or
coverage would be finance charges unless the disclosure and consent
requirements under Sec. 226.4(d)(1) and (3) are met. The Board
believes that the same reasons for extending the ``written in
connection with'' rule to insurance or coverage purchased after the
opening of an open-end (not home-secured) plan exist with regard to
insurance or coverage purchased after the opening of a HELOC. Although
the creditors' ability to terminate or restrict HELOC accounts is more
limited than in the case of open-end (not home-secured) accounts,
consumers may not be aware of this difference and therefore consumers'
decisions about whether to purchase insurance or coverage may be
influenced by concern about their continued access to credit, or about
possible adverse changes to the terms and conditions of the account.
Telephone sales of insurance or coverage. Another of the revisions
made in the January 2009 Regulation Z Rule affecting only open-end (not
home-secured) credit involves sales of credit insurance or debt
cancellation or suspension coverage by telephone. Under Sec.
226.4(d)(1) and (d)(3), creditors may exclude from the finance charge
credit insurance premiums and debt cancellation or suspension charges
if the consumer signs or initials an affirmative written request for
the insurance or coverage, after disclosure of the fact that the
insurance or coverage is optional and of the cost.
In the June 2007 Regulation Z Proposal the Board proposed, and in
the January 2009 Regulation Z Rule adopted, an exception to the
requirement to obtain a written signature or initials for telephone
purchases of credit insurance or debt cancellation and debt suspension
coverage on an open-end (not home-secured) plan. Under new Sec.
226.4(d)(4), for telephone purchases, the creditor is permitted to make
the disclosures orally and the consumer may affirmatively request the
insurance or coverage orally, provided that the creditor (1) maintains
evidence that demonstrates that the consumer, after being provided the
disclosures orally, affirmatively elected to purchase the insurance or
coverage; and (2) mailed the disclosures under Sec. 226.4(d)(1) or
(d)(3) within three business days after the telephone purchase. Comment
4(d)(4)-1 provides that a creditor does not satisfy the requirement to
obtain an affirmative request if the creditor uses a script with
leading questions or negative consent. This new rule is consistent with
rules published by the federal banking agencies to implement Section
305 of the Gramm-Leach-Bliley Act regarding the sale of insurance
products by depository institutions, as well as guidance published by
the Office of the Comptroller of the Currency regarding the sale of
debt cancellation and suspension products. See 12 CFR 208.81 et seq.
regarding insurance sales; 12 CFR part 37 regarding debt cancellation
and debt suspension products. HELOCs subject to Sec. 226.5b were not
affected by this revision.
The Board adopted this approach pursuant to its exception and
exemption authorities under TILA Section 105. Section 105(a) authorizes
the Board to make exceptions to TILA to effectuate the statute's
purposes, which include facilitating consumers' ability to compare
credit terms and helping consumers avoid the uniformed use of credit.
15 U.S.C. 1601(a), 1604(a). Section 105(f) authorizes the Board to
exempt any class of transactions from coverage under any part of TILA
if the Board determines that coverage under that part does not provide
a meaningful benefit to consumers in the form of useful information or
protection. 15 U.S.C. 1604(f)(1). Section 105(f) directs the Board to
make this determination in light of specific factors. 15 U.S.C.
1604(f)(2). These factors are (1) the amount of the loan and whether
the disclosure provides a benefit to consumers who are parties to the
transaction involving a loan of such amount; (2) the extent to which
the requirement complicates, hinders, or makes more expensive the
credit process; (3) the status of the borrower, including any related
financial arrangements of the borrower, the financial sophistication of
the borrower relative to the type of transaction, and the importance to
the borrower of the credit, related supporting property, and coverage
under TILA; (4) whether the loan is secured by the principal residence
of the borrower; and (5) whether the exemption would undermine the goal
of consumer protection.
The Board stated in the January 2009 Regulation Z Rule that it
considered each of these factors carefully, and based on that review,
believed it is appropriate to exempt, for open-end (not home-secured)
plans, telephone sales of credit insurance or debt cancellation or debt
suspension plans from the requirement to obtain a written signature or
initials from the consumer. Requiring a consumer's written signature or
initials is intended to evidence that the consumer is purchasing the
product voluntarily; the rule contains safeguards intended to insure
that oral purchases are voluntary. Under the rule, creditors must
maintain tapes or other evidence that the consumer received required
disclosures orally and affirmatively requested the product. Comment
4(d)(4)-1 indicates that a creditor does not satisfy the requirement to
obtain an affirmative request if the creditor uses a script with
leading questions or negative consent. In addition to oral disclosures,
under the proposal consumers will receive written disclosures shortly
after the transaction.
The Board proposes to extend the telephone sales rule for credit
insurance and debt cancellation or suspension coverage, as adopted in
the January 2009 Regulation Z Rule, to HELOCs. Section 226.4(d)(4)
would be amended to apply to all open-end credit, not only open-end
(not home-secured) credit. The Board proposes this approach pursuant to
its exception and exemption authorities under TILA Section 105, and has
considered the factors specified in Section 105(f) as discussed above.
The proposed rule contains safeguards to ensure that the purchase is
voluntary. In addition, other proposed safeguards regarding eligibility
restrictions and revised disclosures, discussed in the Board's separate
proposal regarding closed-end mortgage lending provisions of Regulation
Z and published today
[[Page 43440]]
elsewhere in the Federal Register, would apply to HELOCs as well as
closed-end mortgage loans.
The fee for the credit insurance or debt cancellation or debt
suspension coverage would also appear on the first monthly periodic
statement after the purchase, and, as applicable, thereafter. As
discussed in the section-by-section analysis under Sec. 226.7, under
the proposal fees, including insurance and debt cancellation or
suspension coverage charges, would be better highlighted on statements.
Consumers who are billed for insurance or coverage they did not
purchase may dispute the charge as a billing error. At the same time,
the proposed amendments should facilitate the convenience to both
consumers and creditors of conducting transactions by telephone. The
proposed amendments, therefore, have the potential to better inform
consumers and further the goals of consumer protection and the informed
use of credit.
Proposals Regarding Finance Charge and Credit Insurance, Debt
Cancellation Coverage, and Debt Suspension Coverage Published in
Separate Federal Register Notice
As noted above, in addition to the proposed amendments discussed
above, the Board is separately proposing a number of amendments to the
rules in Sec. 226.4 regarding finance charge, and to the rules in
Sec. 226.4 and other sections of Regulation Z regarding credit
insurance and debt cancellation or suspension coverage. These other
proposed amendments are discussed in detail in the Board's separate
Federal Register notice, published today and appearing elsewhere in
this Federal Register. Also, the regulatory and staff commentary text
for these proposed amendments appears in the Board's separate Federal
Register notice. A brief discussion of these other proposed amendments
follows.
``All-in'' finance charge. The Board is proposing to adopt, for
closed-end mortgage lending under Regulation Z only, an ``all-in''
finance charge concept, under which all fees payable directly or
indirectly by the consumer and imposed directly or indirectly by the
creditor as an incident to or condition of the extension of credit
would be included in the finance charge. Thus, many of the exclusions
from the finance charge under Sec. 226.4(a), (c), (d), and (e) would
no longer apply to closed-end mortgage loans. For example, for closed-
end mortgage loans, charges for credit insurance and debt cancellation
or suspension coverage would be considered finance charges, whether or
not the insurance or coverage is optional and even though revised
disclosures would be required.
The Board is not proposing this ``all-in'' finance charge approach
for credit other than closed-end mortgage loans. Thus, the proposed
approach would not apply, for example, to closed-end non-mortgage
credit, or to HELOCs or other open-end credit. As discussed below in
the section-by-section analysis under Sec. Sec. 226.5 and 226.7,
disclosures for HELOCs would no longer be required to use the term
``finance charge,'' and would no longer be required to contain a
disclosure of the effective APR (i.e., an APR that includes not only
interest but also other fees that constitute finance charges). In the
January 2009 Regulation Z Rule, the Board adopted these changes for
open-end (not home-secured) credit. Therefore, the Board believes that
changing the definition of finance charge for HELOC accounts would not
have a material effect on the HELOC disclosures and accordingly is
unnecessary. However, the Board requests comment on whether there are
reasons why consideration should be given to changing the definition of
finance charge for HELOCs. For a detailed discussion of the Board's
proposals regarding the ``all-in'' finance charge for closed-end
mortgage loans, see the Board's separate Federal Register notice
published today.
Age or employment eligibility criteria. The Board is proposing to
add new Sec. 226.4(d)(1)(iv) and (d)(3)(v) to permit creditors to
exclude a credit insurance premium or debt cancellation or suspension
charge from the finance charge only if the creditor determines at the
time of enrollment that the consumer meets any applicable age or
employment eligibility criteria for the insurance or coverage. These
provisions would apply to all open-end credit, including HELOCs, as
well as to closed-end (non-real-property) credit. The Board is
proposing these new provisions because some creditors offer credit
insurance or debt cancellation or suspension products with eligibility
restrictions, but may not evaluate whether applicants actually meet the
criteria at the time the applicants request the product. As a result,
many consumers may not discover until they file a claim that they were
paying for a product for which they were not eligible. For a detailed
discussion of this proposal, see the Board's separate Federal Register
notice published today. Note that, for HELOCs and other open-end credit
in which the telephone purchase rule under Sec. 226.4(d)(4) could be
used, the new conditions under proposed Sec. 226.4(d)(1)(iv) and
(d)(3)(v) would still apply.
Revised disclosures for insurance or coverage. The Board is
proposing to add model clauses that would provide clearer information
to consumers about the optional nature and costs of credit insurance or
debt cancellation or suspension coverage. The model clauses would apply
to open-end as well as closed-end credit transactions, and appear in
Appendix G-16(C) for open-end credit and Appendix H-17(C) for closed-
end credit. The disclosure language is based on consumer testing
conducted by the Board to determine whether consumers understood the
optional nature and costs of credit insurance or debt cancellation or
suspension coverage. In addition, the disclosures would contain
language about eligibility restrictions and a reference to the Board's
Web site to learn more about the product. These model clauses would be
in addition to the Debt Suspension Model Clause found at Appendix G-
16(A) for open-end credit and Appendix H-17(A) for closed-end credit.
For a detailed discussion of this proposal, see the Board's separate
Federal Register notice published today.
Section 226.5 General Disclosure Requirements
Section 226.5 contains the general requirements for open-end credit
disclosures under Regulation Z, both for credit cards and other open-
end (not home-secured) credit and for HELOCs subject to Sec. 226.5b.
Section 226.5 addresses, among other requirements, that disclosures be
clear and conspicuous, in writing, and in a form the consumer can keep,
as well as requirements concerning terminology, formats for
disclosures, and timing of disclosures. In the January 2009 Regulation
Z Rule, the Board adopted a number of changes to the general disclosure
requirements for open-end (not home-secured) credit, but did not change
the requirements applicable to HELOCs. The Board is now proposing to
revise the format and other disclosure requirements for HELOCs in a
manner generally paralleling the revisions in the requirements for
open-end (not home-secured) credit.
In addition to the proposed changes to the specific rules for
disclosures, the Board proposes to adopt a new comment 5-1 that would
provide guidance in situations where a creditor is uncertain whether an
open-end credit plan is covered by the Sec. 226.5b rules for HELOCs or
the rules for open-end (not home-secured) credit. The Board understands
that there is uncertainty for
[[Page 43441]]
creditors that offer open-end credit secured by real property, where it
is unclear whether that property is, or remains, the consumer's
dwelling. Such creditors may be uncertain how they should comply with
the January 2009 Regulation Z Rule. The Board solicited comment on this
issue in the May 2009 proposal regarding technical revisions and other
changes to open-end (not home-secured) credit rules. 74 FR 20784 (May
5, 2009) (May 2009 Regulation Z Proposal). The comment period ended on
June 4, 2009. Financial institutions commenters suggested that
creditors be permitted to treat all open-end credit secured by
residential property as covered by Sec. 226.5b, rather than the rules
for open-end (not home-secured) credit, regardless of whether the
property is the consumer's dwelling. Consumer group commenters did not
address this issue.
Proposed comment 5-1 generally permits creditors to assume that the
property securing the line of credit is the principal residence or a
second or vacation home of the consumer and, therefore, that the line
of credit is covered by the HELOC rules. (The HELOC rules cover not
only credit secured by consumer's principal residence, but also credit
secured by vacation and second homes, assuming the credit is for
personal, family, or household purposes.) However, creditors are also
permitted to investigate the actual use of the property. If the
creditor ascertains that the property is not the consumer's principal
residence or a second or vacation home, the creditor may comply with
the rules applicable to open-end (not home-secured) credit under
Regulation Z. In this case, if the credit plan is accessible by credit
card, the creditor must comply with, in addition to the rules
applicable to open-end credit generally, the rules for open-end (not
home-secured) credit card plans under Sec. 226.5a and associated
sections in the regulation. The Board requests comment on whether the
proposed comment provides useful and appropriate guidance.
5(a) Form of Disclosures
5(a)(1) General
Paragraph 5(a)(1)(i)
Section 226.5(a)(1)(i) requires that disclosures required under the
regulation be clear and conspicuous. Comment 5(a)(1)-1 states that the
``clear and conspicuous'' standard generally requires that disclosures
be in a reasonably understandable form. The comment further states that
disclosures for credit card applications and solicitations under Sec.
226.5a, and related disclosures such as those required to be in a
tabular format under Sec. 226.6(b)(1), must also be readily noticeable
to the consumer. Comment 5(a)(1)-3 explains that the disclosures
subject to the readily noticeable standard must be given in a minimum
of 10-point font and cross-references the rule that the APR for
purchases in an open-end (not home-secured) plan under Sec. Sec.
226.5a(b)(1) and 226.6(b)(2)(i) must be in a minimum 16-point font.
The Board proposes to revise comments 5(a)(1)-1 and -3 to apply the
same standards to home-equity plan disclosures as those applicable to
the comparable disclosures for credit cards and other open-end (not
home-secured) credit. Specifically, the Board proposes to revise
comments 5(a)(1)-1 and -3 to require that the following home-equity
disclosures be readily noticeable to the consumer, meaning that they
must be provided in a minimum font size of 10-point: disclosures
required to be given in a tabular format within three business days
after application (Sec. 226.5b(b)); disclosures required to be given
in a tabular format at account opening (Sec. 226.6(a)(1)); change-in-
terms disclosures required to be given in a tabular format (Sec.
226.9(c)(1)(iii)(B)); and disclosures required to be given in a tabular
format when a rate is increased due to delinquency or default under
Sec. 226.5b(f)(2) (Sec. 226.9(i)(4)). The proposal also adds a cross-
reference to the 16-point minimum font size requirement for the APR in
a home-equity plan under proposed Sec. Sec. 226.5b(c)(10) and
226.6(a)(2)(vi).
The Board believes that the same reasoning underlying the minimum
font size requirements for open-end (not home-secured) plan disclosures
applies to the comparable home-equity plan disclosures. In the June
2007 Regulation Z Proposal, the Board stated its belief that special
formatting requirements, such as a tabular format and font size
requirements, are needed to highlight for consumers the importance and
significance of certain disclosures required at application or
solicitation for a credit card, and at the opening of a credit card
account. Similarly, for disclosures that may appear on periodic
statements, such as the change-in-terms disclosures under Sec.
226.9(c)(2)(iii)(B) and disclosures when a rate is increased due to
delinquency, default or as a penalty under Sec. 226.9(g)(3)(ii), the
Board stated that highlighting these disclosures by using a minimum 10-
point font size is important because consumers do not expect to see
these disclosures each billing cycle and because the changes may have a
significant impact on the consumer.
Consumer comments on the June 2007 Regulation Z Proposal noted that
credit card disclosures are in fine print and argued that disclosures
should be given in a larger font. Many consumer and consumer group
commenters suggested that the regulation require a minimum 12-point
font for disclosures. In consumer testing conducted by the Board in the
open-end (not home-secured) credit review demonstrated that
participants were able to read and notice information in a 10-point
font. Consumer testing conducted by the Board in the home-equity credit
review showed the same result. Accordingly, the Board proposes to
require that the HELOC disclosures discussed above must be provided in
a minimum 10-point font size.
Paragraph 5(a)(1)(ii)
Paragraph 5(a)(1)(ii)(A)
Section 226.5(a)(1)(ii) requires that disclosures required by the
regulation be given in writing and in a form that the consumer may
keep. Section 226.5(a)(1)(ii)(A) specifies several exceptions to the
requirement that disclosures be in writing, including account-opening
disclosures of charges imposed as part of an open-end (not home-
secured) plan that are not required to be disclosed in a tabular format
under Sec. 226.6(b)(2) and related change-in-terms disclosures under
Sec. 226.9(c)(2)(ii)(B), when such charges change. The Board proposes
to add a parallel exception, applicable to home-equity plans, for
disclosures of certain charges not required to be given in tabular
format at the time of account opening and for related change-in-terms
disclosures.
The Board believes that the same reasoning underlying the exception
to the written disclosure requirement for certain open-end (not home-
secured) plan disclosures applies to home-equity plan disclosures. As
discussed in the January 2009 Regulation Z Rule, in permitting certain
charges in open-end (not home-secured) credit to be disclosed either
orally or in writing (and after account opening, as discussed further
under Sec. 226.5(b)(1)(ii) below), the Board's goal was to better
ensure that consumers receive disclosures at a time and in a manner in
which they would be likely to notice them. At account opening, both for
open-end (not home-secured) plans and for HELOCs, written disclosure
has obvious merit because account opening is a time when a consumer
must assimilate information that may influence major decisions by
[[Page 43442]]
the consumer about how, or even whether, to use the account. During the
life of an account, however, a consumer may sometimes need to decide
whether to purchase a single service from the creditor that may not be
central to the consumer's use of the account, such as an expedited
telephone payment service. The consumer may have become accustomed to
purchasing similar services by telephone for other financial products,
such as credit cards, and expect to receive an oral disclosure of the
charge for the service during the same telephone call. Permitting oral
disclosure of charges that are not central to the consumer's use of the
account would be consistent with consumer expectations and with the
business practices of creditors.
Accordingly, the Board proposes to exempt from the written
disclosure requirement the following HELOC disclosures: charges not
required to be in given in tabular format at account opening under
Sec. 226.6(a)(2) (i.e., charges that are not the most significant
charges related to the plan) and related change-in-terms notices under
Sec. 226.9(c)(1)(ii)(B). A creditor would not be permitted to increase
the APR (assuming a rate increase were permissible at all) without
providing written notice, because the APR is a disclosure required to
be given in tabular format. Of course, any change in terms in a HELOC
subject to Sec. 226.5b would have to be permissible under Sec.
226.5b(f). For example, the charge for an expedited telephone payment
service would not be permitted to be increased; however, the charge
could be decreased, or a new optional telephone payment service, with
its associated charge, could be introduced, because these would be
beneficial changes permitted under Sec. 226.5b(f).
The most significant charges would not be covered by the proposed
exemption and would continue to have to be disclosed in writing at
account opening, because these charges would be required to be shown in
the tabular account-opening disclosures. For example, the annual fee,
early termination fee, penalty fees such as late payment and over-the-
credit-limit fees, and fees to use the account such as transaction fees
would have to be disclosed in writing at account opening in the tabular
disclosure. Further, any changes in these charges (assuming a change
were permissible at all, which in most cases it would not be) would be
required to be disclosed in a written change-in-terms notice under
Sec. 226.9(c).
Paragraph 5(a)(1)(ii)(B)
Application disclosures. Section 226.5(a)(1)(ii)(B) lists several
exceptions to the requirement that disclosures be in a form that the
consumer may keep, including the disclosures required to be given at
the time of application for a HELOC under Sec. 226.5b(d) (to be
redesignated Sec. 226.5b(c) under the proposal). The Board proposes to
eliminate this exception because, as discussed in greater detail below
in this section-by-section analysis under Sec. Sec. 226.5(b)(4) and
226.5b(b), the Board is proposing to change the timing and content of
HELOC disclosures under Sec. 226.5b(c). Under the proposal, these
disclosures would be required to show the terms and conditions that
would apply to the particular consumer, rather than only describing the
creditor's plans in general terms. In addition, Sec. 226.5b(c)
disclosures would be given within three business days after application
rather than at the time of application.
The purpose of the existing exception to the retainability
requirement was to avoid requiring creditors to give consumers a
separate disclosure document, in addition to the application form
itself. When proposing and adopting in final form the amendments to
Regulation Z implementing the 1988 Home Equity Loan Act (cited above),
the Board noted that the exception from the retainability requirement
would permit the creditor to place the disclosures on the application
form that the consumer would return to the creditor to apply for the
plan. 54 FR 3063 (January 23, 1989); 54 FR 24670 (June 9, 1989). This
purpose for the exception from the retainability requirement would not
apply under the proposal because the relevant disclosures would be not
be provided at the time of application, but instead within three
business days later.
Home-equity brochure. The current regulation does not exempt the
home-equity brochure required under Sec. 226.5b(e) from the
retainability requirement under the current regulation, even though the
brochure is required to be provided to a consumer at the time of
application. One reason is that the brochure is not easily incorporated
into the application form itself. As discussed under Sec. 226.5b(a)
below, the Board is proposing to replace the brochure with a shorter
disclosure serving the same purpose of informing consumers generally
about home-equity plan features and risks (``Key Questions to Ask about
Home Equity Lines of Credit'' or ``Key Questions'' document). The
retainability requirement would continue to apply to this disclosure;
it would be a form developed and specifically prescribed by the Board,
and therefore would not necessarily be readily incorporated into the
application form itself.
Paragraph 5(a)(1)(iii)
Under Sec. 226.5(a)(1)(iii), a creditor may give a consumer open-
end credit disclosures in electronic form, as long as the creditor
complies with the consumer notice and consent procedures and other
applicable provisions of the Electronic Signatures in Global and
National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.). Under
certain circumstances, however, the disclosures required at application
for a home-equity plan under Sec. 226.5b (as well as the application
and solicitation disclosures for credit cards under Sec. 226.5a and
disclosures in open-end credit advertising under Sec. 226.16) may be
provided to a consumer in electronic form without regard to the
requirements of the E-Sign Act. Section 226.5b(a)(3) (proposed to be
redesignated Sec. 226.5b(a)(2)), in turn, requires that for the Sec.
226.5b disclosures to be provided in electronic form, the application
must be accessed by the consumer in electronic form and the disclosures
must be provided on or with the application. The Board proposes to
continue to apply this exception from the E-Sign consumer notice and
consent requirements to the disclosure that would be provided to a
consumer at application under proposed Sec. 226.5b(a) (i.e., ``Key
Questions'' document).
The purpose of these exceptions from the E-Sign Act's notice and
consent requirements is to facilitate credit shopping. When proposing
these exceptions, the Board stated its belief that the exceptions would
eliminate a potentially significant burden on electronic commerce
without increasing the risk of harm to consumers: requiring consumers
to follow the notice and consent procedures of the E-Sign Act to access
an online application, solicitation, or advertisement is potentially
burdensome and could discourage consumers from shopping for credit
online; at the same time, there appears to be little, if any, risk that
the consumer will be unable to view the disclosures online when they
are already able to view the application, solicitation, or
advertisement online. 72 FR 63462 (November 9, 2007).
This exception would not be extended to the disclosures that would
be provided within three business days after application under proposed
Sec. 226.5b(b). The credit shopping process takes place primarily when
a consumer reviews applications and associated disclosures and decides
whether to
[[Page 43443]]
submit an application. Three business days after the consumer has
submitted an application, the consumer may have completed the credit
shopping process. Requiring compliance with the E-Sign Act's notice and
consent procedures for disclosures at this point would not likely
hinder credit shopping, and would ensure that the consumer is able and
willing to receive disclosures in electronic form. In addition,
compliance with the E-Sign Act for disclosures provided within three
business days after application should not be unduly burdensome,
because the time between application and three days later should be
sufficient for the creditor to carry out the E-Sign Act notice and
consent procedures.
5(a)(2) Terminology
Paragraph 5(a)(2)(ii)
``Finance charge'' and ``annual percentage rate.'' Section
226.5(a)(2) relates to terminology used in disclosures. Section
226.5(a)(2)(ii) requires that for HELOCs subject to Sec. 226.5b, the
terms ``finance charge'' and ``annual percentage rate,'' when required
to be disclosed with a corresponding amount or percentage rate, must be
more conspicuous than any other required disclosure, with some
exceptions. This regulatory provision implements section 122(a) of
TILA; 15 U.S.C. 1632(a).
In the January 2009 Regulation Z Rule, the Board eliminated the
``more conspicuous'' rule for open-end (not home-secured) credit, using
the Board's authority under TILA Section 105(a) to make ``such
adjustments and exceptions for any class of transactions, as in the
judgment of the Board are necessary or proper to effectuate the
purposes of this title, to prevent circumvention or evasion thereof, or
to facilitate compliance therewith.'' 15 U.S.C. 1604(a). The Board
concluded that requiring the terms ``annual percentage rate'' and
``finance charge'' to be more conspicuous than other disclosures was
unnecessary, because creditors would be required to emphasize APRs and
certain other finance charges by disclosing them in a tabular format
with a minimum 10-point font size (or 16-point font size as required
for the APR for purchases). Furthermore, the Board noted that the use
of the term ``finance charge'' in disclosures for open-end (not home-
secured) plans is no longer required; as a result, creditors would in
many cases not use the term ``finance charge'' at all.
The Board believes that the same reasoning applies to the terms
``finance charge'' and ``annual percentage rate'' when disclosed for
home-equity plans. As for open-end (not home-secured) credit, for
HELOCs subject to Sec. 226.5b the Board is proposing to require
creditors to disclose the APR and certain other finance charges in a
tabular format with a minimum 10-point font size (or 16-point font size
for the APR the first time it appears in the table). The Board is also
proposing to eliminate the requirement that creditors use the term
``finance charge'' in disclosures for HELOCs subject to Sec. 226.5b
(see discussion in this section-by-section analysis under Sec. 226.7).
Accordingly, under the Board's authority in TILA Section 105(a)
discussed above, the Board proposes to revise Sec. 226.5(a)(2)(ii) to
eliminate the ``more conspicuous'' rule for the terms ``finance
charge'' and ``annual percentage rate'' for home-equity plans. Comments
5(a)(2)-1, -2, and -3, providing guidance on the ``more conspicuous''
rule, would be deleted, and comment 5(a)(2)-4 would be renumbered as
5(a)(2)-1.
``Borrowing period,'' ``repayment period,'' and ``balloon
payment.'' The Board also proposes to revise Sec. 226.5(a)(2)(ii) to
require the use of the terms ``borrowing period,'' ``repayment
period,'' and ``balloon payment'' in disclosures required to be given
in tabular format in HELOCs subject to Sec. 226.5b, as applicable. In
consumer testing conducted by the Board to develop the proposed revised
home-equity plan disclosures, consumers understood these terms. In
particular, consumers overall understood that the term ``borrowing
period'' referred to the part of a HELOC term during which consumers
could obtain funds, whereas they did not clearly understand the
alternative term ``draw period,'' which is used in the existing
regulation's home-equity sample disclosures (Appendices G-14A and G-
14B).
``Required'' for required credit insurance or debt cancellation or
suspension coverage. Section 226.5(a)(2)(ii) would also be revised to
require that, if credit insurance or debt cancellation or suspension
coverage is required as part of the plan, the term ``required'' must be
used and the program must be identified by its name. This would be
parallel to the requirement adopted in the January 2009 Regulation Z
Rule for open-end (not home-secured) credit under Sec.
226.5(a)(2)(iii) discussed below.
Paragraph 5(a)(2)(iii)
Section 226.5(a)(2)(iii) contains three terminology requirements
adopted in the January 2009 Regulation Z Rule for open-end (not home-
secured) credit. First, if credit insurance or debt cancellation or
suspension coverage is required as part of the plan, the term
``required'' must be used and the program must be identified by its
name. This requirement is proposed to apply to HELOCs subject to Sec.
226.5b as well (under proposed Sec. 226.5(a)(2)(ii), as discussed
above).
Second, Sec. 226.5(a)(2)(iii) requires a creditor to use the term
``penalty APR'' as applicable. Third, Sec. 226.5(a)(2)(iii) prohibits
a creditor from using the term ``fixed'' to describe a rate unless the
creditor also specifies a time period during which the rate will be
fixed and the rate will not increase during that period, or, if the
creditor does not disclose a time period during which the rate will be
fixed, the rate will not increase while the plan is open.
These latter two rules would not be applied to HELOCs subject to
Sec. 226.5b; accordingly, Sec. 226.5(a)(2)(iii) would be revised to
exclude home-equity plans from the terminology requirements relating to
the terms ``penalty APR'' and ``fixed.'' Regarding the ``penalty APR''
requirement, the Board's review of home-equity plans and HELOC creditor
practices indicates that most HELOCs do not have penalty rates. Even if
a penalty rate could apply, under Sec. 226.5b(f) such a rate could
apply to balances (both outstanding and future) only if an event
permitting termination and acceleration of the plan, such as a
significant payment default (more than 30 days late), has occurred. See
proposed Sec. 226.5b(f)(2)(ii) and comment 5b(f)(2)(ii)-1. In general,
rate increases of any kind, including application of penalty rates, are
much more restricted for HELOCs subject to Sec. 226.5b than for credit
card accounts, in which penalty rates can be applied even for minor
defaults (although only on future transactions). For these reasons, the
disclosures required for HELOCs, unlike those for credit card accounts,
do not include penalty rates; see the discussion of this issue under
Sec. Sec. 226.5b and 226.6, below. Therefore, a terminology
requirement relating to penalty rates is inapplicable.
Regarding using the term ``fixed'' to describe a rate, the Board
believes that the reason for the prohibition applicable to credit card
accounts does not exist for HELOCs. Credit card accounts have been
marketed as having ``fixed'' rates even though rates could be increased
at any time and for any reason. The rates of HELOCs subject to Sec.
226.5b generally may only be changed in accordance with a publicly
available index not under the control of the creditor or due to a
circumstance permitting termination and acceleration. Thus,
[[Page 43444]]
HELOC rates are generally variable, and would not be marketed as
``fixed.''
5(a)(3) Specific Formats
Section 226.5(a)(3) contains formatting requirements applicable to
credit card and other open-end (not home-secured) credit, including
tabular format requirements for applications and solicitations under
Sec. 226.5a, account-opening disclosures under Sec. 226.6(b),
disclosures accompanying checks that access a credit card account under
Sec. 226.9(b)(3), change-in-terms notices under Sec. 226.9(c)(2), and
notices of application of a penalty rate under Sec. 226.9(g). Section
226.5(a)(3) also includes formatting requirements for periodic
statements under Sec. 226.7(b)(6) and (b)(13). In addition, this
provision sets forth formatting requirements for HELOC disclosures at
application under Sec. 226.5b(b), but does not require use of a
tabular format for these or any other HELOC disclosures.
The Board proposes to adopt tabular format requirements for HELOC
disclosures, paralleling requirements adopted for credit card and other
open-end (not home-secured) credit in the January 2009 Regulation Z
Rule. Section 226.5(a)(3)(ii) would be revised to require a tabular
format for HELOC disclosures currently required to be provided at the
time of application. (The timing of these disclosures would be changed
from at application to within three business days after application.
See the discussion in this section-by-section analysis under Sec. Sec.
226.5(b)(4) and 226.5b(b) below.) The tabular format requirement is
discussed in detail under Sec. 226.5b(b)(2)) below. The proposal would
also revise Sec. 226.5(a)(3) to eliminate the requirement that certain
disclosures must precede other disclosures, as discussed below under
Sec. 226.5b(b)(2). Similarly, Sec. 226.5(a)(3)(iii), (iv), (vi), and
(vii) would be revised to impose formatting requirements comparable to
those applicable to credit card and other open-end (not home-secured)
credit for home-equity plan account-opening disclosures (Sec.
226.6(a)(1)), periodic statements (Sec. 226.7(a)(6)), change-in-terms
notices (Sec. 226.9(c)(1)(iii)(B)), and notices of application of a
penalty rate (Sec. 226.9(i)(4)), as discussed in this section-by-
section analysis below under those disclosure provisions.
5(b) Time of Disclosures
5(b)(1) Account-Opening Disclosures
5(b)(1)(ii) Charges Imposed as Part of an Open-End Plan
In the January 2009 Regulation Z Rule, the Board adopted new Sec.
226.5(b)(1)(ii) to provide, for open-end (not home-secured) credit, an
exception to the requirement to provide account-opening disclosures
before the first transaction under the plan. The exception applies to
charges that are imposed as part of an open-end (not home-secured)
credit plan but that are not required to be disclosed in a tabular
format in the account-opening disclosures under Sec. 226.6(b)(2).
Under Sec. 226.5(a)(1)(ii), these disclosures do not have to be
provided in writing. Thus, a creditor may disclose these charges orally
or in writing, after account opening but before the consumer agrees to
pay or becomes obligated to pay for the charge, as long as the creditor
discloses them at a time and in a manner such that a consumer would be
likely to notice them.
As discussed above, the Board is proposing to revise Sec.
226.5(a)(1)(ii) to apply the same exception to the written disclosure
requirement to HELOCs subject to Sec. 226.5b. For the reasons
discussed above under Sec. 226.5(a)(1)(ii), the Board also proposes to
revise Sec. 226.5(b)(1)(ii) to except the same charges from the
general timing requirements. These are charges that are not required to
be provided in a tabular format in the account-opening disclosures in a
home-equity plan, and therefore would be expected to be less
significant. Further, as discussed above, disclosure of these charges
at the time a consumer agrees to pay the charge may be more useful to
the consumer, because the disclosure would come at a time when the
consumer would be more likely to notice the disclosure.
Comment 5(b)(1)(ii)-1, which provides guidance on compliance with
the provisions of Sec. 226.5(b)(1)(ii), would be revised to apply to
HELOCs as well as open-end (not home-secured) plans. New comment
5(b)(1)(ii)-2 would be added to explain the relationship of the
provisions of Sec. 226.5(b)(1)(ii) to the restrictions on changes in
terms of HELOCs under Sec. 226.5b(f). The comment states that even if
certain charges may be disclosed at a time later than account opening,
the creditor would not be permitted to impose a charge for a feature or
service previously available under the plan for no charge, or to
increase a fee for a service previously available under the plan for a
lower charge.
5(b)(1)(iv) Membership Fees
Section 226.5(b)(1)(iv)(A) provides that in general, a creditor may
not collect any fee before account-opening disclosures are given.
However, this provision allows creditors to collect a membership fee at
an earlier time, as long as the consumer may, after receiving the
disclosures, reject the plan and have the fee refunded. Section
226.5(b)(1)(iv)(B) provides that this provision does not apply to
HELOCs, because separate rules about collection and refunds of fees
apply under Sec. Sec. 226.5b(g) and (h) and 226.15, which would cover
membership fee reimbursements. Section 226.5b(g) requires that a
creditor refund all fees paid if a term changes after application and
the consumer decides not to open a HELOC account; Sec. 226.5b(h)
requires a refund of all fees upon the consumer's request within three
business days after receipt of the application disclosures. (Under the
proposal, Sec. 226.5b(g) and (h) would be redesignated Sec. 226.5b(d)
and (e), respectively.) Section 226.5(b)(1)(iv)(B) would be revised by
adding a cross-reference to Sec. Sec. 226.5b(d) and (e) and 226.15, to
ensure that users of the regulation are aware that even though the fee
refundability rules of Sec. 226.5(b)(1)(iv)(A) do not apply, home-
equity plans are subject to other rules regarding refunds of fees.
5(b)(1)(v) Application Fees
Section 226.5(b)(1)(v) provides that application fees excludable
from the finance charge under Sec. 226.4(c)(1) are subject to the same
rules regarding collection and refundability as other membership fees
under Sec. 226.5(b)(1)(iv). To clarify that HELOCs are not subject to
these rules, but instead are subject to the separate rules about
collection and refunds of fees under Sec. Sec. 226.5b(d) and (e) and
226.15, Sec. 226.5(b)(1)(v) would be redesignated Sec.
226.5(b)(1)(v)(A), and a new Sec. 226.5(b)(1)(v)(B) would be added,
parallel to Sec. 226.5(b)(1)(iv)(B).
5(b)(2) Periodic Statements
Paragraph 5(b)(2)(ii)
Section 226.5(b)(2)(ii) requires that the creditor mail or deliver
a periodic statement at least 14 days before the end of any period
allowing the consumer to pay to avoid the imposition of finance or
other charges. Section 106(b) of the 2009 Credit Card Act (cited
above), amends TILA Section 163 (15 U.S.C. 1666b) to require that the
period between the mailing of the statement and the due date to avoid
finance or other charges must be at least 21 days. On July 15, 2009,
the Board published an interim final rule amending Sec.
226.5(b)(2)(ii) to implement this provision of the Credit Card Act,
which under the legislation becomes effective 90 days after enactment.
Accordingly, no proposed amendments to Sec. 226.5(b)(2)(ii) are in
this proposal. When this proposal is adopted into a
[[Page 43445]]
final rule, Sec. 226.5(b)(2)(ii) will reflect the amendments made to
implement the Credit Card Act.
5(b)(4) Home-Equity Plan Application and Three Days After Application
Disclosures
Section 226.5(b)(4) states that the disclosures required at the
time of an application for a home-equity plan must be provided in
accordance with the timing requirements of Sec. 226.5b. As discussed
under Sec. 226.5b below, the Board is proposing to change the timing
requirements for home-equity plan disclosures; some disclosures would
be required at the time of application, and additional disclosures
would be required three business days after application. Accordingly,
Sec. 226.5(b)(4) would be revised to reflect the new timing
requirements for the disclosures under Sec. 226.5b, and to correct the
cross-reference to the applicable paragraphs in that section. See the
discussion of the proposed changes in the disclosure timing
requirements under Sec. 226.5b below.
Section 226.5b Requirements for Home-Equity Plans
Summary of Proposed Disclosure Requirements
Current Sec. 226.5b, which implements TILA Section 127A, generally
requires creditors to provide to the consumer two types of disclosures
at the time an application for a HELOC is provided: ``application
disclosures'' and a home-equity brochure published by the Board (the
``HELOC brochure''). 15 U.S.C. 1637a. The application disclosures and
HELOC brochure provide information about the creditor's HELOC plans and
how HELOCs work; neither contains transaction-specific information
about the terms of the HELOC offered by a creditor to a consumer, such
as the credit limit or APR.
Application disclosures. The application disclosures that a
creditor generally must provide to a consumer on or with an application
for a HELOC plan must contain details about the creditor's HELOC plan,
including the length of the draw and repayment periods, how the minimum
required payment is calculated, whether a balloon payment will be owed
if a consumer only makes minimum required payments, payment examples,
and what fees are charged by the creditor to open, use, or maintain the
plan. Again, they do not include information that is dependent on the
value of the dwelling or a borrower's creditworthiness, such as a
credit limit or the APRs offered to the consumer, because the
application disclosures are provided before underwriting takes place.
The Board proposes to replace the application disclosures with
transaction-specific HELOC disclosures (``early HELOC disclosures'')
that must be given within three business days after application (but no
later than account opening). Under the proposal, the information
required to be disclosed in the early HELOC disclosures would differ
from the information required to be disclosed as part of the current
application disclosures. For example, the Board proposes to require
creditors to include several additional disclosures in the early HELOC
disclosures that are not currently required to be disclosed as part of
the application disclosures, such as the credit limit and the APRs
being offered to the consumer. In addition, the Board proposes not to
require creditors to provide certain disclosures in the early HELOC
disclosures that are currently required to be disclosed as part of the
application disclosures. For example, creditors generally would not be
required to disclose as part of the early HELOC disclosures certain
information related to variable rates currently required in the
application disclosures under Sec. 226.5b(d)(12), such as the
historical payment example table. Moreover, the Board proposes to
revise the disclosure requirements for other information currently
required to be disclosed in the application disclosures and included in
the proposed early HELOC disclosures. For example, the application
disclosures currently must include several payment examples based on a
$10,000 outstanding balance. Under the proposal, the Board would
require payment examples in the early HELOC disclosures, but would
revise the payment examples to assume the consumer borrowed the full
credit line offered to the consumer (as disclosed in the early HELOC
disclosures) at the beginning of the draw period and drew no additional
advances.
Moreover, the Board proposes stricter format requirements for the
proposed early HELOC disclosures than currently are required for the
application disclosures. Currently, the application disclosures may be
provided in a narrative form, as shown in the current model forms for
the application disclosures (see current Home-equity Samples G-14A and
G-14B of Appendix G). Under the proposal, the early HELOC disclosures
generally must be provided in the form of a table with headings,
content, and format substantially similar to any of the applicable
tables found in proposed G-14 in Appendix G.
HELOC brochure. Currently, a creditor is required to provide to a
consumer the HELOC brochure or a suitable substitute at the time an
application for a HELOC is provided to the consumer. The HELOC brochure
is around 20 pages long and provides general information about HELOCs
and how they work, as well as a glossary of relevant terms and a
description of various features that can apply to HELOCs. The Board
proposes to eliminate the requirement for creditors to provide to
consumers the HELOC brochure with applications for HELOCs. Instead, the
Board proposes to require that a creditor must provide a new document
published by the Board entitled, ``Key Questions to Ask about Home
Equity Lines of Credit'' (the ``Key Questions'' document) to a consumer
when a HELOC application is given to the consumer. This ``Key
Questions'' document would be a one-page document that is designed to
contain simple, straightforward and concise information about HELOCs,
including potentially risky features.
Current Comments 5b-2 and 5b-3
Current comments 5b-2 and 5b-3 provide transaction rules that were
included in the commentary when Sec. 226.5b was added to Regulation Z
in 1989. Specifically current 5b-2 provides that the notice rules of
Sec. 226.9(c) apply if, by written agreement under Sec.
226.5b(f)(3)(iii), a creditor changes the terms of a HELOC plan entered
into on or after November 7, 1989 at or before the plan's scheduled
expiration (for example, by renewing the plan on different terms). A
new plan results, however, if the plan is renewed (with or without
changes to the terms) after the scheduled expiration. The new plan is
subject to all open-end credit rules, including Sec. Sec. 226.5b,
226.6, and 226.15.
The Board proposes a technical revision to this comment to delete
the reference to November 7, 1989, as obsolete. Thus, this proposed
comment provides that the notice rules of Sec. 226.9(c) applies if, by
written agreement under Sec. 226.5b(f)(3)(iii), a creditor changes the
terms of a HELOC plan at or before its scheduled expiration (for
example, by renewing the plan on different terms). A new plan would
result, however, if the plan is renewed (with or without changes to the
terms) after the scheduled expiration. The new plan would be subject to
all open-end credit rules, including Sec. Sec. 226.5b, 226.6, and
226.15.
Current comment 5b-3 provides that the requirements of Sec. 226.5b
do not apply to HELOC plans entered into before November 7, 1989. The
requirements of Sec. 226.5b also do not
[[Page 43446]]
apply if the original consumer, on or after November 7, 1989, renews a
plan entered into prior to that date (with or without changes to the
terms). If, on or after November 7, 1989, a security interest in the
consumer's dwelling is added to a line of credit entered into before
that date, the substantive restrictions of Sec. 226.5b apply for the
remainder of the plan, but no new disclosures are required under Sec.
226.5b. The Board proposes to delete this comment as obsolete.
5b(a) Home-Equity Document Provided on or With the Application
5b(a)(1) General
Current Sec. 226.5b(b) and (e), which implement TILA Section
127A(b)(1)(A) and (e), require a creditor to provide the HELOC brochure
published by the Board, or a suitable substitute, to a consumer when a
HELOC application is given to the consumer. 15 U.S.C. 1637a(b)(1)(A)
and (e). Pursuant to Section 4 of the Home Equity Loan Act cited
earlier, the Board's HELOC brochure must contain (1) a general
description of HELOC plans and the terms and conditions on which such
plans are generally extended; and (2) a discussion of the potential
advantages and disadvantages of such plans. As discussed above, the
current HELOC brochure is around 20 pages long and provides general
information about HELOCs and how they work, as well as a glossary of
relevant terms, and a description of various features that can apply to
HELOCs.
``Key Questions'' document. The Board proposes to eliminate the
requirement in current Sec. 226.5b(b) and (e) for creditors to provide
to consumers the HELOC brochure on or with applications for HELOCs.
Instead, the Board proposes in new Sec. 226.5b(a)(1) to require a
creditor to provide a new document published by the Board entitled
``Key Questions to Ask about Home Equity Lines of Credit'' (the ``Key
Questions'' document) to a consumer when a HELOC application is given
to the consumer. The Board proposes this rule pursuant to its authority
in TILA Section 105(a) to make adjustments and exceptions to the
requirements in TILA to effectuate the statute's purposes, which
include facilitating consumers' ability to compare credit terms and
helping consumers avoid the uniformed use of credit. See 15 U.S.C.
1601(a), 1604(a). TILA also gives the Board authority to require a
brochure with content ``substantially similar'' to that required in
Section 4 of the Home Equity Loan Act. 15 U.S.C. 1637(e)(2). In
consumer testing conducted by the Board on HELOC disclosures, the Board
asked participants to review the HELOC brochure, and indicate whether
the brochure provides useful information and whether they would be
likely to read the brochure if it were given to them with a HELOC
application. In this consumer testing, some participants found the
HELOC brochure useful, particularly if they had little experience with
HELOCs or home-equity products in general. However, a significant
number of participants indicated that the HELOC brochure is too long,
and, as a result, they would be unlikely to read it. In the consumer
testing, most participants had obtained a HELOC in the past, but none
of the participants recalled reading the HELOC brochure when they
applied for a HELOC. Some participants recommended that a shorter, more
concise version of the HELOC brochure would be more useful and easier
to read and comprehend.
In many respects, the ``Key Questions'' document (included in this
SUPPLEMENTARY INFORMATION as Attachment A) satisfies the statutory
requirements for the HELOC brochure, which, as noted, must include a
general description of HELOC plans and the terms and conditions on
which such plans are generally extended; and a discussion of the
potential advantages and disadvantages of such plans. This one-page
document would inform consumers about certain HELOC terms that are
important for consumers to consider when selecting a home-equity
product, including potentially risky features such as variable rates
and balloon payments. As shown in Attachment A, the ``Key Questions''
document would contain answers to the following questions: ``Can my
interest rate increase?,'' ``Can my minimum payment increase?,'' ``When
can I borrow money?,'' ``How soon do I have to pay off my balance?,''
``Will I owe a balloon payment?'', ``Do I have to pay any fees?,'' and
``Should I get a home equity loan instead of a line of credit?'' The
``Key Questions'' document also would provide a link to the Board's Web
site for further information, which currently contains an electronic
version of the HELOC brochure. The ``Key Questions'' document was
designed based on consumers' preference for a question-and-answer
tabular format, and refined in several rounds of consumer testing. In
the consumer testing, the ``Key Questions'' document tested well with
participants: all indicated that they would find it useful, most found
it very clear and easy to read, and the majority indicated that they
would read a one-page disclosure, such as the ``Key Questions''
document, when considering a HELOC.
As a result, proposed Sec. 226.5b(a)(1) requires a creditor to
provide the Board's ``Key Questions'' document to a consumer at the
time an application is provided to the consumer. Proposed Sec.
226.5b(a)(1) requires creditors to provide this document ``as
published.'' Proposed comment 5b(a)(1)-9 clarifies that a creditor may
not revise the ``Key Questions'' document. The Board believes that
requiring creditors to provide the ``Key Questions'' document without
revision would benefit consumers. Consumers would receive consistent
information about certain HELOC terms that are important to consider
when selecting a home-equity product; this information would be
provided in a question-and-answer format using language proven to be
useful to consumers through consumer testing.
HELOC applications contained in magazines or other publications, or
when the application is received by telephone or through an
intermediary agent or broker. Under footnote 10a, which implements TILA
Section 127A(b)(1)(A), the application disclosures and HELOC brochure
may be delivered or placed in the mail not later than three business
days following receipt of a consumer's application that was in a
magazine or other publication, or when the application is received by
telephone or through an intermediary agent or broker. 15 U.S.C.
1637a(b)(1)(A). Current comment 5b(b)-6 provides a cross reference to
comment 19(b)-3 for guidance on determining whether or not an
application involves an ``intermediary agent or broker.'' Current
comment 19(b)-3 provides that an example of an ``intermediary agent or
broker'' is a broker who (1) customarily within a brief time after
receiving an application inquires about the credit terms of several
creditors with whom the broker does business and submits the
application to one of them; and (2) is responsible for only a small
percentage of the applications received by that creditor. During the
time the broker has the application, the broker might request a credit
report and an appraisal (or even prepare an entire loan package if
customary in that particular area). (In the proposal issued by the
Board on closed-end mortgages published elsewhere in today's Federal
Register, the Board proposes to move current comment 19(b)-3 to
proposed comment 19(d)(3)-3.)
The Board proposes to revise and move the contents of footnote 10a
related to telephone applications and applications received through
[[Page 43447]]
intermediary agents and brokers to proposed Sec. 226.5b(a)(1)(ii).
Specifically, proposed Sec. 226.5b(a)(1)(ii) provides that for
telephone applications and applications received through an
intermediary agent or broker, the ``Key Questions'' document must be
delivered or mailed within three business days following receipt of a
consumer's application by the creditor (but no later than account
opening). In these cases, the ``Key Questions'' document must be
provided along with the early HELOC disclosures (which are discussed in
more detail in the section-by-section analysis to proposed Sec.
226.5b(b)(1)). In addition, current comment 5b(b)-6 (that provides a
cross reference to current comment 19(b)-3 for guidance on determining
whether an application involves an ``intermediary agent or broker'')
would be moved to proposed comment 5b(a)(1)-7 with technical revisions.
The Board also proposes to add new comment 5b(a)(1)-8 to cross
reference the definition of ``business day'' contained in Sec.
226.2(a)(6).
The Board proposes, however, to delete the contents of footnote 10a
related to applications contained in magazines or other publications.
Specifically, current footnote 10a permits a creditor not to provide
application disclosures and the HELOC brochure with applications that a
creditor makes available to consumers in magazine or other
publications. Instead, the creditor may provide these disclosures
within three business days following receipt of a consumer's
application. The rationale for this approach was that requiring a
creditor to provide the application disclosures and HELOC brochure with
applications available to consumers in magazines or other publications
would overly burden creditors because these disclosures would take up
many pages in a magazine or other publication.
Nonetheless, the Board proposes under new Sec. 226.5b(a)(1) to
require a creditor to provide the ``Key Questions'' document with
applications that the creditor makes available to consumers in
magazines or other publications, rather than providing the pamphlet
within three days of application as required by TILA 127A(b)(1)(A). 15
U.S.C. 1637a(b)(1)(A). The Board proposes this rule pursuant to its
authority in TILA Section 105(a) to make adjustments and exceptions to
the requirements in TILA to effectuate the statute's purposes, which
include facilitating consumers' ability to compare credit terms and
helping consumers avoid the uniformed use of credit. See 15 U.S.C.
1601(a), 1604(a). Unlike the application disclosures and the HELOC
brochure that could take up multiple pages in a magazine or other
publication, the ``Key Questions'' document would be one page. Thus,
the Board believes that requiring the ``Key Questions'' document to be
disclosed with applications in magazines or other publications would
not place undue burdens on creditors. In addition, requiring the ``Key
Questions'' document to be given with applications in magazines or
other publications would benefit consumers by providing with the
application, information about HELOC terms that are important for
consumers to consider when selecting a home-equity product. The Board
solicits comments on this approach.
Mail applications. Current comment 5b(b)-1 provides that if a
creditor sends an application through the mail, the application
disclosures and the HELOC brochure must accompany the application. In
addition, as discussed above, if an application is taken over the
telephone, the application disclosures and HELOC brochure may be
delivered or mailed within three business days of taking the
application. If an application is mailed to the consumer following a
telephone request, however, the creditor also must send the application
disclosures and a HELOC brochure along with the application. The Board
proposes to move this comment to proposed comment 5b(a)(1)-1 and to
apply this comment to disclosure of the ``Key Questions'' document.
Specifically, proposed comment 5b(a)(1)-1 provides that if the creditor
sends an application through the mail, the ``Key Questions'' document
must accompany the application. In addition, proposed comment 5b(a)(1)-
1 provides that if an application is taken over the telephone, the
``Key Questions'' document must be delivered or mailed within three
business days of taking the application (but not later than account
opening). If an application is mailed to the consumer following a
telephone request, however, the creditor would be required to send the
``Key Questions'' document along with the application.
General purpose applications. Current comment 5b(b)-2 provides that
the application disclosures and the HELOC brochure need not be provided
when a general purpose application is given to a consumer unless (1)
the application or materials accompanying it indicate that it can be
used to apply for a HELOC plan, or (2) the application is provided in
response to a consumer's specific inquiry about a HELOC plan. If a
general purpose application is provided in response to a consumer's
specific inquiry only about credit other than a HELOC plan, the
application disclosures and HELOC brochure need not be provided even if
the application indicates it can be used for a HELOC plan, unless it is
accompanied by promotional information about HELOC plans.
The Board proposes to move this comment to proposed comment
5b(a)(1)-2 and to apply this comment to disclosure of the ``Key
Questions'' document. Specifically, proposed comment 5b(a)(1)-2
provides that the ``Key Questions'' document need not be provided when
a general purpose application is given to a consumer unless (1) the
application or materials accompanying it indicate that it can be used
to apply for a HELOC plan or (2) the application is provided in
response to a consumer's specific inquiry about a HELOC plan. Proposed
comment 5b(a)(1)-2 also provides that if a general purpose application
is provided in response to a consumer's specific inquiry only about
credit other than a HELOC plan, the ``Key Questions'' document need not
be provided even if the application indicates it can be used for a
HELOC, unless it is accompanied by promotional information about HELOC
plans.
Publicly-available applications. Current comment 5b(b)-3 addresses
applications for HELOCs that are available without the need for a
consumer to request them, such as so-called ``take-one forms''. This
comment provides that these applications must be accompanied by the
application disclosures and the HELOC brochure, such as by attaching
the application disclosures and the HELOC brochure to the application
form. The Board proposes to move this comment to proposed comment
5b(a)(1)-3 and to apply this comment to disclosure of the ``Key
Questions'' document. Specifically, proposed comment 5b(a)(1)-3
provides that a creditor must include the ``Key Questions'' document
with applications that are available without the need for a consumer to
request them, such as take-ones, and that a creditor may provide this
document by attaching it to the application.
Response cards. Current comment 5b(b)-4 states that sometimes a
creditor may solicit consumers for its HELOC plan by mailing a response
card which the consumer returns to the creditor to indicate interest in
the plan. If the only action taken by the creditor upon receipt of the
response card is to send the consumer an application form or to
telephone the consumer to discuss the plan, the creditor need not send
the application disclosures and the HELOC brochure with the response
card. The
[[Page 43448]]
Board proposes to move this comment to proposed comment 5b(a)(1)-4 and
to apply this comment to disclosure of the ``Key Questions'' document.
Specifically, proposed comment 5b(a)(1)-4 provides that a creditor is
not required to send the ``Key Questions'' document with a response
card if the only action taken by the creditor upon receipt of the
response card is to send the consumer an application form or to
telephone the consumer to discuss the plan. If the creditor sends the
consumer an application form in response to receiving a response card,
proposed comment 5b(a)(1)-1 provides that a creditor must provide the
``Key Questions'' document with the application form. In addition, if a
creditor calls the consumer in response to receiving a response card
and an application is taken over the phone, proposed comment 5b(a)(1)-1
provides that the ``Key Questions'' document must be delivered or
mailed within three business days of taking the application (but not
later than account opening).
Denial or withdrawal of application. Current comment 5b(b)-5
provides that in situations where current footnote 10a permits the
creditor a three-day delay in providing application disclosures and the
HELOC brochure, if the creditor determines within that period that an
application will not be approved, the creditor need not provide the
consumer with the application disclosures or HELOC brochure. Similarly,
if the consumer withdraws the application within this three-day period,
the creditor need not provide the application disclosures or the HELOC
brochure. The Board proposes to move this comment to proposed comment
5b(a)(1)-5 and to apply this comment to the ``Key Questions'' document.
Specifically, proposed comment 5b(a)(1)-5 provides that in situations
where proposed Sec. 226.5b(a)(1)(ii) allows a creditor to delay
providing the ``Key Questions'' document until three business days
following receipt of a consumer's application--namely, for telephone
applications and applications received through an intermediary agent or
broker--if the creditor determines within that three-day period that an
application will not be approved, the creditor would not need to
provide the ``Key Questions'' document. Similarly, under this proposed
comment, if a consumer withdraws the application within this three-day
period, the creditor would not need to provide the ``Key Questions''
document.
Prominent location. Current Sec. 226.5b provides that the
application disclosures and the HELOC brochure must be provided on or
with the application. See current Sec. 226.5b(a)(1), (b) and (e).
Current comment 5b(a)(1)-5 contains guidance on providing the
application disclosures and the HELOC brochure on or with a blank
application that is made available to the consumer in electronic form,
such as on a creditor's Internet Web site. Current comment 5a(a)(1)-5
provides creditors with flexibility in satisfying the requirement to
provide the application disclosures and the HELOC brochure on or with a
blank application that is made available to the consumer in electronic
form. Methods creditors could use to satisfy the requirement include,
but are not limited to, the following examples. First, the application
disclosures and HELOC brochure could automatically appear on the screen
when the application appears. Second, the application disclosures and
the HELOC brochure could be located on the same Web page as the
application (whether or not they appear on the initial screen), if the
application contains a clear and conspicuous reference to the location
of the application disclosures and the HELOC brochure and indicates
that the application disclosures contain rate, fee, and other cost
information, as applicable. Third, creditors could provide a link to
the electronic application disclosures and HELOC brochure on or with
the application as long as consumers cannot bypass the application
disclosures and HELOC brochure before submitting the application. The
link would take the consumer to the application disclosures and HELOC
brochure, but the consumer need not be required to scroll completely
through the application disclosures or HELOC brochure. Fourth, the
application disclosures and HELOC brochure could be located on the same
Web page as the application without necessarily appearing on the
initial screen, immediately preceding the button that the consumer will
click to submit the application. Whatever method is used, a creditor
need not confirm that the consumer has read the application disclosures
and HELOC brochure.
Under proposed Sec. 226.5b(a)(1), creditors would be required to
provide the ``Key Questions'' document in a prominent location on or
with the application. Proposed comment 5b(a)(1)-6 provides guidance to
creditors for how to comply with the prominent location requirement
when the document is given in either paper or electronic form. Proposed
comment 5b(a)(1)-6.i provides that when the ``Key Questions'' document
is provided in paper form, the document is prominently located, for
example, if the document is on the same page as an application. If the
document appears elsewhere, it is deemed to be prominently located if
the application contains a clear and conspicuous reference to the
location of the document and indicates that the document provides
information about HELOCs.
With respect to disclosure of the ``Key Questions'' document in
electronic form, the Board proposes to move current comment 5b(a)(1)-5,
which provides guidance on providing the application disclosures and
the HELOC brochure on or with a blank application that is made
available to the consumer in electronic form, to proposed comment
5b(a)(1)-6.ii and to apply this guidance to the ``Key Questions''
document. In particular, proposed comment 5b(a)(1)-6.ii provides that
generally, creditors must provide the ``Key Questions'' document in a
prominent location on or with a blank application that is made
available to the consumer in electronic form, such as on a creditor's
Internet Web site. Creditors would have flexibility in satisfying this
requirement. Under proposed comment 5b(a)(1)-6, methods creditors could
use to satisfy the requirement include, but are not limited to, the
following examples. First, the ``Key Questions'' document could
automatically appear on the screen when the application appears.
Second, the ``Key Questions'' document could be located on the same Web
page as the application (whether or not they appear on the initial
screen), if the application contains a clear and conspicuous reference
to the location of the document and indicates the document includes
information about HELOCs. Third, creditors could provide a link to the
electronic ``Key Questions'' document on or with the application as
long as consumers cannot bypass the document before submitting the
application. The link would take the consumer to the document, but the
consumer need not be required to scroll completely through the
document. Fourth, the ``Key Questions'' document could be located on
the same Web page as the application without necessarily appearing on
the initial screen, immediately preceding the button that the consumer
will click to submit the application. Whatever method is used, a
creditor would not need to confirm that the consumer has read the ``Key
Questions'' document.
5b(a)(2) Electronic Disclosures
Current Sec. 226.5b(a)(3) provides that for an application
accessed by the
[[Page 43449]]
consumer in electronic form, the application disclosures and HELOC
brochure may be provided to the consumer in electronic form on or with
the application. Current comment 5b(a)(3)-1 provides guidance on when
the application disclosures and HELOC brochure must be in electronic
form. Specifically, current comment 5b(a)(3)-1 provides that if a
consumer accesses a HELOC application electronically (other than as
described below), such as online at a home computer, the creditor must
provide the application disclosures and HELOC brochure in electronic
form (such as with the application form on its Web site) in order to
meet the requirement to provide disclosures in a timely manner on or
with the application. If the creditor instead mailed paper disclosures
to the consumer, this requirement would not be met. In contrast, if a
consumer is physically present in the creditor's office, and accesses a
HELOC application electronically, such as via a terminal or kiosk (or
if the consumer uses a terminal or kiosk located on the premises of an
affiliate or third party that has arranged with the creditor to provide
applications to consumers), the creditor may provide the application
disclosures and HELOC brochure in either electronic or paper form,
provided the creditor complies with the timing, delivery, and
retainability requirements of the regulation.
The Board proposes to move current Sec. 226.5b(a)(3) and current
comment 5b(a)(3)-1 to proposed Sec. 226.5b(a)(2) and proposed comment
5b(a)(2)-1, respectively, and to apply these provisions to the ``Key
Questions'' document. Specifically, proposed Sec. 226.5b(a)(2)
provides that for an application accessed by the consumer in electronic
form, the ``Key Questions'' document may be provided to the consumer in
electronic form on or with the application. In addition, proposed
comment 5b(a)(2)-1 provides guidance on when the ``Key Questions''
document must be in electronic form. Specifically, proposed comment
5b(a)(2)-1 provides that if a consumer accesses a HELOC application
electronically (other than as described below), such as online at a
home computer, the creditor must provide the ``Key Questions'' document
in electronic form (such as with the application form on its Web site)
in order to meet the requirement to provide the document in a timely
manner on or with the application. If the creditor instead mailed the
``Key Questions'' document in paper form to the consumer, the
requirement that the ``Key Questions'' document be provided on or with
the application would not be met. In contrast, if a consumer is
physically present in the creditor's office, and accesses a HELOC
application electronically, such as via a terminal or kiosk (or if the
consumer uses a terminal or kiosk located on the premises of an
affiliate or third party that has arranged with the creditor to provide
applications to consumers), the creditor may provide the ``Key
Questions'' document in either electronic or paper form, provided the
creditor complies with the timing, delivery, and retainability
requirements of the regulation.
5b(a)(3) Duties of Third Parties
Current Sec. 226.5b(c), which implements TILA Section 127A(c),
provides that persons other than the creditor who provide applications
to consumers for HELOC plans generally must provide the HELOC brochure
at the time an application is provided. 15 U.S.C. 1637a(c). If such
persons have the application disclosures for a creditor's HELOC plan,
they also must provide the disclosures at the time an application is
provided. Current comment 5b(c)-1 clarifies that although third parties
who give applications to consumers for HELOC plans must provide the
HELOC brochure in all cases, such persons are required to provide the
application disclosures only in certain instances. A third party has no
duty to obtain application disclosures about a creditor's HELOC plan or
to create a set of disclosures based on what it knows about a
creditor's plan. If, however, a creditor provides the third party with
application disclosures along with its application form, the third
party must give the disclosures to the consumer with the application
form. Current comment 5b(c)-1 also provides that the duties under
current Sec. 226.5b(c) are those of the third party; the creditor is
not responsible for ensuring that a third party complies with those
obligations. Current comment 5b(c)-1 further provides that if an
intermediary agent or broker takes an application over the telephone or
receives an application contained in a magazine or other publication,
current footnote 10a permits that person to mail the application
disclosures and the HELOC brochure within three business days of
receipt of the application. In addition, current comment 5b(e)-2
provides that if a creditor determines that third party has provided a
consumer with the required HELOC brochure, the creditor need not give
the consumer a second brochure.
The Board proposes to delete current Sec. 226.5b(c) and current
5b(c)-1 as obsolete. As discussed above and in more detail in the
section-by-section analysis to proposed Sec. 226.5b(b)(1), the Board
proposes to delete the requirement that the application disclosures and
HELOC brochure be provided on or with an application for a HELOC plan.
Regarding obligations on third parties to provide disclosures on or
with HELOC applications, the Board proposes in new Sec. 226.5b(a)(3)
to require persons other than the creditor who provide applications to
consumers for HELOC plans to provide the ``Key Questions'' document on
or with HELOC applications (except for telephone applications,
discussed below). This proposed requirement on third parties generally
to provide the ``Key Questions'' document on or with HELOC applications
is consistent with the requirement in current Sec. 226.5b(c) that
third parties must provide the HELOC brochure on or with HELOC
applications.
Nonetheless, unlike current Sec. 226.5b(c), which does not require
a third party to provide the HELOC brochure with applications the third
party makes available in magazines and other publications, proposed
Sec. 226.5b(a)(3) requires third parties to provide the ``Key
Questions'' document with these HELOC applications. As discussed above
regarding a creditor's duty to provide the ``Key Questions'' document
with HELOC applications in magazines or other publications, the Board
believes that requiring the ``Key Questions'' document to be disclosed
with applications in magazines or other publications would not place
undue burdens on third parties because the ``Key Questions'' document
is a single page. In addition, requiring the ``Key Questions'' document
to be given with applications in magazines or other publications would
benefit consumers by providing with the application information about
HELOC terms that are important for consumers to consider when selecting
a home-equity product. The Board solicits comments on this approach.
Under proposed Sec. 226.5b(a)(3), third parties would not be
required to provide the ``Key Questions'' document with respect to
telephone applications. Proposed comment 5b(a)(3)-3 clarifies that for
telephone applications taken by a third party, the creditor would have
the duty to provide the ``Key Questions'' document within three days
following receipt of the consumer's application by the creditor (but
not later than account opening). The Board believes that imposing a
separate duty on a third
[[Page 43450]]
party to provide the ``Key Questions'' document for telephone
applications is unnecessary, because the creditor would be required
under proposed Sec. 226.5b(a)(1) to provide the ``Key Questions''
document and the early HELOC disclosures (as discussed in more detail
in the section-by-section analysis to proposed Sec. 226.5b(b)(1))
within three days after the application has been received by the
creditor (but not later than account opening).
Proposed comment 5b(a)(3)-1 provides that the duties to provide the
``Key Questions'' document under proposed Sec. 226.5b(a)(3) are those
of the third party; the creditor would not responsible for ensuring
that a third party complies with those obligations. This proposed
comment is consistent with current guidance in current comment 5b(c)-1.
Proposed comment 5b(a)(3)-2 provides that if a creditor determines that
a third party has provided a consumer with the ``Key Questions''
document, the creditor need not give the consumer a second copy of the
document. This proposed comment is consistent with current guidance in
comment 5b(e)-2 regarding disclosure of the HELOC brochure.
5b(b) Home-Equity Disclosures Provided No Later Than Account-Opening or
Three Business Days After Application, Whichever Is Earlier
5b(b)(1) Timing
Current Sec. 226.5b(b), which implements TILA Section
127A(b)(1)(A), generally requires creditors to provide to the consumer
two types of disclosures at the time an application for a HELOC is
provided: Application disclosures and the HELOC brochure. 15 U.S.C.
1637a(b)(1)(A). The Board proposes to delete current Sec. 226.5b(b).
As discussed in more detail above in the section-by-section analysis to
proposed Sec. 226.5b(a), the Board proposes no longer to require
creditors to disclose the HELOC brochure to consumers on or with HELOC
applications. In addition, as discussed below, the Board proposes to
replace the application disclosures with transaction-specific HELOC
disclosures (the ``early HELOC disclosures'') that must be given within
three business days after application (but no later than account
opening). See proposed Sec. 226.5b(b)(1).
The application disclosures that a creditor generally must provide
to a consumer on or with an application for a HELOC plan must contain
details about the creditor's HELOC plan, including the length of the
draw and repayment periods, how the minimum required payment is
calculated, whether a balloon payment will be owed if a consumer only
makes minimum required payments, payment examples, and what fees are
charged by the creditor to open, use, or maintain the plan. The
application disclosures do not include information dependent on the
value of the dwelling or a borrower's creditworthiness, such as a
credit limit or the APRs offered to the consumer, because the
application disclosures are provided before underwriting takes place.
In the proposed rule implementing the Mortgage Disclosure
Improvement Act of 2008 (contained in Sections 2501-2503 of the Housing
and Economic Recovery Act of 2008, Pub. L. 110-289, enacted on July 30,
2008, as amended by the Emergency Economic Stabilization Act of 2008,
Pub. L. 110-343, enacted on October 3, 2008) (MDIA), the Board
solicited comment on the timing of HELOC disclosures. 73 FR 74989
(December 10, 2008). MDIA, which applies only to closed-end mortgage
transactions, requires that early mortgage disclosures be provided no
later than three business days after application and seven business
days before consummation of the loan. The Board noted that the timing
of HELOC application disclosures is not affected by MDIA, but solicited
comment on whether it would be necessary or appropriate to change the
timing of the HELOC application disclosures and, if so, what changes
should be made. The Board asked whether transaction-specific
disclosures (such as the APR, an itemization of fees, and potential
payment amounts) should be required after application and earlier than
account opening, at least in some circumstances. The Board noted that
many consumers take a major draw on the account immediately upon
opening it, to fund a home purchase, for example, or pay for an
immediate large expense such as a college tuition bill. The Board asked
commenters to address whether a requirement to disclose the final HELOC
terms, including the APR and fees, three days before account opening
would substantially benefit consumers who plan to take a draw
immediately. The Board also requested comment on whether the potential
costs of such a requirement would outweigh the potential benefits.
Financial institution commenters opposed requiring disclosures
based on the amount of an initial draw on the line of credit to be
given in advance of account opening. Commenters contended that it would
be impracticable to provide disclosures based on the amount of an
initial draw, because the creditor, at the time disclosures would be
required, would have no way of knowing the amount of the draw, or even
whether the consumer planned to take a draw immediately upon account
opening. Commenters argued that it would be difficult for creditors to
discern the consumer's intent prior to account opening. The consumer
might not have plans at the time of the disclosures regarding the
initial draw; thus, even if the creditor asked the consumer, the
creditor might still be unable to obtain this information. Commenters
also contended that consumers might need funds soon and that in such
cases the enforced three-day waiting period would be more
disadvantageous than beneficial to consumers.
Another commenter discussed the possibility of two separate timing
requirements--one for cases in which the amount of the initial draw is
known, and another in which this amount is not known--but argued that
such a rule would be difficult for creditors to manage correctly. Other
commenters argued generally that existing disclosures provide adequate
information for consumers and that imposing the suggested timing
requirement would impose undue burdens and costs on creditors.
Consumer group commenters argued that HELOCs are widely used by
creditors in place of closed-end second mortgages, and that some
creditors use HELOCs for first mortgages as well, to avoid having to
provide closed-end TILA disclosures. Accordingly, these commenters
argued that HELOC creditors should be required to disclose the expected
total of payments, finance charge, and payment schedule. One consumer
group commenter stated that the differences in content and timing
between closed-end mortgage disclosures and HELOC disclosures makes it
difficult for consumers effectively to comparison shop between these
two types of credit, and thus difficult to make meaningful choices. The
commenter also argued that since creditors must revise their systems to
comply with MDIA for closed-end mortgage loans, complying with the same
rules for HELOCs would cause little additional expense.
The Board believes that providing disclosures that would be
transaction-specific, based on the amount of an initial draw, or on
expected amounts of draws and payments over the life of the plan, would
not be practicable. In addition, the Board believes that requiring the
account-opening HELOC disclosures to be provided some period, such as
three or seven business days, in
[[Page 43451]]
advance of account opening could unnecessarily delay the process of
opening a HELOC in some cases and thus could disadvantage some
consumers.\13\
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\13\ An American Bankers Association (ABA) survey reported that
the average business days between application and closing for HELOCs
and home equity loans ranged from 8 days for larger institutions to
10 days for smaller institutions. American Bankers Ass'n, ``ABA Home
Equity Lending Survey Report'' (2005), pp. 18 and 71.
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The Board nevertheless believes that consumers could benefit from
receiving early HELOC disclosures that are more transaction-specific
than the application disclosures provided under the current regulation.
Therefore, the proposal provides for early HELOC disclosures to be
given within three business days after application or no later than
account opening, whichever is earlier. The Board anticipates that in
most cases account opening will not occur prior to three business days
after application, and the early HELOC disclosures will be given at
least some days in advance of account opening. Further, as discussed in
more detail in the section-by-section analysis to proposed Sec.
226.5b(c), the proposal requires early HELOC disclosures to be based on
(1) the actual APR for which the consumer qualifies (unlike the
application disclosures, which do not include a consumer-specific APR)
and (2) the amount of the credit limit for which the consumer likely
qualifies (unlike the current application disclosures, which include
disclosures based on a hypothetical draw of $10,000). The Board
proposes this rule pursuant to its authority in TILA Section 105(a) to
make adjustments and exceptions to the requirements in TILA to
effectuate the statute's purposes, which include facilitating
consumers' ability to compare credit terms and helping consumers avoid
the uniformed use of credit. See 15 U.S.C. 1601(a), 1604(a). The Board
believes that to assure a meaningful disclosure of the credit terms of
a HELOC, so that consumers can fully understand the terms offered on
the HELOC, it is necessary and proper to adjust the timing of the HELOC
disclosures from at-application to within three business days after
application (but no later than account opening).
Consumer testing conducted by the Board on HELOC disclosures
supports this proposed approach. In the first two rounds of testing,
some participants reviewing a disclosure based on the current
requirements for the application disclosures either tried to find an
interest rate applicable to their plan and were surprised to learn that
such a rate is not contained in the disclosure, or incorrectly assumed
that one of the rates shown in the disclosure (which are hypothetical,
not actual, rates) was the rate that was being offered to them. In
subsequent testing of a disclosure form with more transaction-specific
information (including the APR and credit limit for which the consumer
qualified), participants indicated they would prefer to receive a
transaction-specific disclosure, as opposed to a more generic
disclosure at application (such as the one provided under the current
regulation), even if this choice meant that the consumer would not
receive any disclosure of HELOC plan terms at the time of application.
Participants indicated that the APR and the credit limit offered on a
HELOC plan are two of the most important pieces of information that
they want to know in deciding whether to open a HELOC. The participants
said that they would still prefer to receive transaction-specific
disclosures soon after application rather than generic disclosures at
application even if they were required to pay an application fee before
receiving the later, more transaction-specific disclosure.\14\ These
findings are consistent with the findings in the Board's testing of
closed-end mortgage disclosures, as discussed in the proposal issued by
the Board on closed-end mortgages published elsewhere in today's
Federal Register.
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\14\ The rules regarding refundability of fees, discussed in
more detail in the section-by-section analysis to Sec. Sec.
226.5b(d) and (e) below, would permit consumers to obtain a refund
of such fees in some cases; however, most participants were not
aware of this fact when they expressed their preference for the more
transaction-specific disclosure.
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The proposal regarding the early HELOC disclosures is also
supported by the legislative history of the Home Equity Loan Act. The
chief sponsor of the Act, Representative David Price, explained that
the disclosure provisions of the bill (H.R. 3011) were enacted to
address concerns about the then-current law on HELOC disclosures, under
which ``a consumer may never be advised about the essential features of
his or her home-equity loan until it's time to sign the full
agreement.'' \15\ It appears that the intent of the legislation was to
provide the consumer information about the consumer's particular HELOC,
based on the belief that transaction-specific information could be
given at the time of application. Because transaction-specific
information is not available until after application, the Board
believes that the proposed approach of requiring disclosures to contain
more transaction-specific information, and to be given within three
business days after application, is in accord with the congressional
intent.
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\15\ Remarks of Rep. Price on H.R. 3011, the Home Equity Loan
Consumer Protection Act of 1988, Pub. L., 100-709, enacted on Nov.
23, 1988, Congr. Rec., H4472 (June 20, 1988).
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The Board notes that delaying the early HELOC disclosures until
three days after application would not result in added cost to a
consumer, because as noted above, and as further discussed in the
section-by-section analysis to proposed Sec. 226.5b(d) and (e), the
consumer has the right to a refund of any fees paid in connection with
the HELOC for three business days after the consumer receives the
disclosures. In addition, if the disclosed terms change after the early
HELOC disclosures are provided but before the plan is opened, the
consumer has the right to a refund of any fees at any time before
account opening.
Substitution of account-opening disclosures for early HELOC
disclosures. Proposed Sec. 226.5b(b)(1) provides that the early HELOC
disclosures must be provided within three business days after
application, but no later than account opening. Account opening might
be unlikely to occur sooner than three business days after application,
but this situation could arise. In that event, under the proposal, a
creditor would be required to provide both the early HELOC disclosures
under proposed Sec. 226.5b(b)(1) and account-opening disclosures under
proposed Sec. 226.6. As discussed in more detail in the section-by-
section analysis to proposed Sec. 226.6, the Board proposes that
certain account-opening disclosures must be disclosed in a tabular
format. Under the proposal, the account-opening summary table would not
be identical to the table containing the early HELOC disclosures. For
example, the table containing the early HELOC disclosures would show
and compare two payment options offered on the HELOC (unless a creditor
offers only one), while the account-opening summary table would show
only the payment plan chosen by the consumer. In addition, the table
containing the early HELOC disclosures contains a summary of fees,
while the account-opening summary table shows fees in greater detail.
The Board solicits comment on whether, and if so in what
circumstances, creditors should be permitted to substitute the account-
opening summary table for the table containing the early HELOC
disclosures in situations where the early HELOC disclosures are
required to be given at the time the account is opened (because
[[Page 43452]]
account opening occurs within three business days after application).
For example, the regulation could provide that, because the account-
opening summary table shows only one HELOC payment plan, the account-
opening summary table would be permitted to be used in place of the
early HELOC disclosures only if the creditor offers only one payment
plan or the consumer had already chosen a plan before account opening.
The Board also requests comment on how frequently account opening for
HELOCs occurs within three business days after application.
Denial or withdrawal of application. Current footnote 10a provides
that the application disclosures and HELOC brochure may be delivered or
placed in the mail not later than three business days following receipt
of a consumer's application for applications in magazines or other
publications, or when the application is received by telephone or
through an intermediary agent or broker. Current comment 5b(b)-5
provides that in situations where current footnote 10a permits the
creditor a three-day delay in providing application disclosures and the
HELOC brochure, if the creditor determines within that period that an
application will not be approved, the creditor need not provide the
consumer with the application disclosures or HELOC brochure. Similarly,
if the consumer withdraws the application within this three-day period,
the creditor need not provide the application disclosures or the HELOC
brochure.
The Board proposes to move this comment to proposed comment
5b(b)(1)-1 and apply this comment to disclosure of the early HELOC
disclosures. As discussed above, Sec. 226.5b(b)(1) provides that
creditors must deliver or mail the early HELOC disclosures to a
consumer not later than account opening or three business days
following receipt of a consumer's application by the creditor,
whichever is earlier. The Board also proposes to add new comment
5b(b)(1)-2 to cross reference the definition of ``business day''
contained in Sec. 226.2(a)(6). Proposed comment 5b(b)(1)-1 provides
that if the creditor determines within this three-day period that an
application will not be approved, the creditor would not need to
provide the early HELOC disclosures. Similarly, under this proposed
comment, if a consumer withdraws the application within this three-day
period, the creditor would not need to provide the early HELOC
disclosures.
5b(b)(2) Form of Disclosures; Tabular Format
Tabular format. Current Sec. 226.5b(a)(1), which implements TILA
Section 127A(b)(2)(B), provides that the application disclosures must
be made clearly and conspicuously and generally must be grouped
together and segregated from all unrelated information. 15 U.S.C.
1637a(b)(2)(B). Nonetheless, several application disclosures are not
required to be grouped together with other application disclosures.
Specifically, current Sec. 226.5b(a)(1), which in part implements TILA
Section 127A(b)(2)(D), provides that disclosures about variable rates
offered on an HELOC plan that are required to be disclosed as part of
the application disclosures may be grouped together with the other
application disclosures, or may be provided separately from the other
application disclosures. 15 U.S.C. 1637a(b)(2)(D). In addition, under
current Sec. 226.5b(a)(1), a disclosure of conditions under which a
creditor can take certain actions under the plan, such as terminating
the plan, described in current Sec. 226.5b(d)(4)(iii), and an
itemization of fees imposed by third parties to open the HELOC plan
described in current Sec. 226.5b(d)(8) also may be grouped together
with the other application disclosures or may be disclosed separately.
Current comment 5b(a)(1)-3 provides that while most of the
application disclosures must be grouped together and segregated from
all unrelated information, a creditor is permitted to include with the
application disclosures information that explains or expands on the
required disclosures. This comment also provides guidance on what types
of information explain or expand on the required disclosures.
Although the application disclosures generally must be grouped
together and segregated from all unrelated information, current Sec.
226.5b(a)(1) does not require the application disclosures to be
disclosed in a tabular format. Currently, creditors generally provide
the application disclosures in a narrative form, consistent with the
current sample forms for the application disclosures set forth in
current G-14A and G-14B of Appendix G.
Proposal. The Board proposes to delete current Sec. 226.5b(a)(1)
and current 5b(a)(1)-3. As described above, the Board proposes to
delete the requirement that creditors must provide the application
disclosures required under current Sec. 226.5b. Instead, the Board
proposes to require creditors to provide early HELOC disclosures within
three business days following receipt of the consumer's application by
the creditor (but not later than account opening). In addition, the
Board proposes stricter format requirements for the proposed early
HELOC disclosures than currently are required for the application
disclosures. Specifically, proposed Sec. 226.5b(b)(2)(i) requires that
the early HELOC disclosures generally must be provided in the form of a
table with headings, content, and format substantially similar to any
of the applicable tables found in proposed G-14 in Appendix G. Proposed
comment 5b(b)(2)-1 clarifies that proposed Sec. 226.5b(b)(2)(i)
generally requires that the headings, content and format of the tabular
disclosures be substantially similar, but need not be identical, to the
applicable tables in proposed G-14 to Appendix G. Under the proposal,
creditors would not be allowed to include in the table information that
is not specifically required or permitted to be disclosed in the table,
as set forth in proposed Sec. 226.5b(c)(4)(ii) through (c)(19).
Creditors would be required to place certain information, such as the
name and address of the borrower, directly above the table, in a format
substantially similar to any of the applicable tables found in proposed
G-14 in Appendix G. See proposed Sec. 226.5b(b)(2)(iii). Creditors
would be required to place certain information, such as a statement
that the consumer is not required to accept the disclosed terms,
directly below the table, in a format substantially similar to any of
the applicable tables found in proposed G-14 in Appendix G. See
proposed Sec. 226.5b(b)(2)(iv). Creditors could include other
information outside the table. See proposed Sec. 226.5b(b)(2)(v). The
Board proposes this rule pursuant to its authority in TILA Section
105(a) to make adjustments and exceptions to the requirements in TILA
to effectuate the statute's purposes, which include facilitating
consumers' ability to compare credit terms and helping consumers avoid
the uninformed use of credit. See 15 U.S.C. 1601(a), 1604(a). The
proposed requirements that the early HELOC disclosures must be provided
in a table (or directly above or below the table) and no other
information may be disclosed in the table is consistent with TILA
Section 127A(b)(2)(B), which generally requires the application
disclosures to be segregated from all unrelated information.
As discussed above, creditors typically provide the application
disclosures in a narrative form, consistent with the model forms for
the
[[Page 43453]]
application disclosures set forth in current Home-equity Samples G-14A
and G-14B of Appendix G. In the consumer testing conducted by the Board
on HELOC disclosures, the Board tested application disclosures in a
narrative form, designed to simulate those currently in use.
Participants in consumer testing found this form difficult to read and
understand, and their responses to follow-up questions showed that they
also had difficulty identifying specific information in the text.
Participants who saw forms that were structured in a tabular format, on
the other hand, commented that the information was easier to understand
and had more success answering comprehension questions. These results
regarding the benefit of disclosing information in a tabular format are
consistent with the results of research that the Board conducted on
credit card disclosures in relation to the January 2009 Regulation Z
Rule. (See Sec. Sec. 226.5a(a)(2), 226.6(b)(1), 226.9(b)(3),
226.9(c)(2)(iii)(B) and 226.9(g)(3)(iii) for certain disclosures
applicable to open-end (not home-secured) credit that must be disclosed
in a tabular format.) For these reasons, the Board proposes to require
that the early HELOC disclosures generally must be provided in the form
of a table with headings, content, and format substantially similar to
any of the applicable tables found in proposed G-14 in Appendix G.
Unlike with current Sec. 226.5b(a)(1), under the proposal,
creditors would not be allowed to disclose information about variable
rates pursuant to proposed Sec. 226.5b(c)(10) separately from the
other early HELOC disclosures. See proposed Sec. 226.5b(b)(2)(i) and
(c)(10). The Board proposes to require the variable-rate information to
be disclosed in the table with the other early HELOC disclosures. The
Board proposes this rule pursuant to its authority in TILA Section
105(a) to make adjustments and exceptions to the requirements in TILA
to effectuate the statute's purposes, which include facilitating
consumers' ability to compare credit terms and helping consumers avoid
the uniformed use of credit. See 15 U.S.C. 1601(a), 1604(a). In the
consumer testing conducted by the Board on HELOC disclosures,
participants indicated that information about the current rate on the
plan (based on the current value of the index and margin) was one of
the most important pieces of information that the participants wanted
to know as part of the early HELOC disclosures. Requiring creditors to
disclose the current rate offered on the plan, along with other
variable-rate information, in the table, as proposed, would better
ensure that consumers are aware of and understand those terms. As
discussed above, in the consumer testing on HELOC disclosures,
participants were more likely to notice and understand information when
it was presented in a tabular format, than when it was presented in a
narrative form. In addition, as discussed in more detail below in the
section-by-section analysis to proposed Sec. 226.5b(c)(9)(iii),
information about sample payments is required to be disclosed in the
table, and these sample payments are calculated using the rates
applicable to the HELOC plan. Requiring information about rates and
certain other variable-rate information to be disclosed in the table
would allow consumers to understand how the sample payments relate to
the rates offered on the plan.
In addition, unlike current Sec. 226.5b(a)(1), the Board proposes
to require that information about one-time fees imposed by third
parties to open the HELOC plan must be disclosed in the table provided
as part of the early HELOC disclosures. See proposed Sec.
226.5b(b)(2)(i) and (c)(11). Again, participants in the consumer
testing conducted by the Board on HELOC disclosures indicated that
information about fees to open the HELOC account was important
information that they want to know as part of the early HELOC
disclosures. Requiring creditors to disclose information about one-time
fees imposed by third parties to open the HELOC plan in the table would
better ensure that consumers are aware of these fees. In addition, as
discussed in more detail below in the section-by-section analysis to
proposed Sec. 226.5b(c)(11), under the proposal, creditors would be
required to disclose in the table one-time fees imposed by the creditor
to open the HELOC plan. Requiring creditors to disclose all one-time
fees to open the HELOC plan in the table, regardless of whether they
are charged by the creditor or by a third party, would enable consumers
to understand better the total fees that they would be required to pay
to open the HELOC plan. In addition, the Board believes that
highlighting all one-time fees to open the HELOC plan in the table may
facilitate consumer shopping for HELOC plans, by helping consumers to
compare easily these fees from one HELOC plan to another.
As discussed above, current Sec. 226.5b(a)(1) provides that a
disclosure of the conditions under which a creditor may take certain
actions under the plan, such as terminating the plan, described in
current Sec. 226.5b(d)(4)(iii) may be disclosed with the application
disclosures that must be segregated or disclosed separately from the
segregated application disclosures. As discussed in more detail in the
section-by-section analysis to proposed Sec. 226.5b(c)(7), under the
proposal, a creditor would not be allowed to include in the table a
disclosure of the conditions under which a creditor can take certain
actions under the plan, such as terminating the plan, as described in
proposed Sec. 226.5b(c)(7) (although the fact that the creditor may
take these actions under certain circumstances must be disclosed in the
table under proposed Sec. 226.5b(c)(7)). The Board believes that
including a disclosure of the conditions in the table could lead to
``information overload'' for consumers and could distract from other
information in the table. The conditions under which a creditor may
take certain actions, such as terminating the HELOC plan, will likely
not change from creditor to creditor, and thus this information may not
be useful to consumers in comparing one HELOC plan to another. A
creditor would be permitted to include this information with the early
HELOC disclosures table, as long as it is outside the table. See
proposed Sec. 226.5b(b)(2)(v).
Precedence of certain disclosures. Current Sec. 226.5b(a)(2), in
implementing TILA Section 127A(b)(2)(C), provides that the following
application disclosures must precede all other required application
disclosures: (1) A statement that the consumer should make or otherwise
retain a copy of the application disclosures; (2) a statement of the
time by which the consumer must submit an application to obtain
specific terms disclosed, an identification of any disclosed term that
is subject to change prior to opening the plan, and an explanation of
the right to refund of all fees paid in connection with the application
if a disclosed term changes prior to opening the plan and the consumer
therefore elects not to open the plan; (3) a statement that the
creditor will acquire a security interest in the consumer's dwelling
and that loss of the dwelling may occur in the event of default; and
(4) a statement that, under certain conditions, the creditor may
terminate the plan and require payment of the outstanding balance in
full in a single payment and impose fees upon termination; prohibit
additional extensions of credit or reduce the credit limit; and, as
specified in the initial agreement, implement certain changes in the
plan, and a statement that the consumer may receive, upon request,
information about the conditions under which such actions may occur.
[[Page 43454]]
The Board proposes no longer to require the above statutorily
required disclosures to precede other information provided as part of
the proposed early HELOC disclosures. The Board proposes this rule
pursuant to its authority in TILA Section 105(a) to make adjustments
and exceptions to the requirements in TILA to effectuate the statute's
purposes, which include facilitating consumers' ability to compare
credit terms and helping consumers avoid the uninformed use of credit.
See 15 U.S.C. 1601(a), 1604(a). As discussed below, based on consumer
testing, the Board believes that this information is more effectively
presented when grouped together with related information. As discussed
in more detail below in the section-by-section analysis to proposed
Sec. 226.5b(c), the Board also proposes to delete the statement that
the consumer should make or otherwise retain a copy of the disclosures
because under the proposal, the early HELOC disclosures must be given
in a retainable form. In addition, as discussed in more detail in the
section-by-section analysis to proposed Sec. 226.5b(c)(4), the
statement of the time by which the consumer must submit an application
to obtain specific terms disclosed also would be deleted as unnecessary
because the early HELOC disclosures would be given after the
application has been submitted.
1. Disclosure of which terms in the table are subject to change
prior to the consumer opening the plan: Under the proposal, a creditor
would be required to disclose which terms in the table, if any, are
subject to change prior to the consumer opening the plan. Under the
proposal, this information must be provided directly below the table
with other general information that a consumer may want to consider
when deciding whether to open the HELOC plan being offered (in contrast
to information in the table that provides specific information about
the terms being offered on the HELOC plan). Specifically, this
disclosure must be grouped with the following disclosures: (1) A
disclosure informing the consumer that he or she is not required to
accept the terms described in the table; (2) a statement that the
consumer may be entitled to a refund of all fees paid if the consumer
decides not to open the plan, (3) a cross reference to the disclosure
in the table of a consumer's right to a refund of fees paid by the
consumer if the consumer decides not to open the HELOC plan for any
reason within three business days of receiving the early HELOC
disclosures, or any time before the plan is opened if any of the
disclosed terms change (except for the APR), (4) a statement that if
the consumer does not understand any disclosure shown in the table in
the consumer should ask questions; and (5) a statement that the
consumer may obtain additional information at the Web site of the
Board, and a reference to the Board's Web site. To help ensure that the
statement about which terms in the table may change prior to account
opening is noticeable to consumers, the Board proposes to require that
this statement be disclosed in bold text, as discussed in more detail
below.
2. Disclosure of right to a refund of fees if terms change before
account opening: Under the proposal, the explanation of the right to a
refund of fees if terms change before account opening and the consumer
decides not to open the plan would be grouped together with information
about another right of a consumer to receive a refund of fees if the
consumer notifies the creditor that he or she does not want to open the
HELOC account within three business days of receiving the early HELOC
disclosures. Under the proposal, these explanations about the two
rights to a refund of fees would be placed in the ``Fees'' section of
the table. In the consumer testing conducted by the Board on HELOC
disclosures, the Board tested a version of the early HELOC disclosures
where the explanations of the two rights to a refund of fees were
located directly above the table near the top of the early HELOC
disclosures. The Board also tested a version of the early HELOC
disclosures where the explanation was disclosed in the table in the
``Fees'' section. Participants were more likely to notice and
understand information about the refundability of fees when it was
provided in the table in the ``Fees'' section, rather than directly
above the table near the top of the early HELOC disclosures.
3. Statement about risk of loss of home and statement about certain
actions that a creditor may take with respect to the plan: Under the
proposal, the information about risk of loss of the home in case of
default and the information about certain actions that a creditor may
take with respect to the plan, such as terminating the plan, are
identified as ``risks'' to the consumer and are grouped together under
the heading ``Risks,'' along with information about the deductibility
of interest for tax purposes. In consumer testing conducted by the
Board on HELOC disclosures, the Board tested versions of the
application disclosures (in a narrative format) where the information
about risk of loss of the home in case of default and the information
about certain actions that a creditor may take with respect to the
plan, such as terminating the plan, were placed near the top of the
application disclosures, but were not grouped together under a common
heading. The Board also tested versions of the application disclosures
and the early HELOC disclosures (in a tabular format) where the
information was grouped in the ``Risks'' section as discussed above.
Grouping these disclosures in a single ``Risks'' section made them more
noticeable to participants, and made it easier for participants to
review the information quickly and efficiently.
Under the proposal, the ``Risks'' section would be placed at the
bottom of the table on the second page of the early HELOC disclosures.
In consumer testing by the Board on HELOC disclosures, the Board tested
several different locations for the ``Risks'' section in the table,
namely, (1) at the top of the table on the first page of the early
HELOC disclosures, (2) in the middle of the table at the bottom of the
first page of the early HELOC disclosures, and (3) at or near the
bottom of the table on the second page of the early HELOC disclosures.
In each round of the consumer testing, participants were asked
questions to determine whether they noticed and understood the
information about risk of the loss of the home if a consumer defaulted
on the plan, and about the creditors' right to terminate the plan in
certain circumstances. In several rounds of the consumer testing,
participants also were asked their views on the placement of the
``Risks'' section in the table. While some participants indicated that
they preferred to have the ``Risks'' section displayed at the top of
the table on the first page because of the importance of the
information, other participants preferred to have the ``Risks'' section
lower down in the table or at the bottom of the table on the second
page because they were more interested in the specific terms of their
line of credit, such as the APRs and the credit limit offered on the
plan. Regardless of the placement of the ``Risks'' section in the
table, most participants noticed and understood the disclosure about
the risk of loss of the home in case of default and the disclosure
about a creditor's right to terminate the plan in certain
circumstances.
The Board proposes to place the ``Risks'' section at the bottom of
the table on page two of the early HELOC disclosures. The information
contained in the ``Risks'' section may not be as useful to the
consumers as other information contained in the table for
[[Page 43455]]
comparing one HELOC to another, such as the APRs and credit limit
offered on the plan, because the information about risks is likely to
be the same among all creditors. The Board seeks comment on this aspect
of the proposal.
Highlighting of certain disclosures. Proposed Sec.
226.5b(b)(2)(vi) would require that certain early HELOC disclosures
must be disclosed in bold text. The Board proposes this rule pursuant
to its authority in TILA Section 105(a) to make adjustments and
exceptions to the requirements in TILA to effectuate the statute's
purposes, which include facilitating consumers' ability to compare
credit terms and helping consumers avoid the uniformed use of credit.
See 15 U.S.C. 1601(a), 1604(a).
Under the proposal, certain disclosures must be disclosed below the
table because they provide general information that a consumer may want
to consider when deciding whether to open the HELOC plan being offered
(in contrast to information in the table that provides specific
information about the terms being offered on the HELOC plan). To help
consumers notice the statements that are below the table, the Board
proposes that the following statements must be disclosed in bold text:
(1) A statement that the consumer is not required to accept the terms
disclosed in the table, as required under proposed Sec. 226.5b(c)(2);
(2) if the creditor has a provision for the consumer's signature, a
statement that a signature by the consumer only confirms receipt of the
disclosure statement, as required under proposed Sec. 226.5b(c)(2);
(3) a statement identifying any disclosed term that is subject to
change prior to opening the plan, as required under proposed Sec.
226.5b(c)(4)(i); (4) a statement that if the consumer does not
understand any disclosure required by this section the consumer should
ask questions, as required under proposed Sec. 226.5b(c)(20); (5) a
statement that the consumer may obtain additional information at the
Web site of the Board, and a reference to the Board's Web site, as
required under proposed Sec. 226.5b(c)(21); and (6) a statement that
the consumer may be entitled to a refund of all fees paid if the
consumer decides not to open the plan, as required under proposed Sec.
226.5b(c)(22)(i).
In addition, proposed Sec. 226.5b(c) generally requires that
certain information about rates, fees, the credit limit, and certain
limitations or requirements on transactions, such as any minimum
outstanding balance or minimum draw requirements, applicable to the
HELOC plan must be disclosed to the consumer as part of the early HELOC
disclosures. This information includes not only the percentage or
dollar amounts that will apply, but also explanatory information that
gives context to these figures. The Board seeks to enable consumers to
identify easily the rates, fees, the credit limit and the dollar
amounts related to any limitations or requirements on transactions
disclosed in the table. Thus, the Board generally proposes to require
the percentage or dollar amounts related to those disclosures to be
disclosed in bold text.
Nonetheless, the Board proposes several exceptions to the general
rule that fees disclosed in the early HELOC disclosures table must be
disclosed in bold text. First, while the total amount of account-
opening fees disclosed under proposed Sec. 226.5b(c)(11) would be
required to be disclosed in bold text, the itemization of those fees
also required to be disclosed under proposed Sec. 226.5b(c)(11) must
not be disclosed in bold text. See proposed comment 5b(b)(2)-5 provides
that a creditor would be deemed to provide the itemization of the
account-opening fees clearly and conspicuously if the creditor provides
this information in a bullet format as shown in proposed Samples G-
14(C), G-14(D) and G-14(E) in Appendix G. The Board believes that the
bullet format properly highlights the itemization of the account-
opening fees, and that requiring these fees also to be disclosed in
bold text would detract from the total amount of account-opening fees
that is disclosed in bold text in the same row.
Second, under the proposal, periodic fees imposed by the creditor
for availability of the plan pursuant to proposed Sec. 226.5b(b)(12)
that are not an annualized amount must not be disclosed in bold.
Proposed comment 5b(b)(2)-3.ii provides guidance on this exception for
periodic fees. For example, if a creditor imposes a $10 monthly
maintenance fee for a HELOC plan, the creditor would be required to
disclose in the table that there is a $10 monthly maintenance fee, and
that the fee is $120 on an annual basis. In this example, under the
proposal, the $10 fee disclosure must not be disclosed in bold, but the
$120 annualized amount must be disclosed in bold. Under the proposal,
the periodic fee would be disclosed in the same row as the annualized
amount of the fee. The Board believes that requiring the periodic fee
to be in bold text would detract from the annualized amount of the fee
that is disclosed in bold text in the same row. The Board proposes to
highlight in the table the annualized amount of a periodic fee (rather
than the amount of the periodic fees) because the Board believes this
annualized amount will be more useful to consumers in understanding the
costs of the HELOC plan and deciding whether to open the HELOC plan
offered by the creditor.
Proposed Sec. 226.5b(b)(2)(vi)(E) provides that when a creditor is
required to disclose certain payment terms under proposed Sec.
226.5b(c)(9) in a format substantially similar to the format used in
any of the applicable tables found in proposed Samples G-14(C), G-14(D)
and G-14(E) in Appendix G, the creditor must provide in bold text any
terms and phrases that are shown in bold text for that disclosure in
the applicable tables. Proposed comment 5b(b)(2)-3.iii provides
guidance on this requirement. For example, proposed Sec. 226.5b(c)(9)
provides that a creditor must distinguish payment terms applicable to
the draw period and payment terms applicable to the repayment period by
using the heading ``Borrowing Period'' for the draw period and
``Repayment Period'' for the repayment period in a format substantially
similar to the format used in any of the applicable tables found in
proposed Samples G-14C) and G-14(E) in Appendix G. See the section-by-
section analysis to proposed Sec. 226.5b(c)(9). The tables found in
proposed Samples G-14(C) and G-14(E) in Appendix G show the headings
``Borrowing Period'' and ``Repayment Period'' in bold text, thus, a
creditor must disclose these headings in bold text in providing the
table.
In addition, proposed Sec. 226.5b(c)(9)(i) provides that when the
length of the plan is definite, a creditor must disclose the length of
the plan, the length of the draw period and the length of the repayment
period, if any, in a format substantially similar to the format used in
any of the applicable tables found in proposed Samples G-14(C) and G-
14(D) in Appendix G. The length of the draw period and any repayment
period are shown in bold text in the applicable tables; thus, a
creditor would be required to provide these disclosures in bold text.
Moreover, proposed Sec. 226.5b(c)(9)(iii)(D) requires a creditor to
provide the sample payments and related information required to be
disclosed under proposed Sec. 226.5b(c)(9)(iii) in a format
substantially similar to the format used in any of the applicable
tables found in proposed Samples G-14(C), G-14(D) and G-14(E) in
Appendix G. Certain information related to these sample payments is
shown in bold text in the applicable table; thus, a creditor would
[[Page 43456]]
be required to disclose this same information in bold text in providing
the table.
As discussed in more detail below in the section-by-section
analysis to proposed Sec. 226.5b(c)(9), in the consumer testing
conducted by the Board on HELOC disclosures, the Board found that
certain formats set forth in the tables in proposed Samples G-14(C), G-
14(D) and G-14(E) to Appendix G, such as headings to distinguish
payment terms applicable to the draw period and the repayment period,
were effective in helping participants identify and understand the
payment terms offered on the plan. Thus, the Board proposes to require
the use of these formats, and to require the bold text that is used in
the formats.
Terminology. As discussed in the section-by-section analysis to
proposed Sec. 226.5(a)(2), the Board proposes that creditors offering
HELOCs subject to Sec. 226.5b must use certain terminology when
disclosing the draw period, any repayment period, and certain other
terms in the early HELOC disclosures table. See proposed
226.5(a)(2)(ii). Proposed comment 5b(b)(2)-1 provides a cross reference
to the terminology requirements set forth in proposed Sec.
226.5(a)(2).
Clear and conspicuous standard. As discussed in the section-by-
section analysis to proposed Sec. 226.5(a)(1), the Board proposes a
clear and conspicuous standard applicable to Sec. 226.5b disclosures.
Proposed comment 5b(b)(2)-4 provides a cross reference to the clear and
conspicuous standard applicable to the disclosures in proposed Sec.
226.5b(b), as set forth in proposed comment 5(a)(1)-1.
Other format requirements. Generally, the format requirements
applicable to the early HELOC disclosures would be set forth in
proposed Sec. 226.5b(b)(2). Nonetheless, proposed Sec. 226.5b(c)(9)
contains formatting requirements applicable to certain payment terms
that must be disclosed in the early HELOC disclosures table. See
section-by-section analysis to proposed Sec. 226.5b(c)(9). In
addition, proposed Sec. 226.5b(c)(10)(i)(A)(1) contains formatting
requirements applicable to disclosure of variable rates in the early
HELOC disclosures table. Proposed comment 5b(b)(2)-2 provides a cross
reference to the formatting requirements set forth in proposed Sec.
226.5b(c)(9) and (c)(10). In addition, this proposed comment cross
references proposed formatting requirements that would be applicable to
information that a creditor would be required to provide to a consumer
upon his or her request prior to account opening, as described in more
detail in the section-by-section analysis to proposed Sec.
226.5b(c)(7), (c)(9), (c)(14), and (c)(18).
Electronic disclosures. Current Sec. 226.5b(a)(3) provides that
for an application accessed by the consumer in electronic form, the
application disclosures and HELOC brochure may be provided to the
consumer in electronic form on or with the application. Guidance on
providing the required disclosures on or with an application accessed
by the consumer in electronic form is found in current comments
5b(a)(1)-5 and 5b(a)(3)-1. As discussed in the section-by-section
analysis to proposed Sec. 226.5b(a)(2), the Board proposes to move the
provisions in current Sec. 226.5b(a)(3) and current comments 5b(a)(1)-
5 and 5b(a)(3)-1 to proposed Sec. 226.5b(a)(2) and proposed comments
5b(a)(1)-6.ii and 5b(a)(2)-1, respectively, and to make revisions to
those provisions. Under the proposal, the provisions related to
electronic disclosures would only apply to the disclosure of the ``Key
Questions'' document published by the Board that a creditor generally
is required to provide with an application under proposed Sec.
226.5b(a). As discussed in more detail in the section-by-section
analysis to proposed Sec. 226.5(a)(1)(iii), the Board is not proposing
specific provisions on providing the early HELOC disclosures required
under proposed Sec. 226.5b(b) in electronic form. Thus, creditors
would be required to obtain the consumer's consent, in accordance with
the E-Sign Act, to provide the early HELOC disclosures in electronic
form, or else provide written disclosures. This proposal not to provide
specific provisions for providing the early HELOC disclosures required
under proposed Sec. 226.5b(b) in electronic form is consistent with
the Board's prior decisions on electronic disclosures of early mortgage
disclosures that are given after application but before consummation of
the loan under Sec. 226.19(a). In particular, in its rulemaking on
electronic disclosures issued in November 2007, the Board did not
include specific provisions for providing these early mortgage
disclosures in electronic form, and thus, creditors are required to
obtain the consumer's consent, in accordance with the E-Sign Act, to
provide the early mortgage disclosures in electronic form, or else
provide written disclosures. 72 FR 63462 (November 9, 2007); 72 FR
71058 (December 14, 2007).
Retainable form. Current comment 5b(a)(1)-1 provides that the
current application disclosures must be clear and conspicuous and in
writing, but need not be in a form the consumer can keep. As discussed
in the section-by-section analysis to Sec. 226.5(a)(1), the Board
proposes to require that the early HELOC disclosures must be provided
in a retainable form. See proposed Sec. 226.5(a)(1)(ii)(B). Thus, the
Board proposes to delete current comment 5b(a)(1)-1 as obsolete.
Disclosure of APR--more conspicuous requirement. Current comment
5b(a)(1)-2 provides a cross reference to current Sec. 226.5(a)(2),
which provides that when the term ``annual percentage rate'' is
required to be disclosed with a number in the application disclosures,
the term ``annual percentage rate'' must be more conspicuous than other
required disclosures. As discussed in the section-by-section to
proposed Sec. 226.5(a)(2), the Board proposes to delete the
requirement that the term ``annual percentage rate'' be more
conspicuous than other required disclosures when disclosed with a
number. Thus, the Board proposes to delete current comment 5b(a)(1)-2
as obsolete.
Method of providing disclosures. Current comment 5b(a)(1)-4
provides that in providing the application disclosures, a creditor may
provide a single disclosure form for all of its HELOC plans, as long as
the disclosure describes all aspects of the plans. For example, if the
creditor offers several payment options, all payment options must be
disclosed. Alternatively, a creditor has the option of providing
separate disclosure forms for multiple options or variations in
features. For example, a creditor that offers two payment options for
the draw period may prepare separate disclosure forms for the two
payment options.
The Board proposes to delete current comment 5b(a)(1)-4 as
obsolete. As discussed in more detail in the section-by-section
analysis to proposed Sec. 226.5b(c)(9), under the proposal, creditors
would not be allowed to disclose all aspects of the plan in the table.
For example, proposed Sec. 226.5b(c) provides that in making the early
HELOC disclosures, a creditor generally must not disclose terms
applicable to a fixed-rate and -term payment feature offered during the
draw period of the plan, unless that payment feature is the only
payment plan offered during the draw period of the plan.
In addition, as discussed in more detail in the section-by-section
analysis to proposed Sec. 226.5b(c)(9)(ii), a creditor would not be
allowed to provide separate early HELOC disclosures for each payment
option offered on the HELOC. Specifically, if a creditor offers two or
more payment plans on the HELOC plan (excluding the fixed-rate
[[Page 43457]]
and -term payment plans described above unless those are the only
payment plans offered during the draw period), a creditor may not
provide separate early HELOC disclosures for each payment plan, but
instead must disclose only two payment plans in the table, in
accordance with the requirements in proposed Sec. 226.5b(c)(9)(ii)(B).
(Under the proposal, a creditor would be required to disclose to a
consumer other payment plans offered by the creditor upon request of
the consumer. See proposed comments 5b(c)(9)(ii)-5 and 5b(c)(18)-2.)
5b(b)(3) Disclosures Based on a Percentage
As discussed in more detail in the section-by-section analysis to
proposed Sec. 226.5b(c)(11), current Sec. 226.5b(d)(7) requires a
creditor to provide in the application disclosures an itemization of
certain fees imposed by the creditor to open, use, or maintain the
plan, and these fees may be stated as a dollar amount or percentage of
another amount (such as disclosing the amount of a fee as ``2% of the
credit limit''). In addition, current Sec. 226.5b(d)(10) requires a
creditor to disclose in the application disclosures any limitations on
the number of extensions of credit and the amount of credit that may be
obtained during any time period, as well as any minimum outstanding
balance and minimum draw requirements, stated as dollar amounts or
percentages. In contrast, current Sec. 226.5b(d)(8) requires a
creditor to disclose in the application disclosures a good-faith
estimate of the total amount of fees that may be imposed by third
parties to open a plan and the creditor must disclose that total as
either a single dollar amount or range.
Under the proposal, except for disclosing one-time fees imposed to
open the plan, if the amount of any fee required to be disclosed in the
table is determined on the basis of a percentage of another amount, the
percentage used and the identification of the amount against which the
percentage is applied may be disclosed instead of the amount of the
fee. In addition, any limitations on the number of extensions of credit
and the amount of credit that may be obtained during any time period,
as well as any minimum outstanding balance and minimum draw
requirements, required to be disclosed under proposed Sec.
226.5b(c)(16) may be disclosed as dollar amounts or percentages. See
proposed Sec. 226.5b(b)(3).
As discussed in more detail in the section-by-section analysis to
proposed Sec. 226.5b(c)(11), a creditor would be required to disclose
in the table as part of the early HELOC disclosures a total of one-time
fees to open the account, and this total must include fees imposed by
the creditor and any third party. In addition, a creditor would be
required to disclose an itemization of all one-time fees to open the
account, regardless of whether those fees are imposed by a creditor or
a third party. Both the total of one-time fees to open the account and
the itemization of the fees must be disclosed as a dollar amount (or a
range of dollar amounts) and may not be disclosed as a percentage of
another amount. See proposed Sec. 226.5b(b)(3) and (c)(11). The Board
believes that requiring the one-time fees that are imposed to open the
account to be disclosed as dollar amounts, instead of a percentage of
another amount, would aid consumers' understanding of the account-
opening fees and may aid consumers in comparison shopping for HELOC
plans. In consumer testing conducted on credit card disclosures in
relation to the January 2009 Regulation Z Rule, the Board found that
consumers generally understand dollar amounts better than percentages.
As a result, the Board believes that requiring account opening fees to
be disclosed as dollar amounts instead of percentages of another amount
would better enable consumers to understand the start up costs of
opening the HELOC plan. In addition, consumers could more easily
compare the dollar amount of one-time account-opening fees on different
HELOC plans if all HELOC plans are required to disclose the dollar
amount. Otherwise, consumers would need to calculate the dollar amount
themselves for some HELOC plans if the account-opening fees were
presented as a percentage of another amount.
Consistent with current Sec. 226.5b(d)(7), however, under the
proposal, if the amount of other fees that a creditor must disclose in
the table--namely, fees imposed by the creditor for the availability of
the plan, fees imposed by the creditor for early termination of the
plan by the consumer and fees imposed for required insurance, debt
cancellation or suspension coverage--are determined on the basis of a
percentage of another amount, the percentage used and the
identification of the amount against which the percentage is applied
may be disclosed instead of the amount of the fee. Similarly,
consistent with current Sec. 226.5b(d)(10), the proposal would permit
a creditor to disclose the amount of any limitations on the number of
extensions of credit, the amount of credit that may be obtained during
any time period, any minimum outstanding balance and minimum draw
requirements, required to be disclosed under proposed Sec.
226.5b(c)(16) as either a dollar amount or percentage. The Board
believes that allowing these fees and transaction requirements to be
disclosed as a percentage of another amount is appropriate because
these fees or transaction requirements generally would be imposed
during the life of the plan, and thus, it may be difficult for a
creditor to estimate a dollar amount for these fees or transaction
requirements at the time that the early HELOC disclosures are made.
5b(c) Content of Disclosures
Currently, Sec. 226.5b(d) sets forth the content for the
application disclosures that a creditor must provide on or with the
application. As explained above, other than the ``Key Questions''
document required under proposed Sec. 226.5b(a), the Board proposes to
delete the requirement that creditors provide disclosures to consumers
on or with HELOC applications. Instead, the Board proposes that a
creditor must provide the early HELOC disclosures (generally in the
form of a table) to a consumer within three business days following
receipt of the consumer's application by the creditor (but not later
than at account opening). Under the proposal, proposed Sec. 226.5b(c)
sets forth the content for the early HELOC disclosures.
Fixed-rate and -term feature during draw period. HELOC plans
typically offer the ability to obtain advances that must be repaid
based on a variable interest rate that applies to all outstanding
balances. Some HELOC plans, however, also offer a fixed-rate and -term
payment feature, where a consumer is permitted to repay all or part of
the balance during the draw period at a fixed rate (rather than a
variable rate) and over a specified time period. The Board understands
that for most HELOC plans, consumers must take active steps to access
the fixed-rate and -term payment feature; this feature is not
automatically accessed when a consumer obtains advances from the HELOC
plan.
Current comment 5b(d)(5)(ii)-2, which implements TILA Section
127A(a)(1), (a)(2), (a)(3), and (a)(8), provides that a creditor
generally must disclose in the application disclosures terms that apply
to the fixed-rate and -term payment feature, including the period
during which the feature can be selected, the length of time over which
repayment can occur, any fees imposed for the feature, and the specific
rate or a description of the index and margin that will apply upon
exercise of the
[[Page 43458]]
feature. 15 U.S.C. 1637a(a)(1), (a)(2), (a)(3), and (a)(8).
The Board proposes to delete current comment 5b(d)(5)(ii)-2. The
Board proposes that if a HELOC plan offers a variable-rate feature and
a fixed-rate and -term feature during the draw period, a creditor
generally must not disclose in the table the terms applicable to the
fixed-rate and -term feature, except as discussed below. See proposed
Sec. 226.5b(c) and proposed comment 5b(c)-4. Instead, a creditor may
disclose detailed information relating to the fixed-rate and -term
feature outside of the table. See proposed Sec. 226.5b(b)(2)(v).
However, if a HELOC plan does not offer a variable-rate feature during
the draw period, but only offers a fixed-rate and -term feature during
that period, a creditor must disclose in the table information related
to the fixed-rate and -term feature when making the disclosures
required by proposed Sec. 226.5b(c). The Board proposes this rule
pursuant to its authority in TILA Section 105(a) to make adjustments
and exceptions to the requirements in TILA to effectuate the statute's
purposes, which include facilitating consumers' ability to compare
credit terms and helping consumers avoid the uniformed use of credit.
See 15 U.S.C. 1601(a), 1604(a).
The Board believes that including information about the variable-
rate feature and the fixed-rate and -term feature in the table would
create ``information overload'' for consumers. The terms that apply to
the fixed-rate and -term features often differ significantly from the
terms that apply to the variable-rate feature. For example, different
APRs, fees, length of repayment periods, limitations on the number of
transactions, and minimum transactions amounts may apply to the fixed-
rate and -term feature than the variable-rate feature. In addition,
creditors often provide consumers with several options related to the
fixed-rate and -term feature, such as providing several lengths of
repayment period (e.g., 3, 5, or 7 years) from which a consumer may
choose for a particular advance under the fixed-rate and -term feature.
The Board believes that requiring a creditor to provide all of these
details about the fixed-rate and -term feature in the table would add
to the length and complexity of the table, and would create
``information overload'' for consumers.
Instead of requiring that all the details of the fixed-rate and -
term feature be disclosed in the table, the Board proposes to require a
creditor offering this payment feature (in addition to a variable-rate
feature) to disclose in the table the following: (1) A statement that
the consumer has the option during the draw period to borrow at a fixed
interest rate; (2) the amount of the credit line that the consumer may
borrow at a fixed interest rate for a fixed term; and (3) as
applicable, either a statement that the consumer may receive, upon
request, further details about the fixed-rate and -term payment
feature, or, if information about the fixed-rate and -term payment
feature is provided with the table, a reference to the location of the
information. See proposed Sec. 226.5b(c)(18). Thus, under the
proposal, a consumer would be notified in the table about the fixed-
rate and -term payment feature, and could request additional
information about this payment feature (if a creditor chose not to
provide additional information about this feature outside of the
table).
In responding to a consumer's request, prior to account opening,
for additional information about the fixed-rate and -term feature, a
creditor would be required to provide this additional information as
soon as reasonably possible after the request. See proposed comment
5b(c)-2. Additional information disclosed about the fixed-rate and -
term payment feature upon request (or outside the early HELOC
disclosures table) would have to include in the form of a table, (1)
information about the APRs and payment terms applicable to the fixed-
rate and -term payment feature, and (2) any fees imposed related to the
use of the fixed-rate and -term payment feature, such as fees to
exercise the fixed-rate and -term payment option or to convert a
balance under a fixed-rate and -term payment feature to a variable-rate
feature under the plan. See proposed comment 5b(c)(18)-2. The Board
believes that the above approach to providing information to consumers
about the fixed-rate and -term feature enables consumers interested in
this feature to obtain additional information about this optional
feature easily and quickly, but does not contribute to ``information
overload'' for consumers in general.
Duty to respond to requests for information. Current comment 5b(d)-
2 provides that if the consumer, prior to opening a plan, requests
information as described in the application disclosures, such as the
current index value or margin, the creditor must provide this
information as soon as reasonably possible after the request. The Board
proposes to move this comment to proposed comment 5b(c)-2 and apply it
to requests for additional information described in the early HELOC
disclosures, namely requests for additional information about the
following: (1) Fees applicable to the plan under proposed Sec.
226.5b(c)(14); (2) the conditions under which a creditor may take
certain actions under the plan, such as terminating the plan, under
proposed Sec. 226.5b(c)(7); (3) payment plans offered on the plan not
described as part of the early HELOC disclosures (other than fixed-rate
and -term payment plans unless those are the only payment plans offered
during the draw period) required under proposed Sec. 226.5b(c)(9)(ii);
and (4) fixed-rate and -term payment plans under proposed Sec.
226.5b(c)(18). The Board proposes to revise this comment to update the
examples of information that a consumer may receive upon request (such
as additional information on fees applicable to the plan or the
conditions under which the creditor may take certain actions on the
plan) and to provide a cross reference to comments that specifically
discuss a consumer's right to request the four types of additional
information listed above.
Disclosure of repayment phase--applicability of requirements. Some
HELOC plans provide in the initial agreement for a repayment period
during which no further draws may be taken and repayment of the amount
borrowed is required. Current comment 5b-4 provides that a creditor
must disclose information relating to the repayment period, as well as
the draw period, when providing the application disclosures. Thus, for
example, a creditor must provide payment information about any
repayment phase as well as about the draw period in the application
disclosures, as required by current Sec. 226.5b(d)(5). The Board
proposes to move the relevant part of this comment to proposed 5b(c)-3,
and to make technical revisions to the comment. Under the proposal, a
creditor would be required to disclose in the table as part of the
early HELOC disclosures information relating to any repayment period,
as well as the draw period.
Disclosures given as applicable. Current comment 5b(d)-1 provides
that a creditor may provide the application disclosures described in
current Sec. 226.5b(d) as applicable. For example, if negative
amortization cannot occur in a HELOC plan, a reference to it need not
be made under current Sec. 226.5b(d)(9). The Board proposes to move
this comment to proposed 5b(c)-1 and revise the comment to refer to the
following proposed exceptions to the general rule that a creditor is
only required to include a disclosure required under proposed Sec.
226.5b(c) as applicable: specifically, proposed 5b(c)-1 cross
references proposed
[[Page 43459]]
Sec. 226.5b(c)(9)(ii)(B)(3) and (c)(9)(iii)(C)(4), which provide that
a creditor in certain circumstances must state that a balloon payment
will not result for plans in which no balloon payment would occur; in
addition, proposed comment 5b(c)-1 cross references proposed Sec.
226.5b(c)(10)(i)(A)(5), which provides that if there are no annual or
other periodic limitations on changes in the APR, a creditor must state
that no annual limitation exists.
5b(c)(1) Identification Information
Currently, a creditor is not required to disclose identification
information about the creditor and the borrower as part of the
application disclosures. Pursuant to the Board's authority in TILA
Section 127A(a)(14) to require additional disclosures for HELOC plans,
the Board proposes to require that a creditor disclose as part of the
early HELOC disclosures the following identification information: (1)
The consumer's name and address; (2) the identity of the creditor
making the disclosure; (3) the date the disclosure was prepared; and
(4) the loan originator's unique identifier, as defined by the Secure
and Fair Enforcement for Mortgage Licensing Act of 2008 (``SAFE Act'')
Sections 1503(3) and (12), 12 U.S.C. 5102(3) and (12). 15 U.S.C.
1637a(a)(14). Under the proposal, these disclosures must be placed
directly above the table provided as part of the early HELOC
disclosures, in a format substantially similar to any of the applicable
tables found in G-14(C), G-14(D) and G-14(E) in Appendix G. See
proposed Sec. 226.5b(b)(2)(iii). Proposed comment 5b(c)(1)-1 clarifies
that in identifying the creditor making the disclosure, use of the
creditor's name would be sufficient, but the creditor may also include
an address and/or telephone number. In transactions with multiple
creditors, any one of them would be allowed to make the disclosures;
the one doing so must be identified in the early HELOC disclosures. The
Board solicits comment on whether the creditor making the disclosures
should be required to disclose its contact information, such as its
address and/or telephone number.
The Board believes that this identification information would
provide context for the disclosures provided in the table. For example,
the date the disclosure was prepared would provide consumers
information about the date on which the terms in the table were
accurate. In addition, the Board believes it is important to disclose
the creditor's identity so that consumers can easily identify the
appropriate entity.
Loan originator's unique identifier. On July 30, 2008, the SAFE
Act, 12 U.S.C. 5101-5116, was enacted to create a Nationwide Mortgage
Licensing System and Registry of loan originators to increase
uniformity, reduce fraud and regulatory burden, and enhance consumer
protection. 12 U.S.C. 5102. Under the SAFE Act, a ``loan originator''
is defined as ``an individual who (i) takes a residential mortgage loan
application; and (ii) offers or negotiates terms of a residential
mortgage loan for compensation or gain.'' 12 U.S.C. 5102(3)(A)(i). Each
loan originator is required to obtain a unique identifier through the
Nationwide Mortgage Licensing System and Registry. 12 U.S.C.
5103(a)(2). The term ``unique identifier'' is defined as ``a number or
other identifier that (i) permanently identifies a loan originator;
(ii) is assigned by protocols established by the Nationwide Mortgage
Licensing System and Registry and the Federal banking agencies to
facilitate electronic tracking of loan originators and uniform
identification of, and public access to, the employment history of and
the publicly adjudicated disciplinary and enforcement actions against
loan originators; and (iii) shall not be used for purposes other than
those set forth under this title.'' 15 U.S.C. 5102(12)(A). The system
is intended to provide consumers with easily accessible information to
research a loan originator's history of employment and any disciplinary
or enforcement actions against him or her. 12 U.S.C. 5101(7).
To facilitate the use of the Nationwide Mortgage Licensing System
and Registry and promote the informed use of credit, pursuant to the
Board's authority under TILA Section 127A(a)(14) to require additional
disclosures for HELOC plans, the Board proposes in new Sec.
226.5b(c)(1) to require that a loan originator to disclose as part of
the early HELOC disclosures his or her unique identifier, as defined by
the SAFE Act. 15 U.S.C. 1637a(a)(14). Proposed comment 5b(c)(1)-2
clarifies that in transactions with multiple loan originators, each
loan originator's unique identifier must be listed on the early HELOC
disclosures. For example, in a transaction where a mortgage broker
meets the SAFE Act definition of loan originator, the identifiers for
the broker and for its employee loan originator meeting that definition
would need to be listed on the early HELOC disclosures.
The Board notes that the Board, FDIC, OCC, OTS, NCUA, and Farm
Credit Administration have published a proposed rule to implement the
SAFE Act. See 74 FR 27386 (June 9, 2009). In this proposed rule, the
federal banking agencies have requested comment on whether there are
mortgage loans for which there may be no mortgage loan originator. For
example, the agencies query whether there are situations where a
consumer applies for and is offered a loan through an automated process
without contact with a mortgage loan originator. See id. at 27397. The
Board solicits comments on the scope of this problem and its impact on
the requirements of proposed Sec. 226.5b(c)(1).
Statement About Retaining a Copy of the Disclosures
The Board proposes to delete current Sec. 226.5b(d)(1), which
implements TILA Section 127A(a)(6)(C), and current comment 5b(d)(1)-1
as obsolete. Current Sec. 226.5b(d)(1) provides that a creditor must
disclose as part of the application disclosures a statement that the
consumer should make or otherwise retain a copy of the application
disclosures. Current comment 5b(d)(1)-1 provides that a creditor need
not disclose that the consumer should make or otherwise retain a copy
of the disclosures if they are retainable--for example, if the
disclosures are not part of an application that must be returned to the
creditor to apply for the plan. As discussed in more detail in the
section-by-section analysis to Sec. 226.5(a)(1), however, the Board
proposes to require a creditor to provide the early HELOC disclosures
in a retainable form.
5b(c)(2) No Obligation Statement
Pursuant to the Board's authority in TILA Section 127A(a)(14) to
require additional disclosures for HELOC plans, the Board proposes in
new Sec. 226.5b(c)(2) to require a creditor to disclose as part of the
early HELOC disclosures a statement that the consumer has no obligation
to accept the terms disclosed in the table. 15 U.S.C. 1637a(a)(14). In
addition, under proposed Sec. 226.5b(c)(2), if a creditor provides
space for the consumer to sign or initial the early HELOC disclosures,
the creditor would be required to include a statement that a signature
by the consumer only confirms receipt of the disclosure statement. A
creditor would be required to provide these proposed disclosures
directly below the table provided as part of the early HELOC
disclosures, in a format substantially similar to any of the applicable
tables found in proposed Samples G-14(C), G-14(D) and G-15(E) in
Appendix G. See proposed Sec. 226.5b(b)(2)(iv).
As discussed in the proposal issued by the Board on closed-end
mortgages published elsewhere in today's Federal
[[Page 43460]]
Register, in consumer testing conducted by the Board on closed-end
mortgage products, participants reviewed mock ups of mortgage
disclosures that would be given within three business days after a
consumer's application has been received by the creditor for a mortgage
loan. These participants were asked whether they would be obligated to
accept the loan terms described in the disclosures because they had
submitted an application for a mortgage. Most participants initially
understood in reviewing the tested mortgage disclosures that they would
not be required to accept the loan terms described in the disclosures.
However, some participants later believed they would be obligated to
accept the loan upon signing or initialing the disclosure. Based on
this consumer testing, the Board is concerned that although consumers
may initially understand they are not obligated to accept the terms of
the HELOC plan, this belief may be diminished if a creditor requires a
consumer to sign or initial receipt of the early HELOC disclosures.
This may further discourage negotiation and shopping among HELOC
products and creditors. Thus, the Board proposes to require a creditor
to disclose as part of the early HELOC disclosures a statement that the
consumer has no obligation to accept the terms disclosed in the table.
In addition, if a creditor provides space for the consumer to sign or
initial the early HELOC disclosures, the creditor would be required to
include a statement that a signature by the consumer only confirms
receipt of the disclosure statement.
5b(c)(3) Identification of Plan as a Home-Equity Line of Credit
Pursuant to the Board's authority in TILA Section 127A(a)(14) to
require additional disclosures with respect to HELOC plans, the Board
proposes in new Sec. 226.5b(c)(3) to require that creditors as part of
the early HELOC disclosures disclose above the table a statement that
the consumer has applied for a home-equity line of credit. 15 U.S.C.
1637a(a)(14).
In consumer testing the Board conducted on HELOCs disclosures, most
participants had obtained a HELOC in the past, but some participants
were also recruited who had considered obtaining a HELOC but opted
instead for a home-equity loan. A few participants had never obtained a
home-equity loan or HELOC, but had considered opening a HELOC in the
past five years. In the consumer testing, during the initial portion of
the interview, several participants appeared not to understand the
difference between a home-equity loan and a HELOC. For example, one
person initially indicated that she had a home-equity loan, but after
the difference was explained to her she realized that she actually had
a HELOC.
Based on this consumer testing, the Board proposes to take several
steps to address potential confusion by consumers about the differences
between these two types of home-equity products. First, as discussed in
the section-by-section analysis to Sec. 226.5b(a), the ``Key
Questions'' document that would be required to be given with
applications for HELOCs (except for telephone applications where this
document must be given with the early HELOC disclosures) includes
information describing the relative advantages and disadvantages of a
HELOC and a home-equity loan. Second, as noted, under proposed Sec.
226.5b(c)(3) creditors would be required as part of the early HELOC
disclosures to disclose above the table that the consumer has applied
for a home-equity line of credit. This statement will identify clearly
for the consumer that he or she has applied for a HELOC, and may help a
consumer who mistakenly thought he or she was applying for a home-
equity loan.
5b(c)(4) Conditions for Disclosed Terms
Current Sec. 226.5b(d)(2)(i), which implements TILA Section
127A(a)(6)(A), provides that creditors must disclose as part of the
application disclosures a statement of the time by which the consumer
must submit an application to obtain specific terms disclosed in the
application disclosures and an identification of any disclosed term
that is subject to change prior to opening the plan. 15 U.S.C.
1637a(a)(6)(A). Current comment 5b(d)(2)(i)-1 provides that the
requirement that a creditor disclose the time by which an application
must be submitted to obtain the disclosed terms does not require the
creditor to guarantee any terms. If a creditor chooses not to guarantee
any terms, it must disclose that all of the terms are subject to change
prior to opening the plan. The creditor also is permitted to guarantee
some terms and not others, but must indicate which terms are subject to
change. Current comment 5b(d)(2)(i)-2 provides that if a creditor
chooses to guarantee terms disclosed in the application disclosures, a
creditor may disclose either a specific date or a time period for
obtaining the guaranteed terms. If the creditor discloses a time
period, the consumer must be able to determine from the disclosure the
specific date by which an application must submitted to obtain any
guaranteed terms.
Under current Sec. 226.5b(d)(2)(ii), which implements TILA Section
127A(a)(6)(B), a creditor also must provide as part of the application
disclosures a statement that if a disclosed term changes (other than a
change due to fluctuations in the index in a variable-rate plan) prior
to opening the plan and the consumer therefore elects not to open the
plan the consumer may receive a refund of all fees paid in connection
with the application. 15 U.S.C. 1637a(a)(6)(B). Current comment
5b(d)(2)(ii)-1 provides that a creditor should consult the rules in
current Sec. 226.5b(g) regarding refund of fees when terms change.
Proposal. The Board proposes to move the provisions in current
Sec. 226.5b(d)(2) to proposed Sec. 226.5b(c)(4) and to revise those
provisions. Specifically, because the early HELOC disclosures would be
given after the application has been submitted by the consumer, the
Board proposes to delete as obsolete (1) the requirement in current
Sec. 226.5b(d)(2), which implements TILA Section 127A(a)(6)(A), that a
creditor provide a statement of the time by which the consumer must
submit an application to obtain specific terms disclosed in the
application disclosures, and (2) guidance for providing that statement
in current comment 5b(d)(2)(i)-2. 15 U.S.C. 1637a(a)(6)(A). The Board
proposes this rule pursuant to its authority in TILA Section 105(a) to
make adjustments and exceptions to the requirements in TILA to
effectuate the statute's purposes, which include facilitating
consumers' ability to compare credit terms and helping consumers avoid
the uniformed use of credit. See 15 U.S.C. 1601(a), 1604(a).
Consistent with current Sec. 226.5b(d)(2)(i), the Board proposes
in new Sec. 226.5b(c)(4)(i) to require that a creditor disclose
directly below the table as part of the early HELOC disclosures an
identification of any disclosed term that is subject to change prior to
opening the plan. The Board also proposes to move the provisions in
current comment 5b(d)(2)(i)-1 that relate to this disclosure to
proposed comment 5b(c)(4)(i)-1. Specifically, proposed comment
5b(c)(4)(i)-1 provides that if a creditor chooses not to guarantee any
terms, it must disclose that all of the terms are subject to change
prior to opening the plan. The creditor also would be permitted to
guarantee some terms and not others, but would be required to indicate
which terms are subject to change.
[[Page 43461]]
The Board proposes in new Sec. 226.5b(c)(4)(ii) to require that a
creditor disclose in the table as part of the early HELOC disclosures a
statement that, if a disclosed term changes (other than a change due to
fluctuations in the index in a variable-rate plan) prior to opening the
plan and the consumer elects not to open the plan, the consumer may
receive a refund of all fees paid. The language in new Sec.
226.5b(c)(4)(ii) differs from current Sec. 226.5b(d)(2)(ii), to
reflect proposed changes in proposed Sec. 226.5b(d). Currently Sec.
226.5b(g) contains the substantive right of a consumer to receive a
refund if terms change and the consumer decides not to open the HELOC
plan. As discussed in more detail in proposed Sec. 226.5b(d), the
Board proposes to move the substantive right to a refund of fees if
terms change from current Sec. 226.5b(g) to proposed Sec. 226.5b(d)
and to revise those provisions. The language in proposed Sec.
226.5b(c)(4)(ii) reflects the proposed changes in Sec. 226.5b(d).
In addition, the Board proposes to move guidance on disclosing the
statement about refundability of fees if terms change from current
comment 5b(d)(2)(ii)-1 to proposed comment 5b(c)(4)(ii)-1, and to make
technical revisions to the proposed comment.
5b(c)(5) Statement Regarding Refund of Fees Under Proposed Sec.
226.5b(e)
Current Sec. 226.5b(h) provides that neither a creditor nor any
other person may impose a nonrefundable fee in connection with an
application until three business days after the consumer receives the
application disclosures and the HELOC brochure. Current comment 5(h)-1
provides that if a creditor collects a fee after the consumer receives
the application disclosures and the HELOC brochure and before the
expiration of the three days, the creditor must notify the consumer
that the fee is refundable for three days. The notice must be clear and
conspicuous and in writing, and may be included with the application
disclosures or as an attachment to them.
As discussed in more detail in the section-by-section analysis to
proposed Sec. 226.5b(e), the Board proposes to move current Sec.
226.5b(h) to proposed Sec. 226.5b(e) and revise it. The Board proposes
to add new Sec. 226.5b(c)(5) to require a creditor to disclose in the
table as part of the early HELOC disclosures a statement that the
consumer may receive a refund of all fees paid, if the consumer
notifies the creditor within three business days of receiving the early
HELOC disclosures that the consumer does not want to open the plan. The
proposed disclosure would be required if a creditor will impose fees on
the HELOC plan prior to the expiration of the three-day period.
Proposed comment 5(c)(5)-1 provides that creditors should consult the
rules in Sec. 226.5b(e) regarding refund of fees if the consumer
rejects the plan within three business days of receiving the early
HELOC disclosures.
5b(c)(6) Security Interest and Risk to Home
Current Sec. 226.5b(d)(3), which implements TILA Section
127A(a)(5), provides that a creditor must disclose as part of the
application disclosures a statement that the creditor will acquire a
security interest in the consumer's dwelling and that loss of the
dwelling may occur in the event of default. 15 U.S.C. 1637a(a)(5). The
Board proposes to move this disclosure requirement from current Sec.
226.5b(d)(3) to proposed Sec. 226.5b(c)(6). Thus, under the proposal,
a creditor would be required to disclose this statement in the table as
part of the early HELOC disclosures.
5b(c)(7) Possible Actions by Creditor
Current Sec. 226.5b(d)(4)(i), which implements TILA Section
127A(a)(7)(A), provides that a creditor must disclose as part of the
application disclosures a statement that, under certain conditions, the
creditor may terminate the plan and require payment of the outstanding
balance in full in a single payment and impose fees upon termination;
prohibit additional extensions of credit or reduce the credit limit;
and, as specified in the initial agreement, implement certain changes
in the plan.\16\
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\16\ TILA Section 127A(a)(7) does not specifically require that
a creditor disclose as part of the application disclosures a
statement that under certain conditions the creditor may impose fees
upon termination or may implement certain changes in the plans as
specified in the initial agreement. The Board included these
disclosures in current Sec. 226.5b(d)(4)(i) pursuant to its
authority in TILA Section 127A(a)(14) to required additional
disclosures for HELOC plans.
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The Board proposes to move the provisions in current Sec.
226.5b(d)(4)(i) to proposed Sec. 226.5b(c)(7)(i) and to revise those
provisions. Specifically, proposed Sec. 226.5b(c)(7)(i) provides that
a creditor must disclose in the table as part of the early HELOC
disclosures a statement that, under certain conditions, the creditor
may terminate the plan and require payment of the outstanding balance
in full in a single payment and impose fees upon termination; prohibit
additional extensions of credit or reduce the credit limit; and make
other changes in the plan. Current comment 5b(d)(4)(i)-1 provides
guidance on when a creditor must provide the statement that a creditor
under certain conditions may impose fees upon termination of the plan.
This comment would be moved to proposed comment 5b(c)(7)(i)-1.
The circumstances in which a creditor must provide the disclosure
regarding implementing ``changes in the plan'' would be broader under
proposed Sec. 226.5b(c)(7)(i) than under current Sec.
226.5b(d)(4)(i). As explained in current comment 5b(d)(4)(i)-2, a
creditor must provide the disclosure regarding implementing changes in
the plan under current Sec. 226.5b(d)(4)(i) only if the initial
agreement contains specific changes that may be made in the plan if
specific events take place (see Sec. 226.5b(f)(3)(i)), such as
provisions in the initial agreement that the APR will increase a
specified amount if the consumer leaves the creditor's employment. If
no specific changes are set forth in the initial agreement pursuant to
Sec. 226.5b(f)(3)(i), but the creditor may make changes in the plan
under Sec. 226.5b(f)(3)(ii) through (v), such as making a change that
will unequivocally benefit the consumer under Sec. 226.5b(f)(3)(iv), a
creditor is not required under current Sec. 226.5b(d)(4)(i) to
disclose that the creditor in certain circumstances may make certain
changes in the plan.
As explained in proposed comment 5b(c)(7)(i)-2, under proposed
Sec. 226.5b(c)(7)(i), a creditor would be required to disclose in the
table as part of the early HELOC disclosures a statement that the
creditor under certain conditions may make changes in the plan, if the
creditor may make any changes in the plan under Sec. 226.5b(f)(3)(i)-
(v), including making a change that will unequivocally benefit the
consumer under Sec. 226.5b(f)(3)(iv), even if the creditor does not
set forth specific changes in the plan for specific events in the
initial agreement under Sec. 226.5b(f)(3)(i). The Board believes that
if a creditor may make any changes to the plan, consumers should be
informed generally of this fact.
Under current Sec. 226.5b(d)(4)(ii), which implements TILA Section
127a(a)(7)(B), a creditor must disclose as part of the application
disclosures a statement that the consumer may receive, upon request,
information about the conditions under which a creditor may take
certain actions, such as terminating the plan, as discussed above. 15
U.S.C. 1637a(a)(7)(B). Current Sec. 226.5b(d)(4)(iii) provides a
creditor may provide a disclosure of the conditions in lieu of the
statement that
[[Page 43462]]
a consumer may receive that information upon request.\17\
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\17\ TILA Section 127A(a)(7) does not specifically allow a
creditor to disclose a statement of the conditions in lieu of the
statement that a consumer may receive that information upon request.
The Board provided this alternative in current Sec. 226.5b(d)(4)
pursuant to the Board authority in TILA Section 105(a) to make
adjustments to the requirements in TILA that are necessary to
effectuate the purposes of TILA.
---------------------------------------------------------------------------
The Board proposes to move the provisions in current Sec.
226.5b(d)(4)(ii) and (iii) to proposed Sec. 226.5b(c)(7)(ii) and
revise those provisions. In particular, under proposed Sec.
226.5b(c)(7)(ii), a creditor may either provide a statement that the
consumer may receive, upon request, information about the conditions
under which a creditor may take certain actions such as terminating the
plan or disclose those conditions with the early HELOC disclosures
(outside the table). If a creditor chooses to provide as part of the
early HELOC disclosures a statement that the consumer may receive, upon
request, information about the conditions, this statement must be
disclosed in the table. If a creditor chooses to provide a disclosure
of the conditions with the early HELOC disclosures, the disclosure of
the conditions must not be disclosed in the table. The disclosure of
the conditions must be provided outside the table, and a creditor must
disclose in the table a reference to the location of the disclosure.
Current comment 5b(d)(4)(iii)-2 provides if a creditor chooses to
disclose the conditions in lieu of providing that information upon
request, the creditor may provide the disclosure of the conditions with
the other application disclosures or apart from them. If the creditor
elects to provide the disclosure of the conditions with the application
disclosures, this disclosure need not comply with the precedence rule
in current Sec. 226.5b(a)(2). Under the proposal, current comment
5b(d)(4)(iii)-2 would be deleted. As discussed above, under the
proposal, a creditor would not be allowed to include the disclosure of
conditions under which a creditor may take certain actions, as
discussed above, in the table. See proposed Sec. 226.5b(c)(7)(ii) and
(b)(2)(v). The Board believes that including a disclosure of the
conditions in the table could lead to ``information overload'' for
consumers, distracting consumers from other important information in
the table. The conditions under which a creditor may take certain
actions, such as terminating the HELOC plan, will likely not change
from creditor to creditor, and thus this information may not be useful
to consumers in comparing one HELOC plan to another.
Current comment 5b(d)(4)(iii)-1 provides guidance on how a creditor
may provide the disclosure of the conditions if a creditor is providing
this information with the application disclosures. The Board proposes
to move the provisions in current comment Sec. 226.5b(d)(4)(iii)-1 to
proposed comment Sec. 226.5b(c)(7)(ii)-1 and make revisions to the
provisions. In particular, proposed comment 5b(c)(7)(ii)-1 would
provide guidance on how a creditor may provide the disclosures of the
conditions, either upon the request of the consumer prior to account
opening or with the early HELOC disclosures (outside the table).
5b(c)(8) Tax Implications
Current Sec. 226.5b(d)(11), which implements TILA Section
127A(a)(13)(A), provides that a creditor must disclose as part of the
application disclosures a statement that the consumer should consult a
tax advisor regarding the deductibility of interest and charges under
the plan. 15 U.S.C. 1637a(a)(13)(A). The Board proposes to move current
Sec. 226.5b(d)(11) to proposed Sec. 226.5b(c)(8) and make technical
revisions. In addition, to implement Section 1302 of the Bankruptcy Act
(cited above), which requires disclosure of the tax implications for
home-secured credit that may exceed the dwelling's fair-market value,
the Board proposes in new Sec. 226.5b(c)(8) to require a creditor as
part of the early HELOC disclosures to disclose a statement that the
interest on the portion of the credit extension that is greater than
the fair market value of the dwelling may not be tax deductible for
Federal income tax purposes and that the consumer should consult a tax
advisor for further information on tax deductibility. 15 U.S.C.
1637a(a)(13)(B).
The Board stated its intent to implement the Bankruptcy Act
amendments in an ANPR published in October 2005 as part of the Board's
ongoing review of Regulation Z (October 2005 ANPR). 70 FR 60235
(October 17, 2005). The Board received approximately 50 comment
letters: forty-five letters were submitted by financial institutions
and their trade groups, and five letters were submitted by consumer
groups. In general, creditors asked for flexibility in providing the
disclosure regarding the tax implications for home-secured credit that
may exceed the dwelling's fair-market value, either by permitting the
notice to be provided to all applicants, or to be provided later in the
approval process after creditors have determined whether the disclosure
is triggered. Creditor commenters asked for guidance on loan-to-value
calculations and safe harbors for how creditors should determine
property values. Consumer advocates favored triggering the disclosure
when the possibility of negative amortization could occur. A number of
commenters stated that in order for the disclosure to be effective and
useful to the borrower, it should be given when the new extension of
credit, combined with existing credit secured by the dwelling (if any),
may exceed the fair market value of the dwelling. A few industry
comments took the opposite view that the disclosure should be limited
only to when a new extension of credit itself exceeds fair market
value, citing the difficulty of determining how much debt is already
secured by the dwelling at the time of application.
The Board implemented Section 1302 with regard to advertisements in
its July 2008 HOEPA final rule. See 73 FR 44522 (July 30, 2008). In the
Supplementary Information to that rule, the Board stated its intent to
implement the application disclosure portion of the Bankruptcy Act
during its forthcoming review of closed-end and HELOC disclosures under
TILA.
Proposed Sec. 226.5b(c)(8) would implement provisions of the
Bankruptcy Act by requiring creditors to include in the table required
under proposed Sec. 226.5b(b) as part of the early HELOC disclosures
(1) a statement that the interest on the portion of the credit
extension that is greater than the fair market value of the dwelling
may not be tax deductible for Federal income tax purposes and (2) a
statement that the consumer should consult a tax advisor for further
information on tax deductibility.
The Board proposes to require creditors offering HELOCs to provide
this disclosure to all HELOC applicants as part of the early HELOC
disclosures, even if the particular HELOC plan offered to the consumer
is not designed to allow the consumer to take extensions of credit that
exceed the fair market value of the dwelling. The Board recognizes that
HELOCs by their very nature carry a possibility that subsequent draws
may exceed the fair market value of the dwelling. First, the market
value of a dwelling may decline during the term of a HELOC plan,
leaving less equity available. Second, quite often, consumers who apply
for HELOCs already have first-lien mortgages; the amount of equity that
a consumer may be able to utilize is limited, in part, by how much the
consumer owes on the first mortgage.
[[Page 43463]]
For these reasons, the likelihood is higher with HELOCs than closed-end
home-equity loans that the consumer may exceed the fair market value of
the dwelling with subsequent draws.
5b(c)(9) Payment Terms
Current Sec. 226.5b(d)(5), which implements TILA Section
127A(a)(8), provides that a creditor must disclose as part of the
application disclosures the payment terms applicable to the plan, and
sets forth specific information that must be included in this
disclosure. As discussed below, the Board proposes to move the
provisions in current Sec. 226.5b(d)(5) to proposed Sec. 226.5b(c)(9)
and to revise them.
Format for identifying payment terms applicable to the draw period
and the repayment period. Current comment 5b-4 provides that a creditor
must disclose information relating to the repayment period, as well as
the draw period, when providing the application disclosures. Thus, for
example, a creditor must provide payment information about any
repayment phase as well as about the draw period in the application
disclosures, as required by current Sec. 226.5b(d)(5). The Board
proposes to move the relevant part of this comment to proposed 5b(c)-3,
and to make technical edits to the comment. Under the proposal, a
creditor would be required to disclose in the table as part of the
early HELOC disclosures information relating to any repayment period,
as well as the draw period.
In addition, the Board proposes to require that when disclosing
payment terms in the table, a creditor must distinguish payment terms
applicable to the draw period from payment terms applicable to the
repayment period, by using the heading ``Borrowing Period'' for the
draw period and ``Repayment Period'' for the repayment period, in a
format substantially similar to the format used in any of the
applicable tables in proposed Samples G-14(C) and G-14(E) in Appendix
G. 15 U.S.C. 1604(a); see proposed Sec. 226.5b(c)(9). Thus, under the
proposal, a creditor would be required to include the heading
``Borrowing Period'' each place payment information about the draw
period is included in the table, and the heading ``Repayment Period''
each place payment information about the repayment period is included
in the table, in a format substantially similar to the format used in
any of the applicable tables found in G-14(C) and G-14(E) in Appendix
G. The Board proposes this rule pursuant to its authority in TILA
Section 105(a) to make adjustments and exceptions to the requirements
in TILA to effectuate the statute's purposes, which include
facilitating consumers' ability to compare credit terms and helping
consumers avoid the uniformed use of credit. See 15 U.S.C. 1601(a),
1604(a).
In consumer testing conducted by the Board on HELOC disclosures,
the Board tested application disclosures in a narrative form, designed
to simulate those currently in use. When reviewing these application
disclosures, many participants had difficulty understanding how the
draw period differs from the repayment period, and what impact these
distinctions have on required monthly payments. In the consumer
testing, the Board tested versions of the early HELOC disclosures where
the heading ``Borrowing Period'' was included each place payment
information about the draw period was presented in the table and the
heading ``Repayment Period'' was included each place payment
information about the repayment period was presented in the table. In
reviewing these versions of the early HELOC disclosures, participants
were better able to understand the differences between the draw period
and the repayment period, and the impact these differences have on
required monthly payments. Thus, the Board proposes to require that a
creditor use the headings ``Borrowing Period'' and ``Repayment Period''
in the table to distinguish payment terms applicable to the draw period
from payment terms applicable to the repayment period, respectively, in
a format substantially similar to the format used in any of the
applicable tables in proposed Samples G-14(C) and 14(E) in Appendix G.
Paragraph 5b(c)(9)(i)
Current Sec. 226.5b(d)(5)(i), which implements TILA Section
127A(a)(8)(B), requires a creditor to disclose as part of the
application disclosures the length of the draw period and the length of
any repayment period. 15 U.S.C. 1637a(a)(8)(B). Current comment
5b(d)(5)(i)-1 provides that the combined length of the draw period and
any repayment period need not be disclosed in the application
disclosures.
For the reasons described below, pursuant to its authority in TILA
Section 127A(a)(14) to require additional disclosures for HELOC plans,
the Board proposes in new Sec. 226.5b(c)(9)(i) to require that a
creditor disclose in the table as part of the early HELOC disclosures
the length of the plan, as well as the length of the draw period and
the length of any repayment period. 15 U.S.C. 1637a(a)(14). In
addition, under the proposal, if there is no repayment period on the
HELOC plan, a creditor would be required to disclose in the table as
part of the early HELOC disclosures a statement that after the draw
period ends, the consumer must repay the remaining balance in full.
Length of the HELOC plan is definite. Proposed Sec.
226.5b(c)(9)(i) would require that when the length of the plan is
definite, a creditor, when disclosing the length of the plan, the
length of the draw period and the length of any repayment period in the
table, must make those disclosures using a format substantially similar
to the format used in any of the applicable tables found in proposed
Samples G-14(C) and G-14(D) in Appendix G. Proposed comment
5b(c)(9)(i)-1.i would provide that if a maturity date is set forth for
the HELOC plan, the length of the plan, the length of the draw period
and the length of any repayment period are definite. This proposed
comment also states that the length of the plan must be based on the
maturity date of the plan, regardless of whether the outstanding
balance may be paid off before or after the maturity date. For example,
assume that a plan has a draw period of 10 years and a maturity date of
20 years. If the outstanding balance on the plan is not paid off by the
maturity date, the creditor could extend the maturity date of the plan
and require the consumer to make minimum payments until the outstanding
balance is repaid. In this example, the proposed comment clarifies that
the creditor must disclose the length of the HELOC plan as 20 years,
the length of the draw period as 10 years and the length of the
repayment period as 10 years.
In consumer testing conducted by the Board on HELOC disclosures,
the Board tested application disclosures in a narrative form, designed
to simulate application disclosures currently in use. In these versions
of the application disclosures, the length of the draw period and the
length of the repayment period were disclosed, but the total length of
the plan was not disclosed. When reviewing these application
disclosures, many participants had difficulty understanding the timing
of the draw and repayment periods. For example, several participants
incorrectly thought that the two periods ran concurrently, or that the
repayment period began as soon as money was borrowed.
In the consumer testing, the Board also tested versions of the
early HELOC disclosures developed by the Board where the length of the
plan was 20 years, and the length of the draw and repayment periods was
10 years each. In these tested versions of the early HELOC disclosures,
the length of the plan was disclosed as 20 years, along with a
[[Page 43464]]
statement indicating that this period is divided into two periods. The
length of the draw period was then disclosed as ``Years (1-10)'' and
the length of the repayment period was disclosed as ``Years (11-20),''
to indicate that those periods would run consecutively and not
concurrently. In addition, the length of the draw period and the length
of the repayment period were included as part of the headings
``Borrowing Period'' (for the draw period) and ``Repayment Period''
(for the repayment period), respectively, each time those headings were
used. In the consumer testing, the Board found that including the
length of the plan in the table and using the above format for
presenting the length of the plan, the length of the draw period and
the length of the repayment period effectively helped participants
understand the timing of the two periods.
Thus, the Board proposes to require creditors to disclose the
length of the plan in the table, along with the length of the draw
period and the length of any repayment period. In addition, as
explained in proposed comment 5b(c)(9)(i)-3, the Board proposes to
require that creditors use the above format in presenting the length of
the plan, the length of the draw period and the length of the repayment
period in the table for HELOC plans that have a definite length and
have a draw period and a repayment period, as shown in proposed Sample
G-14(C) in Appendix G. Proposed comment 5b(c)(9)(i)-3 also specifies
that proposed Sample G-14(D) in Appendix G shows the format a creditor
must use to disclose the length of the plan and the length of the draw
period for HELOC plans that have a definite length and have a draw
period but no repayment period.
Length of plan and length of repayment period cannot be determined
at the time the early HELOC disclosures must be given. Current comment
5b(d)(5)(i)-1 provides that if the length of the repayment period
cannot be determined because, for example, it depends on the balance
outstanding at the beginning of the repayment period, the creditor must
disclose in the application disclosures that the length of the
repayment period is determined by the size of the balance. The Board
proposes to move this provision in current comment 5b(d)(5)(i)-1 to
proposed comment 5b(c)(9)(i)-1.ii, and to revise it.
Specifically, proposed comment 5b(c)(9)(i)-1.ii addresses HELOC
plans that do not have a maturity date, and for which the length of the
plan and the length of the repayment period cannot be determined at the
time the early HELOC disclosures must be given because the repayment
period depends on the balance outstanding at the beginning of the
repayment period or the balance at the time of the last advance during
the draw period. For these plans, the creditor would be required to
state that the length of the plan and the length of the repayment
period are determined by the size of the balance outstanding at the
beginning of the repayment period or the balance at the time of the
last advance during the draw period, as applicable.
Proposed comment 5b(c)(9)(i)-1.ii provides two illustrations of
this rule. The first would assume that the plan has no maturity date,
the draw period is 10 years, and the minimum payment during the
repayment period is 1.5 percent of the outstanding balance at the time
of the last advance during the draw period. Under proposed comment
5b(c)(9)(i)-1.ii.A, a creditor must disclose that the length of the
plan and the length of the repayment period are determined by the size
of the outstanding balance at the time of the last advance during the
draw period.
The second illustration would assume that the length of the draw
period is 10 years and the length of the repayment period will be 15
years if the balance at the beginning of the repayment period is less
than $20,000, and 30 years if the balance is $20,000 or more. Under
proposed comment 5b(c)(9)(i)-1.ii.B, a creditor must disclose that the
length of the plan will be 25 or 40 years depending on the outstanding
balance at the beginning of the repayment period. In addition, the
creditor must disclose that the repayment period will be 15 years if
the balance is less than $20,000, and 30 years if the balance is
$20,000 or more. This proposed comment provides that a creditor must
not simply disclose that the repayment period is determined by the size
of the balance. Guidance on how to disclose the information in this
illustration is found in proposed Sample G-14(E) in Appendix G.
The Board requests comment on whether additional guidance is needed
on how to disclose the length of the HELOC plan and the length of the
repayment period in the table where the plan does not have a maturity
date and the length of the repayment period cannot be determined at the
time the early HELOC disclosures must be given.
Length of draw period is indefinite. Current comment 5b(d)(5)(i)-1
provides that if the length of the plan is indefinite (for example,
because there is no time limit on the period during which the consumer
can take advances), the creditor must state that fact in the
application disclosures when disclosing the length of the draw period.
The Board proposes to move this provision from current comment
5b(d)(5)(i)-1 to proposed comment 5b(d)(9)(i)-1.iii. Thus, under the
proposal, a creditor would be required to make this disclosure in the
table as part of the early HELOC disclosures, to satisfy the
requirement in proposed Sec. 226.5b(c)(9)(i) to disclose the length of
the plan and the length of the draw period. The Board requests comment
on whether additional guidance is needed on how to disclose the length
of the plan and the length of draw period in the table when the length
of the draw period is indefinite.
Length of the plan and length of the draw period are the same. For
some HELOC plans, the length of the plan and the length of the draw
period are the same because the HELOC plan does not have a repayment
period. For example, some HELOC plans offer a payment plan where a
consumer would only be required to pay interest during the draw period.
At the end of the draw period, the consumer would be required to pay
the principal balance as a balloon payment. Proposed comment
5b(c)(9)(i)-4 provides that if the length of the plan and the length of
the draw period are the same, a creditor will be deemed to satisfy the
requirement to disclose the length of plan by disclosing the length of
the draw period.
No repayment period on the HELOC plan. Under proposed Sec.
226.5b(c)(9)(i), if there is no repayment period on the HELOC plan, a
creditor would be required to include a statement in the table as part
of the early HELOC disclosures that after the draw period ends, the
consumer must repay the remaining balance in full. Pursuant to its
authority under TILA Section 127A(a)(14) to require additional
disclosures for HELOC plans, the Board proposes to add this disclosure
to make more clear to consumers that there is no repayment period on
the HELOC being offered. 15 U.S.C. 1637a(a)(14).
Draw period renewal provisions. Current comment 5b(d)(5)(i)-2
provides that if, under the credit agreement, a creditor retains the
right to review a line at the end of the draw period and determine
whether to renew or extend the draw period of the plan, the possibility
of renewal or extension--regardless of its likelihood--should be
ignored for the application disclosures. For example, if an agreement
provides that the draw period is five years and that the creditor may
renew the draw period for an additional five years, the possibility of
renewal should be ignored and the draw period should be
[[Page 43465]]
considered five years. The Board proposes to move this comment to
proposed comment 5b(c)(9)(i)-2, and apply it to the early HELOC
disclosures.
Paragraphs 5b(c)(9)(ii) and (c)(9)(iii)
Current Sec. 226.5b(d)(5)(ii), which implements TILA Section
127A(a)(8)(C) and (a)(10), provides that a creditor must disclose as
part of the application disclosures an explanation of how the minimum
periodic payments will be determined and the timing of the payments
(such as whether the payments will be due monthly, quarterly or on some
other periodic basis). 15 U.S.C. 1637a(a)(8)(C) and (a)(10). In
addition, current Sec. 226.5b(d)(5)(ii) provides that if paying only
the minimum periodic payments may not repay any of the principal or may
repay less than the outstanding balance, the creditor must disclose a
statement of this fact, as well as a statement that a balloon payment
may result. Footnote 10b explains that a balloon payment results if
paying the minimum periodic payments does not fully amortize the
outstanding balance by a specified date or time, and the consumer must
repay the entire outstanding balance at that time.
Under current Sec. 226.5b(d)(5)(iii), which implements TILA
Section 127A(a)(9), a creditor must disclose as part of the application
disclosures an example, based on a $10,000 outstanding balance and a
recent APR, of the minimum periodic payments, the amount of any balloon
payment, and the time it would take to repay the $10,000 outstanding
balance if the consumer made only those payments and obtained no
additional extensions of credit. 15 U.S.C. 1637a(a)(9). In addition,
current Sec. 226.5b(d)(12)(x), which implements TILA Section
127A(a)(2)(H), provides that for each payment option offered on a
variable-rate HELOC plan, a creditor must disclose the minimum periodic
payments that would be required if the maximum APR were in effect for a
$10,000 outstanding balance. 15 U.S.C. 1637a(a)(2)(H).
As discussed in more detail below, the Board proposes to move the
provisions in Sec. 226.5b(d)(5)(ii) to proposed Sec. 226.5b(c)(9)(ii)
and to revise them. The Board also proposes to move the provisions in
Sec. 226.5b(d)(5)(iii) and (d)(12)(x) to proposed Sec.
226.5b(c)(9)(iii) and to revise them. In addition, the Board proposes
to move the contents of footnote 10b to proposed comment 5b(c)(9)-1.
Multiple payment plans. In some cases, creditors may offer more
than one payment option on a HELOC plan. For example, a creditor may
provide the following two payment options during the draw period: (1)
minimum monthly payments during the draw period will cover only
interest that accrues each month and will not pay down any of the
principal balance; or (2) minimum monthly payments during the draw
period will cover interest that accrues each month plus 1.5 percent of
the principle balance each month. The Board understands that creditors
typically do not require a consumer to choose the payment plan he or
she wants when applying for a HELOC plan, but instead require the
consumer to choose a payment plan either prior to or at account
opening.
Under current comment 5b(a)(1)-4, a creditor may provide a single
application disclosure form for all of its HELOC plans, as long as the
disclosure describes all aspects of the plans. For example, if the
creditor offers several payment options, all such options generally
must be disclosed, including fixed-rate and -term payment features, as
discussed in more detail above in the section-by-section analysis to
Sec. 226.5b(c). See also current comment 5b(d)(5)(ii)-2.
Alternatively, a creditor has the option of providing separate
disclosure forms for multiple options or variations in features. For
example, a creditor that offers two payment options for the draw period
may prepare separate disclosure forms for the two payment options. A
creditor using this alternative, however, must include a statement on
each application disclosure form that the consumer should ask about the
creditor's other HELOC programs. A creditor that receives a request for
information about other available programs prior to account opening
must provide the additional disclosures as soon as reasonably possible.
As discussed in the section-by-section analysis to proposed Sec.
226.5b(b)(2), the Board proposes to delete current comment 5b(a)(1)-4
as obsolete. Under the proposal, a creditor would not be allowed to
disclose more than two payment options offered on the HELOC in the
table. Specifically, under proposed Sec. 226.5b(c)(9)(ii)(B), if a
creditor only offers two payment plans (excluding fixed-rate and -term
payment plans unless these are the only payment plans offered during
the draw period), the creditor would be required to disclose both of
those payment plans in the table. If a creditor offers more than two
payment plans (excluding fixed-rate and -term payment plans unless
these are the only payment plans offered during the draw period), the
creditor would be allowed to disclose only two of the payment plans in
the table. See proposed comment 5b(c)(9)(ii)-2. Proposed comment
5b(c)(9)(ii)-2 clarifies that the following would be considered two
payment plans: The draw period is 10 years and the consumer has the
choice between two repayment periods--10 and 20 years. The two payment
plans would be (1) a 10 year draw period and a 10 year repayment
period, and (2) a 10 year draw period and a 20 year repayment period.
The Board believes that the proposed approach of allowing only two
payment plans to be disclosed in the table would benefit consumers by
preventing ``information overload'' that might result if more than two
payment options were disclosed in the table. In addition, the Board
believes that requiring a creditor to disclose two payment plans in the
table, instead of allowing the creditor to disclose each payment plan
separately to the consumer, would benefit consumers by enabling
consumers more easily to compare the two payment plans. As discussed in
more detail below, under proposed Sec. 226.5b(c)(9)(iii), a creditor
would be required to disclose sample payments for each payment plan
disclosed in the table based on the assumption that the consumer
borrows the full credit line at account opening, and does not obtain
any additional extensions of credit. Under the proposal, if a creditor
is disclosing two payment plans in the table, the creditor would be
required to disclose in the table which plan results in the least
amount of interest, and which plan results in the most amount of
interest, based on the assumptions used to calculate the sample
payments. See proposed Sec. 226.5b(c)(9)(iii)(C)(3). In addition,
under the proposal, a creditor disclosing two payment plans in the
table, one in which a balloon payment would occur and one in which it
would not, must disclose that a balloon payment will result for the
plan in which a balloon payment would occur and that a balloon payment
will not result for the plan in which no balloon payment would occur.
See proposed Sec. 226.5b(c)(9)(iii)(C)(4). In consumer testing
conducted by the Board on HELOC disclosures, the Board tested the above
disclosures explicitly comparing two payment plans; most participants
responding to questions about this information indicated that they
found this information useful.
Proposed Sec. 226.5b(c)(9)(ii)(B) also provides that if a creditor
offers one or more payment plans (excluding fixed-rate and -term
payment plans unless those are the only payment plans offered during
the draw period) where a consumer would repay all of the
[[Page 43466]]
principal by the end of the plan if the consumer makes only the minimum
payments due during that period, the creditor would be required to
describe one of these payment plans in the table. For example, if a
creditor offers two payment plans where a balloon payment will result
and one payment plan (excluding fixed-rate and -term payment plans
unless those are the only payment plans offered during the draw period)
where a balloon payment will not result, the creditor would be required
to disclose in the table two payments plans, one of which must be the
plan where a balloon payment will not result.
In consumer testing conducted by the Board on HELOC disclosures,
the Board tested versions of early HELOC disclosures where two payment
plans were shown in the table--one payment plan that would result in a
balloon payment and one payment plan that would not result in a balloon
payment. In this consumer testing, participants were asked which of
these payment plans they would be likely to choose if they were opening
the HELOC plan. Most of the participants indicated that they would
choose the payment plan without the balloon payment because, in part,
they did not want to owe a balloon payment at the end of the plan.
Thus, the Board believes that requiring a creditor to disclose in the
table a payment plan where a balloon will not result (if such a plan is
offered by the creditor) would benefit consumers by informing them that
the creditor offers such a payment plan.
Proposed Sec. 226.5b(c)(9)(ii)(B) also requires a creditor to
include a statement in the table indicating that the table shows how
the creditor determines minimum required payments for two plans offered
by the creditor. If the creditor offers more than the two payment plans
described in the table (other than fixed-rate and -term payment plans
unless those are the only payment plans offered during the draw
period), the creditor would be required to disclose that other payment
plans are available, and that the consumer should ask the creditor for
additional details about these other payment plans. Proposed comment
5b(c)(9)(ii)-3 clarifies that this statement about additional payment
plans would be required only if the creditor offers additional payment
plans available to the consumer. If the only other payment plans
available are employee preferred-rate plans, for example, the creditor
would be required to provide this statement only if the consumer would
qualify for the employee preferred-rate plan.
Proposed comment 5b(c)(9)(ii)-5 provides guidance on how a creditor
must provide additional information on other payment plans to a
consumer upon the consumer's request prior to account opening. This
proposed comment provides that if a creditor offers a payment plan
other than the two payment plans disclosed in the table as part of the
early HELOC disclosures (except for fixed-rate and -term payment plans
unless those are the only payment plans offered during the draw
period), and a consumer requests additional information about the other
plan, the creditor must disclose an additional table under Sec.
226.5b(b) to the consumer with the terms of the other payment plan
described in the table. See proposed comment 5(c)(18)-2 for disclosure
of additional information about fixed-rate and -term payment plans upon
a consumer's request. If the creditor offers multiple payment plans
that were not disclosed in the table as part of the early HELOC
disclosures, the creditor would be allowed to disclose only one payment
plan on each additional table given to the consumer. Under the
proposal, for example, if a creditor offers two payment plans (other
than fixed-rate and -term payment plans unless those are the only
payment plans offered during the draw period) that were not disclosed
in the table given as part of the early HELOC disclosures, the creditor
would be required to provide the consumer, upon request, two additional
tables--one table for each payment plan. A creditor that receives a
request for information about other available payment plans prior to
account opening would be required to provide the additional information
as soon as reasonably possible after the request. See proposed comment
5b(c)-2.
The Board believes that this proposed approach of only allowing two
payment plans to be disclosed in the table, and allowing the consumer
easily and quickly to receive information about additional payment
plans upon request, strikes the proper balance between ensuring that
consumers are adequately informed about the payment plans that are
offered on the HELOC plan and preventing ``information overload'' that
might result if all payment plans were disclosed in the table. The
Board solicits comment on the proposed approach.
Minimum payment requirements. As discussed above, current Sec.
226.5b(d)(5)(ii) provides that a creditor must disclose as part of the
application disclosures an explanation of how the minimum periodic
payment will be determined and the timing of the payments (such as
whether the payments will be due monthly, quarterly or on some other
periodic basis). The Board proposes to move the provisions in Sec.
226.5b(d)(5)(ii) to proposed Sec. 226.5b(c)(9)(ii) and to revise them.
Specifically, proposed Sec. 226.5b(c)(9)(ii)(A) provides that if a
creditor offers to the consumer only one payment plan (except for
fixed-rate and -term payment plans unless those are the only payment
plans offered during the draw period), the creditor must disclose in
the table an explanation of how the minimum periodic payment will be
determined and the timing of the payments. Proposed Sec.
226.5b(c)(9)(ii)(B) provides that a creditor disclosing two payment
plans in the table would be required to provide an explanation of how
the minimum payment will be determined for both payment plans and the
timing of the payments.
Current comment 5b(d)(5)(ii)-1 provides that the disclosure of how
the minimum periodic payment is determined need describe only the
principal and interest components of the payment. A creditor, at its
option, may disclose other charges that may be a part of the payment,
as well as the balance computation method. The Board proposes to move
this comment to proposed comment 5b(c)(9)(ii)-1 and revise it.
Specifically, proposed comment 5b(c)(9)(ii)-1 provides that the
disclosure of how the minimum periodic payment is determined in the
early HELOC disclosures table must describe only the principal and
interest components of the payment.
Unlike current comment 5b(d)(5)(ii)-1, however, proposed comment
5b(c)(9)(ii)-1 would not allow a creditor to disclose in the table
other charges that may be a part of the payment or the balance
computation method. In addition, under proposed comment 5b(c)(9)(ii)-1,
a creditor would not be allowed to disclose in the table a description
of any floor payment amount, where the payment will not go below that
amount. The Board believes that allowing charges that may be part of
the payment (other than principal and interest components), the balance
computation method, and any payment floor amount to be disclosed in the
table might create ``information overload'' for consumers. The Board
believes that the proposed approach to allow creditors to disclose
information only about the principle and interest components of the
payment in the table strikes the proper balance between informing
consumers about how minimum periodic payments will be determined, and
preventing the ``information overload'' that may result if other
details were included. The concern about ``information overload'' here
is that
[[Page 43467]]
consumers will either not read the disclosure or not understand or
retain the information they do read.
Payment examples. Current Sec. 226.5b(d)(5)(iii) provides that a
creditor must disclose as part of the application disclosures an
example, based on a $10,000 outstanding balance and a recent APR,
showing the minimum periodic payments, the amount of any balloon
payment, and the time it would take to repay the $10,000 outstanding
balance if the consumer made only those payments and obtained no
additional extensions of credit. 15 U.S.C. 1637a(a)(9). To fulfill this
disclosure requirement, a creditor must disclose the number and amount
of the minimum periodic payments and the amount of any balloon payment,
assuming the consumer borrows $10,000 at the beginning of the draw
period at a recent APR and the outstanding balance is reduced according
to the terms of the plan. A creditor must assume no additional advances
are taken at any time, including at the beginning of any repayment
period. See current comment 5b(d)(5)(iii)-3.
A creditor must disclose separate hypothetical payments (or ranges
of payments) for the draw period and the repayment period, if minimum
periodic payments are calculated differently for the two periods. See
current comment 5b(d)(5)(iii)-3. In this case, the highest payment in
the range of payments for the draw period would be based on a $10,000
balance. The highest payment in the range of payment for the repayment
period would be based on the outstanding balance at the beginning of
the repayment period, which is calculated on the assumptions that the
consumer borrows $10,000 at the beginning of the draw period, the
consumer makes only minimum payments during the draw period, and the
APR does not change during the draw period. Footnote 10c and comment
5b(d)(5)(iii)-1 provide guidance on selecting a recent APR to calculate
the hypothetical payment schedule under current Sec.
226.5b(d)(5)(iii). In disclosing the hypothetical payment schedule, if
the amount of the hypothetical payments may vary within the draw
period, or any repayment period, a creditor may disclose the
hypothetical payments as a range of payments. See current Home Equity
Samples G-14A and G-14B in Appendix G.
Under current comment 5b(d)(5)(iii)-2, a creditor may show a
hypothetical payment schedule either for each payment plan disclosed in
the application disclosures, or for representative payment plans. This
comment also provides guidance how a creditor should choose
representative payment plans. Current Home Equity Samples G-14A and G-
14B, and Home Equity Model Clauses G-15 in Appendix G provide model
language for how to disclose the hypothetical payment schedule required
by current Sec. 226.5b(d)(5)(iii).
Current Sec. 226.5b(d)(12)(x) provides that for variable-rate
HELOC plans, a creditor must disclose, as part of the application
disclosures for each payment option offered on the HELOC, the minimum
periodic payment that would be required if the maximum APR were in
effect for a $10,000 outstanding balance. 15 U.S.C. Unlike the payment
examples required under current Sec. 226.5b(d)(5)(iii) for a recent
rate, the payment examples required under current Sec.
226.5b(d)(12)(x) for the maximum rate do not require the creditor to
disclose a hypothetical payment schedule based on the maximum APR.
Instead, under current Sec. 226.5b(d)(12)(x), a creditor is required
only to show the minimum required payments if the consumer had a
$10,000 balance during the draw period at the maximum APR, and the
minimum required payments if the consumer had a $10,000 balance at the
beginning of the repayment period at the maximum APR, assuming the
minimum required payments are calculated differently in the two
periods. (If minimum required payments are calculated the same in the
two periods, only one payment example need be shown.) See comment
5b(d)(12)(x)-1. Even if a consumer might owe a balloon payment at the
end of the HELOC, a creditor would not need to disclose the amount of
the balloon payment based on the maximum APR. As with the payment
examples required under current Sec. 226.5b(d)(5)(iii) that are based
on a recent APR, a creditor may provide the hypothetical payments based
on the maximum APR either for each payment plan disclosed in the
application disclosures, or for representative payment plans. See
current comment 5b(d)(12)(x)-1. Current Home Equity Samples G-14A and
G-14B and Home Equity Model Clauses G-15 in Appendix G provide model
language for how to disclose the payment examples required by current
Sec. 226.5b(d)(12)(x).
The Board proposes to move the provisions on payment examples in
Sec. 226.5b(d)(5)(iii) and (d)(12)(x) to proposed Sec.
226.5b(c)(9)(iii) and to revise them. The Board proposes to streamline
the payment examples for the current APR and the maximum APR so they
are calculated in a consistent manner. The Board proposes this rule
pursuant to its authority in TILA Section 105(a) to make adjustments
and exceptions to the requirements in TILA to effectuate the statute's
purposes, which include facilitating consumers' ability to compare
credit terms and helping consumers avoid the uniformed use of credit.
See 15 U.S.C. 1601(a), 1604(a). Under proposed Sec.
226.5b(c)(9)(iii)(B), a creditor would be required to provide payment
examples for the current and maximum APR for each payment plan
disclosed in the table. These payment examples would show the first
minimum periodic payment for the draw period and the first minimum
periodic payment for any repayment period, and the balance outstanding
at the beginning of any repayment period, based on the following
assumptions: (1) The consumer borrows the maximum credit line available
(as disclosed in the early HELOC disclosures) at account opening, and
does not obtain any additional extensions of credit; (2) the consumer
makes only minimum periodic payments during the draw period and any
repayment period; and (3) the APRs used to calculate the sample
payments remain the same during the draw period and any repayment
period. Unlike the payment examples in current Sec. 226.5b(d)(5)(iii),
which must be based on a recent APR, proposed Sec. 226.5b(c)(9)(iii)
would require payment examples based on the maximum APR possible for
the plan, as well as the current APR offered to the consumer on the
HELOC plan. Under the proposal, if an introductory APR applies, a
creditor would be required to use the APR that would otherwise apply to
the plan after the introductory APR expires, as described in proposed
Sec. 226.5b(c)(10)(ii). Thus, the Board proposes to delete the
contents of footnote 10c and guidance in current 5b(d)(5)(iii)-1 that
relate to selecting a recent APR.
Proposed Sec. 226.5b(c)(9)(iii) also requires additional
disclosures as part of the proposed payment examples. Specifically, a
creditor would be required to disclose the following information: (1) A
statement that the payment examples show the first periodic payments at
the current and maximum APRs if the consumer borrows the maximum credit
available when the account is opened and does not borrow any more
money; (2) a statement that the payment examples are not the consumer's
actual payments and that the actual payments each period will depend on
the amount that the consumer has borrowed and the interest rate that
period; (3) if a creditor is disclosing two payment plans in the
[[Page 43468]]
table, the creditor must identify which plan results in the least
amount of interest, and which plan results in the most amount of
interest, based on the assumptions used to calculate the payment
examples described above; and (4) if a consumer may pay a balloon
payment under a payment plan disclosed in the table, the creditor must
disclose that fact, and the amount of the balloon payment based on the
assumptions used to calculate the payment examples described above. If
a creditor is disclosing two payment plans in the table, one in which a
balloon payment would occur and one in which it would not, a creditor
must disclose that a balloon payment will not result for the plan in
which no balloon payment would occur. The Board also proposes in new
Sec. 226.5b(c)(9)(iii)(D) to require a creditor to provide the new
payment examples and the other related information in a tabular format
substantially similar to the format used in any of the applicable
tables found in Samples G-14(C), G-14(D) and G-14(E) in Appendix G.
As noted, the proposed payment examples for the current and the
maximum APRs would be based on the assumption that the consumer borrows
the maximum credit available (as disclosed in the early HELOC
disclosures) at account opening, and does not obtain any additional
extensions of credit. The Board proposes not to use $10,000 as the
hypothetical balance for calculating the payment examples because of
concerns that using that balance makes the sample payments
unrealistically low for most consumers. 15 U.S.C. 1604(a). Consumers
typically may borrow more than $10,000 on their HELOC plans. To
illustrate, the Board's 2007 Survey of Consumer Finances data indicates
that the median outstanding balance on HELOCs (for families that had a
balance at the time of the interview) was $24,000.\18\
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\18\ Brian Bucks, et al., Changes in U.S. Family Finances from
2004 to 2007: Evidence from the Survey of Consumer Finances, Federal
Reserve Bulletin (February 2009).
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The Board believes that the proposed payment examples based on the
maximum credit available for the current and maximum APRs will provide
more useful information to consumers than the existing $10,000 example.
Disclosing the first required minimum payment for the draw period if
the consumer borrows the maximum credit available at the current APR
would provide the consumer with an estimate of the actual current
payment if the consumer borrows the maximum credit available at account
opening. Disclosing the first required minimum payment for the draw
period if the consumer borrowers the maximum credit available at the
maximum APR would show the consumer a ``worst case scenario'' payment.
In consumer testing conducted by the Board on HELOC disclosures, the
Board tested versions of the early HELOC disclosures that based the
payment examples on a $10,000 hypothetical balance, and other versions
of the disclosures that based the payment examples on the maximum
credit line. In this testing, a number of participants preferred
payment examples based on the maximum credit line, indicating that they
would like to know what would be the highest payment they would have to
make if they borrowed the entire credit limit.
The proposed payment examples also would show the first minimum
periodic payment during the repayment period for both the current and
maximum APRs. These payment examples would be based on the balance
outstanding at the beginning of the repayment period, assuming that the
consumer borrows the full credit line at the beginning of draw period,
the consumer makes only minimum required payments during the draw
period and borrows no additional money, and the APR does change during
the draw period. Under the proposal, the amount of the balance used to
calculate the first minimum periodic payment during the repayment
period would be disclosed in the table. The Board recognizes that the
first payments during the repayment period may be less useful to the
consumer than the first payments during the draw period, given that the
first payments during the repayment periods are based on the
assumptions that the consumer will not take any additional advances
during the draw period and the APR will not change during the draw
period. Nonetheless, for some plans the required minimum periodic
payments in the repayment period may be considerably larger than the
required minimum periodic payments during the draw period. For example,
some HELOCs offer a payment plan in which the minimum periodic payments
during the draw period cover only interest and do not pay down any of
the principal during the draw period, but during the repayment period,
minimum periodic payments cover interest and at least some of the
principal balance. In these plans, the required minimum periodic
payments during the repayment period could be considerably larger than
the minimum periodic payments during the draw period. The Board
believes that showing the first required minimum periodic payment for
the repayment period will better protect consumers by putting them on
notice that their payments for the repayment period may be much larger
than the minimum periodic payments for the draw period.
Unlike current Sec. 226.5b(d)(5)(iii), proposed Sec.
226.5b(c)(9)(iii) would not require a creditor to disclose a full
hypothetical payment schedule in the early HELOC disclosures. Instead,
proposed Sec. 226.5b(c)(9)(iii) requires a creditor to disclose only
the first minimum periodic payment during the draw period and the first
minimum periodic payment during any repayment period. The Board
proposes to delete the requirement to provide the number of
hypothetical payments and the range of those payments during the draw
period and any repayment period because of concerns that including that
information in the table may confuse consumers and detract from other
important information. In the consumer testing conducted by the Board
on HELOC disclosures, the Board tested versions of the early HELOC
disclosures that showed a range of payments for the draw period and the
repayment period. In this testing, many participants did not understand
why the payments during the draw period and the repayment period were
shown as a range. In addition, participants spent considerable time
attempting to understand the range of payments at the expense of not
focusing on other pertinent information on the disclosure forms.
In addition, the Board believes that showing only the first
payments for the draw period and the repayment period sufficiently
informs consumers about how large the payments could be under the
payment plans. If the range of payments were shown for the draw period,
the first payment for the draw period would be the highest payment in
that range. Likewise, if a range of payments were shown for the
repayment period, the first payment for the repayment period would be
the highest payment in the range.
Current Sec. 226.5(d)(5)(iii) also requires that a creditor
disclose the time it would take to repay a $10,000 advance that is
taken at the beginning of the draw period at a recent rate and is
reduced according to the terms of the plan. The Board proposes not to
include the ``time to repay'' disclosure in the early HELOC
disclosures. The Board proposes this rule pursuant to its authority in
TILA Section 105(a) to make adjustments and exceptions to the
requirements in TILA to effectuate the statute's purposes, which
include facilitating consumers'
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ability to compare credit terms and helping consumers avoid the
uninformed use of credit. See 15 U.S.C. 1601(a), 1604(a). In consumer
testing conducted by the Board on HELOC disclosures, the Board tested
versions of the early HELOC disclosures that contained two payment
options. In disclosing the payment examples for each payment option,
the forms contained a disclosure of the time it would take to repay the
hypothetical balance if the consumer only made minimum periodic
payments. Although a few participants cited the ``time to repay'' as a
reason to choose one payment plan over another, the Board is concerned
that if a creditor discloses two payment options in the table, the time
to repay each plan would not always be an accurate measure of which
payment plan is better for consumers. The Board believes requiring the
``time to repay'' disclosure in the table may distract consumers from
considering other information in the table that may be more useful in
comparing the two payment plans--namely the disclosures of which
payment plan results in the least amount of interest and whether a plan
has a balloon payment.
In addition, the Board understands that most HELOCs have a maturity
date and a definite length for the plan. For these HELOCs, the time to
repay the balance will be the same as the length of the plan (which
must be disclosed in the early HELOC disclosures, see proposed Sec.
226.5b(c)(9)(i)), unless the HELOC plan has a floor payment amount
(which may cause the principal to be paid off earlier than the maturity
date). Even if the plan has a floor payment amount, the length of the
plan will inform consumers of the ``worst case scenario'' of how long
it will take to repay the debt if only minimum periodic payments are
made.
Under current comments 5b(d)(5)(iii)-2 and 5b(d)(12)(x)-1, a
creditor may show the hypothetical payment examples required to be
disclosed under current Sec. 226.5b(d)(5)(iii) and (d)(12)(x) either
for each payment plan disclosed in the application disclosures, or for
representative payment plans. The Board proposes to delete these
comments. Under proposed Sec. 226.5b(c)(9)(iii), a creditor would be
required to disclose the proposed payment examples (as described above)
for each payment plan disclosed in the table.
The current model clauses for disclosing the payment examples under
current Sec. 226.5b(d)(5)(iii) and (d)(12)(x) are contained in current
G-15 in Appendix G. These model clauses provide this information in a
narrative format. The Board proposes in new Sec. 226.5b(c)(9)(iii)(D)
to require a creditor to provide the proposed payment examples and the
other related information in a tabular format that is substantially
similar to the format used in any of the applicable tables found in
proposed Samples G-14(C), G-14(D) and G-14(E) in Appendix G. In the
consumer testing conducted by the Board on HELOC disclosures, the Board
tested versions of the early HELOC disclosures where the proposed
payment examples and related information were presented in the tabular
format shown in proposed Samples G-14(C), G-14(D) and G-14(E) in
Appendix G. This testing showed that presenting this information in a
tabular format more effectively communicated payment information to
participants than the current narrative format.
Current comment 5b(d)(5)(iii)-1 provides guidance to creditors on
how to calculate the hypothetical payment schedule required to be
disclosed under current Sec. 226.5b(d)(5)(iii). Specifically, current
comment 5b(d)(5)(iii)-1 provides that the creditor may assume that the
credit limit as well as the outstanding balance is $10,000. (If the
creditor only offers lines of credit for less than $10,000, however,
the creditor may assume an outstanding balance of $5,000 instead of
$10,000 in making this disclosure.) The example should reflect the
payment comprised only of principal and interest. Creditors may provide
an additional example reflecting other charges that may be included in
the payment, such as credit insurance premiums. Creditors may assume
that all months have an equal number of days, that payments are
collected in whole cents, and that payments will fall on a business day
even though they may be due on a non-business day. For variable-rate
plans, the example must be based on the last rate in the historical
example table required in current Sec. 226.5b(d)(12)(xi), or a more
recent rate. Where the last rate shown in the historical example table
is different from the index value and margin (for example, due to a
rate cap), creditors should calculate the rate by using the index value
and margin. A discounted rate may not be considered a more recent rate
in calculating this payment example for either variable- or fixed-rate
plans.
The Board proposes to move this comment to proposed comment
5b(c)(9)(iii)-1 and revise it. Current guidance in comment
5b(d)(5)(iii)-1 related to the hypothetical $10,000 balance and
selecting a recent APR would be deleted as obsolete. Unlike current
comment 5b(d)(5)(iii)-1, proposed comment 5b(d)(9)(iii)-1 would not
allow a creditor to provide additional payment examples reflecting
other charges that may be included in the payment, such as credit
insurance premiums, because of concerns that allowing these additional
payment examples would be more information than many consumers can
effectively process and may discourage consumers from reviewing the
payment examples at all.
The Board also proposes to include in proposed comment
5b(c)(9)(iii)-1 additional guidance for calculating and disclosing the
proposed payment examples in Sec. 226.5b(c)(9)(iii). Specifically,
proposed comment 5b(c)(9)(iii)-1 provides that in calculating the
payment examples, a creditor must account for any significant terms
related to each payment plan, such as payment caps or payment floor
amounts. A creditor must take payment floor amounts into account when
calculating the payment examples even though the creditor is not
permitted to disclose that payment floor in the table when describing
how minimum payments will be calculated. See proposed comment
5b(c)(9)(ii)-1. For example, assume that under a payment plan, the
monthly payment for the draw period will be calculated as the interest
accrued during that month, or $50, whichever is greater. In the early
HELOC disclosures table, a creditor would be required to disclose that
the minimum monthly payment during the draw period only covers
interest. The creditor would not be allowed to disclose the payment
floor of $50 in the table as part of the early HELOC disclosures.
Nonetheless, the creditor would be required to take into account this
$50 payment floor in calculating the disclosures shown as part of the
payment examples.
In disclosing the payment examples, a creditor would be required to
assume that the consumer borrows the full credit line (as disclosed in
the early HELOC disclosures) at the beginning of the draw period and
that this advance is reduced according to the terms of the plan. The
proposed comment provides that a creditor must not assume that an
additional advance is taken at any time, including at the beginning of
any repayment period. The examples also would be required to reflect
the payment comprised only of principal and interest. The proposed
sample payments in the table showing the first minimum periodic payment
for the draw period and any repayment period, as well as the balance
outstanding at the beginning of any repayment period, must be rounded
to the nearest whole
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dollar. The proposed comment provides that creditors may assume that
all months have an equal number of days, that payments are collected in
whole cents, and that payments will fall on a business day even though
they may be due on a non-business day. A creditor would be required to
assume that the APR used to calculate each payment example required by
Sec. 226.5b(c)(9)(iii) would remain the same during the draw period
and any repayment period as specified in proposed Sec.
226.5b(c)(9)(iii)(A)(3) even if that APR is a variable rate under the
plan.
Balloon payments. Currently, if a balloon payment may be paid by
the consumer under a payment plan, creditors are required to make two
disclosures relating to the balloon payment.
First, current Sec. 226.5b(d)(5)(ii), which implements TILA
Section 127A(a)(10), provides that if paying only the minimum periodic
payments may not repay any of the principal or may repay less than the
outstanding balance, the creditor must disclose as part of the
application disclosures a statement of this fact, as well as a
statement that a balloon payment may result. 15 U.S.C. 1637a(a)(10).
Footnote 10b explains that a balloon payment results if paying the
minimum periodic payments does not fully amortize the outstanding
balance by a specified date or time, and the consumer must repay the
entire outstanding balance at such time. Current comment 5b(d)(5)(ii)-3
provides guidance about disclosing balloon payments in the application
disclosures. This comment provides that in programs where the
occurrence of a balloon payment is possible, a creditor must disclose
the possibility of a balloon payment even if such a payment is
uncertain or unlikely. This comment also provides that in programs
where a balloon payment will occur, such as programs with interest-only
payments during the draw period and no repayment period, the
disclosures must state that a balloon payment will result. Current
comment 5b(d)(5)(ii)-3 clarifies that in making the disclosure about a
balloon payment as required by Sec. 226.5b(d)(5)(ii), a creditor is
not required to use the term ``balloon payment'' and is not required to
disclose the amount of the balloon payment. In addition, this comment
clarifies that the balloon payment disclosure as described in Sec.
226.5b(d)(5)(ii) does not apply in cases where repayment of the entire
outstanding balance would occur only as a result of termination and
acceleration, or if the final payment could not be more than twice the
amount of other minimum payments under the plan.
Second, as discussed above, current Sec. 226.5b(d)(5)(iii)
requires disclosure of a hypothetical payment schedule, based on a
$10,000 outstanding balance and a recent APR, showing the minimum
periodic payments, the amount of any balloon payment, and the time it
would take to repay the $10,000 outstanding balance if the consumer
made only those payments and obtained no additional extensions of
credit.
1. Disclosure of balloon payments when one payment plan is
disclosed in the early HELOC disclosures. Under the proposal, if a
creditor is only disclosing one payment plan in the early HELOC
disclosures and under that payment plan the consumer may pay a balloon
payment, a creditor would be required to disclose information about the
balloon payment twice in the table as part of the early HELOC
disclosures: At the beginning of the information about payment terms,
and as part of the payment examples. The Board proposes to move the
provisions on disclosing a balloon payment in Sec. 226.5b(d)(5)(ii) to
proposed Sec. 226.5b(c)(9)(ii)(A). Specifically, proposed Sec.
226.5b(c)(9)(ii)(A) provides that if a creditor offers to the consumer
only one payment plan (except for fixed-rate and -term payment plans
unless those are the only payment plans offered during the draw period)
and paying only the minimum periodic payments may not repay any of the
principal or may repay less than the outstanding balance by the end of
the HELOC plan, the creditor must disclose a statement of this fact, as
well as a statement that a balloon payment may result. Proposed comment
5b(c)(9)-2 explains that the row ``Balloon Payment'' in the ``Borrowing
and Repayment Terms'' section of proposed Sample G-14(D) in Appendix G
provides guidance on how to comply with the requirements in proposed
Sec. 226.5b(c)(9)(ii)(A). Proposed Sec. 226.5b(c)(9)(ii)(A) also
specifies that if a balloon payment will not result under the payment
plan, a creditor must not disclose in the early HELOC disclosures the
fact that a balloon payment will not result for the plan. The Board
believes that allowing a creditor to disclose in the early HELOC
disclosures table that a balloon payment will not result for the plan
might create ``information overload'' for consumers and distract
consumers from more important information in the table because
consumers are not likely to understand a statement that ``a balloon
payment will not apply'' without additional language defining what a
balloon payment is, which would add complexity to the table.
In addition, as discussed above, the Board proposes to move the
payment examples in current Sec. 226.5b(d)(5)(iii) to proposed Sec.
226.5b(c)(9)(iii) and revise them. Regarding disclosure of the amount
of the balloon payment in the proposed payment examples, proposed Sec.
226.5b(c)(9)(iii)(C)(4) provides that if a consumer may pay a balloon
payment under a payment plan disclosed in the table, a creditor would
be required to disclose that fact when disclosing the proposed payment
examples, as well as disclose the amount of the balloon payment based
on the assumptions used the calculate the payment examples as described
in proposed Sec. 226.5b(c)(9)(iii). Proposed comment 5b(c)(9)-2
explains that the first paragraph of the ``Sample Payments'' section of
proposed Sample G-14(D) in Appendix G provides guidance on how to
comply with the requirements in Sec. 226.5b(c)(9)(iii)(C)(4).
Consistent with proposed Sec. 226.5b(c)(9)(ii)(A), proposed Sec.
226.5b(c)(9)(iii)(C)(4) also specifies that if a creditor is disclosing
only one payment plan in early HELOC disclosures, and a balloon payment
will not occur for that plan, the creditor must not disclose as part of
the payment examples that a balloon payment will not result for the
plan.
The Board proposes to move current comment 5b(d)(5)(ii)-3 and
current footnote 10b, which provide guidance on disclosing balloon
payments, to proposed comment 5b(c)(9)-1 and to revise these
provisions. Like current footnote 10b, proposed comment 5b(c)(9)-1
specifies that a balloon payment results if paying the minimum periodic
payments does not fully amortize the outstanding balance by a specified
date or time, and the consumer must repay the entire outstanding
balance at such time. A creditor also would not need to make a
disclosure about balloon payments if the final payment could not be
more than twice the amount of other minimum payments under the plan.
Consistent with current comment 5b(d)(5)(ii)-3, proposed comment
5b(c)(9)-1 specifies that the balloon payment disclosures in proposed
Sec. 226.5b(c)(9)(ii) and (iii) do not apply where repayment of the
entire outstanding balance would occur only as a result of termination
and acceleration.
Finally, consistent with current comment 5b(d)(5)(ii)-3, proposed
comment 5b(c)(9)-1 specifies that, in disclosing a balloon payment
under Sec. 226.5b(c)(9)(ii) and (iii), a creditor must disclose that a
balloon payment ``may'' result if a balloon payment under
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a payment plan is possible, even if such a payment is uncertain or
unlikely; a creditor must disclose a balloon payment ``will'' result if
a balloon payment will occur under a payment plan, such as a payment
plan with interest-only payments during the draw period and no
repayment period.
2. Disclosure of balloon payments when two payment plans are
disclosed in the early HELOC disclosures. Under the proposal, a
creditor that discloses two payment plans in the table as part of the
early HELOC disclosures and under at least one of the plans a consumer
may pay a balloon payment, the creditor must disclose information about
the balloon payment three times in the table: (1) At the beginning of
information about the payment terms on the HELOC plan; (2) with a
discussion of how the minimum periodic payments are determined for each
plan; and (3) with the payment examples.
First, proposed Sec. 226.5b(c)(9)(ii)(B)(1) provides that if a
creditor is disclosing two payment options in the table and under at
least one of the payment plans, paying only the minimum periodic
payments may not repay any of the principal or may repay less than the
outstanding balance by the end of the plan, a creditor must disclose in
the table as part of the early HELOC disclosures a statement of this
fact, as well as a statement that a balloon payment may result. If a
balloon payment would result under one payment plan but not both
payment plans, the creditor must disclose that a balloon payment may
result depending on the terms of the payment plan. If a balloon payment
would result under both payment plans, the creditor must disclose that
a balloon payment will result. If a balloon payment would not result
under both payment plans, a creditor must not disclose in the early
HELOC disclosures the fact that a balloon payment will not result for
both plans. As noted above with respect to proposed Sec.
226.5b(c)(9)(ii)(A), the Board believes that allowing a creditor to
disclose in the early HELOC disclosures table that a balloon payment
will not result for the both payment plans might create ``information
overload'' for consumers and distract consumers from more important
information in the table. Proposed comment 5b(c)(9)-3 explains that the
row ``Balloon Payment'' in the ``Borrowing and Repayment Terms''
section of proposed Sample G-14(C) in Appendix G provides guidance on
how to comply with the requirements in Sec. 226.5b(c)(9)(ii)(B)(1).
Second, under proposed Sec. 226.5b(c)(9)(ii)(B)(3), for each
payment plan described in the early HELOC disclosures for which a
balloon payment may result (or will result as applicable), a creditor
would be required to disclose that a balloon payment may result or will
result, as applicable, for that plan. For example, assume a creditor
describes two payment plans--Plan A and Plan B--in the early HELOC
disclosures, and a balloon payment will result for both plans. Under
the proposal, a creditor would be required to disclose that a balloon
payment will result for Plan A and disclose that a balloon payment will
result for Plan B. These two statements would be disclosed along with
the information about how minimum payments would be calculated for each
plan required under proposed Sec. 226.5b(c)(9)(ii)(B)(2). See the rows
``Plan A'' and ``Plan B'' in the ``Payment Plans'' section of proposed
Sample G-14(C) in Appendix G.
If one of the plans has a balloon payment and the other does not,
proposed Sec. 226.5b(c)(9)(ii)(B)(3) requires a creditor to disclose
that a balloon payment will result for the plan in which a balloon
payment will occur and that a balloon payment will not result for the
plan in which no balloon payment would occur. If under Plan A, a
consumer would pay a balloon payment while under Plan B a consumer
would not pay a balloon payment, the creditor would be required to
state that a balloon payment will result for Plan A and a statement
that a balloon payment will not result for Plan B. Again, these two
statements would be disclosed along with the information about how
minimum payments would be calculated for each plan required under
proposed Sec. 226.5b(c)(9)(ii)(B)(2). Consistent with proposed Sec.
226.5b(c)(9)(ii)(B)(1), proposed Sec. 226.5b(c)(9)(ii)(B)(3) also
specifies that if neither payment plan has a balloon payment, a
creditor must not disclose the fact that a balloon payment will not
result for the each plan.
Third, proposed Sec. 226.5b(c)(9)(iii)(C)(4) provides that if a
consumer may pay a balloon payment under a payment plan disclosed in
the table, a creditor would be required to disclose that fact when
disclosing the proposed payment examples, and disclose the amount of
the balloon payment based on the assumptions used the calculate the
payment examples as described in proposed Sec. 226.5b(c)(9)(iii). If
under both Plan A and Plan B a consumer would owe a balloon payment,
proposed Sec. 226.5b(c)(9)(ii)(B)(4) requires a creditor to disclose
that a balloon payment will result for Plan A and disclose the amount
of the balloon payment based on the assumptions used to calculate the
payment examples described in proposed Sec. 226.5b(c)(9)(iii). In
addition, a creditor would be required to disclose a balloon payment
will result for Plan B and the amount of the balloon payment. These two
statements would be disclosed along with the payment examples in
proposed Sec. 226.5b(c)(9)(iii). See the ``Plan A vs. Plan B'' part of
the ``Plan Comparison'' section of proposed Sample G-14(C) in Appendix
G.
If one of the plans has a balloon payment and the other does not,
proposed Sec. 226.5b(c)(9)(iii)(C)(4) requires a creditor to disclose
that a balloon payment will not result for the plan in which no balloon
payment would occur. In other words, if under Plan A, a consumer would
pay a balloon payment while under Plan B a consumer would not pay a
balloon payment, the creditor would be required to disclose a statement
that a balloon payment will result for Plan A and the amount of the
balloon payment. In addition, a creditor would be required to disclose
a statement that a balloon payment will not result for Plan B. These
two statements would be disclosed along with the payment examples in
proposed Sec. 226.5b(c)(9)(iii). Consistent with proposed Sec.
226.5b(c)(9)(ii)(B)(1), proposed Sec. 226.5b(c)(9)(iii)(C)(4) also
specifies that if neither payment plan has a balloon payment, a
creditor must not disclose the fact that a balloon payment will not
result for the each plan. Thus, if under both Plan A and Plan B a
consumer would not owe a balloon payment, a creditor must not disclose
in the early HELOC disclosures that a balloon payment would not be paid
under either plan.
The Board believes that the above approach of disclosing
information about balloon payments three places in the table as part of
the early HELOC disclosures would help consumer better understand that
a balloon payment may be owed by the consumer at the end of HELOC plan
if the consumer only makes minimum required payments, and reinforces
for the consumer which payments plans carry the possibility of a
balloon payment.
Reverse mortgages. Current comment 5b(d)(5)(iii)-4 provides
guidance on disclosing terms of reverse mortgages, also known as
reverse annuity or home-equity conversion mortgages, as part of the
application disclosures. The Board proposes to move current comment
5b(d)(5)(iii)-4 to proposed comment 5b(d)(9)(ii)-6, and to make
technical revisions to conform this guidance to proposed revisions in
proposed
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Sec. 226.5b(c). The Board requests comment on whether additional
guidance is needed by creditors offering reverse mortgages on how to
meet the disclosure requirements in proposed Sec. 226.5b(c).
Paragraph 5b(c)(9)(iv)
Pursuant to its authority under TILA Section 127A(a)(14) to require
additional disclosures with respect to HELOC plans, the Board proposes
in new Sec. 226.5b(c)(9)(iv) to require a creditor to disclose in the
table as part of the early HELOC disclosures a statement that the
consumer can borrow money during the draw period. 15 U.S.C.
1637a(a)(14). In addition, if a repayment period is provided, the
creditor would also be required to disclose in the table a statement
that the consumer cannot borrow money during the repayment period.
Although creditors are not specifically required to include the above
information as part of the application disclosures, creditors typically
include this information in the application disclosures. The Board
believes that consumers should be informed about when during the HELOC
plan they can make withdrawals and when they are no longer able to
borrow money under the plan.
Paragraph 5b(c)(9)(v)
As discussed above, current Sec. 226.5b(d)(5)(ii) provides that a
creditor must disclose as part of the application disclosures an
explanation of how the minimum periodic payments will be determined and
the timing of the payments (such as whether the payments will be due
monthly, quarterly or on some other periodic basis). As discussed
above, the Board proposes to move current Sec. 226.5b(d)(5)(ii) to
proposed Sec. 226.5b(c)(9)(ii) and make revisions. Nonetheless,
consistent with current Sec. 226.5b(d)(5)(ii), the Board proposes in
new Sec. 226.5b(c)(9)(ii) to require that a creditor disclose in the
table as part of the early HELOC disclosures the timing of the payments
(such as whether the payments will be due monthly, quarterly or on some
other periodic basis.) In addition, the Board proposes in new Sec.
226.5b(c)(9)(v) to require a creditor to disclose in the table as part
of the early HELOC disclosures a statement indicating whether minimum
payments are due in the draw period and any repayment period. In
consumer testing conducted by the Board on HELOC disclosures, the Board
tested application disclosures in a narrative form, designed to
simulate those currently in use. When reviewing these application
disclosures, many participants had difficulty understanding how the
draw period differs from the repayment period, and what impact these
distinctions have on required monthly payments. The Board believes that
requiring a creditor to state explicitly whether minimum payments are
due in the draw period and any repayment period will help consumers
better understand when minimum payments will be due under the HELOC.
5b(c)(10) Annual Percentage Rate
TILA Section 127A(a)(1) provides that a creditor must disclose as
part of the application disclosures each APR imposed in connection with
the HELOC plan. 15 U.S.C. 1637a(a)(1). Regulation Z currently
interprets TILA Section 127A(a)(1) to mean that for fixed-rate payment
plans, a creditor must disclose as part of the application disclosures
a recent APR imposed under the plan. See current Sec. 226.5b(d)(6).
Current footnote 10c provides that a recent APR for fixed-rate plans is
a rate that has been in effect under the plan within the 12 months
preceding the date that disclosures are provided to the consumer. For
variable rate plans, current Sec. 226.5b(d)(12), which implements TILA
Section 127A(a)(2), requires a creditor to disclose the index that will
be used to determine the variable rate. 15 U.S.C. 1637a(a)(2). In
addition, current Sec. 226.5b(d)(12) sets forth a number of other
disclosures about variable rates that must be included as part of the
application disclosures, such as a statement that the consumer should
ask about the current index value, margin, discount or premium, and
APR. A creditor is not required to disclose in the application
disclosures the current APRs that are offered to the consumer on the
HELOC plan.
The Board proposes to require that a creditor disclose in the table
as part of the early HELOC disclosures the current APRs that are
offered to the consumer on the payment plans described in the early
HELOC disclosures table. Specifically, proposed Sec. 226.5b(c)(10)
requires that a creditor must disclose in the table each APR applicable
to any payment plan disclosed in the early HELOC disclosures. The
proposal to require a creditor to disclose in the table the APRs
applicable to the payment plans disclosed in the table is consistent
with TILA Section 127A(a)(1), which provides that a creditor must
disclose ``each annual percentage rate imposed in connection with
extensions of credit under the plan. * * *'' 15 U.S.C. 127A(a)(1). In
addition, as discussed in more detail above in the section-by-section
analysis to proposed Sec. 226.5b(b), consumer testing on HELOC
disclosures shows that the current APRs on the HELOC plan are some of
the most important pieces of information that consumers want to know in
deciding whether to open a HELOC plan. Participants in the consumer
testing overwhelmingly indicated that they would prefer to receive
transaction-specific disclosures, including the current APRs offered to
the consumer on the HELOC plan, soon after application even if it meant
that they would not receive disclosure of general terms before they
applied. The Board proposes to delete as obsolete current Sec.
226.5b(d)(6) and the contents of footnote 10c, which require the
consumer to disclose for fixed-rate plans a recent rate that has been
in effect within the 12 months preceding the date that disclosures are
provided to the consumer. In addition, the Board proposes to move the
provisions in current Sec. 226.5b(d)(12) relating to variable-rate
plans to proposed Sec. 226.5b(c)(10) and to make revisions to those
provisions.
Rates applicable to payment plans disclosed. Proposed comment
5b(c)(10)-3 clarifies that under proposed Sec. 226.5b(c)(10), a
creditor would only be required to disclose in the table as part of the
early HELOC disclosures the APRs applicable to the payment plans that
are disclosed in the table under proposed Sec. 226.5b(c)(9). As
discussed in more detail in the section-by-section analysis to proposed
Sec. 226.5b(c), for HELOC plans that are variable-rate plans but also
offer fixed-rate and -term payment options during the draw period, a
creditor may only disclose in the table information applicable to the
variable-rate plan, including the applicable APRs. In this case, a
creditor may not disclose in the table the APRs applicable to any
fixed-rate and -term payment plans offered during the draw period.
However, if a HELOC plan does not offer a variable-rate feature during
the draw period, but only offers fixed-rate and -term features during
that period, a creditor must disclose in the table information related
to the fixed-rate and -term features when making the disclosures
required by proposed Sec. 226.5b(c), including the APRs applicable to
these features. The Board believes that requiring disclosure of all the
APRs applicable to the HELOC plan in the table, even those APRs that
relate to payment plans that are not disclosed in the table, would be
confusing to consumers.
Nonetheless, under the proposal, a creditor would be required to
disclose the APRs applicable to other payment plans when disclosing
those payment plans to a consumer upon request prior
[[Page 43473]]
to account opening. In particular, proposed comment 5b(c)(9)(ii)-5
provides guidance on how a creditor must provide additional information
on payment plans that are not disclosed in the table as part of the
early HELOC disclosures (other than fixed-rate and -term payment plans
unless those are the only payment plans offered during the draw period)
to a consumer upon the consumer's request. This proposed comment
provides that if a creditor offers a payment plan other than the two
payment plans disclosed in the table as part of the early HELOC
disclosures (except for fixed-rate and -term payment plans unless those
are the only payment plans offered during the draw period), and a
consumer requests additional information about the other plan, the
creditor must disclose an additional table under Sec. 226.5b(b) to the
consumer with the terms of the other payment plan described in the
table. Proposed comment 5b(c)(10)-3 makes clear that this additional
table must include the APRs applicable to that other payment plan.
In addition, as discussed in more detail in the section-by-section
analysis to proposed Sec. 226.5b(c)(18), proposed comment 5b(c)(18)-2
provides guidance on how a creditor must provide additional information
about fixed-rate and -term payment plans to a consumer upon the
consumer's request prior to account opening. This proposed comment
provides that in disclosing additional information about the fixed-rate
and -term payment plan upon a consumer's request, a creditor must
disclose in the form of a table (1) the information described by
proposed Sec. 226.5b(c) applicable to the fixed-rate and -term payment
plan (including the APRs applicable to the fixed-rate and -term payment
plan) and (2) any fees imposed related to the use of the fixed-rate and
-term payment plan, such as fees to exercise the fixed-rate and -term
payment plan or to convert a balance under a fixed-rate and -term
payment feature to a variable-rate feature under the plan.
Rates changes set forth in initial agreement. Current comments
5b(d)(6)-1 and 5b(d)(12)(viii)-1 provide that a creditor must disclose
in the application disclosures a disclosure of preferred-rate
provisions, where the rate will increase upon the occurrence of some
event, such as the borrower-employee leaving the creditor's employ or
the consumer closing an existing deposit account with the creditor. The
Board proposes to move these comments to proposed comment 5b(c)(10)-2
and revise them. Specifically, proposed comment 5b(c)(10)-2 clarifies
that proposed Sec. 226.5b(c)(10) requires disclosure of any rate
changes set forth in the initial agreement (as discussed in Sec.
226.5b(f)(3)(i)) applicable to the payment plans disclosed in the table
pursuant to proposed Sec. 226.5b(c)(9). For example, a creditor would
be required to disclose under proposed Sec. 226.5b(c)(10) preferred-
rate provisions, where the rate will increase upon the occurrence of
some event, such as the borrower-employee leaving the creditor's employ
or the consumer closing an existing deposit account with the creditor.
The creditor would be required to disclose the preferred rate that
applies to the plan, and the rate that would apply if the event is
triggered, such as the borrower-employee leaving the creditor's employ
or the consumer closing an existing deposit account with the creditor.
Under this proposed comment, if the preferred rate and the rate that
would apply if the event is triggered are variable rates, the creditor
would be required to disclose those rates based on the applicable index
or formula, and disclose other information required by proposed Sec.
226.5b(c)(10)(i).
Penalty APRs. Although under the proposal creditors generally would
be required to disclose in the table as part of the early HELOC
disclosures the APRs applicable to the payment plans disclosed in the
table, proposed Sec. 226.5b(c)(10) provides that a creditor must not
disclose in the table any penalty rate set forth in the initial
agreement that may be imposed in lieu of termination of the plan. As
discussed in more detail in the section-by-section analysis to Sec.
226.5b(f), the Board proposes to restrict creditors offering HELOCs
subject to Sec. 226.5b from imposing a penalty rate or penalty fees
(except for a contractual late-payment fee) on the account for a
consumer's failure to pay the account when due, unless the consumer is
more than 30 days late in paying the account. Based on Board outreach,
the Board understands that HELOC creditors generally do not impose a
penalty rate, regardless of how late the payment is. For this reason,
as well as due to the very limited circumstances in which a penalty
rate may be imposed under the proposal, the Board believes that
information about the penalty rate would not be useful to consumers in
deciding whether to open a HELOC plan and that including it in the
table may distract consumers from noticing information that is more
likely to impact them in choosing and using a HELOC.
Periodic rates. Proposed comment 5b(c)(10)-1 would clarify that a
creditor would be allowed to disclose only APRs in the table as part of
the early HELOC disclosures. Periodic rates would not be allowed to be
disclosed in the table as part of the early HELOC disclosures. For
example, assume a monthly periodic rate of 1.5 percent applies to
transactions on a HELOC account. The corresponding APR to this periodic
rate would be 18 percent. Under the proposal, creditors would be
required to disclose the 18 percent corresponding APR in the early
HELOC disclosures table, but may not disclose the 1.5 percent periodic
rate in the table. The Board believes information about periodic rates
that apply to the HELOC would not be useful to consumers in deciding
whether to open a HELOC plan, and including this information in the
table may distract consumers from noticing more important information.
16-point font. Proposed Sec. 226.5b(c)(10) requires that a
creditor must provide the APRs disclosed in the table as part of the
early HELOC disclosures in at least 16-point type, except for the
following: any minimum or maximum APRs that may apply; and any
disclosure of rate changes set forth in the initial agreement, except
for rates that would apply after the expiration of an introductory
rate. As discussed above, in consumer testing conducted by the Board on
HELOC disclosures, participants indicated that the APRs offered to the
consumer on the HELOC plans were some of the most important pieces of
information in deciding whether to open a HELOC plan. Thus, the Board
proposes generally to highlight the APRs in the table. Given that the
Board proposes to require a minimum of 10-point font for the
disclosures of other terms in the table, the Board believes that a 16-
point font size for the APRs would be effective in highlighting the
APRs in the table.
Proposed Sec. 226.5b(c)(10) requires that the current APR that
will apply to the account be disclosed in 16-point font. If an
introductory rate is offered, a creditor would be required to disclose
the introductory rate and the rate that would otherwise apply after the
introductory rate expires in 16-point font. Under the proposal, the 16-
point font requirement would not apply to any minimum or maximum APRs
disclosed in the table. In addition, the 16-point font requirement
would not apply to any disclosure of rate changes set forth in the
initial agreement except for rates that would apply after the
expiration of an introductory rate. For example, the 16-point font
requirement would not apply to any disclosure of the rate that would
apply if any preferred rate is terminated. The Board believes that
limiting the 16-point font requirement generally to the current
[[Page 43474]]
APRs on the account (or an introductory rate and the rate that would
otherwise apply after the introductory rate expires) would highlight
for consumers the rates that will be most relevant for them at account
opening. The Board believes that requiring all of the APRs disclosed in
the table to be in 16-point font could create ``information overload''
for consumers.
5b(c)(10)(i) Disclosures for Variable-Rate Plans
Current Sec. 226.5b(d)(12), which implements TILA Section
127A(a)(2), provides that if a variable-rate feature is offered on a
HELOC plan, the creditor must disclose as part of the application
disclosures the following information about the variable-rate feature:
(1) The fact that the APRs, payment, or other terms may change due to
the variable-rate feature; (2) the index used in making rate
adjustments and a source of information about the index; (3) an
explanation of how the APR will be determined, including an explanation
of how the index is adjusted, such as by the addition of the margin;
(4) the frequency of changes in the APR: (5) any rules relating to
changes in the index value and the APR and resulting changes in the
payment amount, including, for example, an explanation of payment
limitations and rate carryover; (6) a statement of any annual or more
frequent periodic limitations on changes in the APR (or a statement
that no annual limitation exists), as well as a statement of the
maximum APR that may be imposed under each payment option; (7) an
historical example, based on a $10,000 extension of credit,
illustrating how APRs and payments would have been affected by index
value changes implemented according to the terms of the plan
(``historical example table''). The historical example table must be
based on the most recent 15 years of index values (selected for the
same time period each year) and must reflect all significant plan
terms, such as negative amortization, rate carryover, rate discounts,
and rate and payment limitations, that would have been affected by the
index movement during the period; (8) the minimum periodic payment
required when the maximum APR for each payment option is in effect for
a $10,000 outstanding balance, and a statement of the earliest date or
time the maximum rate may be imposed; (9) a statement that the APR does
not include costs other than interest; (10) a statement that the
consumer should ask about the current index value, margin, discount or
premium, and APR; (11) a statement that rate information will be
provided on or with each periodic statement; and (12) as applicable, a
statement that the initial APR is not based on the index and margin
used to make later rate adjustments, and the period of time such
initial rate will be in effect. As discussed in more detail below, the
Board proposes to move current Sec. 226.5b(d)(12) to proposed Sec.
226.5b(c)(10) and revise it.
Current comment 5b(d)(12)-1 provides that sample forms in current
Appendix G-14 provide illustrative guidance on the variable-rate rules.
The Board proposes to move this comment to proposed comment
5b(c)(10)(i)-6 and to make technical revisions. Current comment 5b-4
provides that if a creditor uses an index to determine the rate that
will apply at the time of conversion to the repayment phase--even if
the rate will thereafter be fixed--the creditor must provide the
variable-rate information in current Sec. 226.5b(d)(12), as
applicable. The Board proposes to move this provision in current
comment 5b-4 to proposed comment 5b(c)(10)(i)-3 and to make technical
revisions.
In addition, the Board proposes to add new comment 5b(c)(10)(i)-1,
which would clarify that a variable-rate account exists when rate
changes are part of the plan and are tied to an index or formula. This
proposed comment also provides a cross reference to comment
6(a)(4)(ii)-1 for examples of variable-rate plans.
Disclosure that APR may change due to the variable-rate feature.
Current Sec. 226.5b(d)(12)(i) provides that a creditor must include as
part of the application disclosures a statement that the APRs, payment,
or other terms may change due to the variable-rate feature. Consistent
with current Sec. 226.5b(d)(12)(i), proposed Sec.
226.5b(c)(9)(i)(A)(1) provides that a creditor must disclose in the
table as part of the early HELOC disclosures the fact that the APR may
change due to the variable-rate feature. The Board believes that it is
important to highlight for consumers that the APR is a variable rate.
Thus, under the proposal, the Board would require a creditor in
disclosing the variable-rate APR to use the term ``variable rate'' in
underlined text as shown in any of the applicable tables found in
proposed Samples G-14(C), G-14(D) and G-14(E) in Appendix G. Unlike
current Sec. 226.5b(d)(12)(i), under the proposal, a creditor would
not be required to disclose explicitly the fact that the payment or
other terms may change due to the variable-rate feature. The Board
believes that the proposed payment examples that would be included in
the early HELOC disclosures communicate effectively to consumers that
the payments would change when the APR changes. In consumer testing
conducted by the Board on HELOC disclosures, participants were asked
whether the payments on the HELOC plan could vary. Most participants
understood from the payment examples contained in the tested forms that
the payments on the HELOC plan would increase if the APR increased.
Explanation of how APR will be determined. Current Sec.
226.5b(d)(12)(iii), which implements TILA Section 127A(a)(2)(B),
provides that a creditor must include as part of the application
disclosures the index used in making rate adjustments to the variable
APR and a source of information about the index. 15 U.S.C.
1637a(a)(2)(B). Current Sec. 226.5b(d)(12)(iv) provides that a
creditor also must include as part of the application disclosures an
explanation of how the variable APR will be determined, including an
explanation of how the index is adjusted, such as by the addition of a
margin. Current comment 5b(d)(12)(iv)-1 provides that if a creditor
adjusts its index through the addition of a margin, the disclosure
might read, ``Your annual percentage rate is based on the index plus a
margin.'' The creditor is not required to disclose a specific value for
the margin.
Consistent with current Sec. 226.5b(d)(12)(iii) and (iv), proposed
Sec. 226.5b(c)(9)(i)(A)(2) requires a creditor to disclose in the
table as part of the early HELOC disclosures an explanation of how the
APR will be determined. Consistent with current Sec.
226.5b(d)(12)(iii), under the proposal, a creditor would be required to
disclose in the table the type of index used in making rate adjustments
to the variable APR, such as indicating the current APR is based on the
``prime rate.'' Unlike current Sec. 226.5b(d)(12)(iv), under the
proposal, a creditor also would be required to disclose in the table
the value of the margin. In consumer testing conducted on HELOC
disclosures, the Board tested some versions of the early HELOC
disclosures that did not contain the current value of the margin, but
instead included only a statement that the APR ``would vary monthly
with the Prime Rate.'' The Board also tested other versions of the
early HELOC disclosures that included the value of the margin, such as
by stating that the APR will be ``a variable rate that will change
monthly based on the Prime Rate plus 1.00%.'' Participants in consumer
testing consistently indicated that they preferred to be shown the
value of the margin, so that they would have detailed information about
how their APR would be determined over time.
[[Page 43475]]
Thus, under proposed Sec. 226.5b(10)(i)(A)(2), a creditor would be
required to disclose in the table the type of index used in making rate
adjustments (such as the prime rate) and the value of the margin.
Current comment 5b(d)(12)(iv)-1 would be deleted as obsolete. Under the
proposal, Samples G-14(C), G-14(D) and G-14(E) would provide guidance
to creditors on how to disclose the fact that the applicable rate
varies and how it is determined. See proposed comment 5b(c)(10)(i)-2.
Under the proposal, in providing an explanation of how the APR will
be determined, a creditor would not be allowed to disclose in the table
as part of the early HELOC disclosures the current value of the index,
such that the prime rate is currently 4 percent. See proposed comment
5b(c)(10)(i)-2. The Board has concerns that requiring the current value
of the index in the table could create ``information overload'' for
consumers and could distract consumers from noticing more important
information. As described above, the current APR (i.e., the current
value of the index plus the margin) and the value of the margin would
be disclosed in the table, so a consumer who is interested in knowing
the current value of the index could calculate the current value of the
index from those figures. At the creditor's option, the creditor would
be allowed under the proposal to disclose the current value of the
index outside the table. See proposed Sec. 226.5b(b)(2)(v).
Unlike current Sec. 226.5b(d)(12)(iii), which implements TILA
Section 127A(a)(2)(B), under the proposal, a creditor would not be
allowed to disclose in the table as part of the early HELOC disclosures
a source of information about the index used in the making rate
adjustments, such as indicating that the prime rate is published in the
Wall Street Journal. 15 U.S.C. 1637(a)(2)(B); see proposed comment
5b(c)(10)(i)-2. The Board proposes no longer to require a creditor to
provide the source of information about the index, pursuant to the
Board's exception and exemption authorities under TILA Section 105.
Section 105(a) authorizes the Board to make adjustments and exceptions
to the requirements in TILA to effectuate the statute's purposes, which
include facilitating consumers' ability to compare credit terms and
helping consumers avoid the uniformed use of credit. See 15 U.S.C.
1601(a), 1604(a). Section 105(f) authorizes the Board to exempt any
class of transactions from coverage under any part of TILA if the Board
determines that coverage under that part does not provide a meaningful
benefit to consumers in the form of useful information or protection.
See 15 U.S.C. 1604(f)(1). The Board must make this determination in
light of specific factors. See 15 U.S.C. 1604(f)(2).
These factors are (1) the amount of the loan and whether the
disclosure provides a benefit to consumers who are parties to the
transaction involving a loan of such amount; (2) the extent to which
the requirement complicates, hinders, or makes more expensive the
credit process; (3) the status of the borrower, including any related
financial arrangements of the borrower, the financial sophistication of
the borrower relative to the type of transaction, and the importance to
the borrower of the credit, related supporting property, and coverage
under TILA; (4) whether the loan is secured by the principal residence
of the borrower; and (5) whether the exemption would undermine the goal
of consumer protection.
The Board has considered each of these factors carefully, and based
on that review, believes that the proposed exemption is appropriate.
The Board proposes not to require a creditor to include information
about the source of the index because of concerns of ``information
overload'' to consumers. In consumer testing conducted by the Board on
HELOC disclosures, the Board asked participants whether information
about the source of the index was important information for them to
know in deciding whether to open a HELOC plan. Most participants
indicated that this information was not useful information and would
not affect their decision about whether to open a HELOC plan. At a
creditor's option, the creditor would be allowed under the proposal to
disclose information about the source of the index outside of the
table. See proposed Sec. 226.5b(b)(2)(v).
Frequency of changes in the APR. Current Sec. 226.5b(d)(12)(vii),
which implements TILA Section 127A(a)(2)(B), requires a creditor to
disclose as part of the application disclosures the frequency of
changes in the variable-rate APR, such as disclosing that the variable
rate may change on a monthly basis. Consistent with current Sec.
226.5b(d)(12)(vii), under proposed Sec. 226.5b(c)(10)(i)(A)(3), a
creditor would be required to disclose in the table as part of the
early HELOC disclosures the frequency of changes in the variable-rate
APR.
Rules relating to changes in the index value and the APR and
resulting changes in the payment amount. Current Sec.
226.5b(d)(12)(viii), which implements TILA Section 127(a)(2)(B),
provides that a creditor must disclose as part of the application
disclosures any rules relating to changes in the index value and the
APR and resulting changes in the payment amount, including, for
example, an explanation of payment limitations and rate carryover. 15
U.S.C. 127(a)(2)(B). Current comment 5b(d)(12)(viii)-1 clarifies that
current Sec. 226.5b(d)(12)(viii) requires a creditor to disclose as
part of the application disclosures any preferred-rate provisions,
where the rate will increase upon the occurrence of some event, such as
the borrower-employee leaving the creditor's employ or the consumer
closing an existing deposit account with the creditor. Current comment
5b(d)(12)(viii)-2 provides a cross reference to current comment
5b(d)(5)(ii)-2, which discusses the disclosure requirement for options
permitting the consumer to convert from a variable rate to a fixed
rate.
Consistent with current Sec. 226.5b(d)(12)(viii), proposed Sec.
226.5b(c)(10)(i)(A)(4) requires a creditor to disclose in the table as
part of the early HELOC disclosures any rules relating to changes in
the index value and the APR and resulting changes in the payment
amount, including, for example, an explanation of payment limitations
and rate carryover. As discussed above, current comment
5b(d)(12)(viii)-1 dealing with preferred-rate provisions would be moved
to proposed comment 5b(c)(10)-2.
The Board proposes to delete as obsolete current comment
5b(d)(12)(viii)-2, which deals with disclosure of options permitting
the consumer to convert from a variable rate to a fixed rate. As
discussed in the section-by-section analysis to proposed Sec.
226.5b(c) and (c)(18), under the proposal, a creditor generally would
not be permitted to disclose in the table as part of the early HELOC
disclosures information related to fixed-rate and -term payment
features, including information about how the rates that apply to those
features are determined.
Limitations on changes in rates. Current Sec. 226.5b(d)(12)(ix),
which implements TILA Section 127A(a)(2)(E) and (F), provides that a
creditor must disclose as part of the application disclosures a
statement of any annual or more frequent periodic limitations on
changes in the APR (or a statement that no annual limitation exists),
as well as a statement of the maximum APR that may be imposed under
each payment option. 15 U.S.C. 1637a(a)(2)(E) and (F). Under current
Sec. 226.5b(d)(12)(ix), a creditor is not required to disclose any
periodic limitations on changes in the
[[Page 43476]]
APR that are longer than a year--such as rate caps that would apply
every two years.
Proposed Sec. 226.5b(c)(10)(i)(A)(5) requires a creditor to
disclose in the table as part of the early HELOC disclosures a
statement of any limitations on changes in the APR, including the
minimum and maximum APRs that may be imposed under each payment option
disclosed in the table. In addition, under the proposal, if no annual
or other periodic limitations apply to changes in the APR, a creditor
would be required in the table to include a statement that no annual
limitation exists. Thus, consistent with current Sec.
226.5b(d)(12)(ix), under the proposal, a creditor would be required to
disclose in the table any annual or more frequent periodic limitations
on changes in the APR and to disclose the maximum APR that may be
imposed under each payment option disclosed in the table.
Unlike current Sec. 226.5b(d)(12)(ix), however, under the
proposal, a creditor must disclose in the table any periodic
limitations on changes in the APR that are longer than a year--such as
rate caps that would apply every two years. In addition, unlike current
Sec. 226.5b(d)(12)(ix), a creditor also would be required to disclose
in the table any minimum rate that would apply to the payment plans
disclosed in the table, such as a rate floor. The Board proposes to add
these disclosures pursuant to its authority under TILA Section
127A(a)(14) to require additional disclosures with respect to HELOC
plans. 15 U.S.C. 1637a(a)(14). The Board believes that consumers should
be informed of all rate caps, and rate floors, as consumer testing has
shown that rate information is among the most important information to
a consumer in deciding whether to open a HELOC plan.
Current comment 5b(d)(12)(ix)-1 clarifies that if a creditor bases
its rate limitation on 12 monthly billing cycles, this limitation
should be treated as an annual cap. Rate limitations imposed on less
than an annual basis must be stated in terms of a specific amount of
time. For example, if the creditor imposes rate limitations on only a
semiannual basis, this must be expressed as a rate limitation for a
six-month time period. If the creditor does not impose periodic
limitations (annual or shorter) on rate increases, the fact that there
are no annual rate limitations must be stated.
The Board proposes to move this comment to proposed comment
5b(c)(10)(i)-4 and to revise it. Specifically, proposed comment
5b(c)(10)(i)-4 clarifies that under proposed Sec.
226.5b(c)(10)(i)(A)(5), a creditor would be required to disclose any
rate limitations that occur, including rate limitations that occur in a
time period of more than one year, annually or less than annually. If
the creditor bases its rate limitation on 12 monthly billing cycles,
this limitation would be treated as an annual cap. A creditor would be
required to state rate limitations imposed on more or less than an
annual basis in terms of a specific amount of time. For example, if the
creditor imposes rate limitations on only a semiannual basis, a
creditor would be required to express this limitation as a rate
limitation for a six-month time period. If a creditor does not impose
annual or other periodic limitations on rate increases, the creditor
would be required to state this fact in the table as part of the early
HELOC disclosures.
Regarding disclosure of the maximum APR that may be imposed over
the term of the plan, current comment 5b(d)(12)(ix)-2 provides that a
creditor may disclose this rate as a specific number (for example, 18
percent) or as a specific amount above the initial rate. If the
creditor states the maximum rate as a specific amount above the initial
rate, the creditor must include a statement that the consumer should
inquire about the rate limitations that are currently available. If an
initial discount is not taken into account in applying maximum rate
limitations, that fact must be disclosed. If separate overall
limitations apply to rate increases resulting from events such as the
exercise of a fixed-rate conversion option or leaving the creditor's
employ, those limitations also must be stated. The current comment
provides that a creditor is not required to disclose in the application
disclosures any legal limits in the nature of usury or rate ceilings
under state or federal statutes or regulations.
The Board proposes to move current comment 5b(d)(12)(ix)-2 to
proposed comment 5b(c)(10)(i)-5 and revise it. Specifically, proposed
comment 5b(c)(10)(i)-5 provides that the maximum APR that may be
imposed under each payment option disclosed in the table over the term
of the plan (including the draw period and any repayment period
provided for in the initial agreement) must be provided. If separate
overall limitations apply to rate increases resulting from events such
as leaving the creditor's employ, those limitations also must be
stated. Limitations would not include legal limits in the nature of
usury or rate ceilings under state or federal statutes or regulations.
The Board would delete as obsolete the guidance in current
5b(d)(12)(ix)-2 related to disclosing the maximum APR as a specific
amount above the initial rate. Under proposed Sec. 226.5b(c)(10), a
creditor must disclose the maximum APR as a specific number.
Current comment 5b(d)(12)(ix)-3 provides that a creditor need not
disclose each periodic or maximum rate limitation that is currently
available. Instead, the creditor may disclose the range of the lowest
and highest periodic and maximum rate limitations that may apply to the
creditor's HELOC plans. Creditors using this alternative must include a
statement that the consumer should inquire about the rate limitations
that are currently available. The Board proposes to delete this comment
as obsolete. Under proposed Sec. 226.5b(c)(10), a creditor would be
required to disclose the periodic limitations and maximum APRs that may
be imposed under each payment option disclosed in the table as part of
the early HELOC disclosures.
Disclosure of the lowest and highest value of the index in the past
15 years. Current Sec. 226.5b(d)(12)(xi), which implements TILA
Section 127A(a)(2)(G), requires a creditor to provide as part of the
application disclosures a historical example, based on a $10,000
extension of credit, illustrating how APRs and payments would have been
affected by index value changes implemented according to the terms of
the plan. 15 U.S.C. 1637a(a)(2)(G). The historical example must be
based on the most recent 15 years of index values (selected for the
same time period each year) and must reflect all significant plan
terms, such as negative amortization, rate carryover, rate discounts,
and rate and payment limitations that would have been affected by the
index movement during the period. For ease of reference, this
SUPPLEMENTARY INFORMATION will refer to this disclosure as the
``historical example table.'' Current comments 5b(d)(12)(xi)-1 through
-10 provide guidance to creditors on how to provide the historical
example table.
For the reasons discussed below, the Board proposes not to require
that a creditor disclose as part of the early HELOC disclosures the
historical example table. Thus, the Board proposes to delete current
Sec. 226.5b(d)(12)(xi) and current comments 5b(d)(12)(xi)-1 through -
10. Instead of requiring a creditor to disclose the historical example
table, the Board proposes to require that a creditor disclose in the
table as part of the early HELOC disclosures the lowest and highest
values of the index used to determine
[[Continued on page 43477]]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
]
[[pp. 43477-43526]] Truth in Lending
[[Continued from page 43476]]
[[Page 43477]]
the variable rate on the HELOC plan in the past 15 years.
The Board proposes no longer to require a creditor to provide the
historical example table, pursuant to the Board's exception and
exemption authorities under TILA Section 105(a) and 105(f), as
discussed above. The Board's consumer testing of HELOC disclosures
shows that this disclosure may be confusing to consumers, and may not
provide meaningful information to consumers. In consumer testing
conducted by the Board on HELOC disclosures, the Board tested versions
of the application disclosures and the early HELOC disclosures that
contained a historical example table. Many participants misunderstood
the information provided in the historical example table. A large group
of participants did not understand that the information in this table
was based on the actual historical behavior of interest rates; they
instead assumed that the data shown was a hypothetical example of how
interest rates and payments might fluctuate in the future. More
significantly, an even larger group of participants mistakenly thought
that the rate and payment information shown in the historical example
table would apply to the HELOC plan going forward, and that the table
contained information on the exact monthly payments that the
participant would be required to make in the future under the HELOC
plan.
Even after the meaning of the table was explained to participants,
many participants indicated that, because the rates and payment
information in the table were based on what had happened to the
interest rate in the past 15 years, the table did not contain valuable
information that would inform their decision about the HELOC for which
they were applying. These participants did not believe that knowing how
the index had behaved in the past would provide them useful information
to predict how the index might behave in the future. A few participants
indicated that the table did not offer any new information that was not
already communicated in the disclosure, namely that the APR and
payments may vary.
Based on this consumer testing, the Board proposes not to require
that creditors provide the historical example table as part of the
early HELOC disclosures. However, pursuant to the Board's authority
under TILA Section 127A(a)(14) to require additional disclosures for
HELOC plans, the Board proposes to require a creditor to provide in the
table as part of the early HELOC disclosures the range of the value of
the index over a 15-year historical period. 15 U.S.C. 1637a(a)(14).
Although many participants in the consumer testing indicated that the
historical example table did not provide useful information about how
interest rates and payment may change in the future, some participants
did indicate that they found it helpful to know how the index had
behaved in the past, so that they would have some sense about how it
might change in the future. In addition, some participants found the
range of the index useful in determining the likelihood of the APR
reaching the maximum APR allowed under the plan. The Board believes
that the proposed disclosure providing the range of the value of the
index over a 15-year historical period will provide the most important
information from the historical example table in a simple and efficient
way.
The Board solicits comment on the appropriateness of this proposal.
The Board also solicits comment on whether the new proposed disclosure
should show the range of the APR that would have applied to the HELOC
plan over the past 15 years, calculated based on the range of the index
value plus the margin that is currently offered to the consumer, or as
proposed, simply show the index range. For example, assume the index on
the HELOC account is the prime rate and the prime rate varied between
4.25 percent and 10 percent over the last 15 years. In addition, assume
the APR offered to the consumer is calculated as the prime rate plus
1.00 percent. Under the new proposed disclosure in proposed Sec.
226.5b(c)(10)(i)(A)(6), a creditor would be required to disclose that
over the past 15 years, the prime rate had varied between 4.25 percent
and 10 percent. The Board solicits comment on whether the Board should
instead require that a creditor disclose, based on the example above,
that over the past 15 years, the APR on the HELOC plan offered to the
consumer would have varied between 5.25 percent and 11 percent.
Maximum rate payment example. Current Sec. 226.5b(d)(12)(x), which
implements TILA Section 127A(a)(2)(H), provides that a creditor must
provide as part of the application disclosures the minimum periodic
payment required when the maximum APR for each payment option is in
effect for a $10,000 outstanding balance, and a statement of the
earliest date or time the maximum rate may be imposed. 15 U.S.C.
1637a(a)(2)(H). Current comment 5b(d)(12)(x)-1 provides guidance for
creditors on how to provide the maximum rate payment example. Current
comment 5b(d)(12)(x)-2 provides guidance on how a creditor should
calculate the earliest date or time the maximum rate may be imposed. As
discussed above in the section-by-section analysis to proposed Sec.
226.5b(c)(9), the Board proposes to move current Sec. 226.5b(d)(12)(x)
to proposed Sec. 226.5b(c)(9)(iii), and to delete comment
5b(d)(12)(x)-1 as obsolete.
In addition, the Board proposes not to require a creditor to
disclose in the table as part of the early HELOC disclosures a
statement of the earliest date or time the maximum rate may be imposed,
pursuant to the Board's exception and exemption authorities under TILA
Section 105(a) and 105(f), as discussed above. Based on consumer
testing, the Board believes that this disclosure may not provide
meaningful information to consumers, and that including it in the table
as part of the early HELOC disclosures may distract consumers from more
important information. The Board tested versions of the early HELOC
disclosures which indicated that the maximum rate could be reached as
early as the first month, based on the Board's understanding that this
statement reflects the terms of most HELOC accounts regarding when the
maximum rate could be reached. Participants were asked whether they
found this information useful in deciding whether to open the HELOC
plan being offered. Many participants did not find this statement
useful because they believed it was extremely unlikely that the rate
would actually increase that quickly. The Board also understands that
while theoretically the maximum rate may be imposed during the first
month of the HELOC plan, in practice this has rarely if ever occurred.
Statement that the APR does not include costs other than interest.
Current Sec. 226.5b(d)(12)(ii), which implements TILA Section
127A(a)(2)(A) and (C), provides that a creditor must disclose as part
of the application disclosures that the variable APR does not include
costs other than interest. 15 U.S.C. 1637a(a)(2)(A) and (C). (A
creditor also must make this disclosure with respect to disclosure of
any fixed-rate APR in the application disclosures. See current Sec.
226.5b(d)(6).)
The Board proposes not to require a creditor to disclose in the
table as part of the early HELOC disclosures a statement that the APRs
applicable to the HELOC plan do not include costs other than interest,
pursuant to the Board's exception and exemption authorities under TILA
Section 105(a) and 105(f), as discussed above. Based on consumer
testing, the Board believes that this disclosure may not provide
meaningful information to consumers,
[[Page 43478]]
and that including it in the table as part of the early HELOC
disclosures may distract consumers from more important information. The
Board tested versions of the early HELOC disclosures indicating that
the APRs included in the table do not include costs other than
interest. The purpose of this requirement is to make clear to consumers
that an APR on a HELOC cannot be directly compared to an APR on a
closed-end loan, which includes most fees. However, several
participants misunderstood this sentence; for example, some incorrectly
thought that they would not be charged any fees. Just as important, no
participants understood the purpose of this statement, or how they
could use the information when applying for a home-equity product.
Different versions of this statement were tested in several rounds to
give it proper context for maximum comprehension, but all attempts were
unsuccessful in communicating to consumer the statement's intended
purpose.
Statement that the consumer should ask about the current index
value, margin, discount or premium, and APR. Current Sec.
226.5b(d)(12)(v), which implements TILA Section 127A(a)(2)(D), provides
that a creditor must disclose as part of the application disclosures a
statement that the consumer should ask about the current index value,
margin, discount or premium, and APR. 15 U.S.C. 127A(a)(2)(D). The
Board proposes not to require a creditor to include this statement in
the table as part of the early HELOC disclosures, pursuant to the
Board's exception and exemption authorities under TILA Section 105(a)
and 105(f), as discussed above. This statement is obsolete for the
early HELOC disclosures. As discussed above, a creditor would be
required to disclose in the table as part of the early HELOC
disclosures the current APRs offered to the consumer (i.e., the current
value of the index plus the margin) as well as the margin, including
any introductory APR (as discussed below). A creditor would not be
allowed to disclose in the table as part of the early HELOC disclosures
the current value of the index, such that the prime rate is currently 4
percent.
Statement that rate information will be provided on or with each
periodic statement. Current Sec. 226.5b(d)(12)(xii), which implements
TILA Section 127A(a)(2)(I), provides that a creditor must disclose as
part of the application disclosures a statement that rate information
will be provided on or with each periodic statement. 15 U.S.C.
1637a(a)(2)(I). The Board proposes not to require a creditor to include
this statement in the table as part of the early HELOC disclosures,
pursuant to the Board's exception and exemption authorities under TILA
Section 105(a) and 105(f), as discussed above. Based on consumer
testing, the Board believes that this disclosure may not provide
meaningful information to consumers, and that including it in the table
as part of the early HELOC disclosures may distract consumers from more
important information. The Board tested versions of the early HELOC
disclosures indicating that monthly statements for the HELOC plan would
tell the consumer each time the rate changes on the plan. Participants
were asked whether they found this information useful in deciding
whether to open the HELOC plan offered. Many participants did not find
this information useful because even in the absence of this statement
they would assume that they would be notified of rate changes on their
monthly statements.
Accuracy of variable rates. Proposed Sec. 226.5b(c)(10)(i)(B)
provides that a variable rate disclosed in the table as part of the
early HELOC disclosures would be considered accurate if it is a rate as
of a specified date and this rate was in effect within the last 30 days
before the disclosures are provided. The Board believes 30 days would
provide sufficient flexibility to creditors and reasonably current
information to consumers.
5b(c)(10)(ii) Introductory Initial Rate
Current Sec. 226.5b(d)(12)(vi), which implements TILA Section
127A(a)(2)(C), provides that if a creditor offers a variable rate on a
HELOC account, a creditor must disclose as part of the application
disclosures, as applicable, a statement that the initial APR is not
based on the index and margin used to make later rate adjustments, and
the period of time the initial rate will be in effect. 15 U.S.C.
1637a(a)(2)(C). The Board proposes to move Sec. 226.5b(d)(12)(vi) to
proposed Sec. 226.5b(c)(10)(ii) and revise it.
Specifically, proposed Sec. 226.5b(c)(10)(ii) provides that if the
initial rate is an introductory rate, a creditor would be required to
disclose in the table as part of the early HELOC disclosures the
introductory rate, and would be required to use the term
``introductory'' or ``intro'' in immediate proximity to the
introductory rate. The creditor also would be required to disclose in
the table the time period during which the introductory rate will
remain in effect. In addition, a creditor would be required to disclose
in the table the rate that would otherwise apply to the plan. Where the
rate that would otherwise apply is variable, the creditor would be
required to disclose the rate based on the applicable index or formula,
and disclose the other variable-rate disclosures required under
proposed Sec. 226.5b(c)(10)(i). See also proposed comment
5b(c)(10)(ii)-3. The Board believes that clearly labeling the
introductory rate as such and disclosing when the introductory rate
will expire will benefit consumers by helping them understand the
temporary nature of this rate.
Proposed comment 5b(c)(10)(ii)-1 clarifies that if a creditor
offers a preferred rate that will increase a specified amount upon the
occurrence of a specified event other than the expiration of a specific
time period, such as the borrower-employee leaving the creditor's
employ, the preferred rate would not be an introductory rate under
proposed Sec. 226.5b(c)(10)(ii), but must be disclosed in accordance
with proposed Sec. 226.5b(c)(10).
Proposed comment 5b(c)(10)(ii)-2 provides guidance on providing the
term ``introductory'' or ``into'' in immediate proximity to the
introductory rate. Specifically, this proposed comment provides that if
the term ``introductory'' is in the same phrase as the introductory
rate, it will be deemed to be in immediate proximity of the listing.
For example, a creditor that uses the phrase ``introductory APR X
percent'' would be deemed to have used the word ``introductory'' within
the same phrase as the rate. In addition, this proposed comment also
provides that if more than one introductory rate may apply to a
particular balance in succeeding periods, the term ``introductory''
need only be used to describe the first introductory rate. For example,
if a creditor offers an introductory rate of 8.99 percent on the plan
for six months, and an introductory rate of 10.99 percent for the
following six months, the term ``introductory'' need only be used to
describe the 8.99 percent rate. This proposed comment also provides a
cross reference to proposed Samples G-14(C) and G-14(E) in Appendix G,
which provides guidance on how to disclose clearly and conspicuously
the expiration date of the introductory rate and the rate that will
apply after the introductory rate expires, if an introductory rate is
disclosed in the table.
5b(c)(11) Fees Imposed by the Creditor and Third Parties To Open the
Plan
Current Sec. 226.5b(d)(7), which implements TILA Section
127A(a)(3), provides that a creditor must disclose as part of the
application disclosures an itemization of any fees imposed by the
[[Page 43479]]
creditor to open, use, or maintain the plan, stated as a dollar amount
or percentage, and when such fees are payable. 15 U.S.C. 1637a(a)(3).
Current Sec. 226.5b(d)(8), which implements TILA Section 127A(a)(4),
provides that a creditor must disclose as part of the application
disclosures a good faith estimate, stated as a single dollar amount or
range, of any fees that may be imposed by persons other than the
creditor to open the plan, as well as a statement that the consumer may
receive, upon request, a good faith itemization of such fees. 15 U.S.C.
1637a(a)(4). In lieu of the statement, the itemization of such fees may
be provided.
Fees imposed by a creditor to maintain and use the plan. As
described above, current Sec. 226.5b(d)(7) requires a creditor to
disclose as part of the application disclosures any fees imposed by the
creditor to maintain and use the HELOC plan. As discussed in more
detail in the section-by-section analysis to proposed Sec.
226.5b(c)(13), the Board proposes to move this part of current Sec.
226.5b(d)(7) to proposed Sec. 226.5b(c)(13) and to revise it.
One-time account-opening fees. As discussed above, with respect to
account-opening fees, current Sec. 226.5b(d)(7) requires a creditor to
disclose in the application disclosures an itemization of any fees
imposed by the creditor to open the HELOC plan, stated as a dollar
amount or percentage. Current Sec. 226.5b(d)(7) does not require a
creditor to disclose the total of one-time fees imposed by the creditor
to open the HELOC plan. Under current Sec. 226.5b(d)(8), however, a
creditor must disclose in the application disclosures a good faith
estimate of the total of fees imposed by third parties to open the
HELOC plan. Under current Sec. 226.5b(d)(8), at a creditor's option,
the creditor may disclose an itemization of third party fees to open a
HELOC plan. Current comment 5b(d)(8)-2 provides guidance to creditors
on how to disclose the total of third party fees and an itemization of
those fees. As discussed in more detail below, the Board proposes to
move these provisions in current Sec. 226.5b(d)(7) and (d)(8) to
proposed Sec. 226.5b(c)(11) and revise them. Current comment 5b(d)(8)-
2 would be deleted as obsolete.
The Board proposes in new Sec. 226.5b(c)(11) to require a creditor
to disclose in the table as part of the early HELOC disclosures the
total of all one-time fees imposed by the creditor and any third
parties to open the plan, stated as a dollar amount. 15 U.S.C. 1604(a).
In addition, under proposed Sec. 226.5b(c)(11), a creditor would be
required to itemize in the table all one-time fees imposed by the
creditor and any third parties to open the plan, stated as a dollar
amount, and when these fees are payable. Proposed comment 5b(c)(11)-5
provides that a creditor would be deemed to have itemized the account-
opening fees clearly and conspicuously if the creditor provides this
information in a bullet format as shown in proposed Samples G-14(C), G-
14(D), and G-14(E) in Appendix G. The Board proposes this rule pursuant
to its authority in TILA Section 105(a) to make adjustments and
exceptions to the requirements in TILA to effectuate the statute's
purposes, which include facilitating consumers' ability to compare
credit terms and helping consumers avoid the uniformed use of credit,
and pursuant to its authority in TILA Section 127A(a)(14) to require
additional disclosures for HELOC plans. See 15 U.S.C. 1601(a), 1604(a),
and 1637a(a)(14).
The Board believes that requiring a creditor to disclose in the
table the total dollar amount for all one-time fees imposed to open the
HELOC plan and an itemization of those costs, regardless of whether
those fees are charged by the creditor or a third party, will help
consumers better understand the costs of opening a HELOC plan. In the
consumer testing conducted by the Board on HELOC disclosures, all of
the application and early HELOC disclosure forms that participants were
shown included a range of the total of one-time fees that the borrower
would be charged for opening the account. Some forms also provided an
itemization of the one-time fees that would be charged for opening the
account. (The one-time fees shown on the disclosure forms were a loan
origination fee, a loan discount fee, an underwriting fee, and an
appraisal fee). In this consumer testing, participants consistently
said that they preferred to see both the total of one-time account-
opening fees and the itemization of these fees to help them understand
what fees they would be paying to open the HELOC plan.
Current comment 5b(d)(7)-2 provides that charges imposed by the
creditor to open a HELOC plan may be stated as an estimated dollar
amount for each fee, or as a percentage of a typical or representative
amount of credit. Current 5b(d)(8)-3 provides that a creditor in
disclosing the total of account-opening fees imposed by third parties
may provide, based on a typical or representative amount of credit, a
range for such fees or state the dollar amount of such fees. Fees may
be expressed on a unit cost basis, for example, $5 per $1,000 of
credit. The Board proposes to move these comments to Sec.
226.5b(c)(11) and revise them.
Specifically, under proposed Sec. 226.5b(c)(11), a creditor would
be required to disclose the dollar amount of fees that will be imposed
by the creditor or by third parties to open the plan. Concerning the
requirement to itemize the one-time account-opening fees, proposed
Sec. 226.5b(c)(11) allows a creditor to provide a range of these fees,
if the dollar amount of a fee is not known at the time the early HELOC
disclosures are delivered or mailed. Proposed comment 5b(c)(11)-2
provides that if a range is shown, a creditor would be required to
assume, in calculating the highest amount of the fee that the consumer
will borrow the full credit line at account opening. In disclosing the
lowest amount of the fee in the range, a creditor would be required to
disclose the lowest amount of the fee that may be imposed. Regarding
disclosure of the total of one-time account-opening fees, proposed
Sec. 226.5b(c)(11) provides that if the exact total of one-time fees
for account opening is not known at the time the early HELOC
disclosures are delivered or mailed, a creditor must disclose in the
table the highest total of one-time account opening fees possible for
the plan terms with an indication that the one-time account opening
costs may be ``up to'' that amount.
The Board believes that requiring the one-time fees that are
imposed to open the account to be disclosed as a dollar amount, instead
of a percentage of another amount, would aid consumers' understanding
of the account-opening fees and may aid consumers in comparison
shopping for HELOC plans. In consumer testing conducted on credit card
disclosures in relation to the January 2009 Regulation Z Rule, the
Board found that consumers generally understand dollar amounts better
than percentages. As a result, the Board believes that requiring
account opening fees to be disclosed as dollar amounts instead of
percentages of another amount would better enable consumers to
understand the start up-costs of opening a HELOC plan. In addition,
consumers could more easily compare the dollar amount of one-time
account-opening fees on different HELOC plans if all HELOC plans are
required to disclose the dollar amount. If the account-opening fees
were presented as a percentage of another amount, consumers would need
to calculate the dollar amount themselves.
Current comment 5b(d)(7)-1 provides guidance on what types of fees
would be considered fees imposed by the creditor to open the plan
required to be
[[Page 43480]]
disclosed under current Sec. 226.5b(d)(7). Current comment 5b(d)(8)-1
provides guidance on what types of fees would be considered account-
opening fees imposed by third parties required to be disclosed under
current Sec. 226.5b(d)(8). The Board proposes to move these provisions
in current comments 5b(d)(7)-1 and 5b(d)(8)-1 to proposed comment
5b(c)(11)-1 and revise them. Specifically, proposed comment 5b(c)(11)-1
clarifies that proposed Sec. 226.5b(c)(11) only applies to one-time
fees imposed by the creditor or third parties to open the plan. The
fees referred to in proposed Sec. 226.5b(c)(11) would include items
such as application fees, points, appraisal or other property valuation
fees, credit report fees, government agency fees, and attorneys' fees.
This proposed comment makes clear that annual fees or other periodic
fees that may be imposed for the availability of the plan would not be
disclosed under proposed Sec. 226.5b(c)(11), but would be disclosed
under proposed Sec. 226.5b(c)(12).
Current comments 5b(d)(7)-4 and 5b(d)(8)-4 provide that if closing
costs are imposed by the creditor and third parties they must be
disclosed, regardless of whether such costs may be rebated later (for
example, rebated to the extent of any interest paid during the first
year of the plan). The Board proposes to move these comments to
proposed comment 5b(c)(11)-4 and to make technical revisions.
Current comment 5b(d)(8)-1 provides that in cases where property
insurance is required by the creditor, the creditor may disclose as
part of the application disclosures either the amount of the premium or
a statement that property insurance is required. The Board proposes to
delete this comment as obsolete. Under the proposal, proposed Sec.
226.5b(c)(11) provides that a creditor must not disclose in the table
as part of the early HELOC the amount of any property insurance
premiums, even if the creditor requires property insurance. The Board
believes that disclosure of the amount of any required property
insurance premiums is not needed in the table as part of the early
HELOC disclosures. Consumers are likely to have property insurance on
the home prior to obtaining a HELOC account. For example, most
consumers obtaining a HELOC will already have a first mortgage on their
home and will be carrying property insurance on the home as required by
the first mortgage. The Board solicits comment on this aspect of the
proposal.
Current comment 5b(d)(7)-5 provides that a creditor need not use
the terms ``finance charge'' or ``other charge'' in describing the fees
imposed by the creditor under current Sec. 226.5b(d)(7) or those
imposed by third parties under current Sec. 226.5b(d)(8). Under
current Sec. 226.7, a creditor is required to distinguish costs that
are finance charges from other charges on the periodic statement by
requiring finance charges to be labeled as such. Current comment
5b(d)(7)-5 makes clear that a creditor is not required to use these
labels in describing fees disclosed under current Sec. 226.5b(d)(7)
and (d)(8). The Board proposes to delete this comment as obsolete,
because under the proposal, a creditor would no longer be required to
distinguish finance charges from other charges in disclosing costs on
the periodic statement. See the section-by-section analysis to proposed
Sec. 226.7.
5b(c)(12) Fees Imposed by the Creditor for Availability of the Plan
As discussed above, current Sec. 226.5b(d)(7) provides that a
creditor must disclose as part of the application disclosures any fees
imposed by the creditor to maintain or use the HELOC plans. Current
comment 5b(d)(7)-1 provides that fees imposed by the creditor to
maintain or use the HELOC plan include annual fees, transaction fees,
fees to obtain checks to access the plan, and fees imposed for
converting to a repayment phase that is provided for in the original
agreement. Current comment 5b(d)(7)-3 provides that fees not imposed to
use or maintain a plan, such as fees for researching an account,
photocopying, paying late, stopping payment, having a check returned,
exceeding the credit limit, or closing out an account, do not have to
be disclosed under current Sec. 226.5b(d)(7). In addition, credit
report and appraisal fees imposed to investigate whether a condition
permitting a freeze continues to exist--as discussed in the commentary
to current Sec. 226.5b(f)(3)(vi)--are not required to be disclosed
under current Sec. 226.5b(d)(7). The Board proposes to move the
provisions in current Sec. 226.5b(d)(7) relating to disclosing fees
imposed by the creditor to maintain and use the HELOC plan to proposed
Sec. 226.5b(c)(12) and to revise them.. Specifically, proposed Sec.
226.5b(c)(12) requires a creditor to disclose in the early HELOC
disclosures table any annual or other periodic fees that may be imposed
by the creditor for the availability of the plan, including any fee
based on account activity or inactivity; how frequently the fee will be
imposed; and the annualized amount of the fee.
The Board proposes not to require a creditor to disclose in the
table as part of the early HELOC disclosures fees imposed by the
creditor to maintain and use the HELOC plan, except for fees for the
availability of the plan. The Board proposes this rule pursuant to its
authority in TILA Section 105(a) to make adjustments and exceptions to
the requirements in TILA to effectuate the statute's purposes, which
include facilitating consumers' ability to compare credit terms and
helping consumers avoid the uniformed use of credit. See 15 U.S.C.
1601(a), 1604(a). The Board believes that requiring a creditor to
disclose in the early HELOC disclosures all fees imposed by the
creditor to maintain and use the HELOC plan, such as transaction fees,
could contribute to ``information overload'' for consumers. In the
consumer testing conducted by the Board on HELOC disclosures,
participants were shown versions of a disclosure table that itemized
account-opening fees, penalty fees and transaction fees. Participants
were asked which of these fees was most important for them to know when
deciding whether to open a HELOC plan. Most participants indicated that
it was most important for them to be provided an itemization of the
account-opening fees in the early HELOC disclosures, so that they could
better understand the costs of opening the HELOC plan.
As noted, the Board also proposes in new Sec. 226.5b(c)(12) to
require a creditor to disclose in the table as part of the early HELOC
disclosures any fees for the availability of the plan. The Board
believes that it is important for consumers to be informed in the early
HELOC disclosures of fees for the availability of the plan, so that
consumers will be aware of these fees as they decide whether to open a
HELOC plan. As discussed in the Background section to this
SUPPLEMENTARY INFORMATION, board research indicates that many HELOC
consumers do not plan to take advances at account opening, but instead
plan to use that HELOC account in emergency cases. The on-going costs
of maintaining the HELOC plan may be of particular importance to these
consumers in deciding whether to open a HELOC plan for these purposes.
Other fees to maintain or use the plan that would currently be
disclosed in the application disclosures under current Sec.
226.5b(d)(7), such as transactions fees, would not be required to be
disclosed in the table as part of the early HELOC disclosures under the
proposal. Nonetheless, as discussed in more detail in the section-by-
section analysis to proposed Sec. 226.5b(c)(14), a creditor would be
required to disclose in the table a statement that that other fees will
[[Page 43481]]
apply and a reference to penalty fees and transaction fees as examples
of those fees, as applicable. In addition, a creditor would be required
to disclose in the table either (1) a statement that the consumer may
receive, upon request, additional information about fees applicable to
the plan, or (2) if the additional information about fees is provided
with the table, a reference where that information is located outside
the table. The Board believes that this approach of highlighting in the
table the fees on the HELOC plan that would be most important to
consumers in deciding whether to open a HELOC plan and allowing
consumers to receive information about additional fees upon request
appropriately informs consumers about important fees applicable to the
HELOC plan in the early HELOC disclosures, without creating
``information overload'' that discourages consumers from reading
disclosures at all, distract them from key information, or prevent
retention and understanding of information.
Current comment 5b(d)(7)-1 provides that a creditor would be
required to disclose in the application disclosures any fees imposed by
the creditor to use or maintain the plan, whether the fees are kept by
the creditor or a third party. For example, if a creditor requires an
annual credit report on the consumer and requires the consumer to pay
this fee to the creditor or directly to the third party, the fee must
be specifically stated in the application disclosures. The Board
proposes to move this comment to proposed comment 5b(c)(12)-2 and
revise it. Specifically, proposed comment 5b(c)(12)-2 clarifies that a
creditor would be required to disclose all fees imposed by the creditor
for the availability of the plan in the table as part of the early
HELOC disclosures, regardless of whether those fees are kept by the
creditor or a third party. For example, if a creditor requires an
annual credit report on the consumer and requires the consumer to pay
this fee to the creditor or directly to the third party, the fee must
be disclosed in the table under.
The Board also proposes to add new comment 5b(c)(12)-1, which would
clarify that fees for the availability of credit required to be
disclosed under proposed Sec. 226.5b(c)(12) would include any fees to
obtain access devices, such as fees to obtain checks or credit cards to
access the plan. For example, a fee to obtain checks or a credit card
on the account would be required to be disclosed in the table as a fee
for issuance or availability under Sec. 226.5b(c)(12). This fee would
be required to be disclosed even if the fee is optional; that is, if
the fee is charged only if the consumer requests checks or a credit
card.
In addition, the Board proposes to add new comment 5b(c)(12)-3 to
clarify that if fees required to be disclosed under proposed Sec.
226.5b(c)(12) are waived or reduced for a limited time, a creditor
would be allowed to disclose, in addition to the required fees, the
introductory fees or the fact of fee waivers in the table as part of
the early HELOC disclosures if the creditor also discloses how long the
reduced fees or waivers will remain in effect.
5b(c)(13) Fees Imposed by the Creditor for Early Termination of the
Plan by the Consumer
Currently, a creditor is not required to disclose in the
application disclosures any fee imposed by the creditor for early
termination of the plan by the consumer. See current comment 5b(d)(7)-
3. Pursuant to the Board's authority in TILA Section 127A(a)(14) to
require additional disclosures for HELOC plans, the Board proposes to
add new Sec. 226.5b(c)(13) to required a creditor to disclose in the
table as part of the early HELOC disclosures any fee that may be
imposed by the creditor if a consumer terminates the plan prior to its
scheduled maturity. 15 U.S.C. 127a(a)(14). The Board believes that it
is important for consumers to be informed as they decide whether to
open a HELOC plan of early termination fees. This information may be
especially important for consumers who may want to have the option of
refinancing or cancelling the plan at any time. HELOC consumers may
particularly value these options, as most HELOCs are subject to a
variable interest rate.
The Board proposes to add new comment 5b(c)(13)-1 to clarify the
types of fees that would be required to be disclosed under proposed
Sec. 226.5b(c)(13). This proposed comment clarifies that fees such as
penalty or prepayment fees that the creditor imposes if the consumer
terminates the plan prior to its scheduled maturity would be required
to be disclosed under Sec. 226.5b(c)(13). These fees also would
include waived account-opening fees for the plan, if the creditor will
impose those costs on the consumer if the consumer terminates the plan
within a certain amount of time after account opening. In addition, the
proposed comment clarifies that fees that the creditor may impose in
lieu of termination under comment 5b(f)(2)-2 would not be required to
be disclosed under proposed Sec. 226.5b(c)(13). However, fees that are
imposed when the plan expires in accordance with the agreement or that
are associated with collection of the debt if the creditor terminates
the plan, such as attorneys' fees and court costs, would not be
required to be disclosed under proposed Sec. 226.5b(c)(13).
5b(c)(14) Statement About Other Fees
As discussed in more detail in the section-by-section analysis to
proposed Sec. 226.5b(c)(11), and (c)(12), the Board proposes not to
require a creditor to disclose in the early HELOC disclosures table all
of the fees that may be imposed on the HELOC plan. Instead, a creditor
would be required to disclose in the table only the following fees: (1)
Fees imposed by the creditor and third parties to open the HELOC plan;
(2) fees imposed by the creditor for availability of the plan; (3) fees
imposed by the creditor if a consumer terminates the plan prior to its
scheduled maturity; and (4) fees imposed by the creditor for required
insurance or debt cancellation or debt suspension coverage. See
proposed Sec. 226.5b(c)(11), (c)(12), (c)(13) and (c)(19).
Nonetheless, pursuant to the Board's authority in TILA Section
127A(a)(14) to require additional disclosures for HELOC plans, the
Board proposes to require a creditor to disclose in the table a
statement that other fees will apply and a reference to penalty fees
and transaction fees as examples of those fees, as applicable. 15
U.S.C. 1637a(a)(14). In addition, a creditor would be required to
disclose in the table either (1) a statement that the consumer may
receive, upon request, additional information about fees applicable to
the plan, or (ii) if the additional information about fees is provided
with the table, a reference to where that information is located
outside the table.
Not all fees applicable to a HELOC plan will be disclosed in the
table as part of the early HELOC disclosures. Thus, to ensure consumer
understanding of fees the Board believes that it is important to notify
consumers that additional fees will apply to the plan, and that
consumers may receive information about certain additional fees upon
request prior to account opening. In consumer testing conducted by the
Board on HELOC disclosures, the Board tested versions of the early
HELOC disclosures that contained a statement notifying consumers of
additional fees and versions of the disclosures forms that did not
contain this statement. Many participants that saw the disclosure forms
that did not contain the statement that other fees may apply
incorrectly assumed that no other fees would be charged.
[[Page 43482]]
The Board proposes to add new comment 5b(c)(14)-1 to require a
creditor in providing additional information about fees to a consumer
upon the consumer's request prior to account opening (or along with the
early HELOC disclosures) to disclose the penalty fees and transaction
fees that are required to be disclosed in the account-opening summary
table under proposed Sec. 226.6(a)(2)(x) through (a)(2)(xiv) and a
statement that other fees may apply. A creditor must use a tabular
format to disclose the additional information about fees that is
provided upon request or provided outside the early HELOC disclosures
table. Under proposed comment 5b(c)-2, a creditor would be required to
provide this additional information about fees as soon as reasonably
possible after the request.
The Board believes that fees applicable to the HELOC plan that
would be most important to consumers in deciding whether to open a
HELOC plan should be emphasized by being placed in the table. In
addition, under the proposal, consumers would be able to obtain quickly
and easily additional information about other fees upon request. The
Board believes that this proposed approach appropriately informs
consumers about important fees applicable to the HELOC plan in the
early HELOC disclosures, without creating ``information overload'' that
can discourage consumers from reading disclosures at all, distract them
from key information, or prevent retention and understanding of
information.
5b(c)(15) Negative Amortization
Current Sec. 226.5b(d)(9), which implements TILA Section
127A(a)(11), provides that if applicable, a creditor must provide as
part of the application disclosures a statement that negative
amortization may occur and that negative amortization increases the
principal balance and reduces the consumer's equity in the dwelling. 15
U.S.C. 1637a(a)(11). The Board proposes to move current Sec.
226.5b(d)(9) to proposed Sec. 226.5b(c)(15) and to make technical
revisions.
Current comment 5b(d)(9)-1 provides that in transactions where the
minimum payment will not or may not be sufficient to cover the interest
that accrues on the outstanding balance, the creditor must disclose
that negative amortization will or may occur. This disclosure is
required whether or not the unpaid interest is added to the outstanding
balance upon which interest is computed. A disclosure is not required
merely because a loan calls for non-amortizing or partially amortizing
payments. The Board proposes to move this comment to proposed comment
5b(c)(15)-1 and revise it. Specifically, proposed comment 5b(c)(15)-1
contains the guidance discussed above. In addition, proposed comment
5b(c)(15)-1 provides that a creditor would be deemed to meet the
requirements of proposed Sec. 226.5b(c)(15) if the creditor provides
the following disclosure, as applicable: ``Your minimum payment may
cover/covers only part of the interest you owe each month and none of
the principal. The unpaid interest will be added to your loan amount,
which over time will increase the total amount you are borrowing and
cause you to lose equity in your home.'' This proposed language
describing negative amortization was developed by the Board through its
consumer testing on closed-end mortgage loans, as discussed in the
proposal issued by the Board on closed-end mortgages published
elsewhere in today's Federal Register. The Board believes that this
proposed language effectively communicates the risks of negative
amortization pursuant to the statutory requirements.
5b(c)(16) Transaction Requirements
Current Sec. 226.5b(d)(10) provides that a creditor must disclose
as part of the application disclosures any limitations on the number of
extensions of credit and the amount of credit that may be obtained
during any time period, as well as any minimum outstanding balance and
minimum draw requirements, stated as dollar amounts or percentages. The
Board proposes to move current Sec. 226.5b(d)(10) to proposed Sec.
226.5b(c)(16) and revise it. Specifically, proposed Sec. 226.5b(c)(16)
provides that a creditor must disclose in the table as part of the
early HELOC disclosures any limitations on the number of extensions of
credit and the amount of credit that may be obtained during any time
period, as well as any minimum outstanding balance and minimum draw
requirements. In addition, consistent with current Sec. 226.5b(d)(10),
proposed Sec. 226.5b(b)(3) provides that the transaction requirements
disclosed under proposed Sec. 226.5b(c)(16) may be disclosed as dollar
amounts or as percentages.
Current comment 5b(d)(10)-1 provides that a limitation on automated
teller machine usage need not be disclosed in the application
disclosures under current Sec. 226.5b(d)(10) unless that is the only
means by which the consumer can obtain funds. The Board proposes to
move this comment to proposed comment 5b(c)(16)-1 without any
revisions.
5b(c)(17) Credit Limit
Currently, a creditor is not required to disclose in the
application disclosures the credit limit that is being offered to the
consumer. Pursuant to the Board's authority in TILA Section 127A(a)(14)
to require additional disclosures for HELOC plans, the Board proposes
in new Sec. 226.5b(c)(17) to require a creditor to disclose in the
table as part of the early HELOC disclosures the creditor limit
applicable to the plan. 15 U.S.C. 1637a(a)(14). As discussed in more
detail in the section-by-section analysis to proposed Sec.
226.5b(b)(1), participants in consumer testing conducted by the Board
on HELOC disclosures indicated that the credit limit was one of the
most important pieces of information that they wanted to know in
deciding whether to open a HELOC plan.
5b(c)(18) Statements About Fixed-Rate and -Term Payment Plans
Current comment 5b(d)(5)(ii)-2 provides that a creditor generally
must disclose in the application disclosures terms that apply to the
fixed-rate and -term payment feature, include the period during which
the feature can be selected, the length of time over which repayment
can occur, any fees imposed for the feature, and the specific rate or a
description of the index and margin that will apply upon exercise of
the feature.
For the reasons discussed in the section-by-section analysis to
proposed Sec. 226.5b(c), the Board proposes that if a HELOC plan
offers both a variable-rate feature and a fixed-rate and -term feature
during the draw period, a creditor generally must not disclose in the
table all the terms applicable to the fixed-rate and -term feature. See
proposed Sec. 226.5b(c). Instead, the Board proposes to require a
creditor offering this payment feature (in addition to a variable-rate
feature) to disclose in the table the following: (1) A statement that
the consumer has the option during the draw period to borrow at a fixed
interest rate; (2) the amount of the credit line that the consumer may
borrow at a fixed interest rate for a fixed term; and (3) as
applicable, either a statement that the consumer may receive, upon
request, further details about the fixed-rate and -term payment
feature, or, if information about the fixed-rate and -term payment
feature is provided with the table, a reference to the location of the
information. See proposed Sec. 226.5b(c)(18). Thus, under the
proposal, a consumer would be notified in the table about the fixed-
rate and -term payment feature, and could request additional
information about
[[Page 43483]]
this payment feature (if a creditor chose not to provide additional
information about this feature outside of the table).
In responding to a consumer's request prior to account opening for
additional information about the fixed-rate and -term feature, a
creditor would be required to provide this additional information as
soon as reasonably possible after the request. See proposed comment
5b(c)-2. The following additional information disclosed about the
fixed-rate and -term payment feature upon request (or outside the early
HELOC disclosures table) would have to include in the form of a table:
(1) information about the APRs and payment terms applicable to the
fixed-rate and -term payment feature, and (2) any fees imposed related
to the use of the fixed-rate and -term payment feature, such as fees to
exercise the fixed-rate and -term payment option or to convert a
balance under a fixed-rate and -term payment feature to a variable-rate
feature under the plan. See proposed comment 5b(c)(18)-2. The Board
believes that the above approach to providing information to consumers
about the fixed-rate and -term feature enables consumers interested in
this feature to obtain additional information about this optional
feature easily and quickly, but does not contribute to ``information
overload'' for consumers in general.
5b(c)(19) Required Insurance, Debt Cancellation or Debt Suspension
Coverage
Currently, creditors are not required to provide any information
about the insurance or debt cancellation or suspension coverage,
whether optional or required, in the application disclosures. If a
creditor requires insurance or debt cancellation or debt suspension
coverage (to the extent permitted by state or other applicable law),
the Board proposes new Sec. 226.5b(c)(19) that would require a
creditor to disclose in the table as part of the early HELOC
disclosures any fee for this coverage. In addition, proposed Sec.
226.5a(b)(19) requires that a creditor also disclose in the table a
cross reference to where the consumer may find more information about
the insurance or debt cancellation or debt suspension coverage, if
additional information is included outside the early HELOC disclosures
table. The Board proposes this rule pursuant to the Board's authority
in TILA Section 127A(a)(14) to require additional disclosures for HELOC
plan. 15 U.S.C. 1637a(a)(14). Proposed Samples G-14(D) and G-14(E)
provide guidance on how to provide the fee information and the cross
reference in the table. If insurance or debt cancellation or suspension
coverage is required to obtain a HELOC, the Board believes that any
fees required for this coverage should be emphasized by being placed in
the table; consumers need to be aware of these fees when deciding
whether to open a HELOC plan, because they will be required to pay the
fee for this coverage every month in order to have the plan.
5b(c)(20) Statement About Asking Questions
Pursuant to the Board's authority in TILA Section 127A(a)(14) to
require additional disclosures for HELOC plans, the Board proposes in
new Sec. 226.5b(c)(20) to require a creditor to disclose as part of
the early HELOC disclosures a statement that if the consumer does not
understand any disclosure in the table the consumer should ask
questions. 15 U.S.C. 1637a(a)(14). Under the proposal, a creditor would
be required to provide this disclosure directly below the table
provided as part of the early HELOC disclosures, in a format
substantially similar to any of the applicable tables found in proposed
Samples G-14(C), G-14(D), and G-14(E) in Appendix G. See proposed Sec.
226.5b(b)(2)(iv).
Consumer testing on HELOC and closed-end mortgage disclosures
conducted by the Board showed that many participants educated
themselves about the HELOC and mortgage process through informal
networking with family, friends, and colleagues, while others relied on
the Internet for information. To improve consumers' ability to make
informed decisions about credit, the Board proposes to require a
creditor to disclose that if the consumer does not understand the
disclosures contained in the table as part of the early HELOC
disclosures, the consumer should ask questions.
5b(c)(21) Statement About Board's Web Site
Pursuant to the Board's authority in TILA Section 127A(a)(14) to
require additional disclosures for HELOC plans, the Board proposes in
new Sec. 226.5b(c)(21) to require a creditor to provide as part of the
early HELOC disclosures a statement that the consumer may obtain
additional information at the Web site of the Federal Reserve Board,
and a reference to this Web site. Currently, an electronic copy of the
HELOC brochure is available at the Board's Web site at http://
www.federalreserve.gov/pubs/equity/homeequity.pdf. The Board plans to
enhance its Web site to further assist consumers in shopping for a
HELOC. Although it is hard to predict how many consumers might use the
Board's Web site, and recognizing that not all consumers have access to
the Internet, the Board believes that this Web site may be helpful to
some consumers as they decide whether to open a HELOC plan. The Board
seeks comment on the content for the Web site.
5b(c)(22) Statement About Refundability of Fees
Pursuant to the Board's authority in TILA Section 127A(a)(14) to
require additional disclosures for HELOC plans, the Board proposes in
new Sec. 226.5b(c)(22) to require a creditor to disclose as part of
the early HELOC disclosures a statement that the consumer may be
entitled to a refund of all fees paid if the consumer decides not to
open the plan and a cross reference to the ``Fees'' section in the
table. Under the proposal, a creditor would be required to disclose
these statements directly below the table, in a format substantially
similar to any of the applicable tables found in proposed G-14(C), G-
14(D) and G-14(E) in Appendix G. See proposed Sec. 226.5b(b)(2)(iv).
As discussed in the section-by-section analysis to proposed Sec.
226.5b(c)(4) and (c)(5), under the proposal, a creditor would be
required to disclose in the early HELOC disclosures table circumstances
in which a consumer could receive a refund of all fees paid if the
consumer decides not open the HELOC plan offered to the consumer. In
particular, a creditor must disclose in the table that a consumer has
the right to receive a refund of all fees paid if the consumer notifies
the creditor that the consumer does not want to open the HELOC plan (1)
for any reasons within three business days after the consumer receives
the early HELOC disclosures; and (2) any time before the HELOC account
is opened if any terms disclosed in the early HELOC disclosures change
(except for the APR). In addition, under the proposal, a creditor would
be required to disclose an indication of which terms disclosed in the
early HELOC disclosures table are subject to change prior to account
opening.
As discussed in the section-by-section to proposed Sec.
226.5b(b)(2), the Board tested with consumers versions of the early
HELOC disclosures with the right to a refund of fees disclosures
located near a statement that terms disclosed in the early HELOC
disclosures are subject to change prior to account opening as one of
the rights to a refund of fees relates to changes in terms offered on
the HELOC prior to account opening.
[[Page 43484]]
The Board also tested other versions of the early HELOC disclosures
with these disclosures in the ``Fees'' section of the table. These
tested disclosure forms also included next to the statement about which
terms in the table may change prior to account opening, a statement
that the consumer may be entitled to a refund of all fees paid if the
consumer decides not to open the plan and a cross reference to the
``Fees'' section in the table provided as part of the early HELOC
disclosures.
The Board found through this testing that participants were more
likely to notice and understand information about the refundability of
fees when it was included in the ``Fees'' section of the table. Thus,
under the proposal, the Board proposes to require that the information
about the refundability of fees be disclosed in the ``Fees'' section of
the table. In addition, the Board proposes in new Sec. 226.5b(c)(22)
to require a creditor to disclose as part of the early HELOC
disclosures a statement that the consumer may be entitled to a refund
of all fees paid if the consumer decides not to open the plan and a
cross reference to the ``Fees'' section in the table provided as part
of the early HELOC disclosures. This statement and cross reference
would be disclosed below the table, grouped together with other global
statements that generally relate to the terms being disclosed in the
table such as an indication of which terms disclosed in the table may
change prior to account opening.
5b(d) Refund of Fees
The proposal would redesignate paragraph 5b(g) as paragraph 5b(d)
and comments 5b(g)-1, -2, -3, -4 as comments 5b(d)-1, -2, -3, and -4,
and revise these provisions. Current paragraph 5b(g), which implements
TILA Section 137(d), requires a creditor to refund fees paid ``in
connection with an application'' if any term required to be disclosed
under current section 226.5b(d) changes (other than a change due to
fluctuations in the index in a variable-rate plan) before the plan is
opened and, as a result of the change, the consumer elects not to open
the plan. See 15 U.S.C. 1647(d). Comment 5b(g)-1 explains that all fees
paid must be refunded, including credit-report fees and appraisal fees,
whether they are paid to the creditor or directly to third parties.
Comment 5b(g)-3 specifies that when a term is changed that was
disclosed as a range (as permitted under Sec. 226.5b(d)) and the
resulting term falls within the disclosed range, the consumer is not
entitled to a refund of fees. Similarly, if the creditor discloses a
third-party fee as an estimate (as permitted under Sec. 226.5b(d)) and
those fees change, the consumer is not entitled to a refund of fees.
Under the proposal, the phrase ``in connection with the
application'' would be deleted from both new Sec. 226.5b(d) and
comment 5b(d)-1. The Board views this phrase as unnecessary to describe
the fees that must be refunded under this paragraph. As indicated in
current comment 5b(g)-1, the Board has long interpreted this phrase,
when modifying the term ``fees'' in both the statute and regulation, to
mean any fees that the consumer has paid to the creditor or a third
party related in any way to obtaining a HELOC with the creditor.
The proposal also would eliminate from the provisions in new Sec.
226.5b(d) and accompanying commentary any references to the consumer's
being entitled to a refund of fees only if the consumer decides not to
obtain a HELOC because of a change in terms. The proposal would instead
provide that a refund is required if a disclosed term changes before
account opening and the consumer decides not to enter into the plan.
Pursuant to the Board's authority in TILA Section 105(a) to make
adjustments to the requirements in TILA necessary to effectuate the
purposes of TILA, the Board proposes to eliminate the requirement that
the consumer's reason for deciding not to enter into the plan must be
that a term has changed. The Board believes that requiring consumers to
prove their intent for deciding not to enter a plan, the initially
disclosed terms of which have changed, and requiring creditors to
discern consumer intent, are not practicable. In addition, the Board
believes that when terms change, most consumers who decide not to enter
into the plan will decide not to do so because of the changed term.
Comment 5b(d)-3 would be revised to reflect that under the
proposal, disclosing a range for the maximum rate would no longer be
permitted in the early HELOC disclosure table, nor would disclosing an
estimate for a third-party account-opening fee, in contrast to the
current rule on third-party fees reflected in current comment 5b(g)-3.
See proposed Sec. 226.5b(c)(10). Disclosing an account-opening fee as
a range, however, would be permitted if the dollar amount of the fee is
not known at the time the disclosures under Sec. 226.5b(b) are
delivered or mailed. See proposed Sec. 226.5b(c)(11).
The proposal also would make conforming changes to reflect re-
numbered provisions in the proposal.
5b(e) Imposition of Nonrefundable Fees
The proposal would redesignate paragraph 5b(h) as paragraph 5b(e)
and comments 5b(h)-1, -2, and -3 as comments 5b(e)-1, -2, and -3, and
would revise these provisions. Current paragraph 5b(h), which
implements TILA Section 137(e), obligates a creditor to refund any fee
imposed within three business days of the consumer receiving the
application disclosures and brochure required under existing Sec.
226.5b if, within that time period, the consumer decides not to enter
into the HELOC agreement. See 15 U.S.C. 1647(e). Comment 5b(h)-1
provides that if the creditor collects a fee after the consumer
receives the application disclosures and the HELOC brochure and before
the expiration of three business days, the creditor must notify the
consumer--clearly and conspicuously and in writing--that the fee is
refundable for three business days. This comment also provides that if
disclosures are mailed to the consumer, a nonrefundable fee may not be
imposed until six business days after mailing, because footnote 10d to
the regulation provides that if the disclosures are mailed to the
consumer, the consumer is considered to have received them three
business days after they are mailed.
Proposed comment 5b(e)-1 retains these requirements, but with
technical changes, including changes to reflect that, under the
proposal, notice of the consumer's right to receive a refund must be
included in the early HELOC disclosure table required under proposed
Sec. 226.5b(b), and may not be provided as an attachment to the early
HELOC disclosures. Further discussion of this requirement is in the
section-by-section analysis of Sec. 226.5b(c)(5). In addition,
footnote 10d is moved into the main text of Sec. 226.5b(e).
Proposed comment 5b(e)-4 provides that, for purposes of Sec.
226.5b(e), the term ``business day'' has the more precise definition
used for rescission and for other purposes, meaning all calendar days
except Sundays and the federal holidays referred to in Sec.
226.2(a)(6). For example, if the creditor were to place the disclosures
in the mail on Thursday, June 4, the disclosures would be considered
received on Monday, June 8. The Board proposes to use the more precise
definition of ``business day'' for determining receipt of disclosures
for purposes of Sec. 226.5b(e) to conform to the Board's rules for
determining receipt of disclosures for other dwelling-secured
transactions under Sec. Sec. 226.19(a)(1)(ii) and 226.31(c), as well
[[Page 43485]]
as to the Board's recently adopted rules under Sec. 226.19(a)(2). See
74 FR 23289 (May 19, 2009).
Under the proposal, the phrase ``in connection with the
application'' would be deleted from new Sec. 226.5b(e). The Board
views this phrase as unnecessary to describe the fees that must be
refunded under this paragraph. As indicated in current comment 5b(g)-1,
the Board has long interpreted this phrase, when modifying the term
``fees'' in both the statute and regulation, to mean any fees that the
consumer has paid to the creditor or a third party related in any way
to obtaining a HELOC with the creditor.
The proposal also would make conforming changes to reflect proposed
disclosure requirements and re-numbered provisions, and to indicate
that ``three days'' means, as indicated in the corresponding regulation
text, ``three business days.''
5b(f) Limitations on Home-Equity Plans
TILA Section 137, implemented in Sec. 226.5b(f), limits the
changes that creditors may make to HELOCs subject to Sec. 226.5b. The
proposal would amend and clarify these limitations by revising Sec.
226.5b and accompanying Official Staff Commentary, and adding a new
Sec. 226.5b(g).
The proposal includes a number of significant changes to the rules
restricting changes that creditors may make to HELOCs subject to Sec.
226.5b. First, the proposal would amend Sec. 226.5b(f)(2)(ii), which
permits creditors to terminate and accelerate a HELOC if ``the consumer
fails to meet the repayment terms of the agreement,'' to prohibit
creditors from terminating and accelerating an account or taking lesser
action permitted under comment 5b(f)(2)-2, unless the consumer has
failed to make a required minimum periodic payment within a specified
time period after the due date for that payment. As discussed in more
detail below, the Board is specifically proposing that account action
under Sec. 226.5b(f)(2)(ii) be prohibited unless the consumer has
failed to make a required minimum periodic payment within 30 days of
the due date. The Board is requesting comment on the appropriateness of
this timeframe, or whether some other time period is more appropriate.
Second, the proposal would amend Sec. 226.5b(f)(2)(iv) to permit
creditors to terminate and accelerate a home-equity plan if a federal
law requires the creditor to do so. Similarly, the proposal would add a
new Sec. 226.5b(f)(3)(vi)(G) to permit creditors to suspend advances
or reduce the credit limit if a federal law requires the creditor to do
so.
Third, in a new comment 5b(f)(3)-3, the proposal would clarify that
Regulation Z's general limitation on changing terms does not prohibit a
creditor from passing on to consumers bona fide and reasonable costs
incurred by the creditor for collection activity after default, to
protect the creditor's interest in the property securing the plan, or
to foreclose on the securing property.
Fourth, the proposal would add to comment 5b(f)(3)(v)-2 an example
of a change that would be considered insignificant under this
provision: a creditor may eliminate a method of accessing a HELOC, such
as by credit card, as long as at least one means of access that was
available at account opening remains available to the consumer on the
original terms.
Finally, the proposal would provide additional guidance and amend
the rules in three major areas related to when a creditor may
temporarily suspend advances on a home-equity plan or reduce the credit
limit: (1) Rules regarding when a creditor may suspend or reduce an
account based on a significant decline in the property value (Sec.
226.5b(f)(3)(vi)(A) and existing comment 5b(f)(3)(vi)-6); (2) rules
regarding when a creditor may suspend or reduce an account based on a
material change in the consumer's financial circumstances (Sec.
226.5b(f)(3)(vi)(B) and existing comment 5b(f)(3)(vi)-7); and (3) rules
regarding reinstatement of accounts that have been suspended or reduced
(proposed Sec. 226.5b(g) and existing comments 5b(f)(3)(vi)-2, -3, and
-4).
5b(f)(2)(ii) Limitations on Action Taken for Failure To Meet the
Repayment Terms
Background
Section 226.5b(f)(2)(ii) permits a creditor to terminate a HELOC
and accelerate the balance if the consumer has ``fail[ed] to meet the
repayment terms of the agreement for any outstanding balance.'' The
corresponding statutory provision reads similarly: ``A creditor may not
unilaterally terminate any account * * * except in the case of * * *
(2) failure by the consumer to meet the repayment terms of the
agreement for any outstanding balance.'' 15 U.S.C. 1647(b)(2). Comment
5b(f)(2)(ii)-1 clarifies that a creditor may terminate and accelerate a
plan under this provision ``only if the consumer actually fails to make
payments.'' Thus, an account may not be terminated for a minor payment
infraction, such as when a consumer sends a payment to the wrong
address. Comment 5b(f)(2)-2 interprets this provision to allow
creditors to take an action short of terminating the plan and
accelerating the balance, such as temporarily or permanently suspending
advances, reducing the credit limit, changing the payment terms, or
requiring the consumer to pay a fee. A creditor may also provide in its
agreement that a higher rate or fee will apply in circumstances under
which it could otherwise terminate the plan and accelerate the balance.
Proposal
The proposal would interpret the statute to mean that creditors may
not, for payment-related reasons, terminate the plan and accelerate the
balance or take certain actions short of termination and acceleration
permitted under comment 5b(f)(2)-2, unless the consumer has failed to
make a required minimum periodic payment within 30 days after the due
date for that payment. The Board is specifically proposing that account
action under Sec. 226.5b(f)(2)(ii) be prohibited unless the consumer
has failed to make a required minimum periodic payment within 30 days
of the due date, and requesting comment on whether this timeframe is
appropriate, or whether some other time period is more appropriate. The
Board proposes this rule pursuant to its authority in TILA Section
105(a) to issue provisions and make adjustments to the requirements of
TILA that are necessary or proper to effectuate the statute's purposes.
See 15 U.S.C. 1604(a).
The Board believes that specifying the type of payment infraction
required to take action under this provision is necessary to effectuate
the purposes of TILA and Congress in enacting the Home Equity Loan Act
(cited above). According to section-by-section clarifications in the
Home Equity Loan Act, this provision specifically ``deals with the
failure of the borrower to actually make payments. It does not
encompass minor transgressions such as inadvertently sending the
payment to the wrong branch.'' \19\ Creditors and consumer groups have
expressed uncertainty about when an account may be terminated or other
action taken under this provision, as well as concerns that creditor
practices in this regard vary widely. In particular, concerns have been
raised about ``hair-
[[Page 43486]]
trigger'' terminations and other actions being taken on accounts due to
minor late payments.\20\ Some have pointed out that the plain language
of this provision--the consumer ``fails to meet the repayment terms of
the agreement''--arguably allows creditors to take an action that seems
disproportionate to the consumer's actions, such as account termination
due to as little as a single-day delinquency.
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\19\ Section-by-Section Clarifications to H.R. 3011, the Home
Equity Loan Consumer Protection Act of 1988, Pub. L. 100-709,
enacted on Nov. 23, 1988 (inserted by Rep. David Price), Congr.
Rec., H4474 (June 20, 1988) (emphasis added).
\20\ Board staff discussions with creditors revealed that
creditors terminate HELOC accounts due to a consumer's ``fail[ure]
to meet the repayment terms of the agreement'' for payment
delinquencies ranging from 16 to 90 days. In addition to creditor
practices, Board staff have also considered court decisions such
Cunningham v. Nat'l City, C.A. 1-08-CV-10936-RGS (Dist. Mass., Jan.
7, 2009), in which the court held that termination of an account was
permitted based on a seven-day delinquency, even though the consumer
paid within the contractual late fee courtesy period. Standard HELOC
agreements reviewed by the Board typically incorporate the
regulatory language allowing a creditor to terminate and accelerate
an account or take certain lesser actions due to a consumer's
``fail[ure] to meet the repayment terms of the agreement,'' without
specifying the number of days late a consumer's payment may be
before the account will be terminated or other action taken under
Sec. 226.5b(f)(2)(ii).
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The Board believes that the proposed interpretation of the relevant
statutory and regulatory provisions better carries out the legislative
intent to protect consumers against (1) creditor practices that are
unexpected and harmful,\21\ and (2) actions based on ``minor'' payment
infractions.\22\ The Board believes, for example, that terminating a
line based on a payment that was late but made within a contractual
late fee ``courtesy'' period is arguably unexpected and harmful; a
consumer may have a reasonable expectation that no penalty will be
imposed for a payment made within a certain number of days after the
due date where a late fee courtesy period has consistently been applied
to an account. In addition, the proposal acknowledges that payments may
be late for reasons out of the consumer's control, such as postal
delays or automated funds disbursement errors. A delinquency threshold
for taking action on the account of more than 30 days would give
consumers time to discover and correct the error. Finally, a consumer
who is more than 30 days delinquent will, in most cases, have missed at
least two due dates--and thus will have wholly failed to make a
payment. See existing comment 5b(f)(2)(ii)-1 (prohibiting termination
and acceleration of an account unless the consumer ``actually fails to
make payments'').\23\
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\21\ See, e.g., Remarks of Rep. St. Germain, Chair, House
Committee on Banking, Finance and Urban Affairs on H.R. 3011, the
Home Equity Loan Consumer Protection Act of 1988, Public Law 100-
709, enacted on Nov. 23, 1988, Congr. Rec., H4471 (June 20, 1988)
(The Home-equity Loan Act was intended to ensure that creditors
could impose ``no hidden fees, no hidden terms * * * on unsuspecting
homeowners''); Remarks of Rep. Schumer on H.R. 3011, Congr. Rec.,
H4475 (June 20, 1988) (``Home-equity loans have several potential
pitfalls if a consumer is not completely aware * * *'').
\22\ Section-by-Section Clarifications to H.R. 3011, the Home
Equity Loan Consumer Protection Act of 1988, Public Law 100-709,
enacted on Nov. 23, 1988 (inserted by Rep. David Price), Congr.
Rec., H4474 (June 20, 1988).
\23\ See also id.
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Overall, the proposal is intended to strike a more equitable
balance between creditors' need to protect themselves against risk
(and, for depositories, to ensure their safety and soundness), and
effective protection of HELOC consumers from constraints on their
credit privileges that do not correspond with reasonable expectations.
Consumer protection would be enhanced by eliminating the opportunity
for hair-trigger terminations and certain lesser actions for nominal
delinquencies. In addition, the Board believes that a consumer would be
more likely to expect serious consequences for a delinquency of more
than 30 days on a debt secured by the consumer's home than on an
unsecured credit card account. These protections arguably offset the
risk to consumers that creditors now terminating lines of credit based
on delinquencies of 30 days or less (or that rarely terminate lines)
will begin terminating accounts based on the proposed over-30-days
delinquency rule.
At the same time, creditors would retain options to protect
themselves from losses prior to a payment becoming more than 30 days
delinquent. Specifically, a creditor could impose late payment fees
specified in the HELOC agreement. Creditors also could temporarily
suspend or reduce accounts for a ``default of a material obligation''
under Sec. 226.5b(f)(3)(vi)(C), as payment obligations are commonly
considered material obligations. In effect, whether a line can be
terminated due to failure to meet a payment obligation as permitted
under TILA depends on the extent of the default (i.e., is a payment
late by more than 30 days?); whereas whether a line can be temporarily
suspended or reduced depends on the nature of the obligation on which
the consumer defaulted (i.e., is the obligation itself ``material''?).
The Board requests comment on whether a failure to make a payment
within 30 days is appropriate or whether some other time period is more
appropriate for permitting action under this provision. In this regard,
the Board notes that the 2009 Credit Card Act (cited above) has
suggested considering a delinquency threshold of more than 60 days.
Specifically, the Credit Card Act adds a new section 171 to TILA (15
U.S.C. 1666j) to prohibit increasing the APR on existing credit card
balances unless the creditor has not received a minimum payment within
60 days after the due date for the payment. See Credit Card Act, Sec.
101(b). However, the Credit Card Act does not require that a consumer
must be 60 or even 30 days late before a creditor may terminate a
credit card account; the Credit Card Act deals with when a credit card
creditor may reprice balances on an account.
The Board also requests comment on whether the Board should
consider any other payment infractions to be sufficient grounds for
termination and acceleration (and permitted lesser actions).
5b(f)(2)(iv) Terminations Required by Federal Law
Existing Sec. 226.5b(f)(2)(iv) permits a depository institution to
terminate and accelerate a HELOC plan if ``compliance with federal law
dealing with credit extended by a depository institution to its
executive officers specifically requires that as a condition of the
plan the credit shall become due and payable on demand.'' The Board
narrowly tailored this additional provision permitting termination in
light of Section 22(g) of the Federal Reserve Act (implemented by
Regulation O, 12 CFR Part 215) and Section 309 of the Federal Deposit
Insurance Corporation Improvement Act. See 57 FR 34676 (August 6,
1992).
The proposal would amend Sec. 226.5b(f)(2)(iv) to permit creditors
to terminate and accelerate home-equity plans if a federal law requires
the creditor to do so, expanding this provision to cover other federal
laws that may require a creditor to terminate and accelerate a plan.
``Federal law'' under this provision is limited to any federal statute,
its implementing regulation, and official interpretations issued by the
regulatory agency with authority to implement such statute and
regulation.
With this revision, the Board intends to prevent the need to issue
separate revisions to Regulation Z to account for any new federal law
requiring creditors to terminate and accelerate plans under particular
circumstances. Further discussion of the reasons for this proposal and
requests for comment are found in the explanation below of a similar
proposal designated as new Sec. 226.5b(3)(vi)(G).
[[Page 43487]]
Regarding this proposed provision, the Board requests comment on
what additional examples of conflicts between Regulation Z's
restrictions on account termination and other laws the Board should
consider, if any. The Board also requests comment on whether the
definition of ``federal law'' should be broadened to include, for
example, an order or directive of a federal agency.
5b(f)(3) Limitations on Changes in Terms
Section 226.5b(f)(3) generally prohibits a creditor from changing
the terms of a HELOC plan after it is opened. Comment 5b(f)(3)-1 states
that, for example, a creditor may not increase any fee or impose a new
fee once the plan has been opened, even if the fee is charged by a
third party. This comment also provides that the change-in-terms
prohibition applies to ``all features of a plan,'' even if the features
are not required to be disclosed under Sec. 226.5b (i.e., on the
application disclosures). Comment 5b(f)(3)-2, however, lists three
charges that may be changed: (1) Increases in taxes; (2) increases in
premiums for property insurance (if excluded from the finance charge
under Sec. 226.4(d)(2)); and (3) increases in premiums for credit
insurance (if excluded from the finance charge under Sec.
226.4(d)(2)).
The proposal would first revise comment 5b(f)(3)-1 to remove the
example of a charge that is not required to be disclosed--specifically,
a late-payment fee. Under the proposal, a late-payment fee would not be
required to be disclosed in the early HELOC disclosure table under
Sec. 226.5b(b) (see proposed Sec. 226.5b(c)(11), (c)(12) and
(c)(13)), but it would be required to be disclosed on the account-
opening table under proposed Sec. 226.6(a)(2)(x), along with several
other types of fees. Further discussion of these proposed rules is
included in the section-by-section analysis for proposed Sec.
226.6(a)(2).
Second, proposed comment 5b(f)(3)-3 clarifies that creditors may
pass on to consumers costs in the limited categories of debt
collection, collateral protection and foreclosure under Regulation Z,
but only if certain conditions are present. First, the costs must
``bona fide and reasonable,'' meaning that the creditor may pass on to
the consumer only costs that the creditor actually incurs in taking
these actions on a particular plan, and that the amount of any costs
passed on to the consumer must be reasonably related to any services
related to debt collection, collateral protection or foreclosure
incurred by the creditor. These costs might include attorneys' fees,
court costs, property repairs, payment of overdue taxes, or paying sums
secured by a lien with priority over the lien securing the HELOC.
Second, the need for the creditor's actions must arise due to the
consumer's default of an obligation under the agreement.
During outreach to prepare this proposal, the Board received
requests to clarify whether creditors may pass on to consumers bona
fide and reasonable costs incurred by the creditor for collection
activity after default, to protect the creditor's interest in the
property securing the plan, and to foreclose on the securing property.
Creditors have expressed uncertainty about whether a creditor may pass
these types of costs on to consumers under Regulation Z. As noted,
Sec. 226.5b(f)(3) prohibits creditors from changing the terms of a
home-equity plan except in specified circumstances. Existing comment
5b(f)(3)-2 lists only three types of fees that are not covered by this
section. Thus, it could be argued that creditors may not pass certain
costs on to consumers unless they disclose in the agreement the
specific fees and amounts associated with actions required for debt
collection, collateral protection and foreclosure. The Board
understands that the specific amount of costs required for a creditor
to collect unpaid amounts, protect its collateral or execute
foreclosure can rarely be known at the outset of a home-equity plan.
Events giving rise to the need for a creditor to take action for debt
collection, collateral protection or foreclosure may occur several
years after the opening of a plan, and the specific actions required
for collateral protection or foreclosure, for example, may vary widely
depending on the circumstances, such as the nature of the consumer's
action or inaction giving rise to the need for the creditor to take
affirmative action protect its collateral, or the rules of the
jurisdiction governing the foreclosure proceeding. The Board recognizes
that for closed-end home-secured credit, creditors have more certainty
than do HELOC creditors that these costs may be passed on to the
consumer without specific upfront disclosure of their amounts, and that
this uncertainty for HELOCs creates compliance challenges.
Also, other sections of the existing commentary reflect the Board's
longstanding recognition that specific disclosure of these items and
the amount of the charge for each may be difficult. For example,
comment 5b(d)(4)-1 (redesignated in the proposal as comment
5b(c)(7)(i)-1) excludes from the requirement to disclose termination
fees at application ``fees associated with collection of the debt, such
as attorneys' fees and court costs.'' In addition, longstanding comment
6(b)-2.ii (incorporated with changes into proposed Sec.
226.6(a)(3)(ii)(B)) excludes from disclosure in the Sec. 226.6
account-opening statement ``[a]mounts payable by a consumer for
collection activity after default; attorney's fees, whether or not
automatically imposed; foreclosure costs; [and] post-judgment interest
rates imposed by law,'' among others. As discussed in more detail in
the section-by-section analysis under proposed Sec. 226.6(a)(3), one
category of ``charges imposed as part of a home-equity plan'' would be
``charges resulting from the consumer's failure to use the plan as
agreed, except amounts payable for collection activity after default;
costs for protection of the creditor's interest in the collateral for
the plan due to default; attorney's fees whether or not automatically
imposed; foreclosure costs; and post-judgment interest rates imposed by
law'' (emphasis added). Proposed Sec. 226.6(a)(3) generally parallels
Sec. 226.6(b)(3)(ii)(B) applicable to open-end (not home-secured)
plans finalized in the January 2009 Regulation Z Rule and incorporates,
as noted, longstanding comment 6(b)-2.ii.
The Board is mindful of concerns that consumers may be charged a
wide array of fees upon default without adequate notice or explanation.
For these reasons, the Board requests comment on the appropriateness of
this proposed clarification. The Board also requests comment on
whether, if the proposal is adopted, the Board should clarify
requirements regarding disclosure of these costs in the initial
agreement beyond stating that specific amounts need not be disclosed.
For example, would it be sufficient for the creditor to disclose simply
the possibility that costs under the three categories contemplated in
the proposal--debt collection, collateral protection and foreclosure
upon default--may be charged? Or should the creditor be required to
itemize in whole or in part the types of costs under each category that
could be charged?
5b(f)(3)(i) Changes Provided for in Agreement
Section 226.5b(f)(3)(i) provides exceptions from the general
prohibition on changes in terms of home-equity plans. One of these
``exceptions'' is that a creditor may provide in the initial agreement
that a specified change will take place if a specified event occurs.
The section gives an example that the agreement may provide that the
APR may increase by a specified amount if the consumer leaves the
creditor's
[[Page 43488]]
employment. Comment 5b(f)(3)(i)-1 clarifies that both the triggering
event and the resulting change in terms must be stated in the agreement
with specificity. The comment also restates the employee preferred-rate
example, and gives other examples, including a stepped-rate provision
in the agreement, under which specified changes in the rate may take
place after specified periods of time. This section and accompanying
comment are consistent with the general principle stated in comment
5b(f)(1)-3 that rate changes specifically set forth in the agreement
are not prohibited.
The Board proposes to revise comment 5b(f)(3)(i)-1 to clarify that
rate increases are also permissible upon the occurrence of special
circumstances other than those set forth in the existing comment, as
long as they are specifically set forth in the agreement and do not
conflict with other substantive limitations on rate changes in the
regulation. The Board intends this clarification to provide consistency
between comment 5b(f)(1)-3 and comment 5b(f)(3)(i)-1. The proposal also
would limit the amount by which a rate could be increased once
circumstances qualifying the consumer for a preferred rate no longer
apply. Specifically, a creditor could not raise the rate to be higher
than it would have been had the consumer never qualified for a
preferred rate. If a preferred rate of five percent is available to a
consumer who is an employee of the creditor, for example, and the rate
applicable if the consumer were not a creditor employee were seven
percent, the creditor could not raise the rate above seven percent once
the consumer is no longer the creditor's employee. The Board believes
that such an increased rate would constitute a penalty rate imposed for
reasons not permitted under Regulation Z. See Sec. 226.5b(f)(2) and
comment 5b(f)(2)-2; see also 15 U.S.C. Sec. 1647(a); Sec.
226.5b(f)(1).
The revised comment would clarify that the creditor could not
impose a penalty rate for a reason other than those specified in Sec.
226.5b(f)(2) (allowing termination and acceleration and certain lesser
actions only under particular circumstances). The Board believes that
permitting agreements to provide for the application of penalty rates
upon the occurrence of any triggering event would be inconsistent with
the restrictions on rate increases under the statute and regulation.
See 15 U.S.C. Sec. 1647(a); Sec. 226.5b(f)(1). Thus, the proposed
comment would state that the creditor would be permitted to increase
the rate to a penalty rate level only if the triggering event is a
circumstance that would permit the rate to be increased under the
commentary to Sec. 226.5b(f)(2), such as fraud or material
misrepresentation by the consumer (Sec. 226.5b(f)(2)(i)), failure to
make a required payment within 30 days of the due date for that payment
(proposed Sec. 226.5b(f)(2)(ii)), or action or inaction by the
consumer that adversely affects the creditor's security interest for
the plan (Sec. 226.5b(f)(2)(iii)). The Board believes, however, that a
rate increased from a preferred rate to the rate available to consumers
generally, when the condition for the preferred rate is no longer met,
would be consistent with the statutory provision. A consumer who has a
preferred rate is likely to be aware of the conditions for the rate,
and thus if the conditions are no longer met, the rate increase would
not come as an undue surprise.
5b(f)(3)(iv) Beneficial Changes
Section 226.5b(f)(3)(iv) permits a creditor to change a term of a
home-equity plan if the change ``will unequivocally benefit the
consumer throughout the remainder of the plan.'' Comment 5b(f)(3)(iv)-1
gives several examples of beneficial changes, including a temporary
reduction in the rate or fees charged during the plan. In this case,
however, the comment indicates that a creditor ``may'' be required to
give a change-in-terms notice required under Sec. 226.9(c) (see
proposed Sec. 226.9(c)(1)) when the rate or fees return to their
original level.
The proposal would clarify in comment 5b(f)(3)(iv)-1 that a change-
in-terms notice ``would,'' rather than ``may,'' be required to be
provided to the consumer under Sec. 226.9(c) (proposed Sec.
226.9(c)(1)) when the temporarily reduced rate or fees are returned to
their original level, if these reductions and subsequent increases were
not disclosed in the account agreement. The revised comment also would
clarify that including notice of the increased rate or fee with the
notice to the consumer that the rate or fee is being reduced would
constitute appropriate notice of the increase, as long as this notice
is provided 45 days before the effective date of the increase.
Comment 9(c)(1)(ii)-2 (redesignated in the proposal as comment
9(c)(1)(iv)-2) states that a creditor may offer temporary reductions in
finance charges without giving notice when the charges return to their
original level--as long as this feature is disclosed in the account-
opening disclosures required under Sec. 226.6 (including an
explanation of the terms upon resumption).\24\ The ``beneficial
changes'' provision, however, permits the creditor temporarily to
reduce finance charges such as rates and fees without disclosing these
possible reductions in the account agreement (assuming the change is
``unequivocally'' beneficial). When a creditor relies on this provision
to raise the rate or fees after the reduction period has ended,
however, the Board believes that the consumer should be given notice of
when these charges will return to their original level in accordance
with the proposed 45 days advance notice rule under proposed Sec.
226.9(c)(1). This would ensure that the consumer is given sufficient
notice of the change to make any financial adjustments necessary.
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\24\ This provision also states that temporary reductions in
payments disclosed in the account-opening statement are subject to
the notice exemption. See comment 9(c)(1)(ii)-2 (proposed comment
9(c)(1)(iv)-2). Temporary payment reductions might also be
considered beneficial changes permitted under Sec.
226.5b(f)(3)(iv). See comment 5b(f)(3)(iv)-1. However, in the
Supplementary Information to the final rule implementing Sec.
226.5b(f)(3)(iv), the Board noted that ``reducing the amount of the
minimum payment would not be unequivocally beneficial since it may
result in less principal being repaid over the term of the plan and
may result in a higher total amount of finance charges.'' 54 FR 3063
(Jan. 23, 1989).
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5b(f)(3)(v) Insignificant Changes
Background
Section 226.5b(f)(3)(v) permits a creditor to make
``insignificant'' changes to a home-equity plan's terms. Existing
comment 5b(f)(3)(v)-1 explains that this provision is intended to
``accommodate[] operational and similar problems, such as changing the
address of the creditor for purposes of sending payments.'' Under this
comment, a creditor may not change a term such as a late-payment fee.
Comment 5b(f)(3)(v)-2 gives several examples of changes in terms
considered ``insignificant.'' These include ``minor changes'' to the
billing cycle date, the payment-due date, and the day of the month on
which index values are measured; changes to the creditor's rounding
practices for the APR; and changes to the balance computation method
used. The comment also provides that these changes will not in all
cases be considered ``insignificant.'' For example, a change to the
payment-due date would be insignificant only if this change would not
diminish the grace period, if any, during which finance charges and
late fees are not applied to new transactions. A change in the
creditor's rounding practices for disclosing the APR would be
[[Page 43489]]
insignificant only if the change is within the tolerances prescribed by
Sec. 226.14(a). A change to the balance computation method would be
insignificant only if any resulting difference in the finance charge
paid by the consumer is ``insignificant.''
A number of creditors have expressed concerns to the Board about
difficulties arising when the servicing of a HELOC is transferred and
the new servicer's platform is not programmed to allow for previously
available terms. Creditors are concerned that changing the terms of a
HELOC in this circumstance may not be permitted due to Sec.
226.5b(f)(3)'s limitations on term changes. Creditors have reported
that, as a result, they sometimes have to use multiple servicers or
servicing systems to support all the terms of the various HELOCs they
acquire. These servicers and servicing systems may be of widely varying
quality, which could mean that consumers do not receive optimal service
on their HELOCs. Some creditors have reported that a portfolio
acquisition may not occur at all if the acquirer's servicing system
cannot support the terms of the HELOCs offered, and that this may also
harm consumers if, for example, the proposed acquisition was
necessitated in part by challenges facing the current servicer.
Differences between servicing systems cited by creditors may impact,
among other terms, rate indices, minimum payment and late fee
calculations, or the availability of certain payment options or access
devices such as credit cards.
Proposal
The Board proposes to add to comment 5b(f)(3)(v)-2 an example of a
change that would be considered insignificant under this provision: a
creditor may eliminate a method of accessing the line, such as a credit
card, as long as at least one means of access that was available at
account opening remains available to the consumer on the original
terms. The Board also proposes to clarify that changes to the original
terms on which a means of access was originally available--such as any
fees for using the access method--would not be considered
insignificant, but might be permitted as ``beneficial'' changes under
Sec. 226.5b(f)(3)(iv) if the change met the requirements of comment
5b(f)(3)(iv)-1.
The Board believes that a general rule permitting changes in terms
due to servicing transfers would not sufficiently protect consumers,
and thus would undermine the purpose of the change-in-terms
restrictions mandated by TILA. Such a rule would allow creditors to
change terms as a result of a servicer change that are, in practical
effect, significant. Changes to minimum payment calculations, for
example, could increase the overall costs to the consumer of the HELOC,
or materially increase the consumer's payments in the short or long
term. Changes to late fee calculations could be confusing to consumers
and cause undue surprise related to the amount or timing of the late-
payment fee; in addition, longstanding Board policy prohibits changing
fees charged for late payments. See comment 5b(f)(3)(v)-1.
The Board also considered setting a general standard for changes
that would be considered insignificant, such as allowing changes to be
deemed insignificant that result in the same or substantially similar
payments (including periodic payments and the total of payments),
rates, fees, and overall loan costs. One concern about establishing a
general standard is that confusion among creditors and consumers, and
possibly increased litigation, may result, particularly concerning the
meaning of terms such as ``substantially similar.'' The Board requests
comment on whether setting a general standard for term changes that
would be considered insignificant is desirable. In this regard, the
Board also requests comment on whether prescribing specific tolerances
for resulting payments, costs, and fees would be helpful, and what
appropriate tolerances might be.
Servicing transfers, while sometimes beneficial to consumers, are
neither initiated nor controlled by consumers. Thus, the Board believes
that consumers should not in general be subjected to changes in their
HELOC terms when their servicing is transferred. The current regulation
provides several exceptions allowing creditors to change HELOC terms in
keeping with the consumer protection purpose of TILA and Regulation Z--
such as changes by written agreement (Sec. 226.5b(f) (3)(iii)),
beneficial changes (Sec. 226.5b(f)(3)(iv)), and insignificant changes
(Sec. 226.5b(f)(3)(v)). Regarding insignificant changes, current
comment 5b(f)(3)(v)-2, as noted, clarifies in its examples that, in
effect, a change cannot be considered insignificant if it diminishes or
eliminates a financial benefit to the consumer, such as a grace period,
or if it causes the consumer to pay a finance charge that is more than
nominally higher than the finance charge that would have applied under
the original terms.
Rather than make a broad revision such as permitting all term
changes related to servicing transfers or setting a general standard
for determining whether a change in terms is ``insignificant,'' the
Board is proposing to clarify that an access device such as a credit
card may be eliminated as long as previously available access devices
remain available. Creditors indicated that significant problems can
arise where credit card access, for example, was available on the plan
but a new servicer cannot support this; the creditor may be unable to
transfer the servicing or may have to make individual arrangements with
each consumer. The Board requests comment on the appropriateness of
this additional example of an insignificant change. In addition, the
Board requests comment on whether this example, if adopted, should be
modified, broadened, or narrowed.
5b(f)(3)(vi) Temporary Suspension of Credit or Reduction of Credit
Limit
Introduction
Section 226.5b(f)(3)(vi) lists several circumstances under which a
creditor may temporarily suspend advances on a home-equity plan or
reduce the credit limit. As discussed below, the Board proposes
revisions to this section in three major areas: (1) Rules regarding
when a creditor may suspend or reduce an account based on a significant
decline in the property value (Sec. 226.5b(f)(3)(vi)(A) and existing
comment 5b(f)(3)(vi)-6); (2) rules regarding when a creditor may
suspend or reduce an account based on a material change in the
consumer's financial circumstances (Sec. 226.5b(f)(3)(vi)(B) and
existing comment 5b(f)(3)(vi)-7); and (3) rules regarding reinstatement
of accounts that have been suspended or reduced (existing comments
5b(f)(3)(vi)-2, -3, and -4). As also discussed below, the proposal
would permit a creditor to suspend or reduce an account temporarily if
required to do so by federal law. Certain technical amendments are
proposed to Sec. 226.5b(f) and accompanying commentary as well.
Changes and Requests for Comment Related to Sec. 226.5b(f)(3)(vi)
Generally
No changes are proposed to existing comment 5b(f)(3)(vi)-1, which
provides that a creditor may temporarily suspend advances on an account
or reduce the credit limit only under circumstances specified in Sec.
226.5b(f)(3)(vi), Sec. 226.5b(f)(3)(i) when the maximum annual
percentage is reached, or Sec. 226.5b(f)(2), permitting suspension of
advances or reduction of the credit limit in lieu of terminating and
accelerating the account. See comment 5b(f)(2)-2. The Board requests
comment, however,
[[Page 43490]]
on the portion of this comment providing that the creditor's right to
reduce the credit limit does not permit reducing the limit below the
amount of the outstanding balance if this would require the consumer to
make a higher payment. Specifically, the Board requests whether other
limitations on the amount by which a home-equity line may be reduced
may be appropriate. For example, should the amount by which a credit
line may be reduced for a significant decline in the property value
under Sec. 226.5b(f)(3)(vi)(A) (discussed below) be limited to: (1) No
more than the dollar amount of the property value decline; (2) no more
than the amount needed to restore the creditor's equity cushion at
origination (and whether, in this case, the relevant equity cushion
should be the dollar amount or the percentage of the home value not
encumbered by debt); or (3) some other measure? A related request for
comment is whether a creditor should be prohibited from temporarily
suspending advances on the line until, for example, the property value
declines by the full amount of the credit line.
The proposal would redesignate comment 5b(f)(3)(vi)-5 as comment
5b(f)(3)(vi)-2 and make certain technical revisions. Current comment
5b(f)(3)(vi)-5 permits a creditor to honor a specific request by a
consumer to suspend credit privileges. If two or more consumers are
obligated under a plan and each can take advances, comment
5b(f)(3)(vi)-5 permits creditors to provide that any of the consumers
may direct the creditor not to make further advances. This comment also
permits a creditor to require that all persons obligated under a home-
equity plan request reinstatement.
Proposed comment 5b(f)(3)(vi)-2 would add that consumers may
request not only suspended advances but reduction of the credit limit.
It also clarifies that when a consumer later requests reinstatement,
but a condition permitting suspension or reduction exists (under
Sec. Sec. 226.5b(f)(2) or (f)(3)(i) or (f)(3)(vi)), a creditor that
therefore does not re-open the plan must provide the disclosure of the
specific reasons for the action taken under Sec. 226.9(j)(1) (for
temporary suspensions and reductions under Sec. Sec. 226.5b(f)(3)(i)
or (f)(3)(vi)) or (j)(3) (for termination or permitted lesser actions
under Sec. 226.5b(f)(2)), as applicable. Concerns were expressed to
the Board during outreach for this proposal that under some
circumstances, a person with an ownership interest in the property
securing the line, but who is not obligated on the plan, may wish to
request suspension of advances. The Board has not proposed a change to
this provision to address these concerns, but invites comment on the
issue.
Under longstanding Board policy, rate changes for reasons
permitting suspension of advances or credit limit reductions under
Sec. 226.5b(f)(3)(i) and (f)(3)(vi) have been prohibited. See comment
5b(f)(3)(i)-2. Based on issues raised during the Board's outreach to
prepare this proposal, the Board also requests comment on whether and
under what circumstances it might be appropriate for Regulation Z to
permit actions other than temporary suspension of advances or credit
limit reductions under Sec. 226.5b(f)(3)(i) and (f)(3)(vi).
Finally, as discussed in more detail under the section-by-section
analysis for proposed Sec. 226.5b(g), the proposal moves comments
5b(f)(3)(vi)-2, -3, and -4 regarding reinstatement of accounts to
proposed Sec. 226.5b(g) and accompanying commentary, and revises them.
5b(f)(3)(vi)(A) Suspensions and Credit Limit Reductions Based on a
Significant Decline in the Property Value
Background
Section 226.5b(f)(3)(vi)(A), which implements TILA Section
137(c)(2)(B), permits a creditor temporarily to suspend advances or
reduce a credit line on a HELOC if ``the value of the dwelling that
secures the plan declines significantly below the dwelling's appraised
value for purposes of the plan.'' 15 U.S.C. 1647(c)(2)(B). Comment
226.5b(f)(3)(vi)-6 states that whether a decline in value is
significant under this provision ``will vary according to individual
circumstances.'' The comment goes on to provide a ``safe harbor''
standard for determining whether a decline is significant.
Specifically, a decline in value would be considered significant if it
results in the initial difference between the credit limit and the
available equity (the ``equity cushion'') diminishing by 50 percent or
more.
Concerns have been expressed to the Board that the existing safe
harbor may not be a viable standard for the higher combined loan-to-
value (CLTV) HELOCs made in recent years. For loans nearing or
exceeding 100 percent CLTV when originated, for example, a decline in
value of a few dollars could result in more than a 50 percent decline
in the creditor's equity cushion because the equity cushion was zero or
close to zero at origination. For these higher CLTV loans in
particular, creditors have indicated uncertainty about how to determine
whether a decline in value is ``significant.'' For their part, consumer
advocates have expressed concerns that the lack of guidance on the
proper application of the safe harbor gives creditors too much
authority to take action based on nominal declines in value. Finally,
noting that appraisals are not required to take action under this
provision (see comment 5b(f)(3)(vi)-6), creditors have also asked the
Board for guidance on appropriate property valuation methods for
assessing property values under this provision.
Proposal
The proposal would eliminate references to the ``appraised'' value
in both the regulation and commentary, to reflect that appraisals are
not required to originate many HELOCs,\25\ nor are they required to
establish a basis for taking action under this provision. See existing
comment 5b(f)(3)(vi)-6. Beyond this technical change, the proposal
would revise the commentary interpreting Sec. 226.5b(f)(3)(vi)(A) in
two principal ways. First, the commentary would delineate two ``safe
harbors'' on which creditors could rely to determine that a decline in
property value is ``significant'' under this section. Second, the
commentary would provide additional guidance regarding the appropriate
valuation tools for creditors to use in valuing property under this
section.
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\25\ See, e.g., Office of the Comptroller of the Currency, Board
of Governors of the Federal Reserve System, Federal Deposit
Insurance Corporation, Office of Thrift Supervision, ``Interagency
Appraisal and Evaluation Guidelines,'' SR Letter 94-55 (Oct. 28,
1994); see also 12 CFR 225.63 (FRB); 12 CFR 34.43 (OCC); 12 CFR
323.3 (FDIC); 12 CFR 564.3 (OTS). ``Appraisal'' is defined in
federal banking agency regulations relating to appraisal standards
as ``a written statement independently and impartially prepared by a
qualified appraiser setting forth an opinion as to the market value
of an adequately described property as of a specific date(s),
supported by the presentation and analysis of relevant market
information.'' 12 CFR 225.62(a) (FRB); 12 CFR 34.42(a) (OCC); 12 CFR
323.2(a) (FDIC); 12 CFR 564.2(a) (OTS).
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Proposed comment 5b(f)(3)(vi)-4 confirms existing guidance stating
that whether a decline is ``significant'' under Sec.
226.5b(f)(3)(vi)(A) depends on the individual circumstances of a
particular HELOC secured by a property whose value has declined. Thus,
in all cases the creditor must make an individualized assessment of
whether a property value decline is significant, and may not solely
consider general property value trends.
Safe harbors. To facilitate compliance, the Board proposes two
standards under which a property value decline would be deemed
significant under this section.
[[Page 43491]]
First, for plans with a CLTV at origination of 90 percent
or higher, a five percent reduction in the property value on which the
HELOC terms were based would constitute a significant decline in value
for purposes of Sec. 226.5b(f)(3)(vi)(A).
Second, for plans with a CLTV at origination of under 90
percent, the Board proposes to retain the existing safe harbor, under
which a decline in the value of the property securing the plan is
significant if, as a result of the decline, the initial difference
between the credit limit and the available equity (based on the
property's value for purposes of the plan) is reduced by 50 percent.
Five percent decline for HELOCs with a CLTV at origination of 90
percent or higher. The current commentary allows creditors to assume
that a decline in property value is ``significant'' if the decline
results in a 50 percent decline in the creditor's equity cushion. See
comment 5b(f)(3)(vi)-6. The Board proposes to modify this ``safe
harbor'' for loans with a CLTV at origination of 90 percent or higher:
For these loans, the creditor could assume that a decline in the
property value is significant if the property value declines at least 5
percent from its value when the HELOC was originated.
The Board proposes this new safe harbor for several reasons. First,
the current safe harbor, which allows action on a HELOC when the
creditor's equity cushion falls by 50 percent, establishes an
inappropriate metric for measuring whether a value decline on higher
CLTV loans is ``significant.'' As worded, this provision arguably
permits action based on nominal property value declines. Specifically,
the statute permits suspension of advances or reduction of the credit
limit when the value of property securing the HELOC ``is significantly
less than'' the value of the property when the HELOC was originated. 15
U.S.C. 1647(c)(2)(B). The Board's proposal would interpret this
statutory language to mean that, at minimum, the actual decline in
value must be more than nominal. The 5 percent safe harbor thus is
intended to protect consumers with higher CLTV HELOCs from having their
lines suspended or reduced based on property value declines that are
only slightly less than the value of the property at origination.
Second, the new proposed safe harbor standard would be consistent
with the existing safe harbor. Arithmetically, a five percent decline
on loans with an originating CLTV of 90 percent or higher results in at
least a 50 percent decline in the equity cushion. By contrast, a five
percent property value decline on loans with an originating CLTV of
under 90 percent would not reduce the creditor's equity cushion by 50
percent.
Third, the proposed CLTV threshold of 90 percent or higher for
applying a five percent value decline safe harbor would be consistent
with a CLTV threshold already established by the Board. Specifically,
Board risk management guidance defines a ``high [C]LTV loan'' \26\
generally as a loan with a CLTV of 90 percent or higher, unless the
loan has credit enhancements such as mortgage insurance to mitigate the
risk of loss.\27\ Research validates that loans in this category have a
higher probability of default and yield greater losses upon default
than loans of lower CLTVs.\28\
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\26\ Relevant guidance uses the term ``LTV'' (loan-to-value
ratio) to mean what is often referred to as ``CLTV'' (combined loan-
to-value ratio); in other words, all liens on the property are
considered: ``[A] high LTV residential real estate loan is defined
as any loan, line of credit, or combination of credits secured by
liens on or interests in owner-occupied 1- to 4-family residential
property that equals or exceeds 90 percent of the real estate's
appraised value, unless the loan has appropriate credit support.''
Office of the Comptroller of the Currency, Board of Governors of the
Federal Reserve System, Federal Deposit Insurance Corporation,
Office of Thrift Supervision, National Credit Union Administration,
``Interagency Guidance on High LTV Residential Real Estate
Lending,'' SR Letter 99-26 (Oct. 12, 1999) (emphasis added).
\27\ 12 CFR part 208, subpart E, app. C (providing that, if a
loan's LTV is equal to or exceeds 90 percent, the creditor must add
other credit enhancements (such as mortgage insurance) or the loan
will be considered to exceed the supervisory LTV ratios and be
deemed a ``high LTV loan,'' to which additional rules apply). See
also Board of Governors of the Federal Reserve System, SR Letter 99-
26 (Oct. 12, 1999).
\28\ See, e.g., Kristopher Gerardi, Federal Reserve Bank of
Atlanta, Andreas Lehnert and Shane M. Sherlund, Board of Governors
of the Federal Reserve System, and Paul Willen, Federal Reserve Bank
of Boston, ``Making Sense of the Subprime Crisis,'' Brookings Papers
on Economic Activity (Fall 2008). See also, Min Qi and Xiaolong
Yang, Office of the Comptroller of the Currency, ``Loss Given
Default of High Loan-to-Value Residential Mortgages,'' Economics and
Policy Analysis Working Paper 2007-4 (August 2007).
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Retention of existing safe harbor for HELOCs with a CLTV at
origination of lower than 90 percent. For loans with an originating
CLTV of less than 90 percent, the Board proposes to retain the existing
the safe harbor, under which a value decline is significant if the
decline results in the creditor's equity cushion contracting by 50
percent. Comment 5b(f)(3)(vi)-4 clarifies that in determining whether a
decline results in a 50 percent equity cushion reduction, the creditor
may, but does not have to, consider any changes in available equity
based on the status of the first mortgage.
The Board proposes to retain the existing safe harbor for several
reasons. First, no parties during Board outreach to prepare this
proposal objected to the general principal that a property value
decline resulting in a 50 percent reduction of the equity cushion can
reasonably be considered ``significant'' under this provision.
Second, applying this safe harbor to loans with CLTVs of under 90
percent does not depart significantly from the assumption on which the
original safe harbor example was based. See comment Sec.
226.5b(f)(3)(vi)-6. The commentary illustrates the existing safe harbor
with a HELOC at a starting CLTV of 80 percent; thus, the illustration
indicates that a 50 percent equity cushion reduction would be
significant for loans originated with a CLTV of 80 percent. The
proposal clarifies that a property value decline resulting in a 50
percent equity cushion reduction is significant for loans with a CLTV
of only somewhat higher than 80 percent--under 90 percent.
Finally, there is an arithmetical basis for applying the existing
safe harbor, rather than the proposed flat five percent decline safe
harbor, to HELOCs with an originating CLTV of under 90 percent: a five
percent decline in the value of the property for lines with a starting
CLTV lower than 90 percent would not yield an equity cushion decline of
50 percent or more.
Among other alternatives, the Board considered proposing a safe
harbor that applied a flat percentage property value decline to all
HELOCs, regardless of the originating CLTV, but determined that
defining an single metric appropriate for all loans was not possible. A
safe harbor of a 10 percent decline, for example, may impair creditors'
flexibility to take action where reasonable arguments could be made, as
for higher CLTV loans such those discussed above, that adequate risk
mitigation requires action based on a lesser decline. At the same time,
a 10 percent decline may be inappropriate for loans with lower CLTVs,
such as 50 percent. For these loans, a 10 percent property value
decline would still leave the creditor with a significant equity
cushion. By contrast, even on lower CLTV loans, the current safe harbor
of a 50 percent reduction in the creditor's equity cushion might
reasonably be deemed a sufficient change in the creditor's original
risk level to justify action on the line, such as temporarily reducing
the credit limit.
Significant declines outside of the safe harbors. The Board
recognizes that not all property value declines that might reasonably
be considered ``significant'' for taking action under this provision
will fall into one of the two safe harbors. Thus, the Board
[[Page 43492]]
requests comment on whether and what guidance regarding other factors
that creditors might consider in determining whether a decline is
significant is desirable. Specific comment is requested on whether the
Board should provide guidance clarifying that the creditor may (but
does not have to) consider any changes in available equity based on how
much the consumer owes on a mortgage with a lien superior to that of
the HELOC. On a second-lien HELOC where the first-lien mortgage is
negatively amortizing, or was negatively amortizing during any part of
the HELOC term, for example, the CLTV will decline more and faster than
if the first mortgage were fully or partially amortizing, concomitantly
reducing the HELOC creditor's equity cushion. The actual property value
decline alone may not reduce the creditor's equity cushion by 50
percent, but a 50 percent reduction in the equity cushion may
nonetheless occur if the first mortgage loan is negatively amortizing.
The Board also requests comment on whether and under what
circumstances it may be appropriate to permit consideration of a clear
and consistent trend of declining property values in the market area in
which the securing property is located. The Board understands that
creditors commonly rely on general market data to validate findings for
a property-specific valuation; used in this way, general market data
may be a valuable quality control tool contributing to sound portfolio
management. (Depending on comments received, the Board would not
anticipate that consideration of this factor would be permissible
unless the creditor first completed a property valuation that accounts
for specific characteristics of the subject property and meets other
guidelines proposed in comment 5b(f)(3)(vi)-5.) In addition, the Board
solicits comment on the type of market data that would be appropriate,
such as data based on publicly available, empirically-based research,
as well as on whether a more specific definition of ``market area''
would be needed and, if so, what definition would be appropriate.
Finally, as discussed above under the section-by-section analysis
on Sec. 5b(f)(3)(vi) (specifically concerning comment 5b(f)(3)(vi)-1),
the Board requests comment on what, if any, restrictions on the amount
by which a credit line may be reduced for a significant decline in
value may be appropriate.
Property valuation methods. Existing comment 5b(f)(3)(vi)-6 states
that Sec. 226.5b(f)(3)(vi)(A) does not require a creditor to obtain an
appraisal before suspending credit privileges or reducing the credit
limit based on a significant decline in value, although a significant
decline must have occurred. This means that the creditor must be able
to demonstrate that a significant value decline in value has occurred,
even if an appraisal is not obtained. To establish this basis when the
creditor does not obtain an appraisal, the creditor would have to rely
on a property value generated by a valuation method other than an
appraisal. Proposed comment 5b(f)(3)(vi)-5 reaffirms that an appraisal
is not required to take action under this provision, but provides
additional guidance about the valuation tools that may be appropriate
and the standards that should apply to using these tools.
Proposed comment 5b(f)(3)(vi)-5 would clarify that appropriate
property valuation methods under Sec. 226.5b(f)(3)(vi)(A) may include,
but are not limited to, automated valuation models (AVMs),\29\ tax
assessment valuations (TAVs),\30\ and broker price opinions (BPOs).\31\
These examples of appropriate valuation tools are illustrative; the
Board recognizes that the methods named in the commentary may in the
future commonly be referred to by other names, and that new valuation
methods that may be appropriate could be developed over time. Creditors
would not be able to use any valuation method if state or other
applicable law prohibits using that method for determining whether to
suspend or reduce credit lines. For example, some state laws permit
real estate brokers or salespersons to perform BPOs only as part of the
real estate sales or listing process.\32\
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\29\ An automated valuation model or ``AVM'' is a computer
program that analyzes data to determine a property's market value.
``Hedonic'' models use property characteristics (such as square
footage, room count) on the subject and comparable properties to
determine a value. ``Index'' models determine value based on repeat
sales in the marketplace rather than property characteristic data.
``Blended or hybrid'' models use elements of both hedonic and index
models.
\30\ A tax assessment valuation or ``TAV'' determines the value
of the subject property based on the value established for property
tax purposes.
\31\ A broker price opinion or ``BPO'' is an estimate of value
of the subject property prepared by a real estate broker, agent or
sales person that details the probable listing price of the subject
property and provides varying level of detail about the property's
condition, market, and neighborhood, and information on comparable
sales. A BPO does not include use of an AVM.
\32\ See, e.g., Ark. Code Ann. Sec. 17-14-104, Conn. Gen. Stat.
Sec. 20-526, Minn. Stat. Sec. 82B.035, R.I. Gen. Laws Sec. 5-
20.7-3, Tex. Occ. Code Sec. 1103.004.
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Under proposed comment 5b(f)(3)(vi)-5, any property valuation
method on which the creditor relies to take action under this section
must consider specific property characteristics of the underlying
collateral. Methods that use only indices measuring property values
generally in a particular geographic area would not be appropriate.
Thus, AVMs known as ``hedonic'' or ``hybrid'' (also referred to as
``blended'') models that account for specific property characteristics
and location to produce a value would generally be appropriate, whereas
AVMs known as ``repeat sales index'' or ``home price index'' models
that do not account for property characteristics specific to the
underlying collateral would not be appropriate.\33\
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\33\ See supra note 29, regarding ``hedonic,'' ``hybrid,'' and
``index'' AVMs.
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5b(f)(3)(vi)(B) Suspensions and Credit Limit Reductions Based on a
Material Change in the Consumer's Financial Circumstances
Background
Section 226.5b(f)(3)(vi)(B), which implements TILA Section
137(c)(2)(C), permits a creditor to suspend advances or reduce the
credit limit of a HELOC when ``the creditor reasonably believes that
the consumer will be unable to fulfill the repayment obligations of the
plan because of a material change in the consumer's financial
circumstances.'' 15 U.S.C. 1647(c)(2)(C).
In the Board's discussions with creditor representatives and
others, concerns have been raised that the phrase ``unable to meet''
the repayment obligations is inappropriate in the modern credit market,
in which credit decisions generally involve ranking consumers by their
likelihood of repaying, not on whether they can or cannot repay. The
Board understands that, in effect, a creditor may decide not to extend
credit because a consumer's likelihood of default is calculated to be,
for example, 15 percent over a given period. A 15 percent likelihood of
default, however, does not necessarily show that the consumer is
``unable'' to repay the HELOC on the agreed terms. The Board also
recognizes that credit availability may be reduced if the circumstances
under which creditors may take action under this provision are
ambiguous. One creditor expressed to the Board that uncertainty about
how to fulfill the requirements of this provision contributed to the
creditor's decision to stop offering HELOCs altogether. In sum, many
creditors have requested more detailed guidance about when action is
permissible under this provision, including the extent to which they
may rely on declines in credit scores.
Consumer advocates expressed dissatisfaction with the guidance on
[[Page 43493]]
Sec. 226.5b(f)(3)(vi)(B) as well, voicing concerns that the lack of
clear guidelines results in some creditors taking action on accounts of
consumers who are fully capable of meeting their repayment obligations
or whose financial circumstances in fact have not changed in a manner
truly supporting a reasonable belief that the consumer will be unable
to meet these obligations.
Proposal
As an initial matter, the Board is not proposing to eliminate the
phrase ``unable to meet'' the repayment terms from the regulatory text,
in part because the statute itself stipulates that the creditor must
have ``reason to believe that the consumer will be unable to comply
with the repayment requirements of the account due to a material change
in the consumer's financial circumstances.'' 15 U.S.C. Sec.
1647(c)(2)(C) (emphasis added). Legislative history does not explain
Congress's decision to set this standard; the Board interprets the
statute's ``unable'' to pay standard as evincing a legislative intent
to promote creditor restraint in taking action under this provision. At
the same time, the Board, as did Congress, recognizes the need for
creditors to be able to protect themselves against losses on home-
equity lines; \34\ TILA and Regulation Z therefore permit creditors to
take action on accounts in certain circumstances before the creditor
begins to incur losses on those accounts. See 15 U.S.C. 1647(c)(2)(B)-
(E); Sec. 226.5b(f)(3)(vi)(A)-(F).
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\34\ See Remarks of Rep. David Price (primary sponsor of the
H.R. 3011, the Home Equity Loan Consumer Protection Act of 1988,
Pub. L. 100-709, enacted on Nov. 23, 1988, Congr. Rec., H4473 (June
20, 1988) (``[T]hese provisions protect the consumer without
hindering the ability of lenders to operate successfully equity
credit plans.'').
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Thus, the Board requests comment on whether the Board should
consider expressly interpreting the ``unable'' to pay standard to mean,
for example, that the change in the consumer's financial circumstances
resulted in the consumer's likelihood of default ``substantially''
increasing. Another possible interpretation on which the Board requests
comment is that the ``unable'' to pay standard requires that, as a
result in a change in the consumer's financial circumstances, the
consumer moved into a higher default risk category than at origination
(based on the statistical likelihood of default), such that the
creditor would not have made the loan or would have made the loan on
materially less favorable terms and conditions.
Overall, the proposed revisions to guidance in the commentary on
Sec. 226.5b(f)(3)(vi)(B) is intended to protect consumers by ensuring
that creditors exercise prudent judgment in relying on this provision,
while providing certain limited clarifications regarding the
requirements of this provision to guide creditors. To ensure that
before taking action, creditors carefully consider the consumer's
financial circumstances and the likely impact of these circumstances on
the account, the proposed commentary retains the existing two-part test
for justifying account suspensions or credit limit reductions under
Sec. 226.5b(f)(3)(vi)(B). The creditor must first examine the
consumer's financial circumstances and determine whether a ``material''
change has occurred. The Board interprets the word ``material'' in this
part of the test to mean that the change has some bearing on the
consumer's ability to pay his or her financial obligations. The
creditor must then establish that this change supports the creditor's
reasonable belief that the consumer will be unable to meet the
repayment obligations of the HELOC. The proposal would revise the
commentary interpreting Sec. 226.5b(f)(3)(vi)(B) to include additional
examples of how creditors may demonstrate that both parts of the test
are met, as discussed below.
For the first part of the test, under proposed comment
5b(f)(3)(vi)-6 (based on existing comment 5b(f)(3)(vi)-7 with
revisions), evidence of a significant change in financial circumstances
includes, but is not limited to, a significant decrease in the
consumer's income, or credit report information showing late payments
or nonpayments on the part of the consumer, such as delinquencies,
defaults, or derogatory collections or public records related to the
consumer's failure to pay other obligations. The Board proposes to
require that these payment failures must have occurred within a
reasonable time from the date of the creditor's review of the
consumer's credit performance. A safe harbor for determining whether a
payment failure occurred within a reasonable time from the date of the
creditor's review would be one that occurred within six months of the
creditor's suspending advances or reducing the credit limit. In
addition, the consumer cannot have brought the account on which the
payment failure occurred current as of the time of the creditor's
review. The Board believes that this six-month safe harbor
appropriately observes the statutory and regulatory rule that action
can be taken only ``during any period in which'' the consumer's
financial circumstances have materially worsened from those on which
the credit terms were based. See 15 U.S.C. 1647(c)(2)(C); Sec.
226.5b(f)(3)(vi)(B). The Board solicits comment on this approach.
Meeting the second part of the test requires that the change in
financial circumstances support the creditor's reasonable belief that
the consumer will be unable to fulfill the payment obligations of the
plan. For this part of the test, the proposal retains the existing
commentary's safe harbor--namely, that the creditor may rely on
evidence of the consumer's failure to pay other debts other than the
HELOC to support a reasonable belief that the consumer will not be able
to meet the HELOC's repayment obligations. Proposed comment
5b(f)(3)(vi)-6 adds that these payment failures must have occurred
within a reasonable time from the date of the creditor's review of the
consumer's credit performance, with the six-month safe harbor discussed
above.
Proposed comment 5b(f)(3)(vi)-6 also specifies that for the second
prong of the test, the payment failures on which the creditor relies
may not be solely late payments of 30 days or fewer. The Board does not
believe that a late payment of 30 days or fewer is adequate evidence of
a failure to pay a debt. For example, the consumer's payment may not
have reached the creditor due to errors of which the consumer has not
yet had an opportunity to become aware, such as mail delivery or
electronic funds transfer errors.
Reliance on Credit Score Declines
Several industry representatives requested clarity on whether
creditors could rely on credit score declines to satisfy the
requirements of Sec. 226.5b(f)(3)(vi)(B). The Board believes that
credit score declines may be an appropriate screening tool for
determining which consumers to examine more closely for potential
action based on this provision. However, the Board is concerned about
whether credit score declines alone can meet the required statutory
showing. For reasons discussed below, the proposal neither endorses nor
prohibits reliance on credit score declines alone to meet the
requirements of this provision, but solicits comment on this issue.
Permitting reliance on credit scores alone to satisfy the
requirements of this provision raises several concerns. First, a Board
study has observed that credit scores can drop for reasons unrelated to
the consumer's actual failure to pay
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obligations,\35\ which suggests that a credit score decline alone might
be an insufficient basis to satisfy the two-part test. Credit scores
sometimes drop, for example, due to increases in a consumer's
utilization rate on her credit cards or because a consumer closes one
or more credit card accounts. But an increased utilization rate may
occur because a credit card creditor decides to reduce the credit limit
for reasons out of the consumer's control, not because the consumer is
relying more heavily on credit card credit. Similarly, if the consumer
closes accounts because the consumer has consolidated these debts into
a single, lower interest loan, the consumer may have freed up more
income to repay the HELOC; here, the consumer's credit score drop in
fact corresponds with improvement in the consumer's ability to pay.
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\35\ Board of Governors of the Federal Reserve System, ``Report
to the Congress on Credit Scoring and Its Effects on the
Availability and Affordability of Credit'' (August 2007).
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Second, standard credit scores do not show a consumer's actual
default or delinquency probability--they reflect only a consumer's
likelihood of falling delinquent or defaulting relative to other
consumers. For example, a consumer with a score of 700 is less likely
to default than a consumer with a score of 600--but these scores by
themselves do not indicate the actual probability that either consumer
will default.
Third, the Board also recognizes the challenge of defining how much
of a decline is sufficient to satisfy the standard. Applying a single
metric such as a 40 point decline to all consumers is especially
problematic, because a consumer whose score declines from 800 to 760 is
still much more likely to be able to pay than, for example, a consumer
whose score decreases from 600 to 560. In addition, different scoring
models use different score ranges, so a decline of 40 points on one
model would not have the same meaning as a 40-point decline in another
model.
Fourth, any expected future debt performance associated with
consumers having a given credit score (relative to consumers with
different scores) can change over time based on macroeconomic
conditions. For example, a consumer with a credit score of 700 in Year
One may have better future debt performance than a consumer with a
score of 700 in Year Three, if the macroeconomic conditions have
worsened from Year One to Year Three. This is because all consumers
will have lower average debt performance levels in Year Three. But
again, credit scores show only a credit performance rank of one
consumer compared to other consumers, not an actual default
probability. Thus, to rely on credit score declines alone to meet the
requirements of this exception, creditors may also have to account for
macroeconomic changes.
In sum, without additional sophisticated empirical analysis, a
c