[Federal Register Volume 75, Number 185 (Friday, September 24, 2010)]
[Proposed Rules]
[Pages 58539-58788]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-20667]
Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 /
Proposed Rules
[[Page 58539]]
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FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Docket No. R-1390]
Regulation Z; 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 staff commentary to the
regulation, as part of a comprehensive review of TILA's rules for home-
secured credit. This proposal would revise the rules for the consumer's
right to rescind certain open-end and closed-end loan secured by the
consumer's principal dwelling. In addition, the proposal contains
revisions to the rules for determining when a modification of an
existing closed-end mortgage loan secured by real property or a
dwelling is a new transaction requiring new disclosures. The proposal
would amend the rules for determining whether a closed-end loan secured
by the consumer's principal dwelling is a ``higher-priced'' mortgage
loan subject to the special protections in Sec. 226.35. The proposal
would provide consumers with a right to a refund of fees imposed during
the three business days following the consumer's receipt of early
disclosures for closed-end loans secured by real property or a
dwelling.
The proposal also would amend the disclosure rules for open- and
closed-end reverse mortgages. In addition, the proposal would prohibit
certain unfair acts or practices for reverse mortgages. A creditor
would be prohibited from conditioning a reverse mortgage on the
consumer's purchase of another financial or insurance product such as
an annuity, and a creditor could not extend a reverse mortgage unless
the consumer has obtained counseling. The proposal also would amend the
rules for reverse mortgage advertising.
DATES: Comments must be received on or before December 23, 2010.
ADDRESSES: You may submit comments, identified by Docket No. R-1390, 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: [email protected]. 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: For home-equity lines of credit:
Jennifer S. Benson or Jelena McWilliams, Attorneys; Krista P. Ayoub or
John C. Wood, Counsels. For closed-end mortgages: Jamie Z. Goodson,
Catherine Henderson, Nikita M. Pastor, Samantha J. Pelosi, or Maureen
C. Yap, Attorneys; Paul Mondor, Senior Attorney. For reverse mortgages,
Brent Lattin or Lorna M. Neill, Senior Attorneys. 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:
I. Background on TILA and Regulation Z
Congress enacted the Truth in Lending Act (TILA) based on findings
that economic stability would be enhanced and competition among
consumer credit providers would be strengthened by the informed use of
credit resulting from consumers' awareness of the cost of credit. One
of the purposes of TILA is 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.
TILA's disclosures differ depending on whether 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.
II. Summary of Major Proposed Changes
The goal of the proposed amendments to Regulation Z is to update
and make clarifying changes to the rules regarding the consumer's right
to rescind certain open- and closed-end loans secured by the consumer's
principal dwelling. The amendments would also ensure that consumers
receive TILA disclosures for modifications to key loan terms, by
revising the rules regarding when a modification to an existing closed-
end mortgage loan results in a new transaction. The amendments would
ensure that prime loans are not incorrectly classified as ``higher-
priced mortgage loans'' subject to special protections for subprime
loans in the Board's 2008 HOEPA Final Rule in Sec. 226.35, or as HOEPA
loans under Sec. 226.32. The proposal would provide consumers a right
to a refund of fees for three business days after the consumer receives
early disclosures for closed-end mortgages, ensuring that consumers do
not feel financially committed to a transaction before they have had a
chance to review the disclosures and consider other options.
The amendments also would improve the clarity and usefulness of
disclosures for open- and closed-end reverse mortgages. They would
protect consumers from unfair practices in connection with reverse
mortgages, including conditioning a reverse mortgage on the consumer's
purchase of a financial or insurance product such as an annuity, and
originating a reverse mortgage before the consumer has received
independent counseling. A consumer could not be required to pay a
nonrefundable fee until three business days after the consumer has
received counseling. Finally, the amendments would ensure that
advertisements for reverse mortgages contain balanced information and
are not misleading. Many of the proposed changes to disclosures are
based on consumer testing, which is discussed in more detail below.
The Consumer's Right to Rescind. The proposed revisions to
Regulation Z would:
Simplify and improve the notice of the right to rescind
provided to consumers at closing;
Revise the list of ``material disclosures'' that can
trigger the extended right to rescind, to focus on disclosures that
testing shows are most important to consumers; and
[[Page 58540]]
Clarify the parties' obligations when the extended right
to rescind is asserted, to reduce uncertainty and litigation costs.
Loan Modifications That Require New TILA Disclosure. The proposal
would provide that new TILA disclosures are required when the parties
to an existing closed-end loan secured by real property or a dwelling
agree to modify key loan terms, without reference to State contract
law.
New disclosures would be required when, for example, the
parties agree to change the interest rate or monthly payment, advance
new money, or add an adjustable rate or other risky feature such as a
prepayment penalty.
Consistent with current rules, no new disclosures would be
required for modifications reached in a court proceeding, and
modifications for borrowers in default or delinquency, unless the loan
amount or interest rate is increased, or a fee is imposed on the
consumer.
Certain beneficial modifications, such as ``no cost'' rate
and payment decreases, would also be exempt from the requirement for
new TILA disclosures.
Coverage Test for 2008 HOEPA Final Rule and HOEPA. The Board
proposes to revise how a creditor determines whether a closed-end loan
secured by a consumer's principal dwelling is a ``higher-priced
mortgage loan'' subject to the Board's 2008 HOEPA Final Rule in Sec.
226.35, and how points and fees are calculated for coverage under the
HOEPA rules in Sec. Sec. 226.32 and 226.34.
The proposal would replace the APR as the metric a
creditor compares to the average prime offer rate to determine whether
the transaction is a higher-priced mortgage loan.
Creditors instead would use a ``coverage rate'' that would
be closely comparable to the average prime offer rate, and would not be
disclosed to consumers.
The proposal would clarify that most third party fees
would not be counted towards ``points and fees'' that trigger HOEPA
coverage.
Consumer's Right to a Refund of Fees. For closed-end loans secured
by real property or a dwelling, the proposal would require a creditor
to:
Refund any appraisal or other fees paid by the consumer
(other than a credit report fee), if the consumer decides not to
proceed with a closed-end mortgage transaction within three business
days of receiving the early disclosures (fees imposed after this three-
day period would not be refundable); and
Disclose the right to a refund of fees to consumers before
they apply for a closed-end mortgage loan.
Reverse Mortgage Disclosures. The proposal would require a creditor
to provide a consumer with new and revised reverse mortgage
disclosures.
Before the consumer applies for a mortgage, the creditor
must provide a new two-page notice summarizing basic information and
risks regarding reverse mortgages, entitled ``Key Questions To Ask
about Reverse Mortgage Loans;''
Within three business days of application, and again
before the reverse mortgage loan is consummated (or the account is
opened, for an open-end reverse mortgage):
[cir] Loan cost information specific to reverse mortgages that is
integrated with information required to be disclosed for all home-
equity lines of credit (HELOCs) or closed-end mortgages, as applicable;
and
[cir] A table expressing total costs as dollar amounts, in place of
the table of reverse mortgage ``total annual loan cost rates.''
Required Counseling for Reverse Mortgages. The proposal would
prohibit a creditor or other person from:
Originating a reverse mortgage before the consumer has
obtained independent counseling from a counselor that meets the
qualification standards established by HUD, or substantially similar
standards;
Imposing a nonrefundable fee on a consumer (except a fee
for the counseling itself) until three business days after the consumer
has received counseling from a qualified counselor; and
Steering consumers to specific counselors or compensating
counselors or counseling agencies.
Prohibition on Cross-Selling for Reverse Mortgages. The proposal
would:
Prohibit a creditor or broker from requiring a consumer to
purchase another financial or insurance product (such as an annuity) as
a condition of obtaining a reverse mortgage; and
Provide a ``safe harbor'' for compliance if, among other
things, the reverse mortgage transaction is consummated (or the account
is opened) at least ten calendar days before the consumer purchases
another financial or insurance product.
Reverse mortgage advertising. The proposal would amend Regulation Z
to revise the advertising rules for reverse mortgages so that consumers
receive accurate and balanced information. For example, the proposal
would require advertisements that state that a reverse mortgage
``requires no payments'' to clearly disclose the fact that borrowers
must pay taxes and required insurance.
Other Proposed Revisions. The proposal would contain several
changes to the rules for HELOCs and closed-end mortgage loans. These
changes include:
Conforming advertising rules for HELOCs to rules for
closed-end mortgage loans adopted as part of the Board's 2008 HOEPA
Final Rule;
Clarifying how creditors may comply with the 2008 HOEPA
Final Rule's ability to repay requirement when making short-term
balloon loans;
Clarifying that certain practices regarding prepayment of
FHA loans constitute prepayment penalties for purposes of TILA
disclosures and the Board's 2008 HOEPA Final Rule;
Requiring servicers to provide consumers with the name and
address of the holder or master servicer of the consumer's loan
obligation, upon the consumer's written request; and
Revising the disclosure rules related to credit insurance
and debt cancellation and suspension products.
III. The Board's Review of Home-Secured Credit Rules
A. Background
The Board has amended Regulation Z numerous times since TILA
simplification in 1980. In 1987, the Board revised Regulation Z to
require special disclosures for closed-end ARMs secured by the
borrower's principal dwelling. 52 FR 48665, Dec. 24, 1987. In 1995, the
Board revised Regulation Z to implement changes to TILA by the Home
Ownership and Equity Protection Act (HOEPA). 60 FR 15463, Mar. 24,
1995. HOEPA requires special disclosures and substantive protections
for home-equity loans and refinancings with APRs or points and fees
above certain statutory thresholds. Numerous other amendments have been
made over the years to address new mortgage products and other matters,
such as abusive lending practices in the mortgage and home-equity
markets.
The Board's current review of Regulation Z was initiated in
December 2004 with an advance notice of proposed rulemaking.\1\ 69 FR
70925, Dec. 8, 2004. At that time, the Board announced its intent to
conduct its
[[Page 58541]]
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. In January
2008, the Board issued final rules for open-end credit that is not
home-secured. 74 FR 5244, Jan. 29, 2009. In May 2009, Congress enacted
the Credit Card Accountability Responsibility and Disclosure Act of
2009 (Credit Card Act), which amended TILA's provisions for open-end
credit. The Board approved final rules implementing the Credit Card Act
in January and June 2010 (February 2010 Credit Card Rule). 75 FR 7658,
Feb. 22, 2010; 75 FR 37526, June 29, 2010.
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\1\ 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 advance 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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Beginning in 2007, the Board proposed revisions to the rules for
home-secured credit in several phases.
HOEPA. In 2007, the Board proposed rules under HOEPA for
higher-priced mortgage loans (2007 HOEPA Proposed Rules). The final
rules, adopted in July 2008 (2008 HOEPA Final Rule), prohibited certain
unfair or deceptive lending and servicing practices in connection with
closed-end mortgages. The Board also approved revisions to advertising
rules for both closed-end and open-end home-secured loans to ensure
that advertisements contain accurate and balanced information and are
not misleading or deceptive. The final rules also required creditors to
provide consumers with transaction-specific disclosures early enough to
use while shopping for a mortgage. 73 FR 44522, July 30, 2008.
Timing of Disclosures for Closed-End Mortgages. In May
2009, the Board adopted final rules implementing the Mortgage
Disclosure Improvement Act of 2008 (the MDIA).\2\ The MDIA adds to the
requirements of the 2008 HOEPA Final Rule regarding transaction-
specific disclosures. Among other things, the MDIA and the final rules
require early, transaction-specific disclosures for mortgage loans
secured by dwellings even when the dwelling is not the consumer's
principal dwelling, and requires waiting periods between the time when
disclosures are given and consummation of the transaction. 74 FR 23289,
May 19, 2009.
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\2\ The MDIA is contained in Sections 2501 through 2503 of the
Housing and Economic Recovery Act of 2008, Public Law 110-289,
enacted on July 30, 2008. The MDIA was later amended by the
Emergency Economic Stabilization Act of 2008, Public Law 110-343,
enacted on October 3, 2008.
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Examples of Rate and Payment Increases for Variable Rate
Mortgage Loans. The MDIA also requires payment examples if the interest
rate or payments can change. Those provisions of the MDIA become
effective January 30, 2011. As part of the August 2009 Closed-End
Proposal, the Board proposed rules to implement the examples required
by the MDIA. The Board has adopted an interim final rule published
elsewhere in today's Federal Register that would include the examples
and model clauses, to provide guidance to creditors until the August
2009 Closed-End Proposal is finalized.
Closed-End and HELOC Proposals. In August 2009, the Board
issued two proposals. For closed-end mortgages, the proposal would
revise the disclosure requirements and address other issues such as
loan originators' compensation. 74 FR 43232, Aug. 26, 2009. For HELOCs,
the proposal would revise the disclosure requirements and address other
issues such as account terminations, suspensions and credit limit
reductions, and reinstatement of accounts. 74 FR 43428, Aug. 26, 2009.
Public comments for both proposals were due by December 24, 2009. The
Board has adopted a final rule on mortgage originator compensation,
published elsewhere in today's Federal Register. The Board is reviewing
the comments on the other aspects of the Closed-End and HELOC
Proposals.
Final Rule on Mortgage Originator Compensation. The Board
has adopted a final rule on mortgage originator compensation, published
elsewhere in today's Federal Register. In the August 2009 Closed-End
Proposal, the Board proposed to prohibit compensation to mortgage
brokers and loan officers (collectively ``originators'') that is based
on a loan's interest rate or other terms, and to prohibit originators
from steering consumers to loans that are not in consumers' interests.
The final rule is substantially similar to the proposal.
Notice of Sale or Transfer of Mortgage Loans. On November
20, 2009, the Board issued an interim final rule to implement
amendments to TILA in the Helping Families Save Their Homes Act of
2009. 74 FR 60143, Nov. 20, 2009. The statutory amendments took effect
on May 20, 2009, and require notice to consumers when their mortgage
loan is sold or transferred. The Board has adopted a final rule that is
published elsewhere in today's Federal Register.
This proposal would add or revise several rules, including rules
that apply to rescission; modifications of existing closed-end loans;
the method for determining whether a closed-end loan is a ``higher-
priced mortgage'' loan; the fee restriction for early disclosures for
closed-end mortgage loans; reverse mortgage disclosures; restrictions
on certain acts and practices in connection with reverse mortgages; and
advertising practices for reverse mortgages and HELOCs.
B. Consumer Testing for This Proposal
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 not creating undue burdens
for creditors. Currently, Regulation Z requires creditors to provide a
notice to inform the consumer about the right to rescind and how to
exercise that right.
Regulation Z also provides that a consumer who applies for a
reverse mortgage must receive the ``standard'' TILA disclosure for a
HELOC or closed-end mortgage, as applicable, and a special disclosure
tailored to reverse mortgages. In addition, the Board has recently
proposed some new disclosures that were tested as part of this
proposal:
In the Board's August 2009 HELOC Proposal, the Board
proposed model clauses and forms for periodic statements, and notices
that would be required when a creditor terminates, suspends, or reduces
a HELOC, as well as when a creditor responds to a consumer's request to
reinstate a suspended or reduced line.
In the Board's August 2009 Closed-End Proposal, the Board
proposed model clauses for credit insurance, debt suspension, and debt
cancellation products (``credit protection products'') offered in
connection with a HELOC or closed-end mortgage loan.
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.
ICF Macro worked closely with the Board to test model rescission
notices, model HELOC periodic statements and other HELOC notices, model
notices for credit protection products, and model forms for reverse
mortgages. Each round of testing involved testing several model
disclosure forms. 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.
Some of the key methods and findings of the consumer testing are
summarized below. ICF Macro prepared reports of the results of the
testing, which are available on the Board's public Web site
[[Page 58542]]
along with this proposal at: http://www.federalreserve.gov.
Rescission and Credit Protection Testing. This consumer testing
consisted of four rounds of one-on-one cognitive interviews. The goals
of these interviews were to learn more about what information consumers
read and understand when they receive disclosures, to research how
easily consumers can find various pieces of information in these
disclosures, and to test consumers' understanding of certain words and
phrases. To address specific issues that surfaced during testing, the
Board proposes to revise significantly the content of the model form
for the right to rescind by setting forth new format requirements, and
new mandatory and optional disclosures for the notice. The Board
proposes new model and sample forms for the costs and features of
credit protection products. The Board believes that the proposed new
format rules and model forms would improve consumers' ability to
identify disclosed information more readily; emphasize information that
is most important to consumers; and simplify the organization and
structure of required disclosures to reduce complexity and information
overload.
1. Rescission Testing and Findings. The Board's goal was to develop
clear and conspicuous model forms for the notice of the right to
rescind that would enable borrowers to understand that they have a
right to rescind the transaction within a certain period of time, and
how to exercise that right. Beginning in the fall of 2009, four rounds
of one-on-one cognitive interviews with a total of 39 participants were
conducted in different cities throughout the United States. The
consumer testing groups were comprised of participants representing a
range of ethnicities, ages, educational levels, and levels of
experience with home-secured credit.
Participants in three rounds of testing were shown HELOC model
forms for the notice of the right to rescind, and the participants in
the last round were shown closed-end model forms for the notice of the
right to rescind. In the first two rounds of testing, approximately one
half of the participants had some knowledge about the right to rescind
prior to testing. However, in the last two rounds of testing only a few
participants had some knowledge about the right to rescind.
Tabular format for rescission form. In the first round of
rescission testing, the Board tested two forms, one that provided
required information in a mostly narrative format based on the current
model form, and another form that provided required information in a
tabular form. Almost all participants in the first round commented that
the information was easier to understand in a tabular form and had more
success answering comprehension questions with a tabular form. This
finding is consistent with previous findings in the Board's consumer
testing of the HELOC disclosures, closed-end mortgage disclosures, and
credit card disclosures. 74 FR 43428, Aug. 26, 2009; 74 FR 43232, Aug.
26, 2009; 75 FR 7658, Feb. 22, 2010. As a result, the remaining three
rounds of testing focused on developing, testing and refining the
tabular form. The forms tested in subsequent rounds differed mainly in
how they described the deadline to rescind.
Tear-off portion of rescission form. Currently, consumers must be
given two copies of the notice of right to rescind--one to use to
exercise the right and one to retain for the consumer's records. See
Sec. Sec. 226.15(b) and 226.23(b). The current model forms contain an
instruction to the consumer to keep one copy of the two notices that
they receive because it contains important information regarding their
right to rescind. See Model Forms G-5 through G-9 of Appendix G and
Model Forms H-8 and H-9 of Appendix H. The Board tested a model form
that would allow the consumer to detach the bottom part of the form and
use it to notify the creditor that the consumer wishes to rescind the
transaction. Most participants said that they would use the bottom part
of the form to cancel the transaction. A few participants said that
they would prepare and send a separate statement in addition to the
form. When asked what they would do if they lost the notice and wanted
to rescind, most participants said that they would call the creditor or
visit their creditor's Web site to obtain another copy of the notice.
Almost all participants said that they would make and keep a copy of
the form if they decided to exercise the right.
Accordingly, the Board is proposing to eliminate the requirement
that creditors provide two copies of the notice of the right to rescind
to each consumer entitled to rescind. See proposed Sec. Sec.
226.15(b)(1) and 226.23(b)(1), below. Instead, the Board is proposing
to require creditors to provide a form at the bottom of the notice that
the consumer may detach and use to exercise the right to rescind,
enabling them to retain the portion explaining their rights. See
proposed Sec. 226.15(b)(2)(i) and (3)(viii), Sec. 226.23(b)(2)(i) and
(3)(vii).
Deadline for rescission. Consumer testing also revealed that
consumers are generally unable to calculate the deadline for rescission
based on the information currently required in the notice. The current
model forms provide a blank space for the creditor to insert a date
followed by the language ``(or midnight of the third business day
following the latest of the three events listed above)'' as the
deadline by which the consumer must exercise the right. The three
events referenced are the following: (1) The date of the transaction or
occurrence giving rise to right of rescission; (2) the date the
consumer received the Truth in Lending disclosures; and (3) the date
the consumer received the notice of the right to rescind.
Most participants had difficulty using the three events to
calculate the deadline for rescission. The primary causes of errors
were not counting Saturdays as a business day, counting Federal
holidays as a business day, and counting the day the last event took
place as the first day of the three-day period. Alternative text was
tested to assist participants in calculating the deadline based on the
three events; however, the text added length and complexity to the form
without a significant improvement in comprehension. Participants in all
rounds strongly preferred forms that provided a specific date over
those that required them to calculate the deadline themselves. Thus,
the Board is proposing to require a creditor to provide the calendar
date on which it reasonably and in good faith expects the three
business day period for rescission to expire. See proposed Sec. Sec.
226.15(b)(3)(vii) and 226.23(b)(3)(vi).
Extended right to rescind. Consumer testing also indicated that
consumers do not understand how an extended right to rescind could
arise. Consumers were confused when presented with a single disclosure
that provided information about the three-business-day right to rescind
and an extended right to rescind. In two rounds of testing,
participants were presented with a model form that contained a
statement explaining when a consumer might have an extended right to
rescind. However, consumer testing revealed that these explanations
added length and complexity but did not increase consumer comprehension
of the extended right to rescind. Nonetheless, the Board believes that
some disclosure regarding the extended right to rescind is necessary
for full disclosure of the consumer's rights. Thus, the Board is
proposing to include a statement in the model forms that the right to
cancel the
[[Page 58543]]
transaction or occurrence giving rise to the right of rescission may
extend beyond the date disclosed in the notice.
How to exercise the right of rescission. Consumer testing revealed
that consumers are particularly concerned about proving that they
exercised the right to rescind before the three-day period expires.
Participants offered varied responses about a preferred delivery method
to submit the notice of the right to rescind to the creditor: some
preferred to send it by e-mail and facsimile to receive instant
electronic confirmation; others preferred to send it by mail with
return receipt and tracking requested. Most participants said they
would not hand-deliver the notice to a bank employee unless they could
be certain that the employee was authorized to receive the notice on
the creditor's behalf and could provide them with a receipt.
The proposed rule would require a creditor, at minimum, to disclose
the name and address to which the consumer may mail the notice of
rescission. See proposed Sec. Sec. 226.15(b)(3)(vi) and
226.23(b)(3)(v). The proposed rule would also permit a creditor to
describe other methods, if any, that the consumer may use to send or
deliver written notification of exercise of the right, such as
overnight courier, fax, e-mail, or in person. The proposed sample forms
include information for the consumer to submit the notice of rescission
by mail or fax. See proposed Samples G-5(B) and G-5(C) of Appendix G
and Sample H-8(B) of Appendix H.
2. Credit Protection Products Testing and Findings. The Board and
ICF Macro also developed and tested model and sample forms for credit
protection products in the last two rounds of 18 interviews--one round
with 10 participants for HELOCs, and one round with 8 participants for
closed-end mortgages. These forms were based on model clauses proposed
in the August 2009 Closed-End Proposal. The sample form was based on
samples for credit life insurance disclosures proposed in the August
2009 Closed-End Proposal.
Consumer testing revealed that consumers have limited understanding
of credit protection products, and that some of the current disclosures
do not adequately inform consumers of the costs and risks of these
products. For example, the current regulation allows creditors to
disclose the cost of the product on a unit-cost basis in certain
situations. However, even when provided with a calculator, only three
of 10 participants in the first round of testing could correctly
calculate the cost of the product using the unit cost. When the cost
was disclosed as a dollar figure tailored to the loan amount in the
second round of testing, all participants understood the cost of the
product. Accordingly, the proposal would require creditors to disclose
the maximum premium or charge per period.
In addition, most credit protection products place limits on the
maximum benefit, but the current regulation does not require disclosure
of these limits. To address this problem, the Board tested a disclosure
of the maximum benefit amount for a sample credit life insurance
policy. In the first round of testing, only five of the 10 participants
understood the disclosure of the maximum benefit when disclosed at the
bottom of the form by the signature line. In the second round of
testing, this information was presented in a tabular question-and-
answer format and all eight participants understood the disclosure.
Accordingly, the proposal would require creditors to disclose the
maximum benefit amount. In addition, based on consumer testing, the
proposal would require other improved disclosures, such as the
disclosure of eligibility requirements.
Prior to consumer testing, the Board reviewed several disclosures
for credit protection disclosures, which revealed that many disclosures
were in small font, not grouped together, and in dense blocks of text.
Based on the Board's experience with consumer disclosures, the Board
was concerned that consumers would find these disclosures difficult to
comprehend. To address these problems, the Board tested a sample credit
life insurance disclosure that used 12-point font, tabular question-
and-answer format, and bold, underlined text. Participants understood
the content of the disclosures when presented in this format.
Accordingly, the proposal would require creditors to provide the
disclosures clearly and conspicuously in a minimum 10-point font, and
group them together with substantially similar headings, content, and
format to the proposed model forms. See proposed Model Forms G-16(A)
and H-17(A).
3. Reverse Mortgage Disclosures Testing and Findings.
The reverse mortgage testing consisted of four focus groups and
three rounds of one-on-one cognitive interviews. The goals of these
focus groups and interviews were to learn about consumers'
understanding of reverse mortgages, how consumers shop for reverse
mortgages and what information consumers read when they receive reverse
mortgage disclosures, and to assess their understanding of such
disclosures. The consumer testing groups contained participants with a
range of ethnicities, ages, and educational levels, and included
consumers who had obtained a reverse mortgage as well as those who were
eligible for one based on their age and the amount of equity in their
home.
Exploratory focus groups. In January 2010 the Board worked with ICF
Macro to conduct four focus groups with consumers who had obtained a
reverse mortgage or were eligible for one based on their age and the
amount of equity in their home. Each focus group consisted of ten
people that discussed issues identified by the Board and raised by a
moderator from ICF Macro. Through these focus groups, the Board
gathered information on consumers' understanding of reverse mortgages,
as well as the process through which consumers decide to apply for a
reverse mortgage. Focus group participants also provided feedback on a
sample reverse mortgage disclosure that was representative of those
currently in use. Following the focus groups, ICF Macro's design team
used what they learned to develop improved versions of the disclosures
for further testing.
Cognitive interviews on existing disclosures. In 2010, the Board
worked with ICF Macro to conduct three rounds of cognitive interviews
with a total of 31 participants. These cognitive interviews consisted
of one-on-one discussions with reverse mortgage consumers, during which
consumers were asked to explain what they understood about reverse
mortgages, their experiences and perceptions of shopping for the
product, and to review samples of existing and revised reverse mortgage
disclosures. In addition to learning about the information that
consumers thought was important to know about reverse mortgages, the
goals of these interviews were: (1) To test consumers' comprehension of
the existing reverse mortgage disclosure form; (2) to research how
easily consumers can find various pieces of information in the existing
and revised disclosures; and (3) to test consumers' understanding of
certain reverse mortgage related words and phrases.
Findings of reverse mortgage testing. Many consumer testing
participants did not understand reverse mortgages or had misconceptions
about them. Most participants understood that reverse mortgages are
different from traditional mortgages in that traditional mortgages have
to be paid back during the borrower's lifetime, while reverse mortgage
borrowers receive payments from the lender based on the equity in the
consumer's home. However,
[[Page 58544]]
important misconceptions about reverse mortgages were shared by a
significant number of participants. For example, some participants
believed that by getting a reverse mortgage, a borrower is giving the
lender ownership of his or her home. Rather than seeing a reverse
mortgage as a loan that needs to be repaid, these participants believed
it represented the exchange of a home for a stream of funds. Some
participants also believed that if the amount owed on a reverse
mortgage exceeds the value of the home, the borrower is responsible for
paying the difference and that if at any point a borrower ``outlives''
their reverse mortgage--that is, if the equity in their home decreases
to zero--they will no longer receive any payments from the lender.
Therefore, the proposal would require creditors to provide key
information about reverse mortgages at the time an application form is
provided to the consumer, as discussed below.
Reverse mortgage disclosures provided to consumers before
application. Currently, for reverse mortgages, creditors must provide
the home equity line of credit (HELOC) or closed-end mortgage
application disclosures required by TILA, depending on whether the
reverse mortgage is open-end or closed-end credit. These documents are
not tailored to reverse mortgages.
For open-end reverse mortgages this includes a Board-published
HELOC brochure or a suitable substitute at the time an application for
an open-end reverse mortgage is provided to the consumer. For an
adjustable-rate closed-end reverse mortgage, consumers would receive
the lengthy CHARM booklet that explains how ARMs generally work.
However, closed-end reverse mortgages are almost always fixed rate
transactions, so consumers generally do not receive any TILA
disclosures at application.
Since consumers have a number of misconceptions about reverse
mortgages that are not addressed by the current disclosures, the
proposal would require creditors to provide, for all reverse mortgages,
a two-page document that explains how reverse mortgages work and about
terms and risks that are important to consider when selecting a reverse
mortgage, rather than the current documents.
Reverse mortgage disclosures provided to consumers after
application. Depending on whether a reverse mortgage is open-end or
closed-end credit, the current cost disclosure requirements under TILA
and Regulation Z differ. All reverse mortgage creditors must provide
the total annual loan cost (``TALC'') disclosure at least three
business days before account-opening for an open-end reverse mortgage,
or consummation for a closed-end reverse mortgage. For closed-end
reverse mortgages, TILA and Regulation Z require creditors to provide
an early TILA disclosure within three business days after application
and at least seven business days before consummation, and before the
consumer has paid a fee other than a fee for obtaining a credit
history. For open-end reverse mortgages, creditors must provide
disclosures on or with an application that contain information about
the creditor's open-end reverse mortgage plans. These disclosures do
not include information dependent on a specific borrower's
creditworthiness or the value of the dwelling, such as the APRs offered
to the consumer, because the application disclosures are provided
before underwriting takes place. Creditors are required to disclose
transaction-specific costs and terms at the time that an open-end
reverse mortgage plan is opened.
In addition, reverse mortgage creditors currently must disclose a
table of TALC rates. The table of TALC rates is designed to show
consumers how the cost of the reverse mortgage varies over time and
with house price appreciation. Generally, the longer the consumer keeps
a reverse mortgage the lower the relative cost will be because the
upfront costs of the reverse mortgage will be amortized over a longer
period of time. Thus, the TALC rates usually will decline over time
even though the total dollar cost of the reverse mortgage is rising due
to interest and fees being charged on an increasing loan balance.
Very few participants understood the table of TALC rates. Although
participants seemed to understand the paragraphs explaining the TALC
table, the vast majority could not explain how the description related
to the percentages shown in the TALC table. Participants could not
explain why the TALC rates were declining over time even though the
reverse mortgage's loan balance was rising. Most participants thought
the TALC rates shown were interest rates, and interpreted the table as
showing that their interest rate would decrease if they held their
reverse mortgage for a longer period of time. Participants, including
those who currently have a reverse mortgage (and thus presumably
received the TALC disclosure), consistently stated that they would not
use the disclosure to decide whether or not to obtain a reverse
mortgage. Instead, participants consistently expressed a preference for
a disclosure providing total costs as a dollar amount.
Thus, the proposal would require a table that demonstrates how the
reverse mortgage balance grows over time. The table expresses this
information as dollar amounts rather than as annualized loan cost
rates. The table would show (1) How much money would be advanced to the
consumer; (2) the total of all costs and charges owed by the consumer;
and (3) the total amount the consumer would be required to repay. This
information would be provided for each of three assumed loan periods of
1 year, 5 years, and 10 years. Consumer testing has shown that
consumers would have a much easier time understanding this table and
would be much more likely to use it in evaluating a reverse mortgage
than they would the TALC rates.
In addition, the proposed reverse mortgage disclosures would
combine reverse-mortgage-specific information with much of the
information that the Board proposed for HELOCs and closed-end mortgages
in 2009. For example, the proposed disclosure would include information
about APRs, variable interest rates and fees. However, because not all
of the information currently required for HELOCs and closed-end
mortgages is relevant or applicable to reverse mortgage borrowers, the
disclosures would not contain information that would not be meaningful
to reverse mortgage consumers. By consolidating the reverse mortgage
disclosures, the proposal would ensure that consumers receive
meaningful information in an understandable format that is largely
similar for open-end and closed-end reverse mortgages, and has been
designed and consumer tested for reverse mortgage consumers.
Additional testing during and after comment period. During the
comment period, the Board may work with ICF Macro to conduct additional
testing of model disclosures proposed in this notice.
IV. The Board's Rulemaking Authority
TILA Section 105. 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:
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).
[[Page 58545]]
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).
In the course of developing the proposal, the Board has considered
the views of interested parties, its 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 notice, the Board believes this proposal is
appropriate pursuant to the authority under TILA Section 105(a).
Also, as explained in this notice, the Board believes that the
specific exemptions proposed are appropriate because the existing
requirements do not provide a meaningful benefit to consumers in the
form of useful information or protection. In reaching this conclusion
with each proposed exemption, the Board considered (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 rationales for
these proposed exemptions are explained in part VI below.
TILA Section 129(l)(2). TILA also authorizes the Board to prohibit
acts or practices in connection with:
Mortgage loans that the Board finds to be unfair,
deceptive, or designed to evade the provisions of HOEPA; and
Refinancing of mortgage loans that the Board finds to be
associated with abusive lending practices or that are otherwise not in
the interest of the borrower.
The authority granted to the Board under TILA Section 129(l)(2), 15
U.S.C. 1639(l)(2), is broad. It reaches mortgage loans with rates and
fees that do not meet HOEPA's rate or fee trigger in TILA section
103(aa), 15 U.S.C. 1602(aa), as well as mortgage loans not covered
under that section, such as home purchase loans. Moreover, while
HOEPA's statutory restrictions apply only to creditors and only to loan
terms or lending practices, Section 129(l)(2) is not limited to acts or
practices by creditors, nor is it limited to loan terms or lending
practices. See 15 U.S.C. 1639(l)(2). It authorizes protections against
unfair or deceptive practices ``in connection with mortgage loans,''
and it authorizes protections against abusive practices ``in connection
with refinancing of mortgage loans.'' Thus, the Board's authority is
not limited to regulating specific contractual terms of mortgage loan
agreements; it extends to regulating loan-related practices generally,
within the standards set forth in the statute.
HOEPA does not set forth a standard for what is unfair or
deceptive, but the Conference Report for HOEPA indicates that, in
determining whether a practice in connection with mortgage loans is
unfair or deceptive, the Board should look to the standards employed
for interpreting state unfair and deceptive trade practices statutes
and the Federal Trade Commission Act (FTC Act), Section 5(a), 15 U.S.C.
45(a).\3\
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\3\ H.R. Rep. 103-652, at 162 (1994) (Conf. Rep.).
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Congress has codified standards developed by the Federal Trade
Commission (FTC) for determining whether acts or practices are unfair
under Section 5(a), 15 U.S.C. 45(a).\4\ Under the FTC Act, an act or
practice is unfair when it causes or is likely to cause substantial
injury to consumers which is not reasonably avoidable by consumers
themselves and not outweighed by countervailing benefits to consumers
or to competition. In addition, in determining whether an act or
practice is unfair, the FTC is permitted to consider established public
policies, but public policy considerations may not serve as the primary
basis for an unfairness determination.\5\
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\4\ See 15 U.S.C. 45(n); Letter from Commissioners of the FTC to
the Hon. Wendell H. Ford, Chairman, and the Hon. John C. Danforth,
Ranking Minority Member, Consumer Subcomm. of the H. Comm. on
Commerce, Science, and Transp. (Dec. 17, 1980).
\5\ 15 U.S.C. 45(n).
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The FTC has interpreted these standards to mean that consumer
injury is the central focus of any inquiry regarding unfairness.\6\
Consumer injury may be substantial if it imposes a small harm on a
large number of consumers, or if it raises a significant risk of
concrete harm.\7\ The FTC looks to whether an act or practice is
injurious in its net effects.\8\ The FTC has also observed that an
unfair act or practice will almost always reflect a market failure or
market imperfection that prevents the forces of supply and demand from
maximizing benefits and minimizing costs. \9\ In evaluating unfairness,
the FTC looks to whether consumers' free market decisions are
unjustifiably hindered. \10\
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\6\ Statement of Basis and Purpose and Regulatory Analysis,
Credit Practices Rule, 42 FR 7740, 7743, Mar. 1, 1984 (Credit
Practices Rule).
\7\ Letter from Commissioners of the FTC to the Hon. Wendell H.
Ford, Chairman, and the Hon. John C. Danforth, Ranking Minority
Member, Consumer Subcomm. of the H. Comm. on Commerce, Science, and
Transp., n.12 (Dec. 17, 1980).
\8\ Credit Practices Rule, 42 FR at 7744.
\9\ Id.
\10\ Id.
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The FTC has also adopted standards for determining whether an act
or practice is deceptive (though these standards, unlike unfairness
standards, have not been incorporated into the FTC Act).\11\ First,
there must be a representation, omission or practice that is likely to
mislead the consumer. Second, the act or practice is examined from the
perspective of a consumer acting reasonably in the circumstances.
Third, the representation, omission, or practice must be material. That
is, it must be likely to affect the consumer's conduct or decision with
regard to a product or service.\12\
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\11\ Letter from James C. Miller III, Chairman, FTC to the Hon.
John D. Dingell, Chairman, H. Comm. on Energy and Commerce (Oct. 14,
1983) (Dingell Letter).
\12\ Dingell Letter at 1-2.
---------------------------------------------------------------------------
Many states also have adopted statutes prohibiting unfair or
deceptive acts or practices, and these statutes employ a variety of
standards, many of them different from the standards currently applied
to the FTC Act. A number of states follow an unfairness standard
formerly used by the FTC. Under this standard, an act or practice is
unfair where it offends public policy; or is immoral, unethical,
oppressive, or unscrupulous; and causes substantial injury to
consumers.\13\
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\13\ See, e.g., Kenai Chrysler Ctr., Inc. v. Denison, 167 P.3d
1240, 1255 (Alaska 2007) (quoting FTC v. Sperry & Hutchinson Co.,
405 U.S. 233, 244-45 n.5 (1972)); State v. Moran, 151 N.H. 450, 452,
861 A.2d 763, 755-56 (N.H. 2004) (concurrently applying the FTC's
former test and a test under which an act or practice is unfair or
deceptive if ``the objectionable conduct [hellip] attain[s] a level
of rascality that would raise an eyebrow of someone inured to the
rough and tumble of the world of commerce.'') (citation omitted);
Robinson v. Toyota Motor Credit Corp., 201 Ill. 2d 403, 417-418, 775
N.E.2d 951, 961-62 (2002) (quoting 405 U.S. at 244-45 n.5).
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In developing proposed rules under TILA Section 129(l)(2)(A), 15
U.S.C. 1639(l)(2)(A), the Board has considered the standards currently
applied to the
[[Page 58546]]
FTC Act's prohibition against unfair or deceptive acts or practices, as
well as the standards applied to similar State statutes.
V. Discussion of Major Proposed Revisions
The objectives of the proposed revisions are to update and clarify
the rules for home-secured credit that provide important protections to
consumers, and to reduce undue compliance burden and litigation risk
for creditors. The proposal would improve the clarity and usefulness of
disclosures for the consumer's right to rescind. Disclosures for
reverse mortgages would be improved, providing greater clarity about
transactions that are complex and unfamiliar to many consumers. The
proposal would also ensure that consumers receive disclosures when the
creditor modifies key terms of an existing loan. Consumers would be
assured the opportunity to review early disclosures for closed-end
loans, before a fee is imposed that may make the consumer feel
financially committed to the loan offered. Proposed changes to
disclosures are based on consumer testing, to ensure that the
disclosures are understandable and useful to consumers.
In considering the 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 proposal revises the material disclosures
that can trigger an extended right to rescind, to include disclosures
that consumer testing has shown consumers find important in their
decision making, and exclude disclosures that consumers do not find
useful. The proposal also includes tolerances for certain material
disclosures, to ensure that inconsequential errors do not result in an
extended right to rescind.
A. The Consumer's Right to Rescind
TILA and Regulation Z provide that a consumer generally has three
business days after closing to rescind certain loans secured by the
consumer's principal dwelling. The consumer may have up to three years
after closing to rescind, however, if the creditor fails to provide the
consumer with certain ``material'' disclosures or the notice of the
right to rescind (the ``extended right to rescind'').
The Notice of Rescission. Regulation Z requires creditors to
provide two copies of the notice of the right to rescind to each
consumer entitled to rescind the transaction, to ensure that consumers
can use one copy to rescind the loan and retain the other copy with
information about the right to rescind. The regulation sets forth the
contents for the notice and provides model forms that creditors may use
to satisfy these disclosure requirements. Creditors are required to
provide the date of the transaction, the date the right expires, and an
explanation of how to calculate the deadline on the form.
Consumer testing shows that consumers may have difficulty
understanding the explanation of the right of rescission in the current
model forms. Consumers struggled with determining when the deadline to
rescind expires, based on the later of consummation, delivery of the
material disclosures, or delivery of the notice of the right to
rescind. Consumer testing also shows that when rescission information
was presented in a certain format, participants found information
easier to locate and their comprehension of the disclosures improved.
In addition, creditors have raised concerns about the two-copy rule,
indicting this rule can impose litigation risks when a consumer alleges
an extended right to rescind based on the creditor's failure to deliver
two copies of the notice.
Based on the results of consumer testing and outreach, the Board
proposes to revise the content and format requirements for the notice
of the right to rescind and issue revised model forms. The revised
notice would include:
The calendar date when the three-business-day rescission
period expires, without the explanation of how to calculate the
deadline.
A statement that the consumer's right to cancel the loan
may extend beyond the date stated in the notice and in that case, the
consumer must send the notice to either the current owner of the loan
or the servicer.
A ``tear off'' form that a consumer may use to exercise
his or her right to rescind.
In addition, the information required in the rescission notice must
be disclosed:
In a tabular format, as opposed to a narrative format used
in the current model rescission forms.
On the front side of a one-page document, separate from
all other unrelated material; and
In a minimum 10-point font.
Two-copy rule. The proposal also requires creditors to provide just
one notice of the right to rescind to each consumer entitled to rescind
(as opposed to two copies required under the current regulation). The
proposed model rescission notice contains a ``tear off'' form at the
bottom, so that the consumer could separate that portion to deliver to
the creditor while retaining the top portion with the description of
rights. The Board believes that consumers who rescind should be able to
keep a written explanation of their rights, but is concerned about the
litigation costs imposed by the two-copy rule. Moreover, the need for
the two-copy rule seems to have diminished. Today, consumers generally
have access to copy machines and scanners that would allow them to make
and keep a copy of the notice if they decide to exercise the right.
Material Disclosures. A consumer's right to rescind generally does
not expire until the notice of the right to rescind and the material
disclosures are properly delivered. If the notice or material
disclosures are never delivered, the right to rescind expires on the
earlier of three years from the date of consummation or upon the sale
or transfer of all of the consumer's interest in the property. Delivery
of the material disclosures and notice ensures that consumers are
notified of their right to rescind, and that they have the information
they need to decide whether to exercise the right. Because different
disclosures are given for open- and closed-end loans, TILA and
Regulation Z specify certain ``material disclosures'' that must be
given for HELOCs and other ``material disclosures'' that must be given
for closed-end home-secured loans.
Congress added the statutory definition of ``material disclosures''
in 1980. Changes in the HELOC and closed-end mortgage marketplace since
then have made this statutory definition outdated. Certain disclosures
that are the most important to consumers in deciding whether to take
out a loan (based on consumer testing) currently are not considered
``material disclosures.'' In contrast, other disclosures that are not
likely to impact a consumer's decision to enter into a loan currently
are ``material disclosures'' under the statutory definition. The Board
believes that revising the definition of ``material disclosures'' to
reflect the disclosures that are most critical to the consumer's
evaluation of credit terms would better ensure that the compliance
costs related to rescission are aligned with disclosure requirements
that provide meaningful benefits for consumers. Thus, the Board
proposes to use its adjustment and exception authority to add certain
disclosures and remove other disclosures from the definition of
``material disclosures'' for both HELOCs
[[Page 58547]]
and closed-end mortgage loans. The Board also proposes to add
tolerances for accuracy for certain disclosures to ensure
inconsequential disclosure errors do not result in extended rescission
rights.
Material Disclosures for HELOCs. In the August 2009 HELOC Proposal,
the Board proposed comprehensive revisions to the account-opening
disclosures for HELOCs that would reflect changes in the HELOC market.
The proposed account-opening disclosures and revised model forms were
developed after extensive consumer testing to determine which credit
terms consumers find the most useful in evaluating HELOC plans.
Consistent with the August 2009 HELOC Proposal, the staff recommends
proposed revisions to the definition of material disclosures to include
the information that is critical to consumers in evaluating HELOC
offers, and to remove information that consumers do not find to be
important. For example, the proposal revises the definition of
``material disclosures'' to include the credit limit applicable to the
HELOC plan, which consumer testing shows is one of the most important
pieces of information that consumers wanted to know in deciding whether
to open a HELOC plan. The proposal also adds to the definition of
``material disclosures'' a disclosure of the total one-time costs
imposed to open a HELOC plan (i.e., total closing costs), but removes
from the definition an itemization of these costs. Consumer testing
shows that it is the total closing costs (rather than the itemized
costs) that is more important to consumers in deciding whether to open
a HELOC plan. Also, based on the results of consumer testing, the
proposal would add and remove other disclosures from the definition of
``material disclosures.'' The proposal contains tolerances for accuracy
of the credit limit and the total one-time costs imposed to open a
HELOC plan, to ensure inconsequential errors in these disclosures do
not result in extended rescission rights.
Material Disclosures for Closed-End Mortgage Loans. In the August
2009 Closed-End Proposal, the Board proposed comprehensive revisions to
the disclosures for closed-end mortgages that would reflect the changes
in the mortgage market. The Board developed the proposed disclosures
and revised model forms based on extensive consumer testing to
determine which credit terms consumers find the most useful in
evaluating closed-end mortgage loans. Consistent with the August 2009
Closed-End Proposal, this proposal revises the definition of material
disclosures to include the information that is critical to consumers in
evaluating closed-end mortgage offers, and to remove information that
consumers do not find to be important. For example, the proposal adds
to the definition of ``material disclosures'' information about the
interest rate, the total settlement charges, and whether a loan has
negative amortization or permits interest-only payments. Consumer
testing shows these disclosures are critical to consumers in evaluating
closed-end mortgage loans. In addition, the proposal adds disclosures
of the loan amount and the loan term (e.g., 30 year loan) to the
definition of ``material disclosures.'' These disclosures would replace
disclosures of the amount financed, and the total and number of
payments. Also, based on the results of consumer testing, other
disclosures would be added to the definition of ``material
disclosures,'' such as disclosure of any prepayment penalty. The
proposal retains the current rule's existing tolerances for certain
material disclosures, and provides tolerances for certain of the
proposed material disclosures, such as the total settlement charges,
the loan amount and the prepayment penalty, to ensure inconsequential
errors in these disclosures do not result in extended rescission
rights.
Parties' Obligations When a Consumer Rescinds. TILA and Regulation
Z set out the process for rescission. The regulation specifies that
when a consumer rescinds:
The creditor's security interest becomes void;
The creditor must refund all interest and fees paid by the
consumer; and
After the creditor's performance, the consumer must return
any money or property to the creditor.
TILA and Regulation Z allow a court to modify the process for
rescission.
The rescission process during the initial three-business-day period
after closing normally is straightforward, because loan funds typically
have not been disbursed yet. In those cases, when a consumer provides a
notice of rescission, the creditor's security interest is automatically
void. Within 20 calendar days of receipt of the consumer's notice, the
creditor must return any money paid by the consumer and take whatever
steps are necessary to terminate its security interest.
If the consumer provides a notice of rescission after the initial
three-business-day period, however, the process is problematic. In this
case, the creditor has typically disbursed money or delivered property
to the consumer and perfected its security interest. In addition, it
may be unclear whether the consumer's right to rescind has expired.
Therefore, a creditor may be reluctant to terminate the security
interest until the consumer establishes that the right to rescind has
not expired and the consumer can tender the loan balance. Given these
circumstances, questions have been raised about: (1) Whether the
creditor must respond to a notice of rescission, (2) how the parties
may resolve a claim outside of a court proceeding, and (3) whether the
release of the security interest may be conditioned on the consumer's
tender. Both consumer advocates and creditors have urged the Board to
clarify the operation of the rescission process in the extended right
context. To address the concerns discussed above, the Board proposes a
revised process for rescission in the extended right context.
Rescission process outside a court proceeding. The proposal
provides that if a creditor receives a consumer's notice of rescission
outside of a court proceeding, the creditor must send a written
acknowledgement to the consumer within 20 calendars days of receipt of
the notice. The acknowledgement must indicate whether the creditor will
agree to cancel the transaction. If the creditor agrees to cancel the
transaction, the creditor must release its security interest upon the
consumer's tender of the amount provided in the creditor's written
statement. Under this proposed process, consumers would be promptly and
clearly informed about the status of their notice of rescission, and
better prepared to take appropriate action. The proposal would ensure
that if a consumer tenders the amount requested, the creditor must
terminate its security interest in the consumer's home.
Rescission process in a court proceeding. The Board proposes to use
its adjustment authority to ensure a clearer and more equitable process
for resolving rescission claims raised in court proceedings. The
sequence of rescission procedures set forth in TILA and the current
regulation would seem to require the creditor to release its security
interest whether or not the consumer can tender the loan balance. The
Board does not believe that Congress intended for the creditor to lose
its status as a secured creditor if the consumer does not return the
loan balance. Therefore, the proposal provides that when the parties
are in a court proceeding, the creditor is not required to release its
security interest until the consumer tenders the principal balance less
interest and fees, and any damages and costs, as determined by the
[[Page 58548]]
court. The Board believes this adjustment would facilitate compliance
with TILA. The majority of courts that have considered this issue
condition the creditor's release of the security interest on the
consumer's proof of tender.
Other Revisions Related to Rescission. The Board proposes several
changes to Regulation Z that are designed to preserve the right to
rescind while reducing undue litigation costs and compliance burden for
creditors. These amendments would provide that:
A consumer who exercises the extended right may send the
notice to the servicer rather than the current holder, because many
consumers cannot readily identify the holder;
Certain events terminate the extended right to rescind,
such as a refinancing with a new creditor;
Bona fide personal financial emergencies that enable a
consumer to waive the right to rescind will usually involve imminent
property damage or threats to health or safety, not the imminent
expiration of a discount on goods or services; and
A consumer who guarantees a loan that is subject to the
right of rescission and who pledges his principal dwelling has a right
to rescind.
B. Loan Modifications That Require New TILA Disclosures
Currently Regulation Z provides that for closed-end loans, a
``refinancing'' by the same creditor is a new transaction that requires
new TILA disclosures. Whether there is a ``refinancing'' depends on the
parties' intent and State law. State law is largely based on court
decisions that determine whether the original obligation has been
satisfied and replaced, or merely modified. Reliance on State law leads
to inconsistent application of Regulation Z and in some cases to
loopholes. For example, some creditors simply insert a clause in all
notes that the parties do not intend to refinance, thus, creditors can
make significant changes to loan terms without giving TILA disclosures.
The Board proposes to require new TILA disclosures when the same
creditor and the consumer agree to modify certain key mortgage loan
terms. These key terms include changing the interest rate or monthly
payment, advancing new debt, and adding an adjustable rate or other
risky feature such as a prepayment penalty. In addition, if a fee is
imposed on the consumer in connection with a modification, the
modification would be a new transaction requiring new TILA disclosures.
Consistent with the current rule, the proposal would exempt
modifications reached in a court proceeding, and modifications for
borrowers in default or delinquency, unless the loan amount or interest
rate is increased, or a fee is imposed on the consumer. Certain
beneficial modifications, such as rate and payment decreases, would
also be exempt from the requirement for new TILA disclosures.
The proposal would result in more modifications being new
transactions requiring new disclosures. For example, the Board
estimates in states such as New York and Texas, where refinancings are
commonly structured as modifications or consolidations to avoid State
mortgage recording taxes, the number of transactions reported as
refinancings could potentially double. The Board does not believe,
however, that consumers located in these states would be unable to
refinance their mortgage simply because creditors would be required to
provide TILA disclosures under the proposal. Outreach conducted in
connection with this proposal revealed that some large creditors in
these states always provide consumers with TILA disclosures, regardless
of whether the transaction is classified as a ``refinancing'' for
purposes of Regulation Z.
In addition, the proposal provides that whenever a fee is imposed
on a consumer in connection with a modification, including a
modification for a consumer in default, a ``new transaction'' would
occur requiring new TILA disclosures. The Board believes that including
the imposition of fees as an action that triggers new disclosures is
appropriate to ensure that consumers receive important information
about the costs of modifying loan terms. The Board recognizes, however,
that this aspect of the proposal would likely result in a significant
number of modifications being deemed ``new transactions,'' and is
seeking comment on whether fees imposed on consumers in connection with
modifications should include all costs of the transaction or a more
narrow range of fees.
Finally, if the new transaction's APR exceeds the threshold for a
``higher-priced mortgage loan'' under the Board's 2008 HOEPA rules,
then special HOEPA protections would apply to the new transaction. The
right of rescission would likely apply to any new transaction secured
by the consumer's principal dwelling, unless the transaction qualifies
for a narrow exemption from rescission. Specifically, transactions are
exempt from rescission if they (1) involve the original creditor who is
also the current holder of the note, (2) do not involve an advance of
new money, and (3) do not add a new security interest in the consumer's
principal dwelling. The Board believes, however, that the potential
burdens associated with the right of rescission would not discourage
modifications that are in consumers' interests.
C. Improve the Coverage Test for the 2008 HOEPA Rules
In the 2008 HOEPA Final Rule, the Board adopted special consumer
protections for ``higher-priced mortgage loans'' aimed at addressing
unfair and deceptive practices in the subprime mortgage market. The
Board defined a higher-priced mortgage loan as a transaction secured by
a consumer's principal dwelling for which the annual percentage rate
exceeds the ``average prime offer rate'' by 1.5 percentage points or
more, for a first-lien transaction, or by 3.5 percentage points or
more, for a subordinate-lien transaction.
In the August 2009 Closed-End Proposal, the Board proposed to amend
Regulation Z to provide a simpler, more inclusive APR, to assist
consumers in comparison shopping and reduce compliance burden. APRs
would be higher under the proposal because they would include most
third party closing costs. The Board noted that higher APRs would
result in more loans being classified as ``higher-priced'' mortgage
loans. More loans would be subject to HOEPA's statutory protections,
and to State anti-predatory lending laws. The Board concluded, based on
the limited data it had, that the proposal to improve the APR would be
in consumers' interests. Comment was solicited on the potential impact
of the proposed rule.
Numerous mortgage creditors and their trade associations filed
comments agreeing in principle with the proposed finance charge
definition but opposing the change because it would cause many prime
loans to be incorrectly classified as higher-priced mortgage loans.
They also stated that it would inappropriately expand the coverage of
HOEPA and State laws. Consumer advocates, on the other hand, argued
that any additional loans covered by the more inclusive finance charge
and APR should be subject to the restrictions for HOEPA loans and
higher-priced mortgage loans because they would be similarly risky to
consumers. Accordingly, they argued, the increased coverage would be
warranted.
To ensure that loans are not inappropriately classified as higher-
priced mortgage loans, the proposal would replace the APR as the metric
a creditor compares to the average prime offer rate to determine
whether the
[[Page 58549]]
transaction is a higher-priced mortgage loan. Creditors instead would
use a ``coverage rate'' that would not be disclosed to consumers. The
coverage rate would be calculated using the loan's interest rate, the
points, and any other origination charges the creditor and a mortgage
broker (or an affiliate of either party) retains. Thus the coverage
rate would be closely comparable to the average prime offer rate. The
proposal would also clarify that the more inclusive APR would have no
impact on whether a loan's ``points and fees'' exceed the threshold for
HOEPA's statutory protections. Very few HOEPA loans are made, in part
because assignees of HOEPA loans are subject to all claims and defenses
a consumer could bring against the original creditor. Thus, the
clarification is necessary to avoid unduly restricting access to
credit.
D. Consumer's Right to a Refund of Fees
TILA disclosures are intended to help consumers understand their
credit terms and to enable them to compare available credit options and
avoid the uninformed use of credit. In 2008, Congress amended TILA
through the Mortgage Disclosure Improvement Act (the MDIA), to codify
the Board's 2008 rules requiring creditors to provide good faith
estimates of credit terms (early disclosures) within three business
days after receiving a consumer's application for a closed-end mortgage
loan, and before a fee is imposed on the consumer (other than a fee for
obtaining a consumer's credit history). Thus, the MDIA helps ensure
that consumers receive TILA disclosures at a time when they can use
them to verify the terms of the mortgage loan offered and compare it to
other available loans. The Board issued rules implementing the MDIA in
May 2009. 74 FR 74989, Dec. 10, 2008.
Since the rules required by MDIA were issued, concerns have been
raised that the rules' fee restriction is not sufficient to protect
consumers' ability to comparison shop for credit. Under the current
rule, a fee may be imposed as soon as the consumer receives the early
disclosures for a closed-end mortgage loan. Thus, the consumer may feel
financially committed to a transaction as soon as the disclosure is
received, before having had adequate time to review it and make
decisions. The fee restriction was intended to ensure that consumers
are not discouraged from comparison shopping by paying application fees
that cause them to feel financially committed to the transaction before
costs are fully disclosed. Fees imposed at application historically
have been non-refundable application fees, and include an appraisal fee
and a rate lock fee, if any, which may be significant.
To address this issue, the Board proposes to provide a right to a
refund of fees, if the consumer decides not to proceed with the
transaction during the three business days following receipt of the
early disclosures. To ensure that consumers are aware of the right, the
proposal would require a brief disclosure at application. Mortgage
loans are complex transactions, and thus the proposal would allow
consumers time to review the terms of the loan and decide whether to go
forward without feeling financially committed due to having paid an
application fee. TILA and Regulation Z provide a substantially similar
refund right for HELOCs.
The Board recognizes that the proposal may result in creditors
refraining from imposing any fees until four days after a consumer
receives the early disclosures, to avoid having to refund fees. As a
result, creditors likely will not order an appraisal or lock a rate
without collecting a fee from the consumer, thus, the proposal may
cause a delay in processing the consumer's transaction. The right to a
refund for HELOCs, however, does not seem to have caused undue delays
or burdens for consumers seeking HELOCs. In addition, the proposal
would guarantee that consumers have three days to consider their
disclosures free of any financial constraints or pressures, whereas
under RESPA, an originator may impose a nonrefundable fee on a consumer
as soon as the consumer receives the early RESPA disclosure and has
agreed to go forward with the transaction.
E. Reverse Mortgage Disclosures
Disclosures at Application. TILA and Regulation Z require that
creditors provide, as applicable, closed-end or HELOC disclosures for
reverse mortgage transactions. Currently, a creditor is required to
provide a consumer with a Board-published HELOC brochure or a suitable
substitute at the time an application for a HELOC is provided to the
consumer. The HELOC brochure is 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. However, it does not contain information specific to reverse
mortgages. Closed-end reverse mortgages are almost always fixed-rate
transactions, so consumers generally do not receive any TILA
disclosures at application. For an adjustable-rate closed-end reverse
mortgage, however, consumers would receive the lengthy CHARM booklet
that is not tailored to reverse mortgages.
The Board proposes to use its adjustment and exception authority to
replace the current HELOC and closed-end application disclosures with a
new two-page document published by the Board entitled, ``Key Questions
to Ask about Reverse Mortgage Loans'' (the ``Key Questions'' document).
Consumer testing on reverse mortgage disclosures has shown that
consumers have a number of misconceptions about reverse mortgages that
are not addressed by the current disclosures. The proposal would
require a creditor to provide the new ``Key Questions'' document that
would be published by the Board for all reverse mortgages, whether
open- or closed-end, or fixed- or adjustable-rate. This two-page
document is intended to be a simple, straightforward and concise
disclosure informing consumers about how reverse mortgages work and
about terms and risks that are important to consider when selecting a
reverse mortgage. 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.
Reverse Mortgage Cost Disclosures. Depending on whether a reverse
mortgage is open-end or closed-end credit, the cost disclosure
requirements under TILA and Regulation Z differ. All reverse mortgage
creditors must provide the TALC disclosure at least three business days
before account-opening for an open-end reverse mortgage, or
consummation for a closed-end reverse mortgage. For closed-end reverse
mortgages, TILA and Regulation Z require creditors to provide an early
TILA disclosure within three business days after application and at
least seven business days before consummation, and before the consumer
has paid a fee other than a fee for obtaining a credit history. If
subsequent events make the early TILA disclosure inaccurate, the
creditor must provide corrected disclosures before consummation.
However, if subsequent events cause the APR to exceed certain
tolerances, the creditor must provide a corrected disclosure that the
consumer must receive at least three business days before consummation.
For open-end reverse mortgages, TILA and Regulation Z require
creditors to provide disclosures on or with an application that
contains information about the creditor's open-end reverse mortgage
plans. These disclosures do not include information dependent on a
specific borrower's creditworthiness or the value of the dwelling, such
as the
[[Page 58550]]
APRs offered to the consumer, because the application disclosures are
provided before underwriting takes place. Creditors are required to
disclose transaction-specific costs and terms at the time that an open-
end reverse mortgage plan is opened.
Content of proposed reverse mortgage disclosures. The Board
proposes three consolidated reverse mortgage disclosure forms: (1) An
early disclosure for open-end reverse mortgages, (2) an account-opening
disclosure for open-end reverse mortgages, and (3) a closed-end reverse
mortgage disclosure. The proposal would ensure that consumers receive
meaningful information in an understandable format using forms that are
designed, and have been tested, for reverse mortgage consumers. Rather
than receive two or more disclosures under TILA that come at different
times and have different formats, consumers would receive all the
disclosures in a single format that is largely similar regardless of
whether the reverse mortgage is structured as open-end or closed-end
credit. The proposal would also facilitate compliance with TILA by
providing creditors with a single set of forms that are specific to and
designed for reverse mortgages, rather than requiring creditors to
modify and adapt disclosures designed for forward mortgages.
For reverse mortgages, the proposal would require creditors to
provide either:
The ``early'' open-end reverse mortgage disclosure within
three business days after application, and the account-opening
disclosure at least three business days before account opening; or
The closed-end reverse mortgage disclosures within three
business days after application and again at least three business days
before consummation.
The timing of these disclosures would generally match the proposed
timing requirements in the Board's 2009 HELOC and closed-end mortgage
proposals.
Information about reverse mortgage total costs. Currently,
Regulation Z requires reverse mortgage creditors to disclose a table of
TALC rates. The table of TALC rates is designed to show consumers how
the cost of the reverse mortgage varies over time and with house price
appreciation. Generally, the longer the consumer keeps a reverse
mortgage the lower the relative cost will be because the upfront costs
of the reverse mortgage will be amortized over a longer period of time.
Thus, the TALC rates usually will decline over time even though the
total dollar cost of the reverse mortgage is rising.
As discussed above, very few consumers in testing understood the
table of TALC rates. Although participants seemed to understand the
explanation accompanying the TALC table, the vast majority could not
explain how the explanation related to the percentages shown in the
TALC table. Consumers, including those who currently have a reverse
mortgage (and thus presumably received the TALC disclosure),
consistently stated that they would not use the disclosure to decide
whether or not to obtain a reverse mortgage. Instead, consumers
consistently expressed a preference for a disclosure providing total
costs as a dollar amount.
For these reasons, the Board proposes to use its exception and
exemption authority to propose replacing the TALC rates disclosure with
other information that is likely to be more meaningful to consumers.
The proposal would require a table that demonstrates how the reverse
mortgage balance grows over time. The table expresses this information
as dollar amounts rather than as annualized loan cost rates. Under the
proposal, the creditor must provide three items of information: (1) The
sum of all advances to and for the benefit of the consumer; (2) the sum
of all costs and charges owed by the consumer; and (3) the total amount
the consumer would be required to repay. This information must be
provided for each of three assumed loan periods of one year, 5 years,
and 10 years. Consumer testing has shown that consumers would have a
much easier time understanding this table and would be much more likely
to use it in evaluating a reverse mortgage.
Other reverse mortgage cost information. The proposed reverse
mortgage disclosures would combine reverse-mortgage-specific
information with much of the information that the Board proposed for
HELOCs and closed-end mortgages in 2009. For example, the proposed
disclosure would include information about APRs, variable interest
rates and fees. However, because not all of the information currently
required for HELOCs and closed-end mortgages is relevant or applicable
to reverse mortgage borrowers, the Board proposes to use its exception
and exemption authority to remove or replace disclosures that are not
likely to provide a meaningful benefit to reverse mortgage consumers.
For example, TILA and Regulation Z require HELOC disclosures to state
whether a grace period exists within which any credit extended may be
repaid without incurring a finance charge. For reverse mortgage
borrowers who do not make regular payments to the lender, such a
disclosure is unlikely to be meaningful and may confuse consumers into
thinking that some type of regular repayment is required.
Open-end reverse mortgage account-opening disclosures. For open-end
reverse mortgages, the proposal would require creditors to provide
disclosures at least three business days before account opening,
consistent with the current rule for the TALC disclosure. The content
of the open-end reverse mortgage account-opening disclosures would be
largely similar to the early disclosure, but would contain additional
information about fees, consistent with the Board's 2009 HELOC
proposal.
F. Requirement for Reverse Mortgage Counseling
Prospective borrowers of FHA-insured reverse mortgages, known as
Home Equity Conversion Mortgages (HECMs), must receive counseling
before obtaining a HECM. While proprietary reverse mortgage creditors
have in the past routinely required counseling for borrowers from HUD-
approved counselors, Federal law does not require such counseling for
proprietary reverse mortgages. Recently, concerns have surfaced about
abusive practices in proprietary reverse mortgages. Reverse mortgages
are complex transactions, and even sophisticated consumers seeking
reverse mortgages may not be sufficiently aware of the risks and
obligations of reverse mortgages solely through disclosures provided
during the origination process. Although the proposed rule would
improve TILA's reverse mortgage disclosures, the Board believes that
the complexity of and risks associated with reverse mortgages warrant
added consumer protections. Home equity is a critical financial
resource for reverse mortgage borrowers, who generally must be 62 years
of age or older. Reverse mortgage borrowers also risk foreclosure if
they do not clearly understand important facts about reverse mortgages.
To address these concerns, the proposal would prohibit a creditor
or other person from originating a reverse mortgage before the consumer
has obtained counseling from a counselor or counseling agency that
meets the counselor qualification standards established by HUD, or
substantially similar standards. The proposed rule would apply to HECMs
and proprietary reverse mortgages. To confirm that the consumer
received the required counseling, creditors could rely on a certificate
of counseling in a form approved by HUD, or a substantially
[[Page 58551]]
similar written form. In addition, the proposal would prohibit a
creditor or any other person from imposing a nonrefundable fee (except
a fee for counseling) on a consumer until three business days after the
consumer has obtained counseling. Under the proposal, creditors or
others could not steer consumers to particular counselors, or
compensate counselors or counseling agencies. These rules would be
proposed under the Board's HOEPA authority to prohibit unfair or
deceptive acts or practices in connection with mortgage loans.
G. Conditioning a Reverse Mortgage on the Purchase of Other Financial
or Insurance Products
Reverse mortgage originators often refer reverse mortgage consumers
to third parties that offer the consumers other products or services.
Some originators affirmatively require the consumer to purchase another
financial product to obtain the reverse mortgage. Originators who refer
consumers to providers of financial and other products may receive
referral fees, creating strong incentives to encourage reverse mortgage
consumers to purchase additional products regardless of whether they
are appropriate.
Products often cited as being required as part of a reverse
mortgage transaction include annuities, certificates of deposit (CDs)
and long-term care insurance. These may be beneficial products for many
consumers; however purchase of these and other products may harm
consumers who do not understand them. For example, some reverse
mortgage consumers have reportedly been sold annuities scheduled to
mature after their life expectancy. Further, an annuity may yield at a
lower rate of interest than the reverse mortgage used to pay for it.
Reverse mortgage borrowers who become aware of these drawbacks may face
high fees for early withdrawal or cancellation of the annuity.
Reverse mortgage borrowers often have limited options for obtaining
additional funds; for some, a reverse mortgage may be the resource of
last resort. These consumers may be forced to accept a requirement that
they use reverse mortgage funds to purchase another product, even if it
has little benefit. In addition, reverse mortgages are complex loan
products whose requirements and characteristics tend to be unfamiliar
even to the most sophisticated consumers. Thus, many consumers may be
easily misled or confused about the costs of other products and
services and the potential downsides to tapping their home equity to
pay for them. Moreover, consumers can obtain the benefits from other
products and services by voluntarily choosing them.
The Board proposes anti-tying rules specific to reverse mortgages
to ensure that all reverse mortgage originations are covered--including
both HECMs and proprietary products, as well as reverse mortgages
originated by depository and nondepository institutions. These rules
would be proposed under the Board's HOEPA authority to prohibit unfair
or deceptive acts or practices in connection with mortgage loans.
The proposal would prohibit a creditor or loan originator from
requiring a consumer to purchase another financial or insurance product
as a condition of obtaining a reverse mortgage. A creditor or loan
originator will be deemed not to have required the purchase of another
product if:
The consumer receives the ``Key Questions to Ask about
Reverse Mortgage Loans'' document; and
The reverse mortgage is consummated (or the account is
opened for a HELOC) at least ten days before the consumer purchases
another financial or insurance product.
The proposal would define ``financial or insurance product'' to
include both bank products, such as loans and certificates of deposit,
and non-bank products, such as annuities, long-term care insurance,
securities, and other nondepository investment products. The proposal
expressly exempts from the definition of ``financial or insurance
product'' savings and certain other deposit accounts established to
disburse reverse mortgage proceeds, as well as products and services
intended to protect the creditor's or insurer's investment, such as
mortgage insurance, property inspection services, and appraisal or
property valuation services.
H. Reverse Mortgage Advertising
Regulation Z currently contains rules that apply to advertisements
of HELOCs and closed-end mortgages, including reverse mortgages. The
advertisement of rates is addressed in these rules. In addition,
advertisements that contain certain specified credit terms, including
payment terms, must include additional advertising disclosures, such as
the APR. For closed-end mortgages, including reverse mortgages,
Regulation Z prohibits seven misleading or deceptive practices in
advertisements. For example, Regulation Z prohibits use of the term
``fixed'' in a misleading manner in advertisements where the rate or
payment is not fixed for the full term of the loan.
Reverse mortgage advertisements generally focus on special features
of reverse mortgages, such as the fact that regular payments of
principal and interest are not required. For this reason, the proposal
contains additional advertising requirements specific to reverse
mortgages that supplement, rather than replace, the general advertising
requirements for open-end or closed-end credit.
The proposal would require that a reverse mortgage advertisement
disclose clarifying information if the advertisement contains certain
statements that are likely to mislead or confuse consumers. For
example, a clarifying statement would be required for:
Advertisements stating that a reverse mortgage ``requires
no payments;''
Advertisements stating that a consumer need not repay a
reverse mortgage ``during your lifetime;'' and
Advertisements stating that a consumer ``cannot lose'' or
there is ``no risk'' to a consumer's home with a reverse mortgage.
VI. Section-by-Section Analysis
Section 226.1 Authority, Purpose, Coverage, Organization, Enforcement,
and Liability
Section 226.1(d) provides an outline of Regulation Z. The Board
proposes to revise Sec. 226.1(d)(5) and (7) to reflect the proposed
changes to the requirements for reverse mortgages.
1(d) Organization
1(d)(5)
The Board provided in the 2008 HOEPA Final Rule a staff comment to
clarify how the effective date of October 1, 2009 would apply for each
of the rule's provisions. See comment 1(d)(5)-1. The Board is proposing
to make two changes to comment 1(d)(5)-1. One change would provide that
a radio advertisement occurs on the date it is broadcast, and the other
would conform comment 1(d)(5)-1 to changes proposed to Sec. 226.20(a).
Advertising rules. The comment provides that the Board's
advertising rules adopted as part of the 2008 HOEPA Final Rule would
apply to advertisements that occur on and after the effective date. It
then states as an example that ``a radio ad occurs on the date it is
first broadcast.'' The Board has been asked whether this example means
that, as long as a radio advertisement was first broadcast prior to
October 1, 2009, it then may be rebroadcast indefinitely without the
HOEPA Final Rule's advertising provisions ever
[[Page 58552]]
applying to that advertisement. The Board did not intend this result
but, rather, intended the new advertising rules to apply to all radio
advertisements that are broadcast on or after the effective date,
regardless of whether they happen to have been broadcast prior to the
effective date.
This proposal would remove the word ``first'' from the language
referenced above in comment 1(d)(5)-1. Thus, under proposed comment
1(d)(5)-1, a radio advertisement broadcast on or after October 1, 2009
would be subject to the new advertisement rules, regardless of whether
it is the first time the advertisement has been broadcast. This
revision would prevent possible misinterpretation of the example about
the effective date of the advertising rules as they apply to radio
advertisements.
Conforming amendments for proposed Sec. 226.20(a). Existing
comment 1(d)(5)-1 provides that the 2008 HOEPA protections would apply
to a ``refinancing'' of an existing closed-end mortgage loan under
Sec. 226.20(a), if the creditor receives an application for the
refinancing on or after the effective date. The 2008 HOEPA rules would
not apply, however, if the same creditor and consumer merely ``modify''
an existing obligation after the effective date. Under current Sec.
226.20(a), when the same creditor and consumer modify the terms of an
existing closed-end mortgage loan, there is no refinancing or new
transaction unless the existing loan is satisfied and replaced under
State law.
As discussed under Sec. 226.20(a) below, the Board is proposing to
amend Sec. 226.20(a) to provide that a new transaction would occur
when the same creditor and the consumer agree to change certain key
terms of an existing closed-end loan secured by real property or a
dwelling, regardless of State law. As noted in the discussion under
Sec. 226.20(a) below, the proposal would increase significantly the
number of modifications that are new transactions. A modification that
is a new transaction under proposed Sec. 226.20(a)(1) also would be
subject to the 2008 HOEPA rules in Sec. 226.35, if the new transaction
is a ``higher-priced mortgage loan'' under Sec. 226.35(a). Thus, the
Board expects that the number of transactions that are subject to Sec.
226.35 will increase but believes that the burdens associated with
increased coverage are offset by the consumer protections in Sec.
226.35. The Board solicits comment on the extent of any increased
coverage under Sec. 226.35, and whether the costs of complying with
Sec. 226.35 would unduly restrict consumers' ability to modify their
loans.
Section 226.2 Definitions and Rules of Construction
2(a) Definitions
2(a)(6) 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. See comment 2(a)(6)-1. For some
purposes, however, a more precise definition of business day applies:
all calendar days except Sundays and specified Federal legal holidays
for purposes of determining the three-business-day right of rescission
under Sec. Sec. 226.15 and 226.23, as well as when disclosures are
deemed received, or by when disclosures must be received, for certain
mortgage transactions under Sec. Sec. 226.19(a)(1)(ii), 226.19(a)(2),
and 226.31(c) and for private education loans under Sec. 226.46(d)(4).
In addition, the Board has proposed to apply this more precise
definition of business day to determining when consumers have received
disclosures required under proposed Sec. Sec. 226.5b(e) and
226.9(j)(2). See 74 FR 43428, 43575, 43593, 43608, Aug. 26, 2009.
Nonrefundable fees for closed-end mortgages. Section
226.19(a)(1)(i) currently requires a creditor to provide good faith
estimates of credit terms (early disclosures) within three business
days after the creditor receives a consumer's application for a closed-
end mortgage that is secured by the consumer's dwelling and subject to
RESPA. Under the August 2009 Closed-End Proposal, Sec.
226.19(a)(1)(iv) would require that any fee paid within three business
days after a consumer receives the early disclosures be refundable
during that period, as discussed in detail below. For purposes of
proposed Sec. 226.19(a)(1)(iv), the more precise definition of
business day would apply. The Board therefore proposes to revise Sec.
226.2(a)(6) and comment 2(a)(6)-2 to reflect the use of the more
precise definition in determining when the refund period ends.
Reverse mortgages. For reverse mortgages, the proposal would use
the general definition of business day for purposes of providing the
early open-end reverse mortgage disclosure within three business days
after application. The Board proposes to revise Sec. 226.2(a)(6) and
comment 2(a)(6)-2 to use the more precise definition of business day
for purposes of the requirement in Sec. 226.33 that creditors provide
disclosures for open-end reverse mortgages at least three business days
before account opening. This proposal would also apply the more precise
definition of business day to the proposed prohibition on imposing a
nonrefundable fee until three business days after a reverse mortgage
consumer has obtained required counseling. See proposed Sec.
226.40(b)(2) and accompanying commentary. This prohibition is discussed
in greater detail below, in the section-by-section analysis of Sec.
226.40(b)(2).
2(a)(11) Consumer
Rescission
TILA and Regulation Z provide that, unless the transaction is
exempted, a consumer has a right to rescind a consumer credit
transaction in which a security interest is or will be retained or
acquired in a consumer's principal dwelling. TILA Section 125(a), (e);
15 U.S.C. 1635(a), (e); Sec. 226.23(a), (f). Accordingly, for purposes
of rescission, Regulation Z defines a consumer as ``a natural person in
whose principal dwelling a security interest is or will be retained or
acquired, if that person's ownership interest in the dwelling is or
will be subject to the security interest.'' Section 226.2(a)(11).
Comment 2(a)(11)-1 states that guarantors, endorsers, and sureties
(hereinafter, ``guarantors'') ``are not generally consumers for
purposes of the regulation, but they may be entitled to rescind under
certain circumstances.'' A number of questions have been raised about
the circumstances under which a guarantor may be entitled to rescind.
In particular, the Board is aware of uncertainty regarding when a
guarantor who has pledged his principal dwelling as security for
repayment of another person's consumer credit obligation would have the
right to rescind. For example, creditors have asked if a guarantor
pledging his principal dwelling as additional collateral for a
consumer's residential mortgage transaction would have the right to
rescind. The Board notes the holding of one court that a guarantor
giving a security interest in her principal dwelling as additional
collateral for her nephew's consumer credit transaction to purchase an
automobile and primarily secured by the automobile has the right to
rescind.\14\
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\14\ See, e.g., Soto v. PNC Bank, 221 B.R. 343 (Bankr. E.D. Pa.
1998).
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The Board's proposal. The Board proposes to revise comment
2(a)(11)-1 to specify the circumstances under which a guarantor has the
right of rescission. The proposed comment clarifies that a guarantor
who has pledged his principal dwelling as
[[Page 58553]]
security for repayment of a borrower's consumer credit obligation would
have the right to rescind when: (1) the borrower has the right to
rescind because he or she is a natural person to whom consumer credit
is offered or extended and in whose principal dwelling a security
interest is or will be retained or acquired; and (2) the guarantor
pledges his or her principal dwelling as additional security for the
consumer credit transaction, and personally guarantees the borrower's
repayment of the consumer credit transaction. The Board believes that
in the circumstances outlined in the proposed comment, TILA affords the
guarantor the right to rescind, just as the borrower on the underlying
obligation has a right to rescind.
Where the underlying transaction is not a consumer credit
transaction, TILA Section 125(a) and Sec. Sec. 226.15 and 226.23 do
not provide a guarantor with the right to rescind. 15 U.S.C. 1635(a).
TILA Section 125(a) provides a right to rescind ``in the case of a
consumer credit transaction * * * in which a security interest * * * is
or will be retained or acquired in any property which is used as the
principal dwelling of the person to whom credit is extended.* * *'' 15
U.S.C. 1635(a) (emphasis added). Regulation Z applies to consumer
credit (defined in Sec. 226.2(a)(12) as credit offered or extended to
a consumer primarily for personal, family, or household purposes), not
business credit. Section 226.3(a). Accordingly, comments 15-1 and 23-1
state that the right of rescission does not apply to a business-purpose
loan, even though the loan is secured by the borrower's principal
dwelling.
In addition, a guarantor would not have a right to rescind where
the underlying consumer credit transaction is not secured by the
borrower's principal dwelling, as in the case of an automobile loan
secured only by the automobile, or an unsecured education loan. With
these loans, no security interest is taken in ``the principal dwelling
of the person to whom credit is extended,'' as required by TILA Section
125(a) for the right to rescind to apply to a transaction. 15 U.S.C.
1635(a) (emphasis added). The guarantor's pledge of his or her own
principal dwelling as collateral for the consumer credit transaction is
irrelevant under the statute, because the guarantor is not ``the person
to whom credit is extended.''
Similarly, a guarantor does not have a right to rescind where the
underlying consumer credit transaction is a loan used by the borrower
to purchase his or her principal dwelling and is secured by that
principal dwelling. The right of rescission does not arise in these
transactions because they are ``residential mortgage transactions.''
TILA Section 125(e)(1), 15 U.S.C. 1635(e)(1); Sec. Sec. 226.15(f)(1)
and 226.23(f)(1). Congress exempted residential mortgage transactions
from rescission. It would be impracticable to unwind home-purchase
transactions and return all parties, including the home seller, to the
financial status each occupied before the transaction occurred. Thus,
neither the borrower to whom the consumer credit is extended, nor the
guarantor who has pledged his own principal dwelling as security for
that extension of credit, has the right to rescind such a transaction.
A guarantor who personally guarantees and offers his home as
security for a rescindable consumer credit transaction should have the
right to rescind because the guarantor is in a situation very similar
to that of the borrower. Both the borrower and the guarantor are
obligors who are liable on the promissory note, a security interest is
taken in both the borrower's and the guarantor's principal dwelling,
and the consumer credit transaction is not exempt from rescission.
While the Board believes that it would be unusual for a creditor to
accept the pledge of a guarantor's home without a personal guarantee,
the Board solicits comment on the frequency of such a practice.
Revocable Living Trusts
As discussed in detail below, under Sec. 226.3(a), the Board is
proposing to clarify that credit extensions to revocable living trusts
for a consumer purpose are consumer credit, even though a trust is not
a natural person. Accordingly, proposed comment 2(a)(11)-3 includes
clarification that, therefore, such transactions are considered credit
extended to a consumer.
Reverse Mortgages
The Board proposes to adopt an alternative definition of consumer
for purposes of the counseling requirement for reverse mortgages under
proposed Sec. 226.40(b). The Board proposes to add a sentence to Sec.
226.2(a)(11) cross-referencing the definition of consumer in proposed
Sec. 226.40(b)(7). For clarity, proposed comment 2(a)(11)-4 restates
the proposed Sec. 226.40(b)(7) definition of consumer: for purposes of
the counseling requirements under Sec. 226.40(b) for reverse mortgages
subject to Sec. 226.33, with one exception, a consumer includes any
person who, at the time of origination of a reverse mortgage subject to
Sec. 226.33, will be shown as an owner on the property deed of the
dwelling that will secure the applicable reverse mortgage. For purposes
of the prohibition on imposing nonrefundable fees in connection with a
reverse mortgage transaction until after the third business day
following the consumer's completion of counseling (proposed Sec.
226.40(b)(2)(i)), however, the term consumer includes only persons on
the property deed who will be obligors on the applicable reverse
mortgage. This proposal is discussed in greater detail in the section-
by-section analysis to Sec. 226.40(b)(7), below.
2(a)(25) Security Interest
Current Sec. 226.2(a)(25) defines ``security interest'' and
comment 2(a)(25)-6 provides guidance on the disclosure of a security
interest. With respect to rescission, current comment 2(a)(25)-6
provides that the acquisition or retention of a security interest in
the consumer's principal dwelling may be disclosed in a rescission
notice with a general statement such as the following: ``Your home is
the security for the new transaction.'' See also Sec. Sec.
226.15(b)(1) and 226.23(b)(1)(i). The Board proposes to delete this
provision in comment 2(a)(25)-6 as obsolete. As discussed in more
detail in the section-by-section analysis to proposed Sec. Sec.
226.15(b) and 226.23(b), the rescission notice no longer would include
a disclosure of ``the retention or acquisition of a security interest
in the consumer's principal dwelling.'' Based on consumer testing, the
Board is concerned that the current language in comment 2(a)(25)-6 and
model rescission forms in Appendices G and H for disclosure of the
retention or acquisition of a security interest might not alert
consumers that the creditor has the right to take the consumer's home
if the consumer defaults. To clarify the significance of the security
interest, for rescission notices related to HELOC accounts, proposed
Sec. 226.15(b)(3)(ii) requires a creditor to provide a statement that
the consumer could lose his or her home if the consumer does not repay
the money that is secured by the home. Similarly, for rescission
notices related to closed-end mortgage transactions, proposed Sec.
226.23(b)(3)(i) requires a creditor to provide a statement that the
consumer could lose his or her home if the consumer does not make
payments on the loan. Guidance for how to meet these proposed
disclosure requirements is contained in proposed Samples G-5(B) and G-
5(C) for HELOC accounts, and in proposed Model Forms H-8(A) and H-9 and
Sample H-8(B) for closed-end mortgage transactions.
[[Page 58554]]
Section 226.3 Exempt Transactions
3(a) Business, Commercial, Agricultural, or Organizational Credit
Generally, TILA and Regulation Z cover extensions of credit to a
consumer, which is defined as a natural person. See TILA Section
103(h), 15 U.S.C. 1602(h); Sec. 226.2(a)(11). Extensions of credit to
other than a natural person, such as an organization, are exempt from
coverage. See TILA Sections 103(c), 104(1), 15 U.S.C. 1602(c), 1603(1);
Sec. 226.3(a). Thus, credit extended to a trust is exempt from
coverage, because a trust is considered an organization, not a natural
person. See TILA Section 103(c), 15 U.S.C. 1602(c). However, under
Regulation Z, credit extended to a land trust for consumer purposes is
considered credit extended to a natural person rather than to an
organization, and thus is covered by the regulation. See comment 3(a)-
8. In a land trust transaction, the creditor extends credit to the land
trust, which has been created by a natural person to purchase real
property, borrow against equity, or refinance a loan already secured by
the property. Assuming that these transactions are for personal,
family, or household purposes, they are substantively the same as other
consumer credit transactions covered by the regulation. See comment
3(a)-8.
Concerns have been raised about whether Regulation Z should apply
to loans made to revocable living (``intervivos'') trusts in the same
manner as it applies to land trusts. Revocable living trusts have
become popular estate planning devices for consumers. A natural person
creates the revocable living trust (also referred to as the ``settlor''
of the trust) and is also a beneficiary and trustee of the trust. Title
to the personal and real property of the settlor/beneficiary/trustee is
held by the revocable living trust. A creditor may extend credit to the
revocable living trust (the borrower) to purchase personal or real
property, borrow against equity, or refinance an existing secured or
unsecured loan. Upon the settlor's death, new persons become
beneficiaries of the trust--usually the settlor's heirs.
Many creditors treat loans made to revocable living trusts for
consumer purposes and secured by real property as consumer credit
transactions subject to TILA and Regulation Z. At least one court has
held that the refinancing of a loan originally made to a natural person
and secured by that person's principal dwelling, which was later
transferred to a revocable living trust that refinanced the loan, was a
rescindable consumer credit transaction.\15\
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\15\ See Amonette v. Indymac Bank, F.S.B., 515 F. Supp. 2d 1176
(D. Haw. 2007).
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The Board believes that credit extended to a revocable living trust
should be subject to Regulation Z because in substance (if not form)
consumer credit is being extended. Accordingly, the Board proposes to
revise comments 2(a)(11)-3 and 3(a)-8 to clarify that credit extended
to revocable living trusts for consumer purposes is considered credit
extended to a natural person and, thus, to a consumer.
Section 226.4 Finance Charge
4(a) Definition
Current comment 4(a)(1)-2 clarifies that an annuity required by the
creditor in a reverse mortgage transaction is a finance charge. As
discussed more fully in the section-by-section analysis to Sec. 226.40
below, the Board is proposing to prohibit creditors from requiring the
purchase of an annuity with a reverse mortgage. Accordingly, the Board
is proposing to remove this comment about required annuity purchases.
4(d)(1) and (3) Voluntary Credit Insurance Premiums; Voluntary Debt
Cancellation and Debt Suspension Fees
Under TILA and Regulation Z, a premium or other charge for credit
insurance or debt cancellation or debt suspension coverage
(collectively, ``credit protection products'') is a finance charge if
the insurance or coverage is written in connection with a credit
transaction. TILA Section 106(a)(5), 15 U.S.C. 1605(a)(5); Sec.
226.4(b)(7) and (b)(10). However, under TILA and Regulation Z, the
creditor may exclude the premium or charge from the finance charge if:
(1) The insurance or coverage is not required by the creditor and the
creditor discloses this fact in writing; (2) the creditor discloses the
premium or charge for the initial term of the insurance or coverage;
(3) the creditor discloses the term of the insurance or coverage, if
the term is less than the term of the credit transaction; (4) the
creditor provides a disclosure for debt suspension coverage, as
applicable; and (5) the consumer signs or initials an affirmative
written request for the insurance or coverage after receiving the
required disclosures. TILA Section 106(b), 15 U.S.C. 1605(b); Sec.
226.4(d)(1) and (d)(3).
In the August 2009 Closed-End Proposal, the Board proposed several
changes to the finance charge, the conditions for exclusion from the
finance charge, and the required disclosures. First, under proposed
Sec. 226.4(g), the provisions of Sec. 226.4(d) would not apply to
closed-end credit transactions secured by real property or a dwelling,
so the premium or charge for a credit protection product written in
connection with the credit transaction would be included in the finance
charge for the credit transaction whether or not it was voluntary.
Under proposed Sec. 226.38(h), however, a creditor would still be
required to provide the credit protection product disclosures required
under Sec. 226.4(d)(1) and (d)(3). Second, concerns about eligibility
requirements were addressed in proposed Sec. 226.4(d)(1)(iv) and
(d)(3)(v), which would require the creditor to determine at the time of
enrollment that the consumer meets any applicable age or employment
eligibility criteria for insurance or coverage. The creditor would be
required to make this determination in order to exclude the premium or
charge from the finance charge for the credit transaction. Finally,
based on consumer testing, revised disclosures were proposed to address
concerns about disclosure of the voluntary nature, costs, and
eligibility requirements of the product. See proposed Model Clauses and
Samples G-16(C), G-16(D), H-17(C), and H-17(D) in Appendices G and H,
74 FR 43232, 43338, 43348, Aug. 26, 2009.
Based on comments to the August 2009 Closed-End Proposal and the
Board's review of creditor solicitations and disclosures for credit
protection products, the Board now proposes changes to the timing,
format, and content of disclosures required under Sec. 226.4(d). These
disclosures would be necessary to satisfy the disclosure requirements
of proposed Sec. 226.6(a)(5)(i) for HELOCs, Sec. 226.6(b)(5)(i) for
open-end credit that is not home-secured, Sec. 226.18(n) for closed-
end credit that is not home-secured, and Sec. 226.38(h) for closed-end
mortgages. These disclosures would be required whether the credit
protection product was optional or required. As discussed more fully in
the section-by-section analyses for proposed Sec. 226.38 in the August
2009 Closed-End Proposal and for proposed Sec. Sec. 226.6 and 226.18
below, the Board is proposing to use its TILA Section 105(a) authority
to require these disclosures for credit protection products that are
required in connection with the credit transaction to ensure that
consumers are fully informed of the costs and risks of these products.
The disclosures and requirements are discussed more fully in the
section-by-section analyses below for Sec. Sec. 226.6(a)(5)(i),
226.6(b)(5)(i), and 226.18(n). In the August 2009 Closed-
[[Page 58555]]
End Proposal, the credit protection product disclosures were listed in
proposed Sec. 226.38(h). In the final rule, the list of these
disclosures would be consolidated in Sec. 226.4(d)(1) and (d)(3), and
Sec. 226.38(h) would simply provide a cross-reference to Sec.
226.4(d)(1) and (d)(3).
Timing. Under a final rule for credit cards issued in January 2009
(January 2009 Credit Card Rule), a credit protection product sold
before or after the opening of an open-end (not home-secured) plan
would be considered ``written in connection with the credit
transaction.'' See comments 4(b)(7) and (b)(8)-2 and 4(b)(10)-2; 74 FR
5244, 5459, Jan. 29, 2009. (The January 2009 Credit Card Rule was
withdrawn as of February 22, 2010, but comments 4(b)(7) and (b)(8)-2
and 4(b)(1)-2 were retained in a final rule published separately that
same day (February 2010 Credit Card Rule). 75 FR 7925 and 7658, 7858-
7859, Feb. 22, 2010.) The August 2009 Closed-End Proposal would apply
this same rule to HELOCs. See proposed comments 4(b)(7) and (b)(8)-2
and 4(b)(10)-2; 74 FR 43232, 43370, Aug. 26, 2009. That is, to exclude
a premium or charge from the finance charge, a creditor would have to
comply with Sec. 226.4(d) if the credit protection product was sold
before or after the opening of an open-end plan (whether or not it was
home-secured). Thus, for closed-end credit, a creditor would have to
comply with Sec. 226.4(d) if the creditor protection product was sold
before--but not after--consummation. To clarify these requirements,
proposed Sec. 226.4(d)(1) and (d)(3) and comment 4(d)-2 would state
that a creditor must fulfill the conditions of Sec. 226.4(d) before
the consumer enrolls in the insurance or coverage ``written in
connection with the credit transaction.'' Comment 4(d)-2 would also
cross-reference comments 4(b)(7) and (b)(8)-2 and 4(b)(10)-2 for a
discussion of when insurance or coverage is ``written in connection
with the credit transaction.'' Comment 4(d)-6 would be revised to
clarify that if the premium is not imposed by the creditor in
connection with the credit transaction, it is not covered by Sec.
226.4.
4(d)(1)(i)
Format. Currently, Regulation Z does not mandate the format of the
disclosures required under Sec. 226.4(d) and does not provide model
forms or samples specific to the disclosures for credit protection
products. The Board's review of several disclosures for credit
protection products revealed that many disclosures were in small font,
not grouped together, and in dense blocks of text. For example, one
creditor provided credit protection product disclosures in 6-point font
on the back of an enrollment form, separate from the signature line,
and with multiple Federal and State disclosures in dense blocks of
text. Although the August 2009 Closed-End Proposal provided model
clauses and a credit life insurance sample, there was no model form
with a specific format. In addition, although the proposal included a
credit life insurance sample, commenters requested separate samples for
debt cancellation and debt suspension products.
To address these problems, the Board tested a sample credit life
insurance disclosure that used 12-point font, tabular and question-and-
answer format, and bold and underlined text. Participants understood
the content of the disclosure when presented in this format. The Board
also worked with its consultant to develop samples for debt
cancellation and debt suspension products. Accordingly, the Board
proposes to revise Sec. 226.4(d)(1)(i) and (d)(3)(i) to require the
creditor to provide clearly and conspicuously in a minimum 10-point
font the disclosures, which must be grouped together and substantially
similar in headings, content, and format to Model Forms G-16(A) or H-
17(A) in Appendix G or H. Proposed Sec. 226.4(d)(1)(i)(D) would
require several disclosures in a tabular and question-and-answer
format. Also, samples for credit life insurance, disability debt
cancellation coverage, and unemployment debt suspension coverage are
proposed at Samples G-16(B), (C) and (D), and H-17(B), (C) and (D),
respectively.
4(d)(1)(i)(D)(1)
Need for product. To address concerns about the costs and benefits
of the product relative to traditional life insurance, the August 2009
Closed-End Proposal required the creditor to provide the following
statement: ``If you have insurance already, this policy may not provide
you with any additional benefits.'' Several industry trade
associations, banks, community banks, and credit protection companies
noted that this language could be misleading. Credit protection
products can supplement existing insurance policies. Accordingly, the
Board proposes Sec. 226.4(d)(1)(i)(D)(1) to require a revised
statement that if the consumer already has enough insurance or savings
to pay off or make payments on the debt if a covered event occurs, the
consumer may not need the product. Proposed comment 4(d)-15 would
clarify that a ``covered event'' refers to the event that would trigger
coverage under the policy or agreement, such as loss of life,
disability, or involuntary unemployment. Examples of how to provide
this statement for particular products would be provided in Samples G-
16(B), (C) and (D) and H-17(B), (C) and (D) in Appendices G and H.
4(d)(1)(i)(D)(3)
Cost. Currently, Regulation Z permits a creditor to disclose the
premium or charge on a unit-cost basis for: Open-end transactions;
closed-end credit transactions by mail or telephone under Sec.
226.17(g); and certain closed-end credit transactions involving
insurance or coverage that limits the total amount of indebtedness
subject to coverage. Section 226.4(d)(1)(ii) and (d)(3)(ii). Concerns
have been raised that unit-cost disclosures do not provide a meaningful
disclosure of the potential cost of the product. The Board's review of
several disclosures for credit protection products revealed that
creditors often provide multiple unit-cost disclosures for each State
in which the creditor offers the product. Moreover, during consumer
testing conducted by the Board for this proposal, most participants
could not correctly calculate the cost of the product based on a unit-
cost disclosure. However, when the cost was disclosed as a dollar
figure tailored to the loan amount, all participants understood the
cost of the credit insurance. The Board believes that consumers would
benefit from disclosure of the maximum premium or charge for the
insurance or coverage to determine whether the product is affordable
for them.
Accordingly, the Board proposes Sec. 226.4(d)(1)(i)(D)(3) to
require a statement of the maximum premium or charge per period. The
Board understands that the premium or charge is typically calculated
based on the rate multiplied by the outstanding balance, monthly
principal and interest payment, or minimum monthly payment. Thus, for a
product based on the outstanding balance of closed-end credit, the
periodic premium or charge may decline as the balance declines.
Alternatively, for a product based on the minimum monthly payment under
an open-end credit plan, the periodic premium or charge may vary. Thus,
the Board also proposes to require a disclosure that the cost depends
on the consumer's balance or interest rate, as applicable.
Proposed comment 4(d)-16 would clarify that the creditor must use
the maximum rate under the policy or coverage. In addition, if the
premium or charge is based on the outstanding balance or periodic
principal and
[[Page 58556]]
interest payment, the creditor must base the disclosure on the maximum
outstanding balance or periodic principal and interest payment possible
under the loan contract or line of credit plan. Current comment 4(d)-4
regarding unit-cost disclosures would be revised to apply only to
property insurance disclosures. Comment 4(d)-2 would be revised to
state that, if disclosures are given early, a creditor must redisclose
if the statement of the maximum premium or charge per period is
different at the time of consummation or account-opening.
4(d)(1)(i)(D)(4)
Maximum benefit. The August 2009 Closed-End Proposal would require
creditors to disclose the loan amount together with cost information
for the credit protection product. See proposed Sec. 226.38(h)(9).
However, the Board's review of several disclosures for credit
protection products revealed that the loss-of-life insurance or
coverage sometimes does not cover the full loan amount. Moreover, debt
cancellation or debt suspension coverage usually places limits on the
dollar amount and number of payments to be paid. The Board is concerned
that consumers may not realize that there are limits to the benefits,
and that they will have to pay any amounts that are not covered under
the insurance or coverage. During consumer testing conducted by the
Board for this proposal, some participants were surprised that benefits
would be capped at an amount less than the loan amount, but most
understood the disclosure. Accordingly, the Board proposes Sec.
226.4(d)(1)(i)(D)(4) to require a statement of the maximum benefit
amount, together with a statement that the consumer will be responsible
for any balance due above the maximum benefit amount, as applicable.
4(d)(1)(i)(D)(5) and (6)
Eligibility. The August 2009 Closed-End Proposal would require
creditors to make a determination at the time of enrollment that the
consumer meets any applicable age or employment eligibility criteria
for insurance or debt cancellation or debt suspension coverage. See
proposed Sec. 226.4(d)(1)(iv) and (d)(3)(v). If the insurance or
coverage contained other eligibility restrictions in addition to age
and employment, the proposal provided the following model clauses:
``Based on our review of your age and/or employment status at this
time, you may be eligible to receive benefits. However, you may not
qualify to receive any benefits because of other eligibility
restrictions.'' See proposed Model Clauses G-16(C) in Appendix G and H-
17(C) in Appendix H. Comments from consumer advocates, a Federal
banking agency, a trade association, a bank, two credit protection
companies, and several community banks indicated that they felt that
these statements were too vague and potentially misleading. Consumer
advocates suggested the Board conduct more testing to find the right
balance between information overload and information sufficient for
rational decision making.
To address these concerns, the Board conducted additional rounds of
testing to improve this disclosure. The following language was tested:
``You may not qualify for benefits even if you buy this product. Based
on our review you currently meet the age and employment eligibility
requirements, but there are other requirements that you may not meet.
If you do not meet these eligibility requirements, you will not receive
any benefits even if you purchase this product and pay the monthly
premium.'' Most participants understood the disclosure, and were
surprised that they might not receive benefits even after purchasing
the product and making payments for a number of years. Most indicated
that they would use the Federal Reserve Board Web site to learn more
about eligibility requirements.
Accordingly, the Board proposes Sec. 226.4(d)(1)(i)(D)(5) to
require a statement that the consumer meets the age and employment
eligibility requirements. If there are other eligibility requirements,
the Board further proposes Sec. 226.4(d)(1)(i)(D)(6) to require a
statement in bold, underlined text that the consumer may not receive
any benefits even if the consumer pays for the product, together with a
statement that there are other requirements that the consumer may not
meet and that, if the consumer does not meet these eligibility
requirements, the consumer will not receive any benefits even if the
consumer purchases the product and pays the periodic premium or charge.
Sample language is included in Model Forms G-16(A) and H-17(A), and
Sample Forms G-16(B), (C) and (D), and H-17(B), (C) and (D) in
Appendices G and H.
4(d)(1)(i)(D)(7)
Coverage period. Currently, Regulation Z requires disclosure of the
term of the insurance or coverage if it is less than the term of the
credit transaction. Section 226.4(d)(1)(ii) and (d)(3)(ii). The August
2009 Closed-End Proposal would require disclosure of the term in all
cases. See proposed Sec. 226.38(h)(9). Consumer advocates that
commented on the proposal also suggested disclosure of the date on
which the consumer would no longer meet the age eligibility
requirement. One bank suggested a highlighted disclosure of the age
eligibility requirement. To address these concerns, the Board proposes
Sec. 226.4(d)(1)(i)(D)(7) to require a statement of the time period
and age limit for coverage. The Board believes that disclosure of the
age, rather than the date, would be more meaningful to consumers.
4(d)(1)(ii)
The August 2009 Closed-End Proposal would require creditors to make
a determination at the time of enrollment that the consumer meets any
applicable age or employment eligibility criteria for insurance or debt
cancellation or debt suspension coverage. See proposed Sec.
226.4(d)(1)(iv) and (d)(3)(v). To provide creditors with some
flexibility, the Board proposes Sec. 226.4(d)(1)(ii) to allow
creditors to make the determination prior to or at the time of
enrollment. Comment 4(d)-14 regarding age or employment eligibility
criteria is revised accordingly.
4(d)(3)(i)
Debt suspension coverage. In the January 2009 Credit Card Rule, the
existing rules for debt cancellation coverage were applied to debt
suspension coverage. The rule requires a disclosure that the obligation
to pay loan principal and interest is only suspended, and that interest
will continue to accrue during the period of suspension. See Sec.
226.4(d)(3)(iii); 74 FR 5244, 5401, Jan. 29, 2009. (The January 2009
Credit Card Rule was withdrawn as of February 22, 2010, but Sec.
226.4(d)(3)(iii) was retained in the February 2010 Credit Card Rule. 75
FR 7925 and 7658, 7796, Feb. 22, 2010.) In response to the August 2009
Closed-End Proposal, several industry commenters requested guidance on
how to incorporate this requirement into the revised disclosure.
Accordingly, the Board proposes Sec. 226.4(d)(3)(i) to include this
requirement in the disclosure, and proposes model forms and samples
incorporating the disclosure at G-16(A) and (D) in Appendix G and H-
17(A) and (D) in Appendix H.
4(d)(3)(ii)
The August 2009 Closed-End Proposal would require creditors to make
a determination at the time of enrollment that the consumer meets any
applicable age or employment eligibility criteria for insurance or debt
cancellation or debt suspension coverage. See proposed
[[Page 58557]]
Sec. 226.4(d)(1)(iv) and (d)(3)(v). To provide creditors with some
flexibility, the Board proposes Sec. 226.4(d)(3)(ii) to allow
creditors to make the determination prior to or at the time of
enrollment. Comment 4(d)-14 regarding age or employment eligibility
criteria is revised accordingly.
4(d)(4) Telephone Purchases
In the January 2009 Credit Card Rule, the Board exempted open-end
(not home-secured) plans, from the requirement to obtain a written
signature or initials from the consumer for the telephone sales of
credit insurance or debt cancellation or debt suspension plans. See
Sec. 226.4(d)(4); 74 FR 5244, 5401, Jan. 29, 2009. However, creditors
must make the disclosures required under current Sec. 226.4(d)(1)(i)
and (ii) or (d)(3)(i) through (iii) orally; maintain evidence that the
consumer affirmatively elected to purchase the insurance or coverage;
and mail the required disclosures within three business days after the
telephone purchase. (The January 2009 Credit Card Rule was withdrawn as
of February 22, 2010, but Sec. 226.4(d)(4) was retained in the
February 2010 Credit Card Rule. 75 FR 7925 and 7658, 7796, Feb. 22,
2010.) The August 2009 Closed-End Proposal would apply this same rule
to HELOCs. See proposed Sec. 226.4(d)(4); 74 FR 43232, 43322, Aug. 26,
2009. Under this proposal, the disclosures would be required under
Sec. 226.4(d)(1)(i) and (d)(3)(i), rather than under Sec.
226.4(d)(1)(i) and (ii) and (d)(3)(i) through (iii). Accordingly, the
Board proposes to revise Sec. 226.4(d)(4) to require creditors making
telephone disclosures to provide orally the disclosures required under
Sec. 226.4(d)(1)(i) and (d)(3)(i).
Section 226.5 General Disclosure Requirements
Section 226.5 provides general disclosure requirements for open-end
credit. The Board is proposing to revise Sec. 226.5 and the associated
commentary to include references to the proposed open-end reverse
mortgage disclosures in Sec. 226.33.
Section 226.5b Requirements for Home-Equity Plans
Reverse Mortgages
Currently, reverse mortgages that are structured as open-end credit
plans are subject to Sec. 226.5b. The Board is proposing to
consolidate the disclosure requirements for open-end reverse mortgages
in Sec. 226.33. Consequently, the Board proposes to revise Sec.
226.5b to exclude reverse mortgages from the disclosure requirements in
current paragraphs (a) through (e). The Board's 2009 HELOC Proposal
also proposed to amend Sec. 226.5b. See 74 FR 43428 Aug. 26, 2009 for
further information. The Board has incorporated in the regulatory text
and commentary for Sec. 226.5b both the changes that were proposed in
the Board's 2009 HELOC Proposal and the changes proposed in this
notice. The Board is not soliciting comment on the amendments
previously proposed.
Proposed Sec. 226.5b(h) provides a cross-reference to the sections
in Sec. 226.33 which apply to reverse mortgages. The Board is also
proposing to remove proposed comments 5b(c)(9)(ii)-6 and 5b(c)(9)(iii)-
4, which provide guidance on how to disclose the payment terms for
open-end reverse mortgages. See 74 FR 43428, 43586, Aug. 26, 2009. As
discussed more fully below in the section-by-section analysis to Sec.
226.33, the Board is proposing not to apply the minimum periodic
payment disclosures to open-end reverse mortgages.
Reverse mortgages would remain subject to the other provisions in
Sec. 226.5b. Current Sec. 226.5b(g) (proposed to be redesignated as
Sec. 226.5b(d) in the August 2009 HELOC Proposal) requires a creditor
to refund fees paid for a home equity plan if any term required to be
disclosed in Sec. 226.5b(d) (proposed to be redesignated as Sec.
226.5b(c) in the August 2009 HELOC Proposal) changes (other than a
change due to fluctuations in the index in a variable-rate plan) before
the plan is opened and the consumer elects not to open the plan. See 74
FR 43428, 43484, Aug. 26, 2009. For reverse mortgages, proposed Sec.
226.5b(d) would be revised to apply to the early open-end reverse
mortgage disclosures required by Sec. 226.33(d)(1). Revisions to
proposed Sec. 226.5b(d) also would clarify that the creditor would not
be required to refund fees if the consumer changed the type of payment
he elected to receive under proposed Sec. 226.33(c)(5), or for changes
resulting from verification of the appraised property value or the
consumer's age. For example, if the disclosure is based on the
consumer's choice to receive only monthly payments, but after the
disclosure is provided the consumer decides instead to receive funds in
the form of a line of credit, the creditor would not be required to
refund the consumer's fees if the consumer later decided not to proceed
with the reverse mortgage.
Under current Sec. 226.5b(h) (proposed to be redesignated as Sec.
226.5b(e) in the August 2009 HELOC Proposal), which implements TILA
Section 127A(c)(2), neither a creditor nor any other person may impose
a nonrefundable fee on a consumer until after the third business day
following the consumer's receipt of the disclosures required by Sec.
226.5b. 15 U.S.C. 1637a(c)(2); 74 FR 43428, 43536, 43593, Aug. 26,
2009. This provision applies to all HELOCs subject to Sec. 226.5b,
including reverse mortgages. As discussed in the section-by-section
analysis to Sec. 226.33, for open-end reverse mortgages, the
disclosures required by Sec. 226.5b are proposed to be moved to Sec.
226.33; the nonrefundable fee provision in Sec. 226.5b, however, still
applies to open-end reverse mortgages subject to Sec. 226.33. Thus,
under proposed Sec. 226.5b(e), a consumer who has applied for a HELOC,
including an open-end reverse mortgage, may choose not to proceed with
the transaction for any reason within three business days after
application and receive a refund of any fees paid. See proposed comment
5b(e)-1, 74 FR 43428, 43593, Aug. 26, 2009.
This proposal amends the commentary to previously proposed Sec.
226.5b(e) to reflect a new proposed rule regarding reverse mortgages,
discussed in more detail below in the section-by-section analysis to
Sec. 226.40(b)(2). Under this new rule, neither a creditor nor any
other person may impose a nonrefundable fee on a consumer for a reverse
mortgage until after the third business day following the consumer's
completion of counseling from a qualified counselor. See proposed Sec.
226.40(b)(2) and accompanying commentary. Consequently, open-end
reverse mortgages would be subject to two restrictions on imposing
nonrefundable fees: (1) The rule under previously proposed Sec.
226.5b(e) described above, which applies to all HELOCs subject to Sec.
226.5b (see 74 FR 43428, 43536, Aug. 26, 2009); and (2) the rule under
proposed Sec. 226.40(b)(2), which applies to all reverse mortgages
subject to Sec. 226.33.
The Board proposes to add comment 5b(e)-5 to clarify that, for
open-end reverse mortgages, the restrictions on imposing nonrefundable
fees in Sec. Sec. 226.5b and 226.40(b)(2) both apply. The proposed
comment also cross-references proposed commentary to Sec.
226.40(b)(2), which explains the practical implications of these
restrictions in reverse mortgage transactions. See proposed comment
40(b)(2)(i)-3.
Current Sec. 226.5b(f) limits the changes that creditors may make
to HELOCs subject to Sec. 226.5b, including open-end reverse
mortgages. Current Sec. 226.5b(f)(1) limits changes to the annual
percentage rate, and current Sec. 226.5b(f)(3) limits changes to plan
terms; both apply to
[[Page 58558]]
reverse mortgages. Current Sec. 226.5b(f)(2) limits the situations in
which a creditor may terminate a plan and demand repayment of the
entire outstanding balance in advance of the original term. It does not
apply to reverse mortgages. Instead, current Sec. 226.5b(f)(4) limits
when open-end reverse mortgages may be terminated: in the case of
default; if the consumer transfers title to the property securing the
note; if the consumer ceases using the property as the primary
dwelling; or upon the consumer's death. No substantive revisions to
these provisions are proposed. The proposal would revise Sec.
226.5b(f)(4) to reflect the change of the defined term ``reverse
mortgage transaction'' to ``reverse mortgage'' discussed in the
section-by-section analysis to Sec. 226.33(a).
Interest Rate Not Under the Creditor's Control
TILA Section 137(a), implemented by Sec. 226.5b(f)(1), prohibits
variable-rate HELOCs from being subject to any interest rate changes
other than those based on ``an index or rate of interest which is
publicly available and is not under the control of the creditor.'' 15
U.S.C. 1647(a). Accordingly, Sec. 226.5b(f)(1) prohibits creditors
from changing a HELOC's APR unless the change is ``based on an index
that is not under the creditor's control'' and is ``available to the
general public.'' The Official Staff Commentary to Sec. 226.5b(f)(1)
explains that a creditor may not make changes based on its own prime
rate or cost of funds, and may not reserve a contractual right to
change rates at its discretion. See comment 5b(f)(1)-1. The commentary
states that a creditor may use a published prime rate, such as that in
the Wall Street Journal, even if the creditor's own prime rate is one
of several rates used to establish the published rate. Id.
In the August 2009 HELOC Proposal, the Board did not propose to
revise these provisions. However, earlier this year, the Board adopted
final rules regarding open-end (not-home-secured) credit, which include
additional guidance regarding what constitutes an index outside of the
creditor's control in the context of credit cards under an open-end
(not-home-secured) consumer credit plan (February 2010 Credit Card
Rule). See 75 FR 7658, 7737, 7819, 7909, Feb. 22, 2010. Under the
February 2010 Credit Card Rule, new Sec. 226.55(b)(2) provides that a
creditor may not increase an APR for a variable-rate credit card unless
the change is based on ``an index that is not under the card issuer's
control and is available to the general public'' and ``the increase in
the [APR] is due to an increase in the index.'' See id. at 7819.
The commentary to this new provision incorporates the explanations
of ``an index that is not under the [creditor's] control'' that appear
in the HELOC rules, described above. See comment 55(b)(2)-2.i; 75 FR
7658, 7909, Feb. 22, 2010. In addition, the commentary includes two
situations not currently associated with the meaning of this phrase in
the HELOC rules.
First, under Sec. 226.55(b)(2), a card issuer exercises control
over the index if the card issuer has set a minimum rate ``floor''
below which a variable rate cannot fall, even if a decrease would be
consistent with a change in the applicable index. See comment 55(b)(2)-
2.ii; 75 FR 7658, 7737, 7909, Feb. 22, 2010. Second, a card issuer
exercises control over the index if the variable rate can be calculated
based on any index value that existed during a period of time. See
comment 55(b)(2)-2.iii; 75 FR 7658, 7737, 7909, Feb. 22, 2010. In
explaining this second provision, the SUPPLEMENTARY INFORMATION to the
February 2010 Credit Card Rule notes that card issuers typically reset
rates on variable-rate credit cards monthly, every two months, or
quarterly. Under the new rule, a card issuer is permitted to adjust the
variable rate based on the value of the index on a particular day, or
in the alternative, the average index value during a specific period.
See id. This second provision, however, is designed prevent creditors
from setting the new rate based on, for example, the highest index
value during a given period of time preceding the reset date (such as
the 90 days preceding the last day of a month or billing cycle).
The Board expressed concerns that setting a rate ``floor'' and
adjusting rates based on any index value that existed during a period
of time can prevent consumers from receiving the benefit of decreases
in the index. Upon review, the Board concluded that these practices
constitute a creditor's control over an index to change rates in a
manner prohibited by TILA. See id. at 7909 (citing TILA Section
171(b)(2); 15 U.S.C. 1666(b)(2)).
The Board solicits comment on whether to amend the commentary to
Sec. 226.5b(f)(1) to adopt these clarifications regarding what
constitutes control over an index for purposes of the restrictions on
changing the rate for a variable-rate HELOC. The Board requests that
commenters provide specific reasons why the Board should or should not
do so.
Section 226.6 Account-Opening Disclosures
Reverse Mortgages
Section 226.6(a), as proposed to be amended in the Board's August
2009 HELOC Proposal, would be revised by this proposal to exclude
reverse mortgages from the tabular disclosure requirements in Sec.
226.6(a)(1) and (a)(2). Instead, reverse mortgages would be subject to
the disclosure requirements in proposed Sec. 226.33(c) and (d)(2). In
addition, as discussed in the section-by-section analysis to Sec.
226.33(c) below, reverse mortgages would not be subject to the
requirements in Sec. 226.6(a)(5)(i) to disclose voluntary credit
insurance, debt cancellation or debt suspension, and in Sec.
226.6(a)(5)(v) to disclose information about fixed-rate and -term
payment plans. However, reverse mortgages would remain subject to the
disclosure requirements in Sec. 226.6(a)(3), (a)(4), (a)(5)(iii) and
(a)(5)(iv). These provisions require disclosures about charges, rates,
security interests, billing rights, and possible creditor actions,
respectively, and would be provided outside the required disclosure
tables. The Board has incorporated in the regulatory text and
commentary for Sec. 226.6 both the changes that were proposed in the
Board's 2009 HELOC Proposal and the changes proposed in this notice.
The Board is not soliciting comment on the amendments previously
proposed.
Credit Protection Products
As discussed in the section-by-section analysis to proposed Sec.
226.4(d)(1) and (d)(3) above, credit insurance, debt cancellation
coverage, and debt suspension coverage (collectively, ``credit
protection products'') are products that are offered in connection with
a credit transaction and that present unique costs and risks to the
consumer. Currently, Regulation Z requires the creditor to provide
detailed disclosures of the costs to the consumer if the product is
voluntary (as a condition of excluding the costs from the finance
charge), but not if the product is required. See TILA Section 106(b),
15 U.S.C. 1605(b); Sec. 226.4(d)(1) and (d)(3). If the product is
required, Regulation Z requires only a brief disclosure of the cost,
without further details, such as the length of coverage. See Sec.
226.6(b)(5)(i) (open-end not home-secured); proposed Sec.
226.6(a)(5)(i) (HELOCs). Based on comments to the August 2009 Closed-
End Proposal and the Board's review of creditor solicitations and
disclosures for credit protection products, the Board is proposing more
comprehensive
[[Page 58559]]
disclosures of the risks associated with the optional products. See
proposed Sec. 226.4(d)(1) and (d)(3). However, the Board is concerned
that consumers that are offered HELOCs or open-end (not home-secured)
credit that require payment for credit protection products will not be
fully informed of the costs and risks associated with these products.
Accordingly, the Board proposes to require creditors that require
credit protection products in connection with open-end credit to
provide the disclosures required in Sec. 226.4(d)(1)(i) and (d)(3)(i),
as applicable, except for Sec. 226.4(d)(1)(i)(A), (B), (D)(5), (E) and
(F). This proposal would replace Sec. 226.6(a)(5)(i), which was
proposed for HELOCs in the August 2009 HELOC Proposal, and would revise
Sec. 226.6(b)(5)(i), which was adopted for open-end (not home-secured)
credit in the January 2009 Credit Card Rule. (The January 2009 Credit
Card Proposal was withdrawn as of February 22, 2010, but Sec.
226.6(b)(5)(i) was retained in the February 2010 Credit Card Rule. 75
FR 7925 and 7658, 7804, Feb. 22, 2010.) Thus, for required credit
protection products, creditors would have to disclose information about
the Federal Reserve Board's Web site regarding credit protection
products, the need for the product, the maximum cost and benefit,
general eligibility restrictions, and the time period and age limit for
coverage. However, the creditor would not be required to do the
following because it is not applicable if the credit protection product
is required in connection with the credit transaction: (1) Determine
the consumer's age or employment eligibility at the time of enrollment;
(2) obtain the consumer's affirmative consent; or (3) disclose the
optional nature, age and employment eligibility, or statement of the
consumer's affirmative consent.
The Board proposes to require these disclosures using its authority
under TILA Section 105(a), 15 U.S.C. 1604(a). TILA Section 105(a)
authorizes the Board to prescribe regulations to carry out the purposes
of the act. TILA's purposes include promoting ``the informed use of
credit,'' which ``results from an awareness of the cost thereof by
consumers.'' TILA Section 102(a), 15 U.S.C. 1601(a). A premium or
charge for a required credit protection product is a cost assessed in
connection with credit. The credit transaction and the relationship
between the creditor and the consumer are the reasons the product is
offered or available. Because there have long been concerns about the
merits of these products,\16\ the Board believes that consumers would
benefit from clear and meaningful disclosures regarding the associated
costs and risks. As discussed more fully in the section-by-section
analysis for proposed Sec. 226.4(d)(1) and (d)(3) above, consumer
testing showed that without clear disclosures, participants were
unaware of the costs and risks of these products. For these reasons,
the Board believes that this proposed rule would serve to inform
consumers of the costs and risks of accepting a HELOC or open-end (not
home-secured) credit plan with a required credit protection product.
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\16\ See, e.g., Bd. of Governors of the Fed. Reserve Sys. and
U.S. Dep't of Hous. and Urban Dev., Joint Report to the Congress
Concerning Reform to the Truth in Lending Act and the Real Estate
Settlement Procedures Act at 64-66 (1998) (raising concerns about
high-pressure sales tactics, costs and cancellation rights for
credit protection products).
---------------------------------------------------------------------------
Section 226.7 Periodic Statement
Reverse mortgages. Section 226.7 identifies information about an
open-end account, including a reverse mortgage, that must be disclosed
when a creditor is required to provide periodic statements. Section
226.7(a)(8), which implements TILA Section 127(b)(9), requires a
creditor offering HELOCs subject to Sec. 226.5b, including reverse
mortgages, to disclose on the periodic statement the date by which or
the time period within which the new balance or any portion of the new
balance must be paid to avoid additional finance charges. 15 U.S.C.
1637(b)(9). As discussed more fully below in the section-by-section
analysis to Sec. 226.33(c)(13), the disclosure of a grace period for
reverse mortgages is not relevant or meaningful to consumers who are
not making regular payments. For this reason the Board proposes to
exercise its authority under TILA Sections 105(a) and 105(f) to exempt
reverse mortgages from the requirement to state whether or not any time
period exists within which any credit extended may be repaid without
incurring a finance charge. The Board believes that an exemption is
warranted because the grace period disclosure may be confusing to
reverse mortgage consumers who are not making regular payments.
Consumer testing of periodic statements for all HELOCs. Under the
August 2009 HELOC Proposal, creditors would be required to provide
periodic statements that group fees and interest together, separate
from transactions. See proposed Sec. 226.7(a)(6)(i), 74 FR 43428,
43541, Aug. 26, 2009. The Board also proposed to eliminate the
requirement that creditors disclose the effective APR on HELOC periodic
statements. The Board proposed sample forms for HELOC periodic
statements, developed largely based on the results of the Board's prior
consumer testing conducted for credit cards. See proposed Samples G-
24(A), G-24(B), and G-24(C) in Appendix G of part 226, 74 FR 43428,
43570, Aug. 26, 2009. The Board indicated that it would conduct
additional consumer testing of model disclosures before finalizing the
August 2009 HELOC Proposal. 74 FR 43428, 43433, Aug. 26, 2009. In 2009
and 2010, the Board and ICF Macro tested sample periodic statements in
three rounds of interviews with 31 participants. Macro prepared a
detailed report of findings, which is available on the Board's public
Web site: http://www.federalreserve.gov. The Board is also providing
this summary of the testing and solicits comment.
Consistent with the results from the Board's credit card testing,
participants in the three rounds of HELOC testing found it beneficial
to have fees and interest separated from transactions on the periodic
statement. Consumer testing also further supported the Board's August
2009 HELOC Proposal to eliminate the requirement for creditors to
disclose the effective APR on HELOC periodic statements. Participants
in the three rounds of HELOC testing were asked questions about the
effective APR disclosure designed to elicit their understanding of the
rate. A very small minority of participants correctly explained that
the effective APR for fixed-rate advances was higher than the
corresponding APR for fixed-rate advances because the effective APR
included a fixed-rate advance fee that had been imposed. An even
smaller minority also correctly explained that the effective APR for
variable-rate advances was the same as the corresponding APR for
variable-rate advances because no transaction fee had been imposed on
those advances. A majority offered incorrect explanations or did not
offer any explanation. In addition, the inclusion of the effective APR
disclosure on the statement was often confusing to participants; in two
rounds some participants mistook the effective APR for the
corresponding APR. These results are consistent with the testing
results of the effective APR for credit cards.
Section 226.9 Subsequent Disclosure Requirements
Reverse mortgages. Section 226.9 sets forth a number of disclosure
requirements that apply after a home-equity plan subject to Sec.
226.5b, including an open-end reverse
[[Page 58560]]
mortgage, is opened. This section contains cross-references to the
account-opening disclosures in Sec. 226.6. The proposal would revise
Sec. 226.9 and the associated commentary to reference the reverse
mortgage account-opening disclosure requirements in Sec. 226.33 as
well. The Board has incorporated in the regulatory text and commentary
for Sec. 226.9 both the changes that were proposed in the Board's 2009
HELOC Proposal and the changes proposed in this notice. The Board is
not soliciting comment on the amendments previously proposed.
Consumer testing of notices of action taken and reinstatement
notices and responses for all HELOCs. Under the August 2009 HELOC
Proposal, proposed Sec. 226.9(j)(1) would retain the existing
requirement that a creditor provide the consumer with notice of
temporary account suspension or credit limit reduction under Sec.
226.5b(f)(3)(i) or (f)(3)(vi). 74 FR 43428, 43521, Aug. 26, 2009. Under
proposed Sec. 226.9(j)(3), creditors taking action under Sec.
26.5b(f)(2) would be required to provide the consumer with a notice of
the action taken and specific reasons for the action. In addition,
proposed Sec. 226.5b(g)(2)(v) would require creditors to provide
consumers with a notice of results of a reinstatement investigation. To
facilitate compliance, model clauses were proposed to illustrate the
requirements for these notices. See proposed Model Clauses G-22(A), G-
22(B), G-23(A) and G-23(B) in Appendix G of part 226, 74 FR 43428,
43569, Aug. 26, 2009. The Board indicated that it would conduct
additional consumer testing of model disclosures before finalizing the
August 2009 HELOC Proposal. 74 FR 43428, 43433, Aug. 26, 2009.
The Board and ICF Macro conducted testing in 2009 and 2010 of the
proposed model clauses for notices that would be required when a
creditor suspends or reduces the credit limit for a HELOC, and when a
creditor responds to a consumer's request to reinstate a suspended or
reduced line. In this proposal, the Board provides a summary of the
findings for comment. A detailed report of the findings is included in
Macro's report, available on the Board's public Web site: http://www.federalreserve.gov.
In the August 2009 HELOC Proposal, the Board included model clauses
G-23(A) and G-23(B) to illustrate language for a notice to be used in
circumstances in which the creditor:
Temporarily suspends, advances or reduces a credit limit
due to a significant decline in the value of the property, a material
change in the consumer's financial circumstances, or the consumer's
default of a material obligation under the plan; or
Takes action (including termination of the account as well
as temporary suspension or credit limit reduction) due to the
consumer's failure to make a required minimum periodic payment within
30 days of the due date, the consumer's action or inaction that
adversely affected the creditor's interest in the property, or an
occurrence of fraud or material misrepresentation concerning the
account.
Notice of suspension or reduction. A notice that included model
clauses in G-23(A) was tested in two rounds of interviews with a total
of 21 participants. The notice that was shown to participants indicated
that their credit limit had been reduced because the value of the
property securing their loan had declined significantly. The notice
tested in one round was in the form of a checklist that the creditor
could use to indicate the reason for reducing the credit line. A few
participants were confused by the listing of other options on the list,
even though only one option was checked and the others did not apply to
the consumer's situation. Several other participants seemed somewhat
confused by the format but eventually understood the form.
As a result, the notice tested in the following round included the
specific reason for credit line reduction with no other options listed
on the notice. Participants in the next round expressed significantly
better understanding of the revised notice. All participants understood
that the purpose of the disclosure was to inform them that their credit
line was reduced because the value of their home decreased. All
participants also understood that they could ask for reinstatement of
their original credit limit and how to do so. Some participants
understood that they would not be charged a fee by the creditor for the
first request to reinstate the credit line, and all but one participant
understood that they might be charged for subsequent requests.
Response to request for reinstatement. The Board also tested model
clauses in proposed G-22(B) regarding the consumer's rights when the
consumer requests reinstatement of a HELOC that has been suspended or
reduced and for the creditor's response to a reinstatement request.
These clauses were tested in one round with 11 participants. The model
clauses, for example, inform the consumer that the consumer's
reinstatement request has been received and that the creditor has
investigated the request. They contain sample language for explaining
the results of a reinstatement investigation in which the creditor
found that a reason for suspension of advances or reduction of the
credit limit still exists, either because the condition permitting the
freeze or credit limit reduction continues to exist or because another
condition permitting a freeze or credit line reduction under Regulation
Z exists.
Consumer testing indicated that consumers understand the proposed
model clauses for a reinstatement notice. In one round of interviews,
all participants were able to explain the purpose of the reinstatement
notice. All participants also understood that: Their credit limit was
not being reinstated to the previous level due to factors other than a
reduction in the value of their home; the creditor's decision was based
on information received from an examination of the consumer's credit
report; and that they could ask the creditor to reinstate their credit
limit again, but would have to pay a fee in connection with the
request. The proposed model clauses for a reinstatement notice tested
so well that the Board did not repeat the testing of this disclosure in
subsequent rounds.
Section 226.15 Right of Rescission
15(a) Consumer's Right To Rescind
15(a)(1) Coverage
Section 226.15(a)(1), which implements TILA Section 125(a),
generally provides that in a credit plan in which a security interest
is or will be retained or acquired in a consumer's principal dwelling,
each consumer whose ownership interest is or will be subject to the
security interest shall have the right to rescind: (1) Each credit
extension made under the plan; (2) the plan when the plan is opened;
(3) a security interest when added or increased to secure an existing
plan; and (4) the increase when a credit limit on the plan is
increased. 15 U.S.C. 1635(a). Nonetheless, as provided in TILA Section
125(e), the consumer does not have the right to rescind each credit
extension made under the plan if the extension is made in accordance
with a previously established credit limit for the plan. 15 U.S.C.
1635(e). The Board proposes technical edits to Sec. 226.15(a)(1) and
related commentary. No substantive change is intended.
Different terminology is used throughout Sec. 226.15 and the
related commentary to refer to the events mentioned above that give
rise to a right of rescission, such as ``transactions'' and
``occurrences.'' For consistency, the Board proposes to revise Sec.
226.15 and
[[Page 58561]]
related commentary to refer to these events as ``transactions'' for
purposes of Sec. 226.15.
15(a)(2) Exercise of the Right
As discussed in the section-by-section analysis to proposed Sec.
226.23(a)(2) below, the Board proposes to revise Sec. 226.23(a)(2) and
related commentary on rescission for closed-end loans to describe (1)
How the consumer must exercise the right of rescission, (2) whom the
consumer must notify during the three-business-day period following
consummation and after that period has expired (the extended right),
and (3) when the creditor or current owner will be deemed to receive
the consumer's notice. Proposed Sec. 226.23(a)(2) provides that the
party the consumer must notify depends on whether the right of
rescission is exercised during the three-business-day period following
consummation or after expiration of that period. Proposed Sec.
226.23(a)(2)(ii)(A) states that, during the three-business-day period,
the consumer must notify the creditor or the creditor's agent
designated on the rescission notice. Proposed Sec. 226.23(a)(2)(ii)(A)
also includes the guidance from current comment 23(a)(2)-1, that if the
notice does not designate the address of the creditor or its agent, the
consumer may mail or deliver notification to the servicer, as defined
in Sec. 226.36(c)(3). The proposed rule is intended to ensure that the
notice is sent to the person most likely still to own the debt
obligation. Generally, closed-end loans are not transferred during the
three-business-day period following consummation.
Proposed Sec. 226.23(a)(2)(ii)(B) addresses to whom the notice
must be sent after the three-business-day period has expired, and is
intended to ensure that consumers can exercise the extended right of
rescission if the creditor has transferred the consumer's debt
obligation. Under proposed Sec. 226.23(a)(2)(ii)(B), the consumer must
mail or deliver notification to the current owner of the debt
obligation. However, notice to the servicer would also constitute
delivery to the current owner. As discussed in the section-by-section
analysis to proposed Sec. 226.23(a)(2), closed-end loans are often
transferred shortly after consummation and securitized. In addition,
the original creditor may no longer exist because of dissolution,
bankruptcy, or merger. As a result, consumers may have difficulty
identifying the current owner of their loan, and may reasonably be
confused as to whom they should contact to rescind their loan. In
contrast, consumers usually know the identity of their servicer. They
may regularly receive statements or other correspondence from their
servicer, for example, and many consumers continue to mail monthly
mortgage payments to the servicer rather than have these payments
automatically debited from their checking or savings account.
The Board proposes revisions to Sec. 226.15(a)(2) applicable to
HELOCs, consistent with those proposed in Sec. 226.23(a)(2) as
discussed above. While the Board realizes that HELOC accounts may not
be transferred and securitized as often as closed-end loans, there are
cases for HELOCs where the original creditor no longer exists because
of dissolution, bankruptcy, or merger. Thus, the Board believes that
the proposed rules in Sec. 226.15(a)(2) are needed for HELOCs to
ensure that consumers can exercise the extended right of rescission if
the creditor has transferred the consumer's debt obligation. The Board
also believes that having consistent rules on these issues for closed-
end mortgage loans and HELOCs will facilitate creditors' compliance
with the rules. As discussed in more detail in the section-by-section
analysis to proposed Sec. 226.23(a)(2), the Board solicits comment on
this proposed approach.
15(a)(3) Rescission Period
For the reasons discussed in the section-by-section analysis to
proposed Sec. 226.23(a)(3) below, the Board proposes to revise Sec.
226.15(a)(3) and related commentary to clarify the following: (1) The
consumer's death terminates an unexpired right to rescind; (2) the
consumer's filing for bankruptcy generally does not terminate the
unexpired right to rescind if the consumer still retains an interest in
the property after the bankruptcy estate is created; and (3) a
refinancing with a creditor other than the current holder of the
obligation and paying off the loan would terminate the unexpired right
to rescind. The Board also proposes to clarify when the rescission
period expires where a creditor provides corrected material disclosures
or a rescission notice.
15(a)(4) Joint Owners
Section 226.15(a)(4) provides that when more than one consumer in a
transaction has the right to rescind, the exercise of the right by one
consumer is effective for all consumers. Comment 15(a)(4)-1 provides
that when more than one consumer has the right to rescind a
transaction, any one consumer may exercise that right and cancel the
transaction on behalf of all. For example, if both a husband and wife
have the right to rescind a transaction, either spouse acting alone may
exercise the right and both are bound by the rescission. The Board
proposes technical edits to these provisions. No substantive change is
intended.
15(a)(5) Material Disclosures
Background
TILA and Regulation Z provide that a consumer may exercise the
right to rescind until midnight after the third business day following
the latest of (1) the transaction that gives rise to the right of
rescission (such as opening the HELOC account), (2) delivery of the
notice of the right to rescind, or (3) delivery of all material
disclosures. TILA Section 125(a); 15 U.S.C. 1635(a); Sec.
226.15(a)(3). Thus, the right to rescind does not expire until the
notice of the right to rescind and the material disclosures are
properly delivered. This ensures that consumers are notified of their
right to rescind, and that they have the information they need to
decide whether to exercise the right. If the rescission notice and
material disclosures are not delivered, a consumer's right to rescind
may extend for up to three years from the date of the transaction that
gave rise to the right to rescind. TILA Section 125(f); 15 U.S.C.
1635(f); Sec. 226.15(a)(3).
TILA defines the following as ``material disclosures'' for purpose
of the right of rescission related to HELOCs: (1) The method of
determining the finance charge and the balance upon which a finance
charge will be imposed, and (2) the APR. TILA Section 103(u); 15 U.S.C.
1602(u). Consistent with TILA, current footnote 36 to Sec.
226.15(a)(3) defines the term ``material disclosures'' to include the
above disclosures. In addition, the Board has previously added
information about membership or participation fees and certain payment
information to the regulatory definition of ``material disclosures''
for HELOCs, pursuant to the Board's authority to make adjustments to
TILA requirements as in the judgment of the Board are necessary or
proper to effectuate the purposes of TILA. See TILA Sections 102(a),
105(a); 15 U.S.C. 1601(a), 1604(a); 46 FR 20847, Apr. 7, 1981; 54 FR
24670, June 9, 1989. Thus, current footnote 36 to Sec. 226.15(a)(3)
also includes the following information as ``material disclosures:'':
(1) The amount or method of determining the amount of any membership or
participation fee that may be imposed as part of the plan; and (2)
payment information described in current Sec. Sec. 226.5b(d)(5)(i) and
(ii) that is required under former Sec. 226.6(e)(2)
[[Page 58562]]
(redesignated as Sec. 226.6(a)(3)(ii) in the February 2010 Credit Card
Rule). This payment information is: (1) The length of the draw period
and any repayment period; (2) an explanation of how the minimum
periodic payment will be determined and the timing of the payments; and
(3) if payment of only the minimum periodic payment may not repay any
of the principal or may repay less than the outstanding balance, a
statement of this fact as well as that a balloon payment may result.
Congress first added the definition of ``material disclosures'' to
TILA in 1980 so that creditors would be ``in a better position to know
whether a consumer may properly rescind a transaction.'' \17\ The HELOC
market has changed considerably since Congress created this definition
of ``material disclosures.'' In the August 2009 HELOC Proposal, the
Board proposed comprehensive revisions to the account-opening
disclosures for HELOCs that would reflect these changes in the HELOC
market. The proposed account-opening disclosures and revised model
forms were developed after extensive consumer testing to determine
which credit terms consumers find the most useful in evaluating credit
transactions. Based on consumer testing, the August 2009 HELOC Proposal
made less prominent or eliminated certain account-opening disclosures
that are currently defined as ``material disclosures,'' while adding
other disclosures that are more important to consumers today. As
discussed below, the Board proposes to revise the definition of
``material disclosures'' consistent with the Board's proposed changes
to the account-opening disclosures in Sec. 226.6(a) under the August
2009 HELOC Proposal and with the proposed changes to open-end reverse
mortgage disclosures discussed in the section-by-section analysis to
Sec. 226.33 below. The Board also proposes to revise the definition of
``material disclosures'' for closed-end mortgage loans, as discussed
under Sec. 226.23(a)(5) below.
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\17\ S. Rep. No. 368, 98 Cong. 2d Sess. 29, reprinted in 1980
U.S.C.A.N.N. 236, 264.
---------------------------------------------------------------------------
August 2009 HELOC Proposal
In the August 2009 HELOC Proposal, the Board proposed two
significant revisions to the account-opening disclosures for HELOCs
under Sec. 226.6(a) (moved from former Sec. Sec. 226.6(a) through
(e)). The proposed revisions (1) require a tabular summary of key terms
to be provided before the first transaction on the HELOC plan (see
proposed Sec. Sec. 226.6(a)(1) and (a)(2)), and (2) change how and
when cost disclosures must be made (see proposed Sec. 226.6(a)(3) for
content, and proposed Sec. 226.5(b) and proposed Sec. 226.9(c) for
timing)).
Under the current rules, a creditor must disclose any ``finance
charge'' or ``other charge'' in the account-opening disclosures that
must be provided before the first transaction on a HELOC plan. 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 underdisclosing 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 changes to the disclosures in Sec. 226.6(a) in the
August 2009 HELOC Proposal are designed to respond to these criticisms
while still giving full effect to TILA's requirement to disclose credit
charges before they are imposed. Specifically, in the August 2009 HELOC
Proposal, the Board proposed to require creditors to provide a tabular
summary of key terms in writing to a consumer before the first
transaction is made under the HELOC plan. This proposed tabular summary
contains information about rates, fees, and payment information that
the Board believes to be the most important information in the current
marketplace for consumers to know before they use a HELOC account.
``Charges imposed as part of the HELOC plan,'' as set forth in proposed
Sec. 226.6(a)(3), that are not required to be disclosed in the
account-opening table must be disclosed orally or in writing before the
consumer agrees to or becomes obligated to pay the charge.
The Board's Proposal
Consistent with the August 2009 HELOC Proposal, the Board now
proposes to revise the definition of material disclosures to include
information that is critical to consumers in evaluating HELOC offers,
and to remove information that consumers do not find to be important.
The proposal is intended to ensure that consumers have the information
they need to decide whether to rescind a HELOC.
Proposed Sec. 226.15(a)(5) would retain the following as material
disclosures:
Any APR, information related to introductory rates, and
information related to variable rate plans that is required to be
disclosed in the proposed account-opening table except for the lowest
and highest value of the index in the past 15 years;
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 length of the plan, the length of the draw period and
the length of any repayment period;
An explanation of how the minimum periodic payment will be
determined and the timing of the payments. If 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 statement of
this fact, as well as a statement that a balloon payment may result or
will result, as applicable; and
A fee for required credit insurance, or debt cancellation
or suspension coverage.
The following disclosures would be added to the list of material
disclosures:
The total of all one-time fees imposed by the creditor and
any third parties to open the plan (this disclosure would replace an
itemization of the one-time fees to open the plan that are currently
material disclosures);
Any fee that may be imposed by the creditor if a consumer
terminates the plan prior to its scheduled maturity;
If applicable, a statement that negative amortization may
occur, and that negative amortization increases the principal balance
and reduces the consumer's equity in the dwelling;
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
[[Page 58563]]
requirements (this disclosure would replace the disclosure of fees
imposed for these limitations or restrictions, which are currently
material disclosures); and
The credit limit applicable to the plan.
The following disclosures would be removed from the list of
material disclosures:
Any APRs that are not required to be in the proposed
account-opening table, specifically any penalty APRs or APRs for fixed-
rate and fixed-term advances during the draw period (unless they are
the only advances allowed during the draw period);
An itemization of one-time fees imposed by the creditor
and any third parties to open the plan;
Any transaction charges imposed by the creditor for use of
the home-equity plan;
Any fees imposed by the creditor for a consumer's failure
to comply with 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 for failure to comply with any minimum outstanding balance
and minimum draw requirements;
Any finance charges that are not required to be disclosed
in the account-opening table; and
The method of determining the balance upon which a finance
charge will be imposed (i.e., a description of balance computation
methods).
Proposed comment 15(a)(5)(i)-1 states that the right to rescind
generally does not expire until midnight after the third business day
following the latest of: (1) The transaction that gives rise to the
right of rescission, (2) delivery of the rescission notice, as set
forth in Sec. 226.15(b), or (3) delivery of all material disclosures,
as set forth in Sec. 226.15(a)(5)(i). A creditor must make the
material disclosures clearly and conspicuously, consistent with the
requirements of proposed Sec. 226.6(a)(2) or, for open-end reverse
mortgages, Sec. 226.33(c). The proposed comment clarifies that a
creditor may satisfy the requirements to provide the material
disclosures by providing an account-opening table described in proposed
Sec. 226.6(a)(1) or Sec. 226.33(d)(1) and (d)(4) that complies with
the regulation. Failure to provide the required non-material
disclosures set forth in Sec. 226.6 or Sec. 226.33 or the information
required under Sec. 226.5b does not affect the right of rescission,
although such failure may be a violation subject to the liability
provisions of TILA Section 130, or administrative sanctions. 15 U.S.C.
1640.
Under the August 2009 HELOC Proposal, proposed Sec. Sec.
226.6(a)(1)(ii) and (a)(2) sets forth certain terminology and format
requirements with which creditors must comply in disclosing certain
terms in the account-opening table. For example, under proposed Sec.
226.6(a)(2)(vi)(A)(1)(i), if an APR that must be disclosed in the
account-opening table is a variable rate, a creditor must disclose the
fact that the APR may change due to the variable-rate feature. In
describing that the rate may vary, a creditor in the account-opening
table must use the term ``variable rate'' in underlined text. Similar
requirements for reverse mortgages are proposed in Sec. 226.33(c),
(d)(2) and (d)(4).
Proposed comment 15(a)(5)(i)-3 specifies that failing to satisfy
terminology or format requirements in proposed Sec. Sec. 226.6(a)(1)
or (a)(2) or Sec. 226.33(c), (d)(2) and (d)(4) (including the tabular
format requirement) or in the proposed model forms in Appendix G or
Appendix K is not by itself a failure to provide material disclosures.
In addition, a failure to satisfy the proposed 10-point font size
requirement that would apply to disclosures in the HELOC or reverse
mortgage account-opening tables, as set forth in proposed comment
5(a)(1)-3, is not by itself a failure to provide material disclosures.
Nonetheless, a creditor must provide the material disclosures clearly
and conspicuously, as described in Sec. 226.5(a)(1) and comments
5(a)(1)-1 and -2 (as adopted in the February 2010 Credit Card Rule). In
the example above, as long as a creditor satisfies the requirement to
disclose clearly and conspicuously the fact that the APR may change due
to the variable-rate feature, the creditor will be deemed to have
provided this material disclosure even if the creditor does not use the
term ``variable rate'' in underlined text to indicate that a rate may
vary.
The Board believes that in most cases, creditors will satisfy the
terminology and format requirements applicable to the account-opening
disclosures when providing the material disclosures. As discussed
above, proposed comment 15(a)(5)(i)-1 provides that a creditor may
satisfy the requirement to provide the material disclosures by giving
an account-opening table described in Sec. 226.6(a)(1) or Sec.
226.33(d)(2) and (d)(4) that complies with the regulation (including
the terminology and format requirements). The Board believes that most
creditors will take advantage of the safe harbor in proposed comment
15(a)(5)(i)-1 by using the account-opening disclosures to fulfill the
obligation to provide material disclosures.
The Board does not believe that right of rescission should be
extended when the creditor has provided the material disclosures
clearly and conspicuously to the consumer, but the material disclosures
do not meet all the terminology and format requirements applicable to
the account-opening disclosures. A material disclosure that is clear
and conspicuous but contains a formatting error, such as failure to use
bold text, is unlikely to impair a consumer's ability to determine
whether to exercise the right to rescind. In addition, providing an
extended right of rescission in these cases may increase the cost of
credit, as creditors would incur litigation risk and potential costs to
unwind transactions based on a failure to meet certain technical
terminology or format requirements, even though the disclosure in a
particular case was still made clearly and conspicuously to the
consumer.
Legal authority to add disclosures. The Board proposes to revise
the definition of material disclosures pursuant to its authority under
TILA Section 105. 15 U.S.C. 1604. Although Congress specified in TILA
the disclosures that constitute material disclosures, Congress gave the
Board broad authority to make adjustments to TILA requirements based on
its knowledge and understanding of evolving credit practices and
consumer disclosures. Under TILA Section 105(a), the Board may make
adjustments to TILA to effectuate the purposes of TILA, to prevent
circumvention or evasion, or to facilitate compliance. 15 U.S.C.
1604(a). The purposes of TILA include ensuring the ``meaningful
disclosure of credit terms'' to help consumers avoid the uninformed use
of credit. 15 U.S.C. 1601(a), 1604(a).
The Board has considered the purposes for which it may exercise its
authority under TILA Section 105(a) and, based on that review, believes
that the proposed adjustments are appropriate. The Board believes that
the proposed amendments to the definition of ``material disclosures''
are warranted by the complexity of HELOC products offered today and the
number of disclosures that are critical to the consumer's evaluation of
a credit offer. Consumer testing conducted for the Board for the August
2009 HELOC Proposal showed that certain terms in HELOC products are
more important to consumers. Defining these disclosures as ``material
disclosures'' would ensure the ``meaningful disclosure of credit
terms'' so that consumers would have the information they need to make
informed decisions about whether to rescind the credit transaction. The
[[Page 58564]]
proposed definition may also prevent circumvention or evasion of the
disclosure rules because creditors would have a greater incentive to
ensure that the material disclosures are accurate.
Legal authority to add tolerances. The Board recognizes that
increasing the number of material disclosures could increase the
possibility of errors resulting in extended rescission rights. To
ensure that inconsequential disclosure errors do not result in extended
rescission rights, the Board proposes to add tolerances for accuracy of
disclosures of the credit limit applicable to the plan and the total of
all one-time fees imposed by the creditor and any third parties to open
the plan.
The Board proposes to model the tolerances for disclosures of the
credit limit and the total of all one-time fees imposed to open the
plan on the tolerances provided by Congress in 1995 for the disclosure
of the finance charge for closed-end mortgage loans, as discussed in
more detail in the section-by-section analysis to proposed Sec.
226.23(a)(5). As discussed in more detail in the section-by-section
analyses below, disclosure of the credit limit would be considered
accurate if the disclosed credit limit: (1) Is overstated by no more
than \1/2\ of 1 percent of the credit limit required to be disclosed
under Sec. 226.6(a)(2)(xviii) or $100, whichever is greater; or (2) is
less than the credit limit required to be disclosed under Sec.
226.6(a)(2)(xviii). The total of all one-time fees imposed to open the
plan would be considered accurate if the disclosed amount is
understated by no more than $100; or is greater than the amount
required to be disclosed under Sec. 226.6(a)(2)(vii) or Sec.
226.33(c)(7)(i)(A).
The Board proposes the new tolerances for these disclosures
pursuant to its authority in TILA Section 121(d) to establish
tolerances for numerical disclosures that the Board determines are
necessary to facilitate compliance with TILA and that are narrow enough
to prevent misleading disclosures or disclosures that circumvent the
purposes of TILA. 15 U.S.C. 1631(d). The Board does not believe that an
extended right of rescission is appropriate if a creditor understates
or slightly overstates the credit limit applicable to the plan, or
overstates or slightly understates the total one-time fees imposed to
open the plan. Creditors would incur litigation and other costs to
unwind transactions based on the extended right of rescission, even
though the error in the disclosure was not critical to a consumer's
decision to enter into the credit transaction, and, in turn, to rescind
the transaction. These disclosure errors are unlikely to influence the
consumer's decision of whether to rescind the loan. The Board believes
that the proposed tolerances are broad enough to alleviate creditors'
compliance concerns regarding minor disclosure errors, and narrow
enough to prevent misleading disclosures.
Legal authority to remove disclosures. As discussed above, the
proposal removes certain disclosures from the definition of ``material
disclosures.'' Some of these removed disclosures would be replaced with
similar, but more useful, disclosures, such as removing an itemization
of one-time fees imposed to open a HELOC plan from the definition of
``material disclosures,'' but including the total of one-time fees
imposed to open a plan as a material disclosure. The Board proposes to
remove these disclosures from the definition of ``material
disclosures'' through its exception and exemption authority under TILA
Section 105. 15 U.S.C. 1604. Although Congress specified in TILA the
disclosures that constitute material disclosures that extend
rescission, the Board has broad authority to make exceptions to or
exemptions from TILA requirements based on its knowledge and
understanding of evolving credit practices and consumer disclosures.
Under TILA Section 105(a), the Board may make adjustments to TILA to
effectuate the purposes of TILA, to prevent circumvention or evasion,
or to facilitate compliance. 15 U.S.C. 1604(a). The purposes of TILA
include ensuring ``meaningful disclosure of credit terms'' to help
consumers avoid the uninformed use of credit. 15 U.S.C. 1601(a),
1604(a).
TILA 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). TILA Section 105(f) directs the Board to make the
determination of whether coverage of such transactions provides a
meaningful benefit to consumers in light of specific factors. 15 U.S.C.
1604(f)(2). These factors are (1) The amount of the loan and whether
the disclosures, right of rescission, and other provisions provide a
benefit to consumers who are parties to the transactions 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 and, based on that
review, believes that the proposed exceptions and exemptions are
appropriate. Consumer testing of borrowers with varying levels of
financial sophistication shows that the disclosures the Board proposes
to remove from the definition of ``material disclosures'' (as listed
above) are not likely to impact a consumer's decision to obtain a HELOC
or to exercise the right to rescind. Retaining these disclosures as
material disclosures increases the cost of credit when failure to
provide these disclosures or technical violations due to calculation
errors results in an extended right to rescind. Defining such
disclosures as ``material disclosures'' would not provide a meaningful
benefit to consumers in the form of useful information or protection.
Revising the definition of ``material disclosures'' to reflect the
disclosures that are most critical to the consumer's evaluation of
credit terms would better ensure that the compliance costs are aligned
with disclosure requirements that provide meaningful benefits for
consumers.
An analysis of the disclosures retained, added, and removed from
the definition of ``material disclosures'' is set forth below.
15(a)(5)(i)(A) Annual Percentage Rates
Consistent with TILA Section 103(u), current footnote 36 of Sec.
226.15(a)(3) defines ``material disclosures'' to include APRs. Current
comment 15(a)(3)-3 further provides that for variable rate programs,
the material disclosures also include variable rate disclosures that
must be given as part of the account-opening disclosures, namely the
circumstances under which the rate may increase, the limitations on the
increase, and the effect of the increase. The Board proposes to include
any APRs that must be disclosed in the proposed account-opening table
as material disclosures. See proposed Sec. 226.15(a)(5)(i)(A),
proposed Sec. 226.6(a)(2)(vi), and proposed Sec. 226.33(c)(6)(i).
This includes all APRs that may be imposed on the HELOC plan related to
the payment plan disclosed in the table, except for any penalty APR or
any APR for fixed-rate
[[Page 58565]]
and fixed-term advances during the draw period (unless those are the
only advances allowed during the draw period). See proposed comment
15(a)(5)(i)-4; see also proposed Sec. Sec. 226.6(a)(2) and (a)(2)(vi).
The Board believes that APRs are critical to consumers in deciding
whether to open a particular HELOC plan, and in deciding whether to
rescind the plan. Consumer testing conducted for the Board on HELOC
disclosures for the August 2009 HELOC Proposal shows that that current
APRs on the HELOC plan are among the most important pieces of
information that consumers want to know in deciding whether to open a
HELOC plan.
The Board notes that the tolerance amount set forth in Sec.
226.14(a) applies to the disclosure of APRs as material disclosures
under proposed Sec. 226.15(a)(5). See comment 14(a)-1. Under Sec.
226.14(a), an APR is considered accurate if it is not more than \1/8\
of 1 percentage point above or below the APR determined in accordance
with Sec. 226.14.
Introductory rate information. The Board proposes to continue to
define information related to introductory rates as material
disclosures. Thus, the term ``material disclosures'' would include the
following introductory information: (1) The introductory rate; (2) the
time period during which the introductory rate will remain in effect;
and (3) the rate that will apply after the introductory rate expires.
See proposed Sec. 226.15(a)(5)(i)(A) and proposed Sec.
226.6(a)(2)(vi)(B); see also proposed comment 15(a)(5)(i)-5. Based on
consumer testing conducted for the Board on HELOC plans for the August
2009 HELOC Proposal, the Board believes that this information related
to introductory rates is critical to consumers in understanding the
current APRs that apply to the HELOC plan.
Variable-rate information. In addition, the Board proposes to
continue to define information related to variable-rate plans as
material disclosures. Specifically, the term ``material disclosures''
would include the following information related to variable-rate plans:
(1) The fact that the APR may change due to the variable-rate feature;
(2) an explanation of how the APR will be determined; (3) the frequency
of changes in the APR; (4) 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; and (5) a statement of any limitations on changes in the
APR, including the minimum and maximum APR that may be imposed under
the payment plan disclosed in the table, or if no annual or other
periodic limitations apply to changes in the APR, a statement that no
annual limitation exists. See proposed Sec. 226.15(a)(5)(i)(A) and
proposed Sec. 226.6(a)(2)(vi)(A); see also proposed comment
15(a)(5)(i)-6.
Based on consumer testing conducted for the Board on HELOC plans
for the August 2009 HELOC Proposal, the Board believes that the above
information about variable rates is critical to consumers in
understanding the variable nature of the APRs on HELOC plans. For
example, consumers in the testing consistently said that they found an
explanation of how the APR will be determined, which means the type of
index used in making the rate adjustments and the value of the margin
(such as prime rate plus 1 percent), to be valuable information in
understanding how their APRs would be determined over time. In
addition, the Board believes that consumers should be informed of all
rate caps and floors, as consumer testing has shown that this rate
information is among the most important information to a consumer in
deciding whether to open a HELOC plan. Current comment 15(a)(3)-3
dealing with variable rate plans would be moved to proposed comment
15(a)(5)(i)-6 and would be revised to list the information related to
variable rate plans that would be considered material disclosures, as
discussed above.
The Board proposes not to include the disclosure of the lowest and
highest value of the index in the past 15 years as a material
disclosure even though this information is required to be included in
the proposed account-opening table as part of the variable-rate
information. See proposed Sec. 226.15(a)(5)(i)(A), proposed Sec.
226.6(a)(2)(vi)(A)(1)(vi), and proposed Sec.
226.33(c)(6)(i)(A)(1)(vi). This disclosure may be useful to some
consumers in understanding how the index moved in the past, so that
they would have some sense of how it might change in the future; the
Board does not propose to include this disclosure as a material
disclosure, however, because it provides general information and does
not describe a specific term applicable to the HELOC plan.
Exemption for APRs that are not required to be disclosed in the
account-opening table. As discussed above, the Board proposes to
exclude APRs that are not required to be disclosed in the proposed
account-opening table from the definition of ``material disclosures.''
These APRs are penalty APRs and APRs for fixed-rate and fixed-term
advances during the draw period (unless they are the only advances
allowed during the draw period). See proposed Sec. Sec. 226.6(a)(2)
and (a)(2)(vi).
The Board does not believe that removing penalty APRs and APRs for
fixed-rate and fixed-term advances during the draw period (unless they
are the only advances allowed during the draw period) from the
definition of ``material disclosures'' would undermine the goals of
consumer protection provided by the right of rescission. With respect
to penalty APRs, under the August 2009 HELOC Proposal, the Board
proposed to restrict creditors offering HELOCs subject to Sec. 226.5b
from imposing a penalty rate 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. See proposed comment 5b(f)(2)(ii)-1. In
addition, under the August 2009 HELOC Proposal, creditors offering
HELOCs subject to Sec. 226.5b would be required to provide consumers
with a written notice of the increase in the APR to the penalty rate at
least 45 days before the effective date of the increase. See proposed
Sec. 226.9(i). Due to the very limited circumstances in which a
penalty rate may be imposed under the August 2009 HELOC Proposal, as
well as the more stringent advance notice requirements proposed, the
Board believes that information about the penalty rate would not be
useful to consumers in deciding whether to open a HELOC plan, and, in
turn, deciding whether to exercise the right of rescission. For these
reasons, the Board proposes to remove penalty APRs from the definition
of ``material disclosures.''
Regarding APRs for fixed-rate and fixed-term advances during the
draw period, some HELOC plans offer a fixed-rate and fixed-term payment
feature, where a consumer is permitted to repay all or part of the
balance at a fixed rate (rather than a variable rate) over a specified
time period. In the August 2009 HELOC Proposal, the Board proposed that
if a HELOC plan is generally subject to a variable interest rate but
includes a fixed-rate and fixed-term option during the draw period, a
creditor generally must not disclose in the proposed account-opening
table the terms applicable to the fixed-rate and fixed-term feature,
including the APRs applicable to the fixed-rate and fixed-term
advances. See proposed Sec. 226.6(a)(2). However, if a HELOC plan
offers only a fixed-rate and fixed-term feature during the draw period,
a creditor must disclose in the table information related to the fixed-
rate and fixed-term feature when making the
[[Page 58566]]
disclosures in the proposed account-opening table. The Board believes
that including information about the variable-rate feature and the
fixed-rate and fixed-term feature in the proposed account-opening table
would create ``information overload'' for consumers. The Board chose to
highlight the terms of the variable-rate feature in the table because
this feature is automatically accessed when a consumer obtains advances
from the HELOC plan. The Board understands that consumers generally
must take active steps to access the fixed-rate and fixed-term payment
feature.
When the fixed-rate and fixed-term features are optional features,
the Board believes that information about the APRs applicable to fixed-
rate and fixed-terms advances during the draw period is not critical to
most consumers' decisions on whether to open a HELOC plan, and, in
turn, their decisions on whether to exercise the right of rescission.
Many consumers may never exercise the optional fixed-rate and fixed-
term feature. For these reasons, the Board proposes to remove APRs
applicable to optional fixed-rate and fixed-terms advances during the
draw period from the definition of ``material disclosures.''
15(a)(5)(i)(B) Total of All One-Time Fees Imposed by the Creditor and
Any Third Parties To Open the Plan
Consistent with TILA Section 103(u), footnote 36 to Sec.
226.15(a)(3) defines ``material disclosures'' to include the method of
determining the finance charge. Under Sec. 226.4, some one-time fees
imposed by the creditor or any third parties to open the HELOC plan are
considered finance charges, such as loan origination fees, and those
fees currently are considered material disclosures. Other one-time fees
to open the HELOC plan are not considered ``finance charges'' under
Sec. 226.4, such as appraisal fees, and those fees currently are not
considered material disclosures. See Sec. 226.4(c). In addition, the
total of one-time fees imposed by the creditor or any third parties to
open the plan is not currently required to be disclosed in the account-
opening disclosures set forth in current Sec. 226.6, and that
disclosure currently is not considered a material disclosure.
Under the August 2009 HELOC Proposal, a creditor would be required
to disclose in the proposed account-opening table both (1) the total of
all one-time fees imposed by the creditor and any third parties to open
the HELOC plan, stated as a dollar amount; and (2) an itemization of
all one-time fees imposed by the creditor and any third parties to open
the plan, stated as dollar amounts, and when such fees are payable. See
proposed Sec. Sec. 226.6(a)(2)(vii) and 226.33(c)(7)(i)(A). Under this
proposal, the Board proposes to revise the definition of ``material
disclosures'' to add the total of one-time fees imposed by the creditor
and any third parties to open the HELOC plan. See proposed Sec.
226.15(a)(5)(i)(B). The Board believes that the total of one-time fees
imposed by the creditor and any third parties to open the HELOC plan is
critical information for consumers to understand the cost of the credit
transaction and to decide whether to enter into the credit transaction
or exercise the right of rescission. In consumer testing on HELOCs
conducted for the Board for the August 2009 HELOC Proposal,
participants consistently said that the total of one-time fees imposed
to open the HELOC plan was one of the most important pieces of
information they would consider in deciding whether to open the HELOC
plan.
Tolerances. To reduce the likelihood that rescission claims would
arise because of minor discrepancies in the disclosure of the total of
one-time fees to open the HELOC plan, the Board proposes a tolerance in
Sec. 226.15(a)(5)(ii). As discussed above, this tolerance would be
modeled after the tolerance for the finance charge for closed-end
mortgage loans created by Congress in 1995. Specifically, proposed
Sec. 226.15(a)(5)(ii) provides that the total of all one-time fees
imposed by the creditor and any third parties to open the plan and
other disclosures affected by the total would be considered accurate
for purposes of rescission if the disclosed total of all one-time fees
imposed by the creditor and any third parties to open the plan is
understated by no more than $100 or is greater than the amount required
to be disclosed under proposed Sec. 226.6(a)(2)(vii) or Sec.
226.33(c)(7)(i)(A). As discussed in more detail in the section-by-
section analysis to proposed Sec. 226.23, these tolerances are
consistent with the proposed tolerances applicable to the total
settlement charges disclosed for closed-end mortgage loans under Sec.
226.23(a)(5).
Proposed comment 15(a)(5)(ii)-1 addresses a situation where the
total one-time fees imposed to open the account may affect the
disclosure of fees imposed by the creditor if a consumer terminates the
plan prior to its scheduled maturity. Specifically, waived total costs
of one-time fees imposed to open the account would be considered a fee
imposed by the creditor for early termination of the account by the
consumer, 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. Proposed comment 15(a)(5)(ii)-1 makes clear that the
tolerances set forth in proposed Sec. 226.15(a)(5)(ii) also apply to
these waived total costs of one-time fees if they are disclosed as fees
imposed by the creditor for early termination of the plan by the
consumer.
The Board believes that the proposed tolerances are broad enough to
alleviate creditors' compliance concerns regarding minor disclosure
errors, and narrow enough to prevent misleading disclosures. The total
cost of one-time fees imposed to open the HELOC account may be more
prone to calculation errors than other material disclosures defined in
proposed Sec. 226.15(a)(5) because it is a tally of costs (as opposed
to being a single fee), and is a term that is generally customized to
the consumer (as opposed to being a standard fee amount that is the
same for all consumers offered a particular HELOC plan by the
creditor). The Board notes that the tolerance amounts for the total
one-time fees imposed to open the account only applies to disclosures
for purposes of rescission under Sec. 226.15. These tolerances do not
apply to disclosure of these total costs under Sec. 226.6(a)(2)(vii)
or Sec. 226.33(c)(7)(i)(A); this ensures that creditors continue to
take steps to provide accurate disclosure of the total one-time fees to
open the account under Sec. 226.6(a)(2)(vii) or Sec.
226.33(c)(7)(i)(A) to avoid civil liability or administrative
sanctions.
The Board proposes to model the tolerance for the disclosure of the
total of one-time fees imposed to open the account on the narrow
tolerances provided for closed-end mortgage loans by Congress in 1995.
However, due to compliance concerns, the Board has not proposed a
special tolerance for foreclosures as is provided for the finance
charge for closed-end loans. The Board solicits comment on this
approach. Moreover, the Board believes that the total of one-time fees
imposed to open an account is often smaller than the finance charge for
closed-end mortgages, and for this reason has proposed a tolerance
based on a dollar figure, rather than a percentage of the credit limit
applicable to the plan. The Board requests comment on whether it should
increase or decrease the dollar figure. The Board also requests comment
on whether the tolerance should be linked to an inflation index, such
as the Consumer Price Index.
[[Page 58567]]
Exemption for itemization of one-time fees to open the account.
While the Board proposes to include the total cost of one-time fees
imposed to open the HELOC plan in the definition of ``material
disclosures,'' the Board proposes not to include the itemization of
one-time fees imposed by the creditor and any third parties to open the
HELOC plan as material disclosures. For each itemized one-time account
opening fee that is a ``finance charge,'' the Board would be removing
this fee from the definition of ``material disclosures.'' (Each
itemized one-time account opening fee that is not a ``finance charge''
is currently not considered a material disclosure.) The Board does not
believe that removing the itemization of one-time fees imposed to open
the account from the definition of ``material disclosures'' would
undermine the goals of consumer protection provided by the right of
rescission. In consumer testing on HELOCs conducted for the Board for
the August 2009 HELOC Proposal, participants indicated that they found
the itemization of the one-time fees imposed to open the account
helpful to them for understanding what fees they would be paying to
open the HELOC plan. Nonetheless, as noted above, they indicated that
the total of one-time fees imposed to open the account, and not the
itemization of the fees, is one of the most important pieces of
information on which they would base a decision of whether to enter
into the credit transaction. Therefore, the Board believes that the
total of one-time fees imposed to open the account, and not the
itemization of the fees, is material to the consumer's decision about
whether to enter the credit transaction or, in turn, rescind it. In
addition, the Board believes that defining ``material disclosures'' to
include the itemization of fees imposed to open the plan is unnecessary
because, in most cases, if the itemization of the one-time fees imposed
to open the account is incorrect, the total of those one-time fees will
be incorrect as well. Nonetheless, there may be some cases where the
total of one-time fees to open the account is correct but the creditor
either fails to disclose one of the itemized fees or discloses it
incorrectly. The Board believes that even though consumers would not
have an extended right to rescind in those cases, consumers would not
be harmed because the total of the one-time fees imposed to the open
the account would be correct, and it is this disclosure which consumers
are likely to use to base their decision of whether to enter into the
credit transaction or rescind the transaction. For these reasons, the
Board proposes to remove the itemization of one-time fees imposed to
open the HELOC account from the definition of ``material disclosures.''
15(a)(5)(i)(C) Fees Imposed by the Creditor for the Availability of the
HELOC Plan
Under the August 2009 HELOC Proposal, a HELOC creditor would be
required to disclose in the proposed account-opening 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. See proposed Sec. Sec. 226.6(a)(2)(viii)
and 226.33(c)(7)(ii). These fees currently are considered material
disclosures under footnote 36 to Sec. 226.15(a)(3) because these fees
would either be ``finance charges'' as defined in Sec. 226.4, or
membership or participation fees. The Board proposes to retain these
disclosures as material disclosures. See proposed Sec.
226.15(a)(5)(i)(C). The Board believes that fees for the availability
of the HELOC plan are important to consumers in deciding whether to
open the HELOC account and thus, in deciding whether to rescind the
transaction. As discussed in the SUPPLEMENTARY INFORMATION to the
August 2009 HELOC Proposal, Board research indicates that many HELOC
consumers do not plan to take advances at account opening, but instead
plan to use the HELOC account in case of emergency. 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
and, in turn, whether to rescind it.
15(a)(5)(i)(D) Fees Imposed by the Creditor for Early Termination of
the Plan by the Consumer
Under the August 2009 HELOC Proposal, a creditor would be required
to disclose in the proposed account-opening table any fees that may be
imposed by the creditor if a consumer terminates the plan prior to its
scheduled maturity. See proposed Sec. Sec. 226.6(a)(2)(ix) and
226.33(c)(7)(iii). These fees currently are not considered ``material
disclosures'' under footnote 36 to Sec. 226.15(a)(3) because these
fees traditionally have not be considered ``finance charges'' and are
not membership or participation fees. See comment 6(a)(2)-1.vi (as
designated in the February 2010 Credit Card Rule). The Board proposes
to include these fees in the definition of ``material disclosures.''
The Board believes it is important for consumers to be informed of
these early termination fees as consumers decide whether to open a
HELOC plan, and, in turn, whether to rescind the transaction. This
information may be especially important for consumers who want the
option of re-negotiating or cancelling the plan at any time. HELOC
consumers may particularly value these options, as most HELOCs are
subject to a variable rate. The Board believes that adding fees imposed
by the creditor for early termination of the plan by the consumer to
the definition of ``material disclosures'' would not unduly increase
creditor burden, as these fees typically do not require mathematical
calculations that expose the creditor to the risk of errors. As
discussed above, where waived total one-time fees imposed to open a
HELOC are disclosed as fees imposed by the creditor for early
termination of the plan by the consumer, proposed comment 15(a)(5)(ii)-
1 makes clear that the tolerances set forth in proposed Sec.
226.15(a)(5)(ii) would apply.
15(a)(5)(i)(E)-(F) Payment Terms
Under the August 2009 HELOC Proposal, a creditor would be required
to disclose in the proposed account-opening table certain information
related to the payment terms of the plan that will apply at account
opening, including the following: (1) The length of the plan, the
length of the draw period, and the length of any repayment period; (2)
an explanation of how the minimum periodic payment will be determined
and the timing of the payments; (3) if 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 statement of this fact,
as well as a statement that a balloon payment may result or will
result, as applicable; and (4) sample payments showing the first
minimum periodic payment for the draw period and any repayment period,
and the balance outstanding at the beginning of the repayment period
for both the current APR and the maximum APR, based on the assumption
that the consumer borrows the entire credit line at account opening and
does not make any further draws. See proposed Sec. 226.6(a)(2)(v).
Currently, the following payment terms are defined as ``material
disclosures:'' (1) The length of the draw period and any repayment
period; (2) an explanation of how the minimum periodic payment will be
determined and the timing of the payments; and (3) if payment of only
the minimum
[[Page 58568]]
periodic payment may not repay any of the principal or may repay less
than the outstanding balance, a statement of this fact as well as that
a balloon payment may result. The Board proposes to retain these
disclosures as ``material disclosures.'' See proposed Sec.
226.15(a)(5)(i)(E) and (F). In addition, the Board proposes to include
the length of the plan as a ``material disclosure.''
Based on consumer testing, the Board believes that the payment
information described above is critical to consumers in understanding
how payments will be structured under the HELOC plan. The length of the
plan, the length of the draw period, and the length of any repayment
period communicate important information to consumers about how long
consumers may need to make at least minimum payments on the plan. In
addition, an explanation of how the minimum periodic payment will be
determined and the timing of the payment, as well as information about
any balloon payment, provide important information to consumers about
whether the minimum payments will only cover interest during the draw
period (and any repayment period) or whether the minimum payments will
pay down some or all of the principal by the end of the HELOC plan.
Consumer testing has shown that whether a plan has a balloon payment is
important information that consumers want to know when deciding whether
to open a HELOC plan.
Sample payments. As discussed above, the proposed account-opening
table also contains sample payments based on the payment terms
disclosed in the table. The Board proposes not to include these sample
payments as material disclosures. These sample payments would be based
on a number of assumptions, and in most cases would not be the actual
payments for consumers. Specifically, sample payments 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 account-opening table) 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. The sample payments would be based on the maximum APR
possible for the plan, as well as the current APR offered to the
consumer on the HELOC plan. With respect to the current APR, if an
introductory APR applies, a creditor would be required to calculate the
sample payments based on the rate that would otherwise apply to the
plan after the introductory APR expires. While the Board believes these
sample payments are useful to consumers in understanding the payment
terms offered on the HELOC plan, the Board proposes not to include them
as material disclosures because in most cases they would not be the
actual payments for consumers. This is particularly true for HELOCs, as
opposed to the proposed payment summary for closed-end mortgage loans
(discussed in the section-by-section analysis to Sec. 226.23), because
most HELOC consumers do not take out the full credit line at account
opening and most HELOCs have a variable interest rate, so the rate is
unlikely to remain the same throughout the life of the HELOC plan. The
purpose of the sample payments disclosure is to give the consumer an
understanding of the payment terms applicable to the HELOC plan, not to
ensure that the consumer knows what his or her payments will be.
15(a)(5)(i)(G) Negative Amortization
Under the August 2009 HELOC Proposal, a creditor would be required
to disclose in the proposed account-opening table the statement that
negative amortization may occur and that negative amortization
increases the principal balance and reduces the consumer's equity in
the dwelling, as applicable. See proposed Sec. 226.6(a)(2)(xvi). This
statement about negative amortization currently is not considered a
material disclosure. The Board proposes to include this statement about
negative amortization in the definition of ``material disclosures.''
See proposed Sec. 226.15(a)(5)(i)(G). The Board believes that whether
negative amortization may occur on a HELOC account is likely to impact
a consumer's decision on whether to open a particular HELOC account,
and, in turn, a consumer's decision about whether to rescind the
transaction. Many consumers may want to avoid HELOCs that will erode
the equity in their homes. An explanation of how the minimum periodic
payment will be calculated is a material disclosure, but it will not
always be clear from this explanation that negative amortization might
occur on the HELOC plan. For example, if the minimum periodic payment
is calculated as 1 percent of the outstanding balance--but the APR is
above 12 percent--negative amortization would occur. Nonetheless,
simply disclosing that the minimum periodic payment is calculated as 1
percent of the outstanding balance would not alert most consumers to
the possibility of negative amortization. Consumer testing conducted on
closed-end mortgages in relation to the August 2009 Closed-End Proposal
showed that participants were generally unfamiliar with the term or
concept of negative amortization. Thus, the Board proposes to include
the statement about negative amortization as a material disclosure to
ensure that consumers are informed about the possibility of negative
amortization when deciding whether to open or rescind the HELOC
account. The Board believes that adding this statement about negative
amortization to the definition of material disclosures would not unduly
increase creditor burden, as this statement does not require
mathematical calculations that expose the creditor to the risk of
errors.
15(a)(5)(i)(H) Transaction Requirements
Under the August 2009 HELOC Proposal, a creditor would be required
to disclose in the proposed account-opening table 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. See proposed Sec. Sec.
226.6(a)(2)(xvii) and 226.33(c)(7)(v). This information about
transaction requirements currently is not considered a material
disclosure. The Board proposes to include this information in the
definition of ``material disclosures.'' See proposed Sec.
226.15(a)(5)(i)(H). The Board believes that these transaction
restrictions are likely to impact a consumer's decision to enter into a
particular HELOC account, and the consumer's decision whether to
rescind the transaction. For example, as discussed in the SUPPLEMENTARY
INFORMATION to the August 2009 HELOC Proposal, 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.
Any minimum balance requirement, and any required initial advance,
would be particularly important to consumers that intend to use the
account in emergency cases only. Also, restrictions on the number of
advances or the amount of the advances per month or per year may be
important to consumers, depending on how they plan to use the HELOC
plan. The Board believes that adding disclosures about any limitations
on the number of
[[Page 58569]]
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 requirement, to the definition of material disclosures
would not unduly increase creditor burden, as these disclosures do not
require mathematical calculations that expose the creditor to the risk
of errors.
15(a)(5)(i)(I) Credit Limit
Under the August 2009 HELOC Proposal, creditors would be required
to disclose in the proposed account-opening table the credit limit
applicable to the plan. See proposed Sec. 226.6(a)(2)(xviii).
Currently, the credit limit is not considered a ``material
disclosure.'' The Board proposes to include the credit limit in the
definition of ``material disclosures.'' See proposed Sec.
226.15(a)(5)(i)(I). Based on consumer testing on HELOCs conducted for
the Board for the August 2009 HELOC Proposal, the Board believes that
the credit limit is likely to impact a consumer's decision to open a
particular HELOC account, and a consumer's decision to rescind the
transaction. As discussed in the SUPPLEMENTARY INFORMATION to the
August 2009 HELOC Proposal, participants in consumer testing indicated
that the credit limit was one of the most important pieces of
information that they wanted to have in deciding whether to open a
HELOC plan.
Tolerances. As discussed above, this proposal provides a tolerance
for disclosure of the credit limit applicable to the HELOC plan,
modeled after the tolerances for the finance charge for closed-end
mortgage loans created by Congress in 1995. Specifically, proposed
Sec. 226.15(a)(5)(iii) provides that the credit limit applicable to
the plan shall be considered accurate for purposes of Sec. 226.15 if
the disclosed credit limit (1) is overstated by no more than \1/2\ of 1
percent of the credit limit applicable to the plan required to be
disclosed under Sec. 226.6(a)(2)(xviii) or $100, whichever is greater;
or (2) is less than the credit limit required to be disclosed under
Sec. 226.6(a)(2)(xviii). For example, for a HELOC plan with a credit
limit of $100,000, a creditor may overstate the credit limit by $500
and the disclosure would still be considered accurate for purposes of
triggering an extended rescission right. In addition, a creditor may
understate the credit limit by any amount and still be considered
accurate for purposes of rescission. As discussed in more detail in the
section-by-section analysis to proposed Sec. 226.23, these tolerances
are consistent with the proposed tolerances under Sec. 226.23(a)(5)
applicable to the loan amount for closed-end mortgage loans.
The Board believes that the proposed tolerances are broad enough to
alleviate creditors' compliance concerns regarding minor disclosure
errors, and narrow enough to prevent misleading disclosures. The credit
limit may be more prone to errors than other material disclosures
defined in proposed Sec. 226.15(a)(5) because it is a term that is
customized to the consumer (as opposed to being a standard term that is
the same for all consumers offered a particular HELOC plan by the
creditor). The Board notes that the tolerance amounts for the credit
limit applicable to the plan apply only to disclosures for purposes of
rescission under Sec. 226.15. These tolerances do not apply to
disclosure of the credit limit applicable to the plan under Sec.
226.6(a)(2)(xviii); this ensures that creditors continue to take steps
to provide accurate disclosure of the credit limit applicable to the
plan under Sec. 226.6(a)(2)(xviii) to avoid civil liability or
administrative sanctions.
As stated above, the Board proposes to model the tolerance for
disclosure of the credit limit on the tolerances provided by Congress
in 1995 for disclosure of the finance charge for closed-end mortgage
loans. However, the Board believes that the credit limit for HELOCs is
often smaller than the finance charge for closed-end mortgages. The
Board requests comment on whether it should decrease the amount of the
tolerance in light of the difference between the amount of the finance
charge for closed-end mortgages and the credit limit for HELOCs. On the
other hand, the Board recognizes that Congress set the $100 figure in
1995 and a higher dollar figure may be more appropriate at this time.
Alternatively, it may be more appropriate to link the dollar figure to
an inflation index, such as the Consumer Price Index. Thus, the Board
also requests comments on whether the tolerance should be set at a
higher dollar figure, or linked to an inflation index, such as the
Consumer Price Index. In addition, due to compliance concerns, the
Board has not proposed a special tolerance for disclosure of the credit
limit in connection with foreclosures as is provided for the finance
charge for closed-end mortgage loans. The Board solicits comment on
this approach. Finally, the Board requests comment on whether the Board
should limit the amount by which the credit limit could be understated
and still be considered accurate, and if so, what that limit should be.
For example, could an underdisclosure of the credit limit by a large
amount harm consumers (particularly homeowners that are not also
borrowers on the HELOC) because the amount of the security interest
that would be taken in the property would be larger than the disclosed
credit limit?
15(a)(5)(i)(J) Fees for Required Credit Insurance, Debt Cancellation,
or Debt Suspension Coverage
Under the August 2009 HELOC Proposal, a creditor would be required
to disclose in the proposed account-opening table a premium for credit
insurance described in Sec. 226.4(b)(7) or debt cancellation or
suspension coverage described in Sec. 226.4(b)(10), if the credit
insurance or debt cancellation or suspension coverage is required as
part of the plan. See proposed Sec. 226.6(a)(2)(xx). Fees for required
credit insurance, or debt cancellation or suspension coverage currently
are defined as ``material disclosures'' because these fees would be
considered ``finance charges'' under Sec. 226.4. See Sec. Sec.
226.4(b)(7) and (b)(10). The Board proposes to retain these fees as
material disclosures. See proposed Sec. 226.15(a)(5)(i)(J). If credit
insurance or debt cancellation or suspension coverage is required to
obtain a HELOC, the Board believes that consumers should be aware of
these charges or fees when deciding whether to open a HELOC plan, and,
in turn, whether to rescind the plan, because consumers will be
required to pay the charge or fee for this coverage every month to have
the plan.
Disclosures That Would Be Removed From the Definition of ``Material
Disclosures''
As discussed above, the proposal removes the following disclosures
from the definition of ``material disclosures:'' (1) Any APRs that are
not required to be in the account-opening table, specifically any
penalty APR or APR for fixed-rate and fixed-term advances during the
draw period (unless they are the only advances allowed during the draw
period); (2) an itemization of one-time fees imposed by the creditor
and any third parties to open the plan; (3) any transaction charges
imposed by the creditor for use of the home-equity plan; (4) any fees
imposed by the creditor for a consumer's failure to comply with 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 for
failure to comply with any minimum outstanding balance and minimum draw
requirements; (5) any finance charges that are not required to be
disclosed in the account-opening table; and (6) the method of
[[Page 58570]]
determining the balance upon which a finance charge will be imposed
(i.e., a description of balance computation methods). The proposed
exemptions from the definition of ``material disclosures'' for APRs
that are not required to be in the account-opening table and for an
itemization of one-time fees imposed by the creditor and any third
parties to open the account are discussed in more detail above in the
section-by-section analyses to proposed Sec. Sec. 226.15(a)(3)(A) and
(B) respectively. The other exemptions are discussed below.
Transaction charges. Under the August 2009 HELOC Proposal, a
creditor would be required to disclose in the proposed account-opening
table any transaction charges imposed by the creditor for use of the
home-equity plan (except for transaction charges imposed on fixed-rate
and fixed-term advances during the draw period, unless those are the
only advances allowed during the draw period). See proposed Sec. Sec.
226.6(a)(2) and (a)(2)(xii), and Sec. 226.33(c)(13)(i). For example, a
creditor may impose a charge for certain types of transactions under a
variable-rate feature, such as cash advances or foreign transactions
made with a credit card that accesses the HELOC plan. Transaction
charges currently are considered material disclosures because they are
``finance charges'' under Sec. 226.4. The Board proposes to remove
transaction charges as material disclosures. The Board does not believe
that removing transaction charges from the definition of ``material
disclosures'' would undermine the goals of consumer protection provided
by the right of rescission. Board research and outreach for the August
2009 HELOC Proposal indicates that transaction charges typically
imposed today are not critical to a consumer's decision about whether
to enter into the HELOC plan, or the consumer's decision to rescind the
plan. Based on outreach for the August 2009 HELOC Proposal, the Board
understands that creditors typically do not impose transaction charges
on each advance under the variable-rate feature; instead, transaction
charges typically are only imposed on cash advances or foreign
transactions made with a credit card that accessed the HELOC plan.
While the Board believes that it is important that consumers receive
information about cash advance and foreign transaction fees before
using a HELOC account to avoid being surprised by these fees, the Board
does not believe that these fees are critical to a consumer's decision
about whether to enter into the credit transaction or rescind the
transaction. For these reasons, the Board proposes to remove
transaction charges from the definition of ``material disclosures.''
Fees for failure to comply with transaction requirements. As
discussed above, under the August 2009 HELOC Proposal, a creditor would
be required to disclose in the proposed account-opening table 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. See proposed
Sec. Sec. 226.6(a)(2)(xvii) and 226.33(c)(7)(v). In addition, a
creditor must disclose in the proposed account-opening table any fee
imposed by the creditor for a consumer's failure to comply with any of
the transaction requirements or limitations listed above, as well as
any minimum outstanding balance and minimum draw requirements. See
proposed Sec. Sec. 226.6(a)(2)(xiv) and 226.33(c)(13)(ii). Currently,
these fees for failure to comply with the transaction requirements or
limitations, as well as any minimum outstanding balance and minimum
draw requirements, are considered material disclosures because these
fees are ``finance charges'' under Sec. 226.4.
The Board proposes to remove fees for failure to comply with the
transaction requirements or limitations, as well as minimum outstanding
balance and minimum draw requirements, as material disclosures. While
the Board believes it is important that consumers be informed of these
fees before using the HELOC plan to avoid being surprised by these
fees, the Board does not believe that these fees are critical to a
consumer's decision about whether to enter into the credit transaction
or rescind the transaction. In addition, as discussed above, the Board
proposes to include the transaction requirements or limitations, as
well as minimum outstanding balance and minimum draw requirements, as
material disclosures. Thus, a consumer will have an extended right of
rescission if a creditor incorrectly discloses (or does not disclose)
the transaction requirements or limitations, as well as minimum
outstanding balance and minimum draw requirements, to the consumer. The
Board believes that it is the transaction requirements or limitations
or minimum outstanding balance and minimum draw requirements
themselves, rather than the fees for failure to comply with those
requirements or limitations, that are critical to a consumer's
decisions about whether to enter into the HELOC plan, and whether to
rescind the transaction. For these reasons, the Board proposes to
remove fees for failure to comply with the transaction requirements or
limitations, as well as minimum outstanding balance and minimum draw
requirements, from the definition of ``material disclosures.''
Finance charges not required to be disclosed in the proposed
account-opening table. Again, all finance charges on the HELOC plan
currently must be disclosed prior to the first transaction under the
HELOC plan, and are considered material disclosures. As discussed
above, in the August 2009 HELOC Proposal, the Board proposed no longer
to require that all finance charges be disclosed prior to the first
transaction under the HELOC plan; instead, only finance charges
required to be disclosed in the account-opening table would have to be
provided in writing before the first transaction under the HELOC plan.
``Charges imposed as part of the HELOC plan,'' as set forth in proposed
Sec. 226.6(a)(3), that are not required to be disclosed in the
account-opening table would have to be disclosed orally or in writing
before the consumer agrees to or becomes obligated to pay the charge.
The Board believes that it is appropriate to provide flexibility to
creditors regarding disclosure of less significant charges that are not
likely to impact a consumer's decision to enter into the credit
transaction. Disclosure of these charges soon before 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.
Consistent with the August 2009 HELOC Proposal, the Board proposes
to exclude finance charges that are not disclosed in the proposed
account-opening table from the definition of ``material disclosures.''
The Board does not believe that this would undermine the goals of
consumer protection provided by the right of rescission. The Board
believes that the proposed account-opening table contains the charges
that are most important for consumers to know about before they use a
HELOC account in the current marketplace. In consumer testing on HELOCs
conducted for the Board for the August 2009 HELOC Proposal,
participants could not identify any additional types of fees beyond
those included in the proposed account-opening table that they would
want to know before they use the HELOC account.
On the other hand, continuing to define finance charges that are
not required to be disclosed in the proposed
[[Page 58571]]
account-opening table as ``material disclosures'' would undercut the
flexibility set forth in the August 2009 HELOC Proposal for creditors
to disclose these finance charges at a time after account opening, as
long as they are disclosed orally or in writing before the consumer
agrees to or becomes obligated to pay the charge. If these finance
charges continued to be defined as ``material disclosures,'' creditors
as a practical matter would be required to disclose these fees at
account opening, to avoid the extended right of rescission. For these
reasons, the Board proposes to remove finance charges that are not
disclosed in the proposed account-opening table from the definition of
``material disclosures.''
Description of balance computation methods. Under the August 2009
HELOC Proposal, a creditor would be required to disclose below the
account-opening table the name(s) of the balance computation method(s)
used by the creditor for each feature of the account, along with a
statement that an explanation of the method(s) is provided in the
account agreement or disclosure statement. See proposed Sec.
226.6(a)(2)(xxii). To determine the name of the balance computation
method to be disclosed, a creditor would be required to refer to Sec.
226.5a(g) for a list of commonly-used methods; if the method used is
not among those identified, creditors would be required to provide a
brief explanation in place of the name. As discussed in the
SUPPLEMENTARY INFORMATION to the August 2009 HELOC Proposal, the Board
believes that the proposed approach of disclosing the name of the
balance computation method below the table, with a more detailed
explanation of the method in the account-opening disclosures or account
agreement, would provide an effective way to communicate information
about the balance computation method used on a HELOC plan to consumers,
while not detracting from other information included in the proposed
account-opening table.
TILA and Regulation Z define the method of determining the balance
on which the finance charge will be imposed (i.e., explanation of the
balance computation methods) as a material disclosure. TILA Section
103(u); 15 U.S.C. 1602(u); Sec. 226.15(a)(3) n. 36. The Board proposes
to exclude this disclosure from the definition of ``material
disclosures.'' The Board does not believe that removing information
about the balance computation method from the definition of ``material
disclosures'' would undermine the goals of consumer protection provided
by the right of rescission. Explanations of the balance computation
methods often are complicated and difficult for consumers to
understand. In consumer testing on HELOCs conducted for the Board for
the August 2009 HELOC Proposal, none of the participants indicated that
information about the balance computation methods was information they
would use to decide whether to open a particular HELOC account. For
these reasons, the Board proposes to remove the disclosure of the
balance computation method from the definition of ``material
disclosures.''
Proposed Comments 15(a)(5)(i)-1 and -2
Current comment 15(a)(3)-2 specifies that a creditor must provide
sufficient information to satisfy the requirements of Sec. 226.6 for
the material disclosures, and indicates that a creditor may satisfy
this requirement by giving an initial disclosure statement that
complies with the regulation. This comment also provides that failure
to give the other required initial disclosures (such as the billing
rights statement) or the information required under Sec. 226.5b does
not prevent the running of the three-day rescission period, although
that failure may result in civil liability or administrative sanctions.
In addition, this comment specifies that the payment terms in current
footnote 36 to Sec. 226.15(a)(3) apply to any repayment phase in the
agreement. Thus, the payment terms described in former Sec.
226.6(e)(2) (redesignated as Sec. 226.6(a)(3)(ii) in the February 2010
Credit Card Rule) for any repayment phase as well as for the draw
period are material disclosures.
The Board proposes to move comment 15(a)(3)-2 to proposed comments
15(a)(5)(i)-1 and -2 and revise it consistent with the new definition
of ``material disclosures'' in the proposed regulation. Specifically,
proposed comment 15(a)(5)(i)-1 provides that a creditor must make the
material disclosures clearly and conspicuously consistent with the
requirements of Sec. 226.6(a)(2). A creditor may satisfy the
requirement to provide material disclosures by giving an account-
opening table described in Sec. 226.6(a)(1) or Sec. 226.33(d)(2) and
(d)(4) that complies with the regulation. Failure to provide the
required non-material disclosures set forth in Sec. Sec. 226.6,
226.33, or the information required under Sec. 226.5b does not affect
the right of rescission, although such failure may be a violation
subject to the liability provisions of TILA Section 130, or
administrative sanctions. 15 U.S.C. 1640. In addition, proposed comment
15(a)(5)(i)-2 clarifies that the terms described in Sec. 226.15(a)(5)
for any repayment phase as well as for the draw period are material
disclosures.
Material Disclosures for Reverse Mortgages
The Board is proposing disclosures for open-end reverse mortgages
in Sec. 226.33 that would incorporate many of the disclosures required
by Sec. 226.6(a) for all home-equity plans into the reverse mortgage
specific disclosures. Proposed Sec. 226.15(a)(5)(i) would contain
cross-references to analogous provisions in proposed Sec. 226.33. In
addition, as discussed in the section-by-section analysis to Sec.
226.33, some of the proposed material disclosures for home-equity plans
do not apply to reverse mortgages and would not be required. Thus, for
reverse mortgages, the following disclosures would not be material
disclosures:
The length of the plan, the draw period, and any repayment
period;
An explanation of how the minimum periodic payment will be
determined and the timing of payments;
A statement about negative amortization;
The credit limit applicable to the plan; and
Fees for debt cancellation or suspension coverage.
The Board requests comment on whether any of these, or other,
disclosures should be material disclosures for reverse mortgages.
15(b) Notice of Right To Rescind
TILA Section 125(a) requires the creditor to disclose clearly and
conspicuously the right of rescission to the consumer. 15 U.S.C.
1635(a). It also requires the creditor to provide appropriate forms for
the consumer to exercise the right to rescind. Section Sec. 226.15(b)
implements TILA Section 125(a) by setting forth format, content, and
timing of delivery standards for the notice of the right to rescind for
transactions related to HELOC accounts that give rise to the right to
rescind. Section 226.15(b) also states that the creditor must deliver
two copies of the notice of the right to rescind to each consumer
entitled to rescind (one copy if the notice is delivered in electronic
form in accordance with the E-Sign Act). The right to rescind generally
does not expire until midnight after the third business day following
the latest of: (1) The transaction giving rise to the right of
rescission; (2) delivery of the rescission notice; and (3) delivery of
the material disclosures. TILA Section 125(a); 15 U.S.C. 1635(f); Sec.
226.15(a)(3). If the rescission notice or the material
[[Page 58572]]
disclosures are not delivered, a consumer's right to rescind may extend
for up to three years from the date of the transaction that gave rise
to the right to rescind. TILA Section 125(f); 15 U.S.C. 1635(f); Sec.
226.15(a)(3).
As part of the 1980 Truth in Lending Simplification and Reform Act,
Congress added TILA Section 105(b), requiring the Board to publish
model disclosure forms and clauses for common transactions to
facilitate creditor compliance with the disclosure obligations and to
aid borrowers in understanding the transaction by using readily
understandable language. 12 U.S.C. 1615(b). The Board issued its first
model forms for the notice of the right to rescind applicable to HELOC
accounts in 1981. 46 FR 20848, Apr. 7, 1981. While the Board has made
some changes to the content of the model forms over the years, the
current Model Forms G-5 through G-9 in Appendix G to part 226 are
generally the same as when they were adopted in 1981.
The Board has been presented with a number of questions and
concerns regarding the notice requirements and the model forms.
Creditors have raised concerns about the two-copy rule, indicating that
this rule can impose litigation risks when a consumer alleges an
extended right to rescind based on the creditor's failure to deliver
two copies of the notice. In addition, particular problems with the
format, content, and timing of delivery of the rescission notice were
highlighted during the Board's outreach and consumer testing conducted
for this proposal. To address these problems and concerns, the Board
proposes to revise Sec. 226.15(b), and the related commentary. As
discussed in more detail below, the Board proposes to revise Sec.
226.15(b) to require creditors to provide one notice of the right to
rescind to each consumer entitled to rescind. In addition, the Board
proposes to revise significantly the content of the rescission notice
by setting forth new mandatory and optional disclosures for the notice.
The Board also proposes new format and timing requirements for the
notice. Moreover, as discussed in more detail in the section-by-section
analysis to Appendix G to part 226, the Board proposes to replace the
current model forms for the rescission notices in Model Forms G-5
through G-9 with proposed Model Form G-5(A), and two proposed Samples
G-5(B) and G-5(C).
15(b)(1) Who Receives Notice
Section 226.15(b) currently states that the creditor must deliver
two copies of the notice of the right to rescind to each consumer
entitled to rescind (one copy if the notice is delivered in electronic
form in accordance with the E-Sign Act). Obtaining from the consumer a
written acknowledgment of receipt of the notice creates a rebuttable
presumption of delivery. See 15 U.S.C. 1635(c). Comment 15(b)-1 states
that in a transaction involving joint owners, both of whom are entitled
to rescind, both must receive two copies of the notice of the right of
rescission. For the reasons discussed in the section-by-section
analysis to proposed Sec. 226.23(b)(1) below, the Board proposes to
revise Sec. 226.15(b) and comment 15(b)-1 (redesignated as Sec.
226.15(b)(1) and comment 15(b)(1)-1 respectively) to require creditors
to provide one notice of the right to rescind to each consumer entitled
to rescind.
15(b)(2) Format of Notice
The current formatting requirements for the notice of the right of
rescission appear in Sec. 226.15(b) and are elaborated on in comment
15(b)-2. Section 226.15(b) provides that the required information must
be disclosed clearly and conspicuously. Comment 15(b)-2 provides that
the rescission notice may be physically separate from the material
disclosures or combined with the material disclosures, so long as the
information required to be included on the notice is set forth in a
clear and conspicuous matter. The comment refers to the forms in
Appendix G to part 226 as models that the creditor may use in giving
the notice.
The Board proposes new format rules in Sec. 226.15(b)(2) and
related commentary intended to (1) Improve consumers' ability to
identify disclosed information more readily; (2) emphasize information
that is most important to consumers who wish to exercise the right of
rescission; and (3) simplify the organization and structure of required
disclosures to reduce complexity and ``information overload.'' The
Board proposes these format requirements pursuant to its authority
under TILA Section 105(a). 15 U.S.C. 1604(a). Section 105(a) authorizes
the Board to make exceptions and adjustment to TILA to effectuate the
statute's purpose, which include facilitating consumers' ability to
compare credit terms and helping consumers avoid the uninformed use of
credit. 15 U.S.C. 1601(a), 1604(a). The Board believes that the
proposed formatting rules described below would facilitate consumers'
ability to understand the rescission right and avoid the uninformed use
of credit. The proposed format changes are generally consistent with
findings from the Board's consumer testing of rescission notices
conducted to prepare this proposal, as well as the consumer testing on
HELOC disclosures, credit card disclosures, and closed-end mortgage
disclosures conducted in connection with the Board's August 2009 HELOC
Proposal, February 2010 Credit Card Rule, and August 2009 Closed-End
Proposal, respectively. 74 FR 43428, Aug. 26, 2009; 75 FR 7658, Feb.
22, 2010; 74 FR 43232, Aug. 26, 2009. Testing generally shows that
emphasizing terms and costs consumers find important, and separating
out less useful information, are critical to improving consumers'
ability to identify and use key information in their decision-making
process.\18\
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\18\ See also Improving Consumer Mortgage Disclosure at 69
(consumer testing results showed that current mortgage disclosure
forms failed to convey key cost disclosures, but that prototype
disclosures, which removed less useful information, significantly
improved consumers' recognition of key mortgage costs).
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Proposed Sec. 226.15(b)(2) requires the mandatory and optional
disclosures to appear on the front side of a one-page document,
separate from all other unrelated material, and to be given in a
minimum 10-point font. Proposed Sec. 226.15(b)(2) also requires that
most of the mandatory disclosures appear in a tabular format. During
consumer testing for this proposal, participants overwhelmingly
preferred a version of a notice of the right to rescind that presented
information in a tabular format to a version of a notice that presented
information in narrative form. Moreover, the notice would contain a
``tear off'' section at the bottom of the page, which the consumer
could use to exercise the right of rescission. Information unrelated to
the mandatory disclosures would not be permitted to appear on the
notice.
Proposed comment 15(b)(2)-1 states that the creditor's failure to
comply with the format requirements in Sec. 226.15(b)(2) does not by
itself constitute a failure to deliver the notice to the consumer.
However, to deliver the notice properly for purposes of Sec.
226.15(a)(3), the creditor must provide the mandatory disclosures
appearing in the notice clearly and conspicuously, as described in
proposed Sec. 226.15(b)(3) and proposed comment 15(b)(3)-1.
Section 226.5(a)(1) generally requires that creditors make the
disclosures required by subpart B regarding open-end credit (including
the rescission notice) in writing in a form that the consumer may keep.
Proposed comment 15(b)(2)-2 cross references these requirements in
Sec. 226.5(a)(1) to clarify that they apply to the rescission notice.
[[Page 58573]]
15(b)(2)(i) Grouped and Segregated
Current comment 15(b)-2 provides that the rescission notice may be
physically separate from the material disclosures or combined with the
material disclosures, so long as the information required to be
included on the notice is set forth in a clear and conspicuous matter.
The Board is concerned that allowing creditors to combine the right of
rescission disclosures with other unrelated information, in any format,
will diminish the clarity of this key material, potentially cause
``information overload,'' and increase the likelihood that consumers
may not read the notice of the right of rescission.
To address these concerns, proposed Sec. 226.15(b)(2)(i) requires
the mandatory and any optional rescission disclosures to appear on the
front side of a one-page document, separate from any unrelated
information. Only information directly related to the mandatory
disclosures may be added.
The proposal also requires that certain information be grouped
together. Proposed Sec. 226.15(b)(2)(i) requires that disclosure of
the type of transaction giving rise to the right of rescission, the
security interest, the right to cancel, the refund of fees upon
cancellation, the effect of cancellation on the existing line of
credit, how to cancel, and the deadline for cancelling be grouped
together in the notice. This information was grouped together in forms
the Board tested, and participants generally found the information easy
to identify and understand. In addition, this proposed grouping ensures
that the information about the consumer's rights would be separated
from information at the bottom of the notice, which is designed for the
consumer to detach and use to exercise the right of rescission.
15(b)(2)(ii) Specific Format
The Board proposes to impose formatting requirements for the
rescission notice, to improve consumers' comprehension of the required
disclosures. See proposed Sec. Sec. 226.15(b)(2)(i) and (ii). For
example, some information would be required to be in a tabular format.
The current model forms for the rescission notice provide information
in narrative form, which consumer testing participants found difficult
to read and understand. However, consumer testing showed that when
rescission information was presented in a tabular format, participants
found the information easier to locate and their comprehension of the
disclosures improved.
The proposal requires the title of the notice to appear at the top
of the notice. Certain mandatory disclosures (i.e., the identification
of the type of transaction giving rise to the right of rescission, the
security interest, the right to cancel, the refund of fees upon
cancellation, the effect of cancellation on the existing line of
credit, how to cancel, and the deadline for cancelling in proposed
Sec. Sec. 226.15(b)(3)(i)-(vii)) would appear beneath the title and be
in the form of a table. If the creditor chooses to place in the notice
one or both of the optional disclosures (e.g., regarding joint owners
and acknowledgement of receipt as permitted in proposed Sec.
226.15(b)(4)), the text must appear after the disclosures required by
proposed Sec. Sec. 226.15(b)(3)(i)-(vii), but before the portion of
the notice that the consumer may use to exercise the right of
rescission required by proposed Sec. 226.15(b)(3)(viii). If both
optional disclosures are inserted, the statement regarding joint owners
must appear before the statement acknowledging receipt. If the creditor
chooses to insert an acknowledgement as described in Sec.
226.15(b)(4)(ii), the acknowledgement must appear in a format
substantially similar to the format used in Model Form G-5(A) in
Appendix G to part 226. The proposal would require the mandatory
disclosures required by proposed Sec. 226.15(b)(3) and the optional
disclosures permitted under Sec. 226.15(b)(4) to be given in a minimum
10-point font.
15(b)(3) Required Content of Notice
TILA Section 125(a) and current Sec. 226.15(b) require that all
disclosures of the right to rescind be made clearly and conspicuously.
15 U.S.C. 1635(a). This requirement restates the general requirement in
Sec. 226.5(a)(1) that creditors make the disclosures required under
subpart B (including the rescission notice) clearly and conspicuously.
Comments 5(a)(1)-1 through -3, as revised by the February 2010 Credit
Card Rule, set forth guidance regarding the clear and conspicuous
standard contained in Sec. 226.5(a)(1). Proposed comment 15(b)(3)-1
clarifies that the guidance in comments 5(a)(1)-1 and -2 is applicable
to the rescission notice.
Current Sec. 226.15(b) provides the list of disclosures that must
appear in the notice: (i) An identification of the transaction or
occurrence giving rise to the right of rescission; (ii) the retention
or acquisition of a security interest in the consumer's principal
dwelling; (iii) the consumer's right to rescind the transaction; (iv)
how to exercise the right to rescind, with a form for that purpose,
designating the address of the creditor's (or its agent's) place of
business; (v) the effects of rescission, as described in current Sec.
226.15(d); and (vi) the date the rescission period expires. Current
comment 15(b)-3 states that the notice must include all of the
information described in Sec. 226.15(b)(1)-(5). This comment also
provides that the requirement to identify the transaction or occurrence
may be met by providing the date of the transaction. Current Model
Forms G-5 through G-9 contain these disclosures. However, consumer
testing of the model forms conducted by the Board for this proposal
suggests that the amount and complexity of the information currently
required to be disclosed in the notice might result in information
overload and discourage consumers from reading the notice carefully.
The Board also is concerned that certain terminology in the current
model forms might impede consumer comprehension of the information.
To address these concerns, the Board proposes to revise the
requirements for the notice in new Sec. 226.15(b)(3). Proposed Sec.
226.15(b)(3) removes information required under current Sec. Sec.
226.15(b)(1)-(5) that consumer testing indicated is unnecessary for the
consumer's comprehension and exercise of the right of rescission. The
proposed section also simplifies the information disclosed and presents
key information in plain language instead of legalistic terms. The
Board proposes these revisions pursuant to its authority in TILA
Section 125(a) which provides that creditors shall clearly and
conspicuously disclose, in accordance with regulations of the Board, to
any obligator in a transaction subject to rescission the rights of the
obligor. 15 U.S.C. 1635(a).
15(b)(3)(i) Identification of Transaction
Current Sec. 226.15(b) requires a creditor to identify in the
notice the transaction or occurrence giving rise to the right of
rescission; current comment 15(b)-3 provides that the requirement that
the transaction or occurrence be identified may be met by providing the
date of the transaction or occurrence. As discussed in more detail in
the section-by-section analysis to proposed Sec. 226.15(b)(3)(vii),
creditors, servicers, and their trade associations noted that creditors
might be unable to provide an accurate transaction date where a
transaction giving rise to the right of rescission is conducted by mail
or through an escrow agent, as is customary in some states. They noted
that in these cases, the date of the transaction giving rise to the
right of rescission cannot be identified accurately before it actually
occurs. For
[[Page 58574]]
example, for a transaction by mail, the creditor cannot know at the
time of mailing the rescission notice when the consumer will sign the
loan documents (i.e., the date of the transaction).
The Board proposes in new Sec. 226.15(b)(3)(i) to retain the
requirement that the rescission notice identify the transaction giving
rise to the right of rescission. Nonetheless, to address the concerns
discussed above, the provision in current comment 15(b)-3 about the
date of the transaction satisfying this requirement would be deleted.
Instead, the proposal provides that a creditor would identify the
transaction giving rise to the right of rescission by disclosing the
type of transaction that is occurring. For example, proposed Sample G-
5(B) provides guidance on how to satisfy to this disclosure requirement
when the rescission notice is given for opening a HELOC account where
the full credit line is secured by the consumer's home and is
rescindable. In this case, a creditor may meet this disclosure
requirement by stating: ``You are opening a home-equity line of
credit.'' Proposed Sample G-5(C) provides guidance on how to satisfy
this disclosure requirement when the rescission notice is given for a
credit limit increase on an existing HELOC account. Here, a creditor
may meet this disclosure requirement by stating: ``We are increasing
the credit limit on your line of credit.'' The Board believes that
identifying in the rescission notice the type of transaction that is
triggering the right of rescission is particularly important for HELOCs
where a number of transactions give rise to a rescission right, such as
account opening, an increase in the credit limit, or an addition of a
security interest. The Board believes that identifying the relevant
transaction in the rescission notice will clarify for consumers why
they are receiving the rescission notice.
15(b)(3)(ii) Security Interest
Current Sec. 226.15(b)(1) requires the creditor to disclose that a
security interest will be retained or acquired in the consumer's
principal dwelling. For example, current Model Form G-5, which provides
a model rescission notice for when a HELOC account is opened, discloses
the retention or acquisition of a security interest by stating: ``You
have agreed to give us a [mortgage/lien/security interest] [on/in] your
home as security for the account.''
The Board's consumer testing of a similar statement regarding a
security interest for its August 2009 Closed-End Proposal showed that
very few participants understood the statement. 74 FR 43232, Aug. 26,
2009. The Board is concerned that the current language in Model Forms
G-5 through G-9 for disclosure of the retention or acquisition of a
security interest might not alert consumers that the creditor has the
right to take the consumer's home if the consumer defaults. To clarify
the significance of the security interest, proposed Sec.
226.15(b)(3)(ii) requires a creditor to provide a statement that the
consumer could lose his or her home if the consumer does not repay the
money that is secured by the home. Proposed Sample G-5(B) provides
guidance on how to satisfy this disclosure requirement when the
rescission notice is given for opening a HELOC account where the full
credit line is secured by the consumer's home and is rescindable. In
this case, a creditor may meet this disclosure requirement by stating,
``You are giving us the right to take your home if you do not repay the
money you owe under this line of credit.'' Consumer testing of this
plain-language version of the security interest disclosure showed high
comprehension by participants. Proposed Sample G-5(C) provides guidance
on how to satisfy this disclosure requirement when the rescission
notice is given for a credit limit increase on an existing HELOC
account. Here, a creditor may meet this disclosure requirement by
stating: ``You are giving us the right to take your home if you do not
repay the money you owe.''
15(b)(3)(iii) Right To Cancel
Current Sec. 226.15(b)(2) requires the creditor to disclose the
consumer's right to rescind the transaction. Accordingly, in a section
entitled ``Your Right to Cancel,'' current Model Form G-5, which
provides a model rescission notice for opening a HELOC account,
discloses the right by stating that the consumer has a legal right
under Federal law to cancel the account, without costs, within three
business days from the latest of the opening date of the consumer's
account (followed by a blank to be completed by the creditor with a
date), the date the consumer received the Truth in Lending disclosures,
or the date the consumer received the notice of the right to cancel.
Consumer testing of language similar to the disclosure in current Model
Form G-5 showed that the current description of the right was
unnecessarily wordy and too complex for most consumers to understand
and use.
In addition, during outreach regarding this proposal, industry
representatives remarked that consumers often overlook the disclosure
that the right of rescission is provided by Federal law. They also
noted that the rule generally requiring creditors to delay remitting
funds to the consumer until the rescission period has ended, also
imposed by Federal law, is not a required disclosure and not included
in the current model forms. See Sec. 226.15(c). Industry
representatives indicated that consumers should be notified of this
delay in funding so they are not surprised when they must wait for at
least three business days after signing the loan documents to receive
any funds. To address these problems and concerns, proposed Sec.
226.15(b)(3)(iii) requires two statements: (1) A statement that the
consumer has the right under Federal law to cancel the transaction
giving rise to the right of rescission on or before the date provided
in the notice; and (2) if Sec. 226.15(c) applies, a statement that
Federal law prohibits the creditor from making any funds (or certain
funds, as applicable) available to the consumer until after the stated
date. Proposed Sample G-5(B) provides guidance on how to satisfy these
disclosure requirements when the rescission notice is given for opening
a HELOC account where the full credit line is secured by the consumer's
home and is rescindable. In this case, a creditor may meet these
disclosure requirements by stating: ``You have the right under Federal
law to cancel this line of credit on or before the date stated below.
Under Federal law, we cannot make any funds available to you until
after this date.'' Proposed Sample G-5(C) provides guidance on how to
satisfy these disclosure requirements when the rescission notice is
given for a credit limit increase on an existing HELOC account. Here, a
creditor may meet these disclosure requirements by stating: ``You have
the right under Federal law to cancel this credit limit increase on or
before the date stated below. Under Federal law, we cannot make these
funds available to you until after this date.''
The Board notes that in some instances the delay of performance
requirement in Sec. 226.15(c) does not apply during a rescission
period. Specifically, comment 15(c)-1 provides that a creditor may
continue to allow transactions under an existing open-end credit plan
during a rescission period that results solely from the addition of a
security interest in the consumer's principal dwelling. Thus, in those
cases, a creditor would not be required to include in the rescission
notice a statement that Federal law prohibits the creditor from making
any funds (or certain funds, as applicable) available to the consumer
until after the stated date.
[[Page 58575]]
15(b)(3)(iv) Fees
Current Sec. 226.15(b)(4) requires the creditor to disclose the
effects of rescission, as described in current Sec. 226.15(d). The
disclosure of the effects of rescission in current Model Forms G-5
through G-9 is essentially a restatement of the rescission process set
forth in current Sec. Sec. 226.15(d)(1)-(3). This information consumes
one-third of the space in the model forms, is dense, and uses
legalistic phrases. Moreover, in most cases, this information is
unnecessary to understand or exercise the right of rescission.
In addition, consumer testing showed that the current model forms
do not adequately communicate that the consumer would not be charged a
cancellation fee for exercising the right of rescission. Also, the
language of the current model forms did not convey that all fees the
consumer had paid in connection with the transaction giving rise to the
right of rescission would be refunded to the consumer. To clarify the
results of rescission for the consumer, the Board proposes in Sec.
226.15(b)(3)(iv) to require a plain-English statement regarding fees,
instead of restating the rescission process in current Sec. 226.15(d).
Specifically, proposed Sec. 226.15(b)(3)(iv) requires a statement that
if the consumer cancels, the creditor will not charge the consumer a
cancellation fee and will refund any fees the consumer paid in
connection with the transaction giving rise to the right of rescission.
Most participants in the Board's consumer testing of these proposed
statements understood that the creditor had to return all applicable
fees to the consumer, and could not charge fees for rescission. The
Board believes that the statement about the refund of fees communicates
important information to consumers about their rights if they choose to
cancel the transaction. In addition, the Board is concerned that
without this disclosure, consumers might believe that they would not be
entitled to a refund of fees. This mistaken belief might discourage
consumers from exercising the right to rescind where a consumer has
paid a significant amount of fees related to opening the line of credit
or other transaction that gave rise to the right of rescission.
15(b)(3)(v) Effect of Cancellation on Existing Line of Credit
As discussed above, current Sec. 226.15(b)(4) requires the
creditor to disclose the effects of rescission, as described in current
Sec. 226.15(d). As part of satisfying this requirement, current Model
Forms G-6 through G-9 provide a disclosure of how cancellation of the
transaction giving rise to the right of rescission will impact the
existing line of credit. (This disclosure is not provided in Model Form
G-5, which provides a model form for opening a HELOC account.) For
example, current Model Form G-7 provides a model form for an increase
in the credit limit on an existing HELOC account. This model form
states that ``If you cancel, your cancellation will apply only to the
increase in your credit limit and to the [mortgage/lien/security
interest] that resulted from the increase in your credit limit. It will
not affect the amount you presently owe, and it will not affect the
[mortgage/lien/security interest] we already have [on/in] your home.''
The Board proposes to retain a description of the effects of the
cancellation on the existing line of credit. Specifically, proposed
Sec. 226.15(b)(3)(v) requires creditors to disclose the following
statements, as applicable: (1) A statement that if the consumer cancels
the transaction giving rise to the right of rescission, all of the
terms of the consumer's current line of credit with the creditor will
still apply; (2) a statement that the consumer will still owe the
creditor the current balance; and (3) if some or all of that money is
secured by the home, a statement that the consumer could lose his or
her home if the consumer does not repay the money that is secured by
the home. Proposed Sample G-5(C) provides guidance on how to satisfy
these disclosure requirements when the rescission notice is given for a
credit limit increase on an existing HELOC account. In this case, a
creditor may meet these disclosure requirements by stating: ``If you
cancel this credit limit increase, all of the terms of your current
line of credit with us will still apply. You will still owe us your
current balance, and we will have the right to take your home if you do
not repay that money.''
15(b)(3)(vi) How To Cancel
Current Sec. 226.15(b)(3) requires the creditor to disclose how to
exercise the right to rescind, with a form for that purpose,
designating the address of the creditor's (or its agent's) place of
business. Current Model Forms G-5 through G-9 contain a statement that
the consumer may cancel by notifying the creditor in writing; the form
contains a blank for the creditor to insert its name and business
address. The current model forms state that if the consumer wishes to
cancel by mail or telegram, the notice must be sent ``no later than
midnight of,'' followed by a blank for the creditor to insert a date,
followed in turn by the language ``(or midnight of the third business
day following the latest of the three events listed above).'' If the
consumer wishes to cancel by another means of communication, the notice
must be delivered to the creditor's business address listed in the
notice ``no later than that time.''
Current comment 15(a)(2)-1 states that the creditor may designate
an agent to receive the rescission notification as long as the agent's
name and address appear on the notice. The Board proposes to remove
this comment, but insert similar language into proposed Sec.
226.15(b)(3)(vi) and proposed comment 15(b)(3)-3. Specifically,
proposed Sec. 226.15(b)(3)(vi) requires a creditor to disclose the
name and address of the creditor or of the agent chosen by the creditor
to receive the consumer's notice of rescission and a statement that the
consumer may cancel by submitting the form located at the bottom
portion of the notice to the address provided. Proposed comment
15(b)(3)-3 states that if a creditor designates an agent to receive the
consumer's rescission notice, the creditor may include its name along
with the agent's name and address in the notice.
Proposed comment 15(b)(3)-2 clarifies that the creditor may, at its
option, in addition to providing a postal address for regular mail,
describe other methods the consumer may use to send or deliver written
notification of exercise of the right, such as overnight courier, fax,
e-mail, or in-person. The Board requires the notice to include a postal
address to ensure that an easy and accessible method of sending
notification of rescission is provided to all consumers. Nonetheless,
the Board would provide flexibility to creditors to provide in the
notice additional methods of sending or delivering notification, such
as fax and e-mail, which consumers might find convenient.
15(b)(3)(vii) Deadline To Cancel
Current Sec. 226.15(b)(5) requires the creditor to disclose the
date on which the rescission period expires. Current Model Forms G-5
through G-9 disclose the expiration date in the section of the notice
entitled ``How to Cancel.'' The current model forms provide a blank for
the creditor to insert a date followed by the language ``(or midnight
of the third business day following the latest of the three events
listed above)'' as the deadline by which the consumer must exercise the
right. The three events referenced are the date of the transaction
giving rise to right of
[[Page 58576]]
rescission, the date the consumer received the Truth in Lending
disclosures, and the date the consumer received the notice of the right
to cancel.
The Board proposes to eliminate the statements about the three
events and require instead that the creditor provide the calendar date
on which the three-business-day period for rescission expires. See
proposed Sec. 226.15(b)(3)(vii). Many participants in the Board's
consumer testing had difficulty using the three events to calculate the
deadline for rescission. The primary causes of errors were: Not
counting Saturdays, not identifying Federal holidays, and counting the
day the last event took place as day one of the three-business-day
period. Alternative text was tested to assist participants in
calculating the deadline based on the three events; however, the text
added length and complexity to the form without a significant
improvement in participant comprehension. Moreover, participants in the
Board's consumer testing strongly preferred forms that provided a
specific date over those that required them to calculate the deadline
themselves. Also, parties consulted during the Board's outreach on this
proposal stated that the model forms should provide a date certain for
the expiration of the three-business-day period.
One of the dates that serves as the basis for calculating the
expiration date is the transaction date. Creditors, servicers, and
their trade associations noted, however, that creditors might be unable
to provide an accurate expiration date when a transaction giving rise
to the right of rescission is conducted by mail or through an escrow
agent, as is customary in some states. They pointed out that in these
cases, the date of the transaction giving rise to the right of
rescission cannot be identified accurately before it actually occurs.
For example, for a transaction by mail, the creditor cannot know at the
time the rescission notice is mailed when the consumer will sign the
loan documents (i.e., the date on which the transaction occurs). Some
creditors stated that when a transaction giving rise to the right of
rescission is conducted by mail or through an escrow agent, they
anticipate dates for the date of the transaction and the deadline for
rescission. These creditors stated that they calculate a deadline that
provides extra time to consumers, because they cannot accurately
predict the date the transaction giving rise to the right of rescission
would occur (that is, the date the consumer will sign the documents).
To ensure that consumers can readily identify the deadline for
rescinding the transaction giving rise to the right of rescission,
proposed Sec. 226.15(b)(3)(vii) specifies that a creditor must
disclose in the rescission notice the calendar date on which the three-
business-day rescission period expires. If the creditor cannot provide
an accurate calendar date on which the three-business-day rescission
period expires, the creditor must provide the calendar date on which it
reasonably and in good faith expects the three-business-day period for
rescission to expire. If the creditor provides a date in the notice
that gives the consumer a longer period within which to rescind than
the actual period for rescission, the notice shall be deemed to comply
with proposed Sec. 226.15(b)(3)(vii), as long as the creditor permits
the consumer to rescind through the end of the date in the notice. If
the creditor provides a date in the notice that gives the consumer a
shorter period within which to rescind than the actual period for
rescission, the creditor shall be deemed to comply with the requirement
in proposed Sec. 226.15(b)(3)(vii) if the creditor notifies the
consumer that the deadline in the first notice of the right of
rescission has changed and provides a second notice to the consumer
stating that the consumer's right to rescind expires on a calendar date
which is three business days from the date the consumer receives the
second notice. Proposed comment 15(b)(3)-4 provides further guidance on
these proposed provisions.
The proposed approach is intended to provide consumers with
accurate notice of the date on which their right to rescind expires
while ensuring that creditors do not face liability for providing a
deadline in good faith, that later turns out to be incorrect. The Board
recognizes that this approach will further delay access to funds for
consumers in certain cases where the creditor must provide a corrected
notice. Nonetheless, the Board believes that a corrected notice is
appropriate; otherwise, consumers would believe based on the first
notice that the rescission period ends earlier than the actual date of
expiration. The Board, however, solicits comment on the proposed
approach and on alternative approaches for addressing situations where
the transaction date is not known at the time the rescission notice is
provided.
Extended right to rescind. Under TILA and Regulation Z, the right
to rescind generally does not expire until midnight after the third
business day following the latest of: (1) The transaction giving rise
to the right of rescission; (2) delivery of the rescission notice; and
(3) delivery of the material disclosures. If the rescission notice or
the material disclosures are not delivered, consumer's right to rescind
may extend for up to three years from the date of the transaction that
gave rise to the right to rescind. TILA Section 125(f); 15 U.S.C.
1635(f); Sec. 226.15(a)(3). In multiple rounds of consumer testing for
this proposal, the Board tested statements explaining when a consumer
might have up to three years to rescind (the extended right to
rescind). The Board found, however, that including such explanations
added length and complexity to the notice, and confused consumers.
Nonetheless, the Board believes that some disclosure regarding the
extended right is necessary for an accurate disclosure of the
consumer's right of rescission. Thus, the Board proposes in new Sec.
226.15(b)(3)(vii) to require creditors to include a statement that the
right to cancel the transaction giving rise to the right of rescission
may extend beyond the date disclosed in the notice, and in such a case,
a consumer wishing to exercise the right must submit the form located
at the bottom of the notice to either the current owner of the line of
credit or the person to whom the consumer sends his or her payments.
Proposed Samples G-5(B) and G-5(C) provide examples of how to satisfy
these disclosure requirements. For example, proposed Sample G-5(B)
provides guidance on how to satisfy these disclosure requirements when
the rescission notice is given for opening a HELOC account where the
full credit line is secured by the consumer's home and is rescindable.
In this situation, a creditor may meet these disclosure requirements by
placing an asterisk after the sentence disclosing the calendar date on
which the right of rescission expires along with a sentence starting
with an asterisk that states: ``In certain circumstances, your right to
cancel this line of credit may extend beyond this date. In that case,
you must submit the bottom portion of this notice to either the current
owner of your line of credit or the person to whom you send payments.''
See proposed Samples G-5(B) and G-5(C). Without this statement, the
notice would imply that the period for exercising the right is always
three business days. In addition, this statement would inform consumers
to whom they should submit notification of exercise when they have this
extended right to rescind. See proposed Sec. 226.15(a)(2). The Board
requests comment on the proposed approach to making the consumer aware
of the extended right.
[[Page 58577]]
15(b)(3)(viii) Form for Consumer's Exercise of Right
Current Sec. 226.15(b)(3) requires the creditor to disclose how to
exercise the right to rescind, and to provide a form that the consumer
can use to rescind. Current Model Forms G-5 though G-9 explain the
consumer may cancel by using any signed and dated written statement, or
may use the notice by signing and dating below the statement: ``I WISH
TO CANCEL.''
Section 226.15(b) currently requires a creditor to provide two
copies of the notice of the right (one copy if delivered in electronic
form in accordance with the E-Sign Act) to each consumer entitled to
rescind. The current Model Forms contain an instruction to the consumer
to keep one copy of the two notices because it contains important
information regarding the right of rescission. The Board tested a model
notice form that would allow the consumer to detach the bottom part of
the notice form and use it to notify the creditor that the consumer is
rescinding the transaction. Participants in the Board's consumer
testing said unanimously that, if they wished to exercise the right of
rescission, they would use the bottom part of the notice to cancel the
transaction. However, a few participants said that they would prepare
and send a statement of cancellation in addition to the bottom part of
the notice. When asked what they would do if they lost the notice and
wanted to rescind, most participants said that they would contact the
creditor to obtain another copy of the notice. Almost all participants
said that they would make and keep a copy of the notice if they decided
to exercise the right.
Based on these findings, proposed Sec. Sec. 226.15(b)(2)(i) and
(3)(viii) require creditors to provide a form at the bottom of the
notice that the consumer may use to exercise the right to rescind. The
creditor would be required to provide two lines on the form for entry
of the consumer's name and property address. The creditor would have
the option to pre-print on the form the consumer's name and property
address. In addition, a creditor would have the option to include the
account number on the form, but may not request that or require the
consumer to provide the account number. Proposed comment 15(b)(3)-5
elaborates that creditors are not obligated to complete the lines in
the form for the consumer's name and property address, but may wish to
do so to identify accurately a consumer who uses the form to exercise
the right. Proposed comment 15(b)(3)-5 further explains that at its
option, a creditor may include the account number on the form. A
creditor would not, however, be allowed to request that or require the
consumer to provide the account number on the form, such as by
providing a space for the consumer to fill in the account number. A
consumer might not be able to locate the account number easily and the
Board is concerned that allowing creditors to request a consumer to
provide the account number might mislead the consumer into thinking
that he or she must provide the account number to rescind.
Current Model Forms G-5 through G-9 contain a statement that the
consumer may use any signed and dated written statement to exercise the
right to rescind. The Board does not propose to retain such a statement
on the rescission notice because consumer testing showed that this
disclosure is unnecessary. In fact, the Board's consumer testing
results suggested that the statement might cause some consumers to
believe that they must prepare a second statement of cancellation.
Moreover, the Board believes it is unlikely that consumers who misplace
the form, and later decide to rescind, would remember the statement
about preparing their own documents. Based on consumer testing, the
Board expects that consumers would use the form provided at the bottom
of the notice to exercise the right of rescission. Participants in the
Board's testing said that if they lost the form, they would contact the
creditor to get another copy.
In addition, current Model Forms G-5 through G-9 contain a
statement that the consumer should ``keep one copy'' of the notice
because it contains information regarding the consumer's rescission
rights. This statement would be deleted as obsolete. As discussed in
the section-by-section analysis to proposed Sec. 226.15(b)(1), the
proposal requires creditors to provide a single copy of the notice to
each consumer entitled to rescind. The notice would be revised to
permit a consumer to detach the bottom part of the notice to use as a
form for exercising the right of rescission while retaining the top
portion of the notice containing the explanation of the consumer's
rights.
15(b)(4) Optional Content of Notice
Current comment 15(b)-3 states that the notice of the right of
rescission may include information related to the required information,
such as: a description of the property subject to the security
interest; a statement that joint owners may have the right to rescind
and that a rescission by one is effective for all; and the name and
address of an agent of the creditor to receive notification of
rescission.
The Board proposes to continue to allow creditors to include
additional information in the rescission notice that is directly
related to the required disclosures. Proposed Sec. 226.15(b)(4) sets
forth two optional disclosures that are directly related to the
mandatory rescission disclosures: (1) A statement that joint owners may
have the right to rescind and that a rescission by one owner is
effective for all owners; and (2) a statement acknowledging the
consumer's receipt of the notice for the consumer to initial and date.
In addition, proposed comment 15(b)(4)-1 clarifies that, at the
creditor's option, other information directly related to the
disclosures required by Sec. 226.15(b)(3) may be included in the
notice. For instance, an explanation of the use of pronouns or other
references to the parties to the transaction is directly related
information that the creditor may choose to add to the notice.
The Board notes, however, that under the proposal, only information
directly related to the disclosures may be added to the notice. See
proposed Sec. 226.15(a)(2)(i). The Board is concerned that allowing
creditors to combine disclosures regarding the right of rescission with
other unrelated information, in any format, will diminish the clarity
of this key material, potentially cause ``information overload,'' and
increase the likelihood that consumers may not read the rescission
notice.
15(b)(5) Time of Providing Notice
TILA and Regulation Z currently do not specify when the consumer
must receive the notice of the right to rescind. Current comment 15(b)-
4 states that the creditor need not give the notice to the consumer
before the transaction giving rise to the right of rescission, but
notes that the rescission period will not begin to run until the notice
is given to the consumer. As a practical matter, with respect to the
rescission notice that must be given when opening a HELOC account, most
creditors provide the notice to the consumer along with the account-
opening disclosures and other documents given at account opening.
The Board proposes to require creditors to provide the notice of
the right to rescind before the transaction that gives rise to the
right of rescission. See proposed Sec. 226.15(b)(5). The Board
proposes this new timing requirement pursuant to the Board's authority
under TILA Section 105(a), which authorizes the Board to make
exceptions and adjustments to TILA to effectuate the
[[Page 58578]]
statute's purposes which include facilitating consumers' ability to
compare credit terms and helping consumers avoid the uninformed use of
credit. 15 U.S.C. 1601(a), 1604(a). The Board believes that this
proposed timing rule would facilitate consumers' ability to consider
the rescission right and avoid the uninformed use of credit.
TILA and Regulation Z provide that a consumer may exercise the
right to rescind until midnight after the third business following the
latest of (1) The transaction giving rise to the right of rescission,
(2) delivery of the notice of right to rescind, or (3) delivery of all
material disclosures. TILA Section 125(a); 15 U.S.C. 1635(a); Sec.
226.23(a)(3). Creditors typically provide the account opening
disclosures at closing, and use these disclosures to satisfy the
requirement to provide material disclosures. For the right of
rescission that arises with respect to account opening, requiring that
the rescission notice be given prior to account opening would better
ensure that account opening will be the latest of the three events that
trigger the three-business-day rescission period (assuming the account-
opening disclosures were given no later than account opening). In this
way, the three-business-day period would occur directly after account
opening, a time during which the consumer may be most focused on the
transaction and most concerned about the right to rescind. By tying a
creditor's provision of the rescission notice to an event in the
lending process of primary importance to the consumer--account
opening--this rule might lead consumers to assess the account-opening
disclosures and other loan documents with a more critical eye. The
Board solicits comment on any compliance or other operational
difficulties the proposal might cause. For example, the Board invites
comment on problems that could arise from applying this requirement to
transactions that give rise to the right of rescission that occur after
account opening, such as a credit limit increase on an existing HELOC
account.
Current comment 15(b)-4 would be removed as inconsistent with the
proposed timing requirement. Proposed comment 15(b)(5)-1 clarifies that
delivery of the notice after the transaction giving rise to the right
of rescission would violate the timing requirement of Sec.
226.15(b)(5), and the right of rescission does not expire until three
business days after the day of late delivery if the notice was complete
and correct.
15(b)(6) Proper Form of Notice
Appendix G to part 226 currently contains five model rescission
notices, one that corresponds to each of the five transactions that
might give rise to a right of rescission. Consumer advocates have
expressed concern about creditors failing to complete the model forms
properly. For example, some courts have held that notices with
incorrect or omitted dates for the identification of the transaction
and the expiration of the right are nevertheless adequate to meet the
requirement of delivery of notice of the right to the consumer.\19\
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\19\ See, e.g., Melfi v. WMC Mortgage Corp., 568 F.3d 309 (1st
Cir. 2009).
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To address these concerns, proposed Sec. 226.15(b)(6) provides
that a creditor satisfies Sec. 226.15(b)(3) if it provides the model
form in Appendix G, or a substantially similar notice, which is
properly completed with the disclosures required by Sec. 226.15(b)(3).
Proposed comment 15(b)(6)-1 explicitly states that a notice is not
properly completed if it lacks a calendar date or has an incorrectly
calculated calendar date for the expiration of the rescission period.
Such a notice would not fulfill the requirement to deliver the notice
of the right to rescind. As discussed in the section-by-section
analysis to proposed Sec. 226.15(b)(3)(vii) above, however, a creditor
who provides a date reasonably and in good faith that later turns out
to be incorrect would be deemed to have complied with the requirement
to provide the notice if the creditor complies with proposed Sec.
226.15(b)(3)(vii) and proposed comment 15(b)-4.
15(c) Delay of Creditor's Performance
For the reasons discussed in the section-by-section analysis to
Sec. 226.23(c) below, the Board proposes to revise comment 15(c)-5 to
state that a creditor may satisfy itself that the consumer has not
rescinded by obtaining a written statement from the consumer that the
right has not been exercised. The statement must be signed and dated by
the consumer only at the end of the three-business-day period.
15(d) Effects of Rescission
For the reasons discussed in the section-by-section analysis to
proposed Sec. 226.23(d) below, the Board proposes to revise Sec.
226.15(d) to address the effects of rescission during the initial
three-day period following consummation and after that period.
Generally, during the initial three-day period, the creditor has not
disbursed money or delivered property to the consumer. Proposed Sec.
226.15(d)(1) would provide that when a consumer provides a notice of
rescission during this period, the creditor's security interest is
automatically void. Within 20 calendar days after receipt after the
consumer's notice, the creditor must return any money paid by the
consumer and take whatever steps are necessary to terminate its
security interest.
Proposed Sec. 226.15(d)(2) would generally apply after the initial
three-day period has passed. During this time period, the creditor has
typically disbursed money or delivered property to the consumer and
perfected its security interest, but the consumer's right to rescind
may have expired. Most creditors are reluctant to release a lien under
these conditions, and courts are frequently called upon to resolve
rescission claims, which increases costs for consumers and creditors.
Accordingly, proposed Sec. 226.15(d)(2)(i) would provide a process for
the parties to resolve a rescission claims outside of a court
proceeding. The proposal would require that within 20 calendar days
after receiving a consumer's notice of rescission, the creditor must
mail or deliver to the consumer a written acknowledgment of receipt
together with a written statement of whether the creditor will agree to
cancel the transaction. If the creditor agrees to cancel the
transaction, the creditor's acknowledgment of receipt must contain the
amount of money or a description of the property that the creditor will
accept as the consumer's tender; a reasonable date for tender; and a
statement that within 20 calendar days after receipt of tender, the
creditor will take whatever steps are necessary to terminate its
security interest. The consumer may respond by tendering the amount of
money or property described in the written statement. The creditor must
take whatever steps are necessary to terminate its security interest
within 20 calendar days after receipt of the consumer's tender.
Proposed Sec. 226.15(d)(2)(ii) would address the effect of
rescission if the parties are in a court proceeding, the creditor has
disbursed money or delivered property to the consumer, and the
consumer's right to rescind has not expired. Consistent with the
holding of the majority of courts, the proposal would require the
consumer to tender before the creditor releases its security interest.
As in the current regulation, a court may modify these procedures.
15(e) Consumer's Waiver of Right To Rescind
For the reasons discussed in the section-by-section analysis to
proposed Sec. 226.23(e) below, the Board proposes to
[[Page 58579]]
provide additional guidance on when a consumer may waive the right to
rescind due to a bona fide personal financial emergency. The proposed
revisions clarify the procedure to be used for such waiver and add new,
non-exclusive examples of bona fide personal financial emergencies that
may justify such waiver and of circumstances that are not a bona fide
personal financial emergency.
Proposed Sec. 226.15(e) provides that a consumer may modify or
waive the right to rescind, after delivery of the notice required by
Sec. 226.15(b) and the disclosures required by Sec. 226.6, if the
consumer determines that the loan proceeds are needed during the
rescission period to meet a bona fide personal financial emergency.
Proposed Sec. 226.15(e) provides further that to modify or waive the
right, each consumer entitled to rescind must give the creditor a dated
written statement that describes the emergency, specifically modifies
or waives the right to rescind, and bears the consumer's signature.
Finally, proposed Sec. 226.15(e) provides that printed forms for the
purposes of waiver are prohibited.
Proposed comment 15(e)-1 states that a consumer may modify or waive
the right to rescind only after the creditor delivers the notice
required by Sec. 226.15(b) and the disclosures required by Sec.
226.6. Proposed comment 15(e)-1 also states that, after delivery of the
required notice and disclosures, the consumer may waive or modify the
right to rescind by giving the creditor a dated, written statement that
specifically waives or modifies the right and describes the bona fide
personal financial emergency. In addition, proposed comment 15(e)-1
clarifies that a waiver is effective only if each consumer entitled to
rescind signs a waiver statement. Further, proposed comment 15(e)-1
clarifies that where there are multiple consumers entitled to rescind,
the consumers may, but need not, sign the same waiver statement.
Finally, proposed comment 15(e)-1 sets forth a cross-reference to Sec.
226.2(a)(11), which establishes which natural persons are consumers
with the right to rescind.
Proposed comment 15(e)-2 states that to modify or waive the right
to rescind, there must be a bona fide personal financial emergency that
requires disbursement of loan proceeds before the end of the rescission
period. Proposed comment 15(e)-2 states further that whether there is a
bona fide personal financial emergency is determined by the facts
surrounding individual circumstances. In addition, proposed comment
15(e)-2 clarifies that a bona fide personal financial emergency
typically, but not always, will involve imminent loss of or harm to a
dwelling or harm to the health or safety of a natural person. Proposed
comment 15(e)-2 also clarifies that a waiver is not effective if the
consumer's statement is inconsistent with facts known to the creditor.
Finally, proposed comment 15(e)-2 provides examples that describe
circumstances that are and are not a bona fide personal financial
emergency. Proposed comment 15(e)-2.i states that examples of a bona
fide personal financial emergency include the following: (1) The
imminent sale of the consumer's home at foreclosure; (2) the need for
loan proceeds to fund immediate repairs to ensure that a dwelling is
habitable, such as structural repairs needed due to storm damage; and
(3) the imminent need for health care services, such as in-home nursing
care for a patient recently discharged from the hospital. In each case,
those examples assume that loan proceeds are needed during the
rescission period.
Proposed comment 15(e)-2.ii states that examples of circumstances
that are not a bona fide personal financial emergency include the
following: (1) The consumer's desire to purchase goods or services not
needed on an emergency basis, even though the price may increase if
purchased after the rescission period; and (2) the consumer's desire to
invest immediately in a financial product, such as purchasing
securities. Proposed comment 15(e)-2.iii states that the conditions for
a waiver are not met where the consumer's waiver statement is
inconsistent with facts known to the creditor. For example, proposed
comment 15(e)-2.iii states that the conditions for a waiver are not met
where the consumer's waiver statement states that loan proceeds are
needed during the rescission period to abate flooding in a consumer's
basement, but the creditor is aware that there is no flooding.
Section 226.16 Advertising
Overview
The Board proposes to revise Sec. 226.16(d) to address certain
misleading or deceptive practices used in open-end home-secured credit
plan advertisements and promote consistency in the advertising rules
applicable to open-end and closed-end home-secured credit. First, the
Board proposes to revise Sec. 226.16(d)(6) to require advertisements
for open-end home-secured credit that state any lower payments that
apply for less than the full term of the plan to state also (1) The
period of time during which those payments will apply, and (2) the
amounts and time periods of other payments that will apply. Second, the
Board proposes to add new Sec. Sec. 226.16(d)(7) through (d)(13),
which would prohibit the following seven acts or practices in
connection with advertisements for open-end home-secured credit: (i)
The use of the term ``fixed'' to refer to rates or payments, unless
certain conditions are satisfied; (ii) comparisons between actual or
hypothetical payments or rates and payments or rates available under
the advertised plan, unless certain conditions are satisfied; (iii)
misleading statements that a plan is supported or endorsed by the
government; (iv) misleading use of the name of a consumer's current
creditor; (v) misleading claims of debt elimination; (vi) misleading
use of the term ``counselor;'' and (vii) foreign-language
advertisements that provide some required disclosures only in English.
In January of 2008, the Board proposed new rules for closed-end
mortgage advertising (January 2008 Proposal). See 73 FR 1672, January
9, 2008. The Board proposed a new rule requiring additional disclosures
about rates and payments to address concerns that advertisements placed
undue emphasis on low promotional ``teaser'' rates or payments, and
proposed to prohibit the seven acts or practices listed above in
connection with closed-end mortgage advertisements. See 73 FR 1672,
1708, January 9, 2008.
The January 2008 Proposal also included a rule regarding disclosure
of promotional rates and payments in advertisements for open-end home-
secured credit (home-equity lines of credit or HELOCs). Unlike the rule
proposed for closed-end mortgages, however, the proposed HELOC rule did
not cover all low introductory payments; instead, additional
disclosures were required in advertisements that included low rates or
payments not based on the index or margin that would apply to rates and
payments after the promotional period. See 73 FR 1672, 1705, January 9,
2008. Low introductory payments based on the index and margin, such as
interest-only payments, were not covered. The Board did not propose to
extend the other seven prohibitions to advertisements for HELOC plans,
but solicited comment on whether to do so and on whether other acts or
practices associated with advertisements for HELOC plans should be
prohibited. See 73 FR 1672, 1705, January 9, 2008.
[[Page 58580]]
Commenters on the January 2008 Proposal were divided on whether to
extend the proposed prohibitions to HELOC advertising. Many community
banks argued that the misleading or deceptive acts often associated
with closed-end mortgage advertisements do not occur in HELOC
advertisements. Some consumer groups and state regulators, however,
urged the Board to extend all of the prohibitions to HELOCs. Few
commenters suggested that Board consider additional prohibitions for
HELOC advertising.
In July of 2008, the Board adopted final rules for closed-end
mortgage advertising, including both the rates and payments disclosure
rule (Sec. 226.24(f)), and the prohibitions on the seven acts or
practices listed above (Sec. Sec. 226.24(i)(1) through (i)(7)) (2008
HOEPA Final Rule). See 73 FR 44522, July 30, 2008. The July 2008 Final
Rule also adopted Sec. 226.16(d)(6), regarding disclosure of
promotional rates and payments in HELOC advertising. The Board did not
extend the prohibitions contained in Sec. 226.24(i) to advertisements
for open-end home-secured credit. The Board indicated that it had not
been provided with, or found, sufficient evidence demonstrating that
advertisements for HELOCs contain deceptive practices similar to those
found in advertisements for closed-end mortgage loans. The Board
stated, however, that it might consider prohibiting certain misleading
or deceptive practices in HELOC advertising as part of its larger
review of the rules for open-end home-secured credit.
As part of its review of these rules, Board staff reviewed numerous
examples of advertisements for HELOCs to identify advertising practices
that could mislead consumers. This research indicated that many
advertisements prominently disclose interest-only payments, while
disclosing with much less prominence, often in a footnote, that higher
payments also will be required during the term of the plan. Many
advertisements also include misleading comparisons with other credit
products and other misleading terms or statements, or employ practices
prohibited in the July 2008 Final Rule for closed-end mortgages.
The Board is now proposing to revise Sec. 226.16(d)(6) to improve
disclosure in advertisements of the rates and payments that will apply
over the full term of a HELOC and to add new Sec. Sec. 226.16(d)(7)
through (d)(13) to extend the prohibitions in Sec. 226.24(i)
applicable to closed-end mortgage advertising to advertising for
HELOCs.
The Board solicits comment on the appropriateness of the proposed
revisions to the advertising rules for open-end home-secured credit
discussed in greater detail below, and on whether other acts or
practices associated with advertisements for HELOC plans should be
prohibited.
Legal Authority
TILA Section 147, implemented by Sec. 226.16(d), governs
advertisements of open-end home-equity plans secured by the consumer's
principal dwelling. 15 U.S.C. 1665b. The statute applies to the
advertisement itself, and therefore, the statutory and regulatory
requirements apply to any person advertising an open-end home-secured
credit plan, whether or not the person meets the definition of
creditor. See comment 2(a)(2)-2. Under the statute, if an advertisement
for an open-end home-secured credit plan sets forth, affirmatively or
negatively, any of the specific terms of the plan, including any
required periodic payment amount, then the advertisement also must
clearly and conspicuously state: (i) Any loan fee the amount of which
is determined as a percentage of the credit limit and an estimate of
the aggregate amount of other fees for opening the account; (ii) in any
case in which periodic rates may be used to compute the finance charge,
the periodic rates expressed as an annual percentage rate; (iii) the
highest annual percentage rate which may be imposed under the plan; and
(iv) any other information the Board may by regulation require.
Under TILA Section 105(a), the Board has authority to adopt
regulations to ensure meaningful disclosure of credit terms so that
consumers will be able to compare available credit terms and avoid the
uninformed use of credit. 15 U.S.C. 1604(a).
The Board proposes to use its authority under TILA Sections 147 and
105(a) to require that advertisements for open-end home-equity plans
with certain payment and rate information also include specified
additional information as described in the proposed rule. See proposed
Sec. Sec. 226.16(d)(6), (d)(7), and (d)(8) and proposed comments
16(d)-5, 16(d)-10, and 16(d)-11.
TILA Section 129(l)(2) authorizes the Board to prohibit acts or
practices in connection with mortgage loans that the Board finds to be
unfair, deceptive, or designed to evade the provisions of TILA Section
129. 12 U.S.C. 1639(l)(2). The Board proposes to use its authority
under TILA Sections 129(l)(2) and 105(a), described above, to prohibit
certain deceptive practices in HELOC advertising. See proposed
Sec. Sec. 226.16(d)(9)-(d)(13) and proposed comment 16(d)-12.
16(d) Additional Requirements for Home-Equity Plans
16(d)(6) Promotional Rates and Payments
Many HELOC advertisements emphasize a low monthly payment as one of
the advantages of the product compared to other forms of credit. The
monthly payment prominently stated in the advertisement, however, often
is an interest-only payment that, for example, would apply only during
the draw period and increase substantially during the repayment period
or would result in a balloon payment. This may mislead consumers about
the actual payments they will be required to make over the life of the
plan.
Section 226.16(d)(6), as adopted in the July 2008 Final Rule,
addresses the advertisement of promotional rates and payments in HELOC
plans. Regarding payments, the rule provides that if an advertisement
for a home-equity plan states a ``promotional payment,'' the
advertisement must include the following in a clear and conspicuous
manner with equal prominence and in close proximity to each listing of
the promotional payment: (i) The period of time during which the
promotional payment will apply; and (ii) the amounts and time periods
of any payments that will apply under the plan (if payments under a
variable-rate plan will be determined based on application of an index
and margin, the additional disclosed payments must be determined based
on application of a reasonably current index and margin). The rule
defines a ``promotional payment'' for a variable-rate plan as any
minimum payment (i) that is applicable for less than the full term of
the loan and is not derived by applying to the outstanding balance the
index and margin used to determine other minimum payments under the
plan, and (ii) that is less than other minimum payments under the plan,
given an assumed balance.
The rules regarding disclosure of rates and payments in closed-end
mortgage advertising (Sec. 226.24(f)) are more comprehensive than
Sec. 226.16(d)(6). Section 226.24(f) generally requires that
advertisements for closed-end mortgages that state a rate or payment
amount also disclose other rates and payments that will apply over the
term of the loan and the time periods during which they apply. In
contrast, Sec. 226.16(d)(6) does not address advertisements that
emphasize low monthly payments derived by applying the index and margin
generally used to determine
[[Page 58581]]
payments under the plan, such as interest-only payments. Also, as
noted, disclosure of payments such as interest-only payments can be
problematic in HELOC advertisements. The Board therefore proposes to
revise the definition of promotional payment for variable-rate plans in
Sec. 226.16(d)(6)(i)(B)(1) so that, as in closed-end advertising, the
HELOC advertising rule will cover these types of payments.
Specifically, the proposal would eliminate the portion of the
current definition of ``promotional payment'' that restricts the term
to payments that are not derived from the generally applicable index
and margin. Instead, the new definition would be limited to the
following portion of the current definition: ``For a variable-rate
plan, any minimum payment applicable for a promotional period that is
less than other minimum payments under the plan derived by applying a
reasonably current index and margin that will be used to determine the
amount of such payments, given an assumed balance.'' See proposed Sec.
226.16(d)(6)(i)(B)(1). Thus, under the proposed rule, a payment would
be ``promotional'' if it is (1) temporary and (2) lower than any
payments under the plan based on the index and margin generally
applicable to the plan. As a result, under this definition, a
``promotional payment'' could be based on the generally applicable
index and margin, but would have to be lower than other payments under
that plan that are also based on the plan's index and margin.
A technical revision would be made to Sec. 226.16(d)(6)(ii)(C),
which describes one of the additional disclosures that must be included
in advertisements with a promotional payment, to reflect the revised
definition. Thus, this additional disclosure would be described as
``the amounts and time periods of any payments that will apply under
the plan given the same assumed balance.'' See proposed Sec.
226.16(d)(6)(ii)(C) (emphasis added).
For example, an advertisement for a variable-rate home-equity plan
might state an interest-only monthly payment derived by applying a
reasonably current index and margin to an assumed balance. This payment
would be considered a promotional payment because it is less than, for
example, fully-amortizing monthly payments or a balloon payment that
would be required at other times during the life of the plan given the
same assumed balance. If an advertisement stated this payment, the
advertisement also would be required to state in a clear and
conspicuous manner with equal prominence and in close proximity to each
listing of that payment: (i) The period of time during which that
payment would apply; and (ii) the amounts and time periods of all
payments that would apply under the plan given the same assumed
balance.
The Board also proposes to revise comment 16(d)-5(i), regarding
variable-rate plans, to reflect the revised definition of promotional
payment for variable-rate plans and to provide additional guidance on
that definition. Revised comment 16(d)-5(i) would state that if the
advertised payment is the same as other minimum payments under the plan
derived by applying a reasonably current index and margin, and given an
assumed balance, it is not a promotional payment. The revised comment
would further state that if the advertised payment is less than other
minimum payments under the plan based on the same assumptions, it is a
promotional payment. The revised comment would give the following
example: if the advertised payment is an interest-only payment
applicable during the draw period, and minimum payments during the
repayment period will be higher because they are based on a schedule
that fully amortizes the outstanding balance by the end of the
repayment period, or there is no repayment period and a balloon payment
would result at the end of the draw period, then the advertised payment
is a promotional payment.
The Board also proposes to revise comment 16(d)-5(iii), regarding
the amounts and time periods of payments, to include the following
example: if an advertisement for a home-equity plan offers a $100,000
line of credit with a 10-year draw period and a 10-year repayment
period, and assumes that the entire line is drawn, resulting in an
interest-only minimum payment of $300 per month during the draw period,
increasing to $750 per month during the repayment period, the
advertisement must disclose the amount and time period of each of the
two monthly payment streams, with equal prominence and in close
proximity to the promotional payment.
The Board also proposes to revise comment 16(d)-5(iv). The comment
states that if an advertised payment is calculated in the same way as
other payments based on an assumed balance, the fact that the minimum
payment could increase if the consumer makes an additional draw does
not make the payment a promotional payment. Currently, the comment
applies only to variable-rate plans; under the proposed revision, the
comment would be applicable to non-variable-rate plans as well as
variable-rate plans.
The Board does not propose to revise the definition of promotional
payment for plans other than variable-rate plans in Sec.
226.16(d)(6)(i)(B)(2) or the definitions and requirements related to
promotional rates included in Sec. 226.16(d)(6). Introductory and
other payments that trigger the additional disclosure requirements in
Sec. 226.16(d)(6)(ii) under the existing rule would continue to do so
under the rule as revised.
16(d)(7) Misleading Advertising of ``Fixed'' Rates and Payments
Use of the term ``fixed'' is addressed in the open-end credit
advertising rules that apply to both home-secured and other open-end
credit. Section 226.16(f) provides that an advertisement for open-end
credit may not refer to an annual percentage rate as ``fixed,'' or use
a similar term, unless the rate will not increase while the plan is
open or the advertisement specifies the time period during which the
rate will be fixed.
The rules regarding use of the term ``fixed'' in closed-end
mortgage loan advertising (Sec. 226.24(i)(1)) are different from the
Sec. 226.16(f) rules applicable to open-end credit. In particular,
whereas the open-end credit rule applies only to descriptions of annual
percentage rates as ``fixed,'' the closed-end mortgage rule restricts
the use of the term ``fixed'' to describe rates, payments, or an
advertised credit plan as a whole. Advertisements for HELOCs, however,
often emphasize the amount of payments under the plan as much as, or
more than, rates associated with the plan.
In adopting Sec. 226.24(i)(1) for closed-end mortgage
advertisements, the Board noted that some advertisements do not
adequately disclose that interest rates or payment amounts are
``fixed'' only for a limited period of time. The use of the word
``fixed'' in these advertisements may mislead consumers into believing
that the advertised product is a fixed-rate mortgage loan with rates
and payments that will not change during the term of the loan. The
Board noted that whether the rates and payments for a particular credit
product are fixed or variable is a key factor for consumers evaluating
the risks and costs associated with that credit. See 73 FR 44522,
44587, July 30, 2008.
The Board believes that inaccurate or incomplete statements about
whether a rate or payment is fixed would be as misleading in the open-
end context as in the closed-end context. The Board therefore proposes
to add new Sec. 226.16(d)(7), which would impose requirements
regarding use of the term ``fixed'' on HELOC advertisements
[[Page 58582]]
similar to those for closed-end mortgage advertisements.
Proposed Sec. 226.16(d)(7) would prohibit the use of the word
``fixed'' to refer to rates, payments, or home-equity plans in
advertisements for variable-rate or other plans in which the payment
may increase, unless certain conditions are met. The proposed rule
describes the conditions that must be met for three different cases:
(i) Advertisements for variable-rate plans; (ii) advertisements for
non-variable-rate plans; and (iii) advertisements for both variable-
and non-variable-rate plans. In an advertisement for one or more
variable-rate plans, ``fixed'' can be used only if: (i) The phrase
``variable rate'' appears in the advertisement before the first use of
the word ``fixed'' and is at least as conspicuous as any use of the
word ``fixed'' in the advertisement; and (ii) each use of ``fixed'' to
refer to a rate or payment is accompanied by an equally prominent and
closely proximate statement of the time period for which the rate or
payment is fixed, and the fact that the rate may vary or the payment
may increase after that period.
Under the proposal, in an advertisement solely for non-variable-
rate plans where the payment may increase, ``fixed'' can be used only
if each use of ``fixed'' to refer to the payment is accompanied by an
equally prominent and closely proximate statement of the time period
for which the payment is fixed and the fact that the payment may
increase after that period.
Under the proposal, in an advertisement for both variable- and non-
variable-rate plans, ``fixed'' can be used only if:
(i) The phrase ``variable rate'' appears in the advertisement with
equal prominence to any use of ``fixed;'' and
(ii) Each use of the word ``fixed'' to refer to a rate, payment, or
plan either:
Refers solely to the plans for which rates are fixed for
the plan term and is accompanied by an equally prominent and closely
proximate statement of the time period for which the payment is fixed,
and, if applicable, the fact that the payment may increase after that
period; or
Refers to variable-rate plans and is accompanied by an
equally prominent and closely proximate statement of the time period
for which the rate or payment is fixed and the fact that the rate may
vary or the payment may increase after that period.
The proposed rule would not prohibit use of the term ``fixed'' in
advertisements for home-equity plans, including advertisements for
variable-rate plans. For example, some advertisements for variable-rate
home-equity plans may state that the consumer has the option to convert
a portion of their balance to a fixed rate. Such an advertisement would
comply with proposed Sec. 226.16(d)(7) as long as: (i) The phrase
``variable rate'' appears in the advertisement with equal prominence as
any use of the term ``fixed'' or similar terms; (ii) ``fixed'' is used
solely in reference to the fixed rate conversion option; and (iii) any
reference to payments associated with that option that may increase as
``fixed'' includes an equally prominent and closely proximate statement
of the time period for which the payment is fixed and the fact that the
payment will increase after that period.
16(d)(8) Misleading Comparisons in Advertisements
For closed-end mortgage loans, an advertisement may not make any
comparison between actual or hypothetical credit payments or rates and
any payment or rate available under the advertised plan unless certain
additional disclosures are made. See Sec. 226.24(i)(2). In adopting
this provision, the Board noted that the advertised rates or payments
used in comparisons included in advertisements for closed-end mortgage
loans often were low introductory ``teaser'' rates or payments that
would not apply over the full term of the loan. The Board concluded
that such comparisons are deceptive and misleading to consumers unless
certain additional disclosures are made. See 73 FR 44522, 44587, July
30, 2008.
Board research indicates that many advertisements for open-end
home-equity plans compare monthly payments under that plan with the
combined monthly payment for other consumer loans, such as credit card,
car loan, and personal loan payments. Without adequate disclosure,
these comparisons may mislead consumers about the relative advantages
and disadvantages of a HELOC. For example, the HELOC payment used in
these comparisons often is an interest-only payment that would apply
only during the draw period and increase substantially thereafter or
would result in a balloon payment. This is problematic because some of
the payments in the comparison group, such as car loan payments, may be
fully-amortized principal and interest payments. In addition, while
HELOCs often have variable interest rates, some of the loans in the
comparison group, such as car loans or personal loans, may have fixed
rates.
Home-equity plan advertisements that include comparisons such as
those described above often explain that the home-equity plan payment
used in the comparison is an interest-only payment or that the home-
equity plan's interest rate is variable. However, these disclosures
often are either wholly or partially in small print, in footnotes, or
on the back of a page. The Board believes that additional, prominent
disclosure is needed to prevent consumers from being misled by payment
comparisons.
The Board therefore proposes to adopt new Sec. 226.16(d)(8), which
would impose requirements consistent with those for closed-end mortgage
advertising under Sec. 226.24(i)(2). Proposed Sec. 226.16(d)(8) would
prohibit an advertisement for a home-equity plan from including any
comparison between actual or hypothetical credit payments or rates and
any payment or rate that will be available under the advertised plan
for a period less than the full term of the plan unless two additional
disclosures are made. First, the advertisement must include a clear and
conspicuous comparison to the information required to be disclosed
under Sec. 226.16(d)(6)(ii) (promotional period and post-promotional
rates or payments). Second, if the advertisement is for a variable-rate
plan, and the advertised payment or rate is based on the index or
margin that will be used to make subsequent rate or payment adjustments
over the term of the loan, the advertisement must include an equally
prominent statement in close proximity to the payment or rate that the
payment or rate is subject to adjustment and the time period when the
first adjustment will occur.
Consistent with comment 24(i)-1 for closed-end mortgages, proposed
comment 16(d)-10 would clarify that the requirements of Sec.
226.16(d)(8) apply to all advertisements for HELOC plans, including
radio and television advertisements. The proposed comment also states
that a claim about the amount a consumer may save under the advertised
plan, such as ``save $400 per month on a balance of $35,000,'' would
constitute an implied comparison between the advertised plan's payment
and an actual or hypothetical payment. The requirements of Sec.
226.16(d)(8) therefore would apply.
The Board also proposes to add comment 16(d)-11; the comment would
clarify that the requirements of Sec. 226.16(d)(8) apply to
comparisons in advertisements for variable-rate plans, because the
payments or rates may not be available for the full term of the plan
due to variation in the rate, even if the
[[Page 58583]]
payments or rates shown for the advertised plan are not promotional
payments or rates, as defined in Sec. 226.16(d)(6)(i).
16(d)(9) Misrepresentations About Government Endorsement
For closed-end mortgage loans, an advertisement may not make any
statement that the loan offered is a ``government loan program,''
``government-supported loan,'' or otherwise endorsed or sponsored by a
Federal, State, or local government entity, unless the advertised loan
is in fact an FHA loan, a VA loan, or a loan offered under a similar
program that is endorsed or sponsored by a Federal, State, or local
government entity. See Sec. 226.24(i)(3). In adopting this provision,
the Board found these types of advertisements to be deceptive, stating
its concern that these advertisements can mislead consumers into
believing that the government is guaranteeing, endorsing, or supporting
the advertised loan product. See 73 FR 44522, 44589, July 30, 2008. The
Board further observed that government-endorsed loans often offer
certain benefits or features that may be attractive to many consumers
and that, as a result, a loan product's association with a government
program can be a material factor in the consumer's decision to apply
for that particular loan.
The Board believes that false or misleading statements about
government endorsement would be as misleading in the context of HELOC
advertising as in the closed-end advertising context. To avoid the
possibility of home-equity advertisements containing misleading
statements about government endorsement in the future, and for
consistency between the advertising rules applicable to open-end and
closed-end home-secured credit, the Board proposes to prohibit
statements in HELOC advertisements that a plan is a ``government loan
program,'' ``government-supported loan,'' or is otherwise endorsed or
sponsored by any Federal, State, or local government entity, unless the
advertisement is for a credit program that is, in fact, endorsed or
sponsored by a Federal, State, or local government entity. See proposed
Sec. 226.16(d)(9).
For closed-end mortgages, comment 24(i)-2 provides an example of a
misrepresentation about government endorsement: A statement that the
Federal Community Reinvestment Act (CRA) entitles the consumer to
refinance his or her mortgage at the low rate offered in the
advertisement. The Board does not propose to adopt a parallel comment
under Sec. 226.16(d); the example does not appear applicable to
HELOCs, because HELOCs generally are not refinanced. However, if a
misleading statement about the CRA were made in a home-equity plan
advertisement, it would be prohibited under Sec. 226.16(d)(9).
16(d)(10) Misleading Use of the Current Creditor's Name
For closed-end mortgage loans, an advertisement that is not sent by
or on behalf of the consumer's current creditor may not use the name of
that creditor, unless the advertisement also discloses with equal
prominence the name of the person or creditor making the advertisement,
and a clear and conspicuous statement that the person making the
advertisement is not associated with, or acting on behalf of, the
consumer's current creditor. See Sec. 226.24(i)(4). In research for
the July 2008 Final Rule, the Board found advertisements for home-
secured loans that prominently displayed the name of the consumer's
current mortgage creditor, but failed to disclose or to disclose
adequately that the advertisement is by a mortgage creditor not
associated with the consumer's current creditor. The Board found that
these advertisements are deceptive because they may mislead consumers
into believing that their current creditor is offering the loan
advertised, or that the advertisement is promoting a reduction in the
consumer's payment amount or rate on his or her current loan, rather
than offering to refinance the current loan with a different creditor.
See 73 FR 44522, 44589, July 30, 2008.
Board research for this proposal has shown that some HELOC
advertisements contain misleading uses of the name of the consumer's
current creditor. To prevent these misleading statements in home-equity
advertisements, and for consistency between the advertising rules
applicable to open-end and closed-end home-secured credit, the Board
proposes to prohibit the use the name of the consumer's current
creditor in a HELOC advertisement that is not sent by or on behalf of
the consumer's current creditor, unless the advertisement: (i)
Discloses with equal prominence the name of the creditor or other
person making the advertisement; and (ii) includes a clear and
conspicuous statement that the creditor or other person making the
advertisement is not associated with, or acting on behalf of, the
consumer's current creditor. See proposed Sec. 226.16(d)(10).
16(d)(11) Misleading Claims of Debt Elimination
Section 226.24(i)(5) prohibits advertisements for closed-end
mortgage loans that offer to eliminate debt, or to waive or forgive a
consumer's existing loan terms or obligations to another creditor. In
the July 2008 Final Rule, the Board found these advertisements to be
deceptive because they can mislead consumers into believing that they
are entering into a debt forgiveness program, rather than merely
replacing one debt obligation with another. See 73 FR 44522, 44589,
July 30, 2008.
The Board has found evidence that some HELOC advertisements contain
misleading statements about debt elimination as well. To prevent this
practice in HELOC advertisements, and for consistency between the
advertising rules applicable to open-end and closed-end home-secured
credit, the Board proposes to prohibit misleading claims in a HELOC
advertisement that the plan offered will eliminate debt or result in a
waiver or forgiveness of a consumer's existing loan terms with, or
obligations to, another creditor. See proposed Sec. 226.16(d)(11). The
Board also proposes to adopt new comment 16(d)-12, parallel to comment
24(i)-3 in the closed-end rule. The proposed comment provides examples
of claims that would be prohibited. These include: ``Get out of debt;''
``Take advantage of this great deal to get rid of all your debt;''
``Celebrate life, debt-free;'' and ``[Name of home-equity plan] gives
you an easy-to-follow plan for being debt-free.'' The proposed comment
also clarifies that the rule would not prohibit a HELOC advertisement
from claiming that the advertised product may reduce debt payments,
consolidate debts, or shorten the term of the debt.
16(d)(12) Misleading Use of the Term ``Counselor''
Advertisements for closed-end mortgage loans may not use the term
``counselor'' to refer to a for-profit mortgage broker or mortgage
creditor, its employees, or persons working for the broker or creditor
that are involved in offering, originating or selling mortgages. See
Sec. 226.24(i)(6). Nothing in the rule prohibits advertisements for
bona fide consumer credit counseling services, such as counseling
services provided by non-profit organizations, or bona fide financial
advisory services, such as services provided by certified financial
planners. In the July 2008 Final Rule, the Board found that the use of
the term ``counselor'' is deceptive outside of the context of non-
profit organizations and bona fide financial
[[Page 58584]]
advisory services; outside of these circumstances, the term
``counselor'' is likely to mislead consumers into believing that the
creditor or broker has a fiduciary relationship with the consumer and
is considering only the consumer's best interest. See 73 FR 44522,
44589, July 30, 2008.
Board research for this proposal has yielded evidence of this
practice in HELOC advertising. To prevent this practice in HELOC
advertising, and for consistency between the advertising rules for
open-end and closed-end home-secured credit, the Board proposes to
prohibit use of the term ``counselor'' in a HELOC advertisement to
refer to a for-profit broker or creditor, its employees, or persons
working for the broker or creditor that are involved in offering,
originating or selling home-equity plans. See proposed Sec.
226.16(d)(12).
16(d)(13) Misleading Foreign-Language Advertisements
Section 226.24(i)(7) prohibits advertisements for closed-end home-
secured mortgages from providing information about some trigger terms
or required disclosures, such as an initial rate or payment, only in a
foreign language, but providing information about other trigger terms
or required disclosures, such as information about the fully-indexed
rate or fully-amortizing payment, only in English. Advertisements that
provide all trigger terms and disclosures in both English and a foreign
language, or advertisements that provide all trigger terms and
disclosures entirely in English or entirely in a foreign language, are
not affected by this prohibition. In the July 2008 Final Rule, the
Board noted that, in general, advertisements for home-secured loans
targeted to non-English speaking consumers are an appropriate means of
promoting home ownership or making credit available to under-served,
immigrant communities. The Board also noted, however, that some of
these advertisements provide information about some trigger terms or
required disclosures, such as a low introductory ``teaser'' rate or
payment, in a foreign language, but provide information about other
trigger terms or required disclosures, such as the fully-indexed rate
or fully-amortizing payment, only in English. The Board found that this
practice is deceptive because it can mislead non-English speaking
consumers who may not be able to comprehend the important English-
language disclosures. See 73 FR 44522, 44590, July 30, 2008.
The Board believes that advertisements that provide some terms only
in English and others only in a foreign language would be as misleading
in HELOC advertisements as in closed-end mortgage advertisements. To
avoid the possibility of this practice in HELOC advertising, and for
consistency between the advertising rules for open-end and closed-end
home-secured credit, the Board proposes to prohibit in HELOC
advertisements the provision of information about some trigger terms or
required disclosures, such as a promotional rate or payment, only in a
foreign language, while providing information about other trigger terms
or required disclosures, such as information about the fully-indexed
rate or fully-amortizing payment, only in English. See proposed Sec.
226.16(d)(13).
Section 226.17 General Disclosure Requirements
17(c) Basis of Disclosures and Use of Estimates
Current comment 17(c)(1)-14 provides guidance on assumptions
creditors must use in disclosing closed-end reverse mortgages. The
guidance in comment 17(c)(1)-14 is still required for creditors to
calculate a finance charge and APR for closed-end reverse mortgages.
For clarity, the proposal would move the comment into proposed Sec.
226.33(c)(16), which provides the rules for disclosing closed-end
reverse mortgages and is discussed in the section-by-section analysis
of that section. The comment also clarifies that reverse mortgages
where some or all of the appreciation in the value of the property will
be shared between the consumer and the creditor are considered
variable-rate mortgages, and, therefore, must follow the disclosure
rules for variable-rate mortgages. Under the proposal, the content of
disclosure for reverse mortgages, including reverse mortgages with
shared appreciation features, would be set forth in Sec. 226.33, as
discussed in the section-by-section analysis to that section.
17(d) Multiple Creditors; Multiple Consumers
The Board is proposing to amend staff comment 17(d)-2 to clarify
that, in rescindable transactions involving more than one consumer,
disclosures required by Sec. 226.19(a) need only be provided to one
consumer who will be primarily liable on the obligation. For example,
if two consumers apply for a covered mortgage loan as co-applicants,
with a third consumer acting solely as a guarantor of the debt, only
either of the first two consumers must receive the Sec. 226.19(a)
disclosures. In addition, the revised comment would clarify that each
consumer entitled to rescind, even any such consumer with no legal
obligation on the transaction, must receive the material disclosures in
Sec. 226.23(a)(5) and the notice of right to rescind in Sec.
226.23(b) prior to consummation.
Background
MDIA amendments to TILA. Prior to the MDIA, TILA and Regulation Z
required creditors to provide good faith estimates of transaction-
specific disclosures for certain purchase-money mortgage loans secured
by the consumer's principal dwelling, within three business days after
application (``the early disclosures''). The MDIA extended this
requirement for early disclosures to certain closed-end, non-purchase
money transactions, including refinance loans, home equity loans, and
reverse mortgages.\20\ The MDIA also extended the requirement for early
disclosures to loans secured by a dwelling other than a consumer's
principal dwelling. In addition, the MDIA required creditors to mail or
deliver the early TILA disclosures at least seven business days before
consummation and, if the APR in the early disclosure becomes
inaccurate, provide corrected disclosures that the consumer must
receive no later than three business days before consummation. See TILA
Section 128(b)(2), 15 U.S.C. 1638(b)(2). The MDIA became effective on
July 30, 2009.
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\20\ This provision of the MDIA codified action that the Board
had taken in the 2008 HOEPA Final Rule, which was to be effective
October 1, 2009. 73 FR 44522, July 30, 2008.
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Final rule implementing the MDIA. The Board published final
regulations implementing the MDIA on May 19, 2009 (MDIA Final Rule). 74
FR 23289. The MDIA Final Rule amended Sec. 226.19(a) of Regulation Z
to require that, in a closed-end mortgage transaction subject to the
Real Estate Settlement Procedures Act (RESPA) that is secured by a
consumer's dwelling, the creditor make good faith estimates of the
disclosures required by Sec. 226.18 and deliver or place them in the
mail not later than the third business day after the creditor receives
the consumer's written application.\21\ See Sec. 226.19(a)(1)(i). The
early disclosures must be delivered or placed in the mail not later
than the seventh business day
[[Page 58585]]
before consummation. See Sec. 226.19(a)(2)(i). Finally, if the APR
stated in the early disclosures becomes inaccurate, the creditor must
provide corrected disclosures with all changed terms, which the
consumer must receive no later than three business days before
consummation.\22\ See Sec. 226.19(a)(2)(ii).
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\21\ The August 2009 Closed-End Proposal would eliminate the
qualification that the transaction be subject to RESPA and instead
would apply Sec. 226.19(a) to any transaction secured by real
property or a dwelling. It also would change the reference to Sec.
226.18 so that it requires good faith estimates of the Sec. 226.38
disclosures that the August 2009 Closed-End Proposal would require
for mortgage transactions generally.
\22\ The August 2009 Closed-End Proposal would require final
disclosures three business days before consummation in all cases,
rather than only when the disclosed APR becomes inaccurate. For
consistency with the August 2009 Closed-End Proposal, this
discussion refers to the disclosures provided three business days
prior to consummation as the ``final disclosures.''
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Transactions involving multiple consumers. Since the MDIA Final
Rule, creditors have asked the Board whether, in a transaction
involving more than one consumer, every consumer must receive the early
and final disclosures.\23\ TILA Section 121(a) provides that in such
transactions, except transactions subject to the right of rescission,
the creditor need only make disclosures to one primary obligor. Section
226.17(d) implements TILA Section 121(a) and further provides that, if
the transaction is rescindable, disclosures must be provided to each
consumer with the right to rescind. Consumers who have the right to
rescind include non-obligors as well as obligors if (i) They have an
ownership interest in the property securing the transaction, (ii) their
ownership interest would be subject to the creditor's security
interest, and (iii) the property securing the transaction is their
principal dwelling. See Sec. Sec. 226.23(a)(1), 226.2(a)(11).
Creditors have expressed uncertainty over whether, for a rescindable
transaction, they must provide early and final disclosures to each
obligor and to each non-obligor consumer.
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\23\ Creditors have noted that practical issues arise for
consumers who have the right to rescind but will not be liable on
the obligation. They state that in many cases a creditor may not
learn of the existence of such consumers until after the early
disclosures must be made under Sec. 226.19(a)(1)(i).
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The Board's Proposal
Disclosure requirements for primary obligors. The Board proposes to
amend staff comment 17(d)-2 to clarify that, in rescindable
transactions involving multiple consumers, the early and final
disclosures required by Sec. 226.19(a) need only be made to one
consumer who will be a primary obligor. The purpose of the early and
final disclosures is to provide consumers with transaction-specific
information early enough to use while shopping for a mortgage. Before
the MDIA was enacted, only consumers considering a purchase-money
transaction received these early disclosures. If multiple obligors were
involved in purchase-money transactions, one set of disclosures was
deemed sufficient to facilitate consumer shopping under Sec.
226.17(d). The MDIA's purpose is to extend the same early disclosure
requirement for purchase-money transactions to non-purchase money
transactions. The MDIA did not amend TILA Section 121(a), which
provides that only one primary obligor need receive disclosures. Thus,
nothing in the MDIA suggests that Congress intended to require that,
for rescindable transactions, each obligor receive the early and final
shopping disclosures. Accordingly, under proposed comment 17(d)-2, in a
rescindable transaction involving multiple obligors only one primary
obligor must receive the early and final disclosures required by Sec.
226.19(a).
Disclosure requirements for non-obligor consumers. The Board
further proposes to amend comment 17(d)-2 to provide that non-obligor
consumers who have a right to rescind need not be given the early and
final disclosures required by Sec. 226.19(a). These non-obligors are
consumers only for the purpose of rescission under Sec. 226.23. See
Sec. 226.2(a)(11). The purpose of TILA Section 121(a)'s requirement
that each consumer with the right to rescind receive disclosures is to
ensure that each such consumer has the necessary information to decide
whether to exercise that right. Non-obligor consumers do not need the
early disclosures because they are not shopping for credit and
comparing different loan offers. Thus, creditors must provide these
consumers only with the material disclosures and a notice of the right
to cancel before consummation of the transaction. See Sec. 226.17(b).
Accordingly, the Board proposes to amend comment 17(d)-2 to clarify
that the early and final disclosures required by Sec. 226.19(a) need
not be made to each consumer who has the right to rescind. This rule
applies in all cases where there are multiple consumers, whether
primarily liable, secondarily liable, or not liable at all on the
obligation. The Board believes that this interpretation is consistent
with the purpose of the Sec. 226.19(a) disclosures. Thus, creditors
may provide Sec. 226.19(a) disclosures solely to any one primary
obligor in a rescindable transaction. Pursuant to Sec. 226.17(b),
however, the creditor must make disclosures before consummation to each
consumer who has the right to rescind under Sec. 226.23, regardless of
whether the consumer is also an obligor. The proposed revisions to
comment 17(d)-2 would contain this guidance. Proposed new comment
19(a)-1 would contain a cross reference to comment 17(d)-2.
Thus, proposed comment 17(d)-2 would address the delivery of Sec.
226.19(a) disclosures to all possible kinds of consumers in a
rescindable transaction. For example, assume a rescindable transaction
in which two consumers will be primarily liable as co-borrowers, own
the collateral property, and occupy it as their principal dwelling, a
third consumer will act as a guarantor (and thus is secondarily but not
primarily liable) but has no ownership interest in the property, and a
fourth consumer will have no liability on the obligation but is
entitled to rescind under Sec. Sec. 226.23(a)(1) and 226.2(a)(11) by
virtue of having an ownership interest and residing in the home
securing the transaction. The creditor satisfies Sec. 226.19(a) by
delivering early and final disclosures to either of the first two
consumers. Before consummation, however, the creditor also must deliver
material disclosures and the notice of the right to rescind to the
other of the first two consumers and to the fourth consumer (but need
not deliver them to the third consumer), pursuant to Sec. Sec.
226.17(b) and 226.23(b).
17(f) Early Disclosures
Section 226.17(f) establishes general timing requirements for
corrected disclosures required where disclosures required by Subpart C
are given before consummation of a closed-end credit transaction and a
subsequent event makes them inaccurate.\24\ The Board proposes to
revise a cross-reference in comment 17(f)(2)-2 to reflect a proposed
change to Sec. 226.22(a)(3), discussed in detail below.
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\24\ Special disclosure timing requirements for transactions
secured by a dwelling are set forth in Sec. 226.19(a).
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17(f)(2)
Section 226.17(f)(2) provides that, if disclosures required by
Subpart C of Regulation Z are given before consummation of a
transaction, the creditor must disclose all changed terms before
consummation if the APR at the time of consummation varies from the APR
disclosed earlier by more than \1/8\ of 1 percentage point in a regular
transaction or more than \1/4\ of 1 percentage point in an irregular
transaction, as defined in Sec. 226.22(a). Comment 17(f)(2)-1 states
that, for purposes of Sec. 226.17(f)(2), a transaction is deemed to be
``irregular'' in accordance with footnote 46 to Sec. 226.22(a)(3). The
Board proposes to revise comment 17(f)(2)-1 to reflect the
[[Page 58586]]
Board's proposal to remove and reserve footnote 46, which defines an
irregular transaction, and to integrate its text into proposed Sec.
226.22(a)(3), as discussed below.
226.18 Content of Disclosures
18(k) Prepayment
18(k)(1)
The Board is proposing to amend comment 18(k)(1)-1 to clarify that,
on a closed-end transaction, assessing interest for a period after the
loan balance has been paid in full is a prepayment penalty, even if the
charge results from the ``interest accrual amortization'' method used
on the transaction, as discussed below. The 2008 HOEPA Final Rule
defined a class of higher-priced mortgage loans that are subject to
certain protections involving prepayment penalties. For example, on a
higher-priced mortgage loan, a prepayment penalty may not apply after
the second year following consummation or if the prepayment is effected
through a refinancing by the creditor or its affiliate. See Sec.
226.35(b)(2)(ii). These restrictions on prepayment penalties were
effective for applications taken on or after October 1, 2009.
Shortly before the 2008 HOEPA Final Rule took effect, the Board was
asked whether the prepayment penalty provisions would apply to certain
Federal Housing Administration (FHA) and other loans as of the October
1, 2009 effective date. Specifically, the Board was informed that, when
a consumer prepays an FHA loan in full, the consumer must pay interest
through the end of the month in which prepayment is made. For example,
if a consumer repays an FHA loan in full on April 20, the payoff amount
the consumer is required to pay includes the principal balance
outstanding as of April 1 and interest calculated on that amount for
all 30 days in April, rather than for only the 20 days elapsed before
the prepayment.
Under the Board's existing guidance, a prepayment penalty includes
``interest charges for any period after prepayment in full is made.''
See Comment 18(k)(1)-1.\25\ FHA staff indicated, however, that it has
not considered the payment of interest for a period after a loan is
prepaid in full as a prepayment penalty and has advised lenders that
they need not disclose this practice as a prepayment penalty for FHA
loans. FHA staff also explained that, under the FHA program, for
purposes of allocating a consumer's payment to accrued interest and
principal, all loan payments are treated as being made on the scheduled
due date if the payment is made prior to the expiration of the payment
grace period. For example, if the grace period expires on the 15th of
the month, payments made on the 14th are not treated as late. This
method of interest accounting is known as ``monthly interest accrual
amortization.'' Under this arrangement, consumers are not penalized for
making payments during the grace period because they are treated as
made on the scheduled due date. At the same time, however, consumers
that make payments before their scheduled due dates, such as on the
20th of the preceding month, also are treated as having paid on the
payment due date and do not receive any reduction in interest due.
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\25\ In the Board's August 2009 Closed-End Proposal, the Board
proposed to revise this comment to clarify that ``when the loan
balance is prepaid in full, there is no balance to which the
creditor may apply the interest rate.'' 74 FR 43232, 43257, Aug. 26,
2009. The Board noted that no substantive change was intended.
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In response to the concerns about FHA loans and prepayment
penalties, Board staff issued an interpretive letter to HUD Secretary
Shaun Donovan on September 29, 2009.\26\ The letter noted that,
although comment 18(k)(1)-1 provides guidance about prepayment
penalties, it does not address the specific situation involving loans
that use the monthly interest accrual amortization method. In light of
FHA's guidance and the fact that the staff commentary does not
expressly address this issue in the context of monthly interest accrual
amortization, Board staff advised HUD that lenders who have followed
this practice in the past have acted reasonably and have complied in
good faith with the prepayment penalty provisions of Regulation Z,
whether or not the additional interest was treated or disclosed as a
prepayment penalty. The letter also noted that Board staff would review
the staff commentary and consider whether it should be changed to
address specifically this aspect of FHA and other lending programs,
including whether the commentary should be changed to treat this
practice as a prepayment penalty.
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\26\ The letter was issued under TILA Section 130(f), which
provides that creditors are not liable for any act or omission taken
in good faith and that conforms with any interpretation of TILA or
Regulation Z issued by a Board official or employee whom the Board
has authorized to issue such interpretations. 15 U.S.C. 1640(f).
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Based on further review and analysis, the Board believes that the
charging of interest for the remainder of the month in which prepayment
in full is made should be treated as a prepayment penalty for TILA
purposes, even when done pursuant to the monthly interest accrual
amortization method. As the Board's proposed revision in the August
2009 Closed-End Proposal reflects, there is no loan balance to which
the creditor can apply the interest rate once the loan has been paid
off. Thus, although the amount the consumer is charged upon prepayment
is determined by reference to the interest rate, the charge is not
accrued interest because there is no balance against which it could
have accrued. Further, because the charge is triggered by prepayment in
full, the Board believes that the charge is most appropriately treated
as a prepayment penalty.
Accordingly, proposed comment 18(k)(1)-1 would provide that
prepayment penalties include charges determined by treating the loan
balance as outstanding for a period after prepayment in full and
applying the interest rate to such ``balance,'' even if the charge
results from the interest accrual amortization method used on the
transaction. The proposed comment would explain by example that, under
monthly interest accrual amortization, if the amount of interest due on
May 1 for the preceding month of April is $3,000, the creditor will
require payment of $3,000 in interest whether the payment is made on
April 20, on May 1, or on May 10. In this example, if the interest
charged for the month of April upon prepayment in full on April 20 is
$3,000, the charge constitutes a prepayment penalty of $1,000 because
the amount of interest actually earned through April 20 is only $2,000.
The Board also proposed certain other changes to comment 18(k)(1)-1
as part of the August 2009 Closed-End Proposal for conforming, clarity,
and organization purposes. For ease of reference, those other proposed
changes are reflected in this proposal as well. The Board requests that
interested parties limit the scope of their comments to the newly
proposed changes to comment 18(k)(1)-1 discussed in the SUPPLEMENTARY
INFORMATION to this proposed rule.
18(n) Insurance, Debt Cancellation, and Debt Suspension
For the reasons discussed in the section-by-section analyses for
Sec. Sec. 226.4(d)(1) and (d)(3) and 226.6 above, the Board proposes
to revise Sec. 226.18(n) to require creditors to provide the
disclosures and comply with the requirements of Sec. Sec.
226.4(d)(1)(i) through (d)(1)(iii) and (d)(3)(i) through (d)(3)(iii) if
the creditor offers optional credit insurance, debt cancellation
coverage, or debt suspension coverage that is identified in Sec. Sec.
226.4(b)(7) or (b)(10). For required
[[Page 58587]]
credit insurance, debt cancellation coverage, or debt suspension
coverage, the Board proposes to require the creditor to provide the
disclosures required in Sec. Sec. 226.4(d)(1)(i) and (d)(3)(i), as
applicable, except for Sec. Sec. 226.4(d)(1)(i)(A), (B), (D)(5), (E)
and (F).
Section 226.19 Early Disclosures and Adjustable-Rate Disclosures for
Transactions Secured by Real Property or a Dwelling
19(a) Mortgage Transactions
Under TILA Section 128(b)(2), as revised by the Mortgage Disclosure
Improvement Act (MDIA), a creditor must provide good faith estimates of
credit terms (early disclosures) to a consumer within three business
days after receiving the consumer's application and at least seven
business days before consummation of a closed-end mortgage transaction
secured by a dwelling.\27\ 15 U.S.C. 1638(b)(2)(A). No person may
impose a fee, other than a fee for obtaining the consumer's credit
history, in connection with such transaction before the consumer
receives the early disclosures. 15 U.S.C. 1638(b)(2)(E). The creditor
must deliver or mail the early disclosures at least seven business days
before consummation. 15 U.S.C. 1638(b)(2)(A). If the APR changes beyond
a specified tolerance, the creditor must provide corrected disclosures,
which the consumer must receive no later than three business days
before consummation. 15 U.S.C. 1638(b)(2)(D). The consumer may waive a
waiting period if the consumer determines that loan proceeds are needed
during the waiting period to meet a bona fide personal financial
emergency. 15 U.S.C. 1638(b)(2)(F). The Board implemented these
requirements in Sec. 226.19(a).\28\
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\27\ The MDIA is contained in Sections 2510 through 2503 of the
Housing and Economic Recovery Act of 2008, enacted on July 30, 2008.
Public Law 110-289, 122 Stat. 2654. The MDIA was amended by the
Emergency Economic Stabilization Act of 2008, enacted on October 3,
2008. Public Law No. 110-343, 122 Stat. 3765.
\28\ Section 226.19(a) also implements the MDIA's timing
requirements for timeshare transactions. The Board proposed
revisions to Sec. 226.19(a) under the August 2009 Closed-End
Proposal. For a detailed discussion of those proposed revisions, see
74 FR 43232, 43258, Aug. 26, 2009. The Board is implementing
provisions of the MDIA related to disclosures for adjustable-rate
mortgages in a separate notice published in today's Federal
Register.
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The Board proposes to require that any fee paid by a consumer,
other than a fee for obtaining the consumer's credit history, be
refundable for three business days after the consumer receives the
early disclosures. Specifically, if a consumer pays a fee after
receiving the early disclosures, the creditor would have to refund such
a fee upon the consumer's request made within three business days after
a consumer receives the early disclosures. A similar requirement
applies to HELOCs under Sec. 226.5b(h) (redesignated Sec. 226.5b(e)
in the August 2009 HELOC Proposal). The Board also proposes several
revisions to Sec. 226.19(a) and associated commentary to address
issues regarding disclosure requirements and limitations on the
imposition of fees before a consumer receives the early disclosures.
Those proposed revisions include: (1) Clarifying that a counselor or
counseling agency may charge a bona fide and reasonable fee for housing
counseling required for a reverse mortgage insured by HUD (a HECM) or
other housing or credit counseling required by applicable law before
the consumer receives the early disclosures; (2) providing examples of
circumstances that constitute imposing a fee; and (3) providing
examples of when an overstated APR is accurate under the tolerances
provided in Sec. 226.22.
The Board has received questions whether, in a transaction
involving more than one consumer, every consumer must receive the early
disclosures and corrected disclosures required by Sec. 226.19(a).\29\
The Board proposes to clarify to which consumers creditors must provide
the disclosures required by Sec. 226.19(a) in a proposed new comment
17(d)-2, as discussed above in the section-by-section analysis of Sec.
226.17(d). Proposed comment 19(a)-1 states that creditors should
utilize comment 17(d)-2 to determine to which consumers a creditor must
provide the required disclosures.
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\29\ The August 2009 Closed-End Proposal requires creditors to
provide final disclosures that a consumer must receive at least
three business days before consummation and corrected disclosures as
needed that trigger an additional waiting period, as discussed below
in the section-by-section analysis of proposed commentary on Sec.
226.19(a)(2)(iii).
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Further, the Board proposes to provide additional guidance
regarding when a consumer may waive a waiting period under Sec.
226.19(a)(3), where the consumer determines that loan proceeds are
needed to meet a bona fide personal financial emergency. Those proposed
revisions are consistent with the proposed revisions to the provisions
for waiver of a rescission period under Sec. Sec. 226.15(e) and
226.23(e), discussed below in the section-by-section analysis of Sec.
226.23(e).
The Board also proposes to add headings to previously proposed
Sec. 226.19(a)(4)(i) through (iii), regarding disclosure requirements
for timeshare transactions, for clarity. Finally, the Board proposes to
conform headings for commentary on proposed Sec. 226.19 with the
headings for Sec. 226.19 previously proposed under the August 2009
Closed-End Proposal. No substantive change is intended by the foregoing
proposed technical amendments, which are not discussed again below.
For ease of reference, this proposal republishes revisions to Sec.
226.19(a) and associated commentary previously proposed under the
August 2009 Closed-End Proposal. The Board requests that interested
parties limit the scope of their comments to the newly proposed changes
to Sec. 226.19(a) and associated commentary discussed in detail in the
SUPPLEMENTARY INFORMATION to this proposed rule.
19(a)(1)
19(a)(1)(ii) Imposition of Fees
TILA Section 128(b)(2)(E) provides that a consumer must receive the
early disclosures ``before paying any fee to the creditor or other
person in connection with the consumer's application for an extension
of credit that is secured by the dwelling of a consumer.'' 15 U.S.C.
1638(b)(2)(E). A creditor or other person may impose a bona fide and
reasonable fee for obtaining the consumer's credit report before the
consumer receives the early disclosures, however. Id. Consistent with
TILA Section 128(b)(2)(E), Sec. 226.19(a)(1)(iii) provides that a
creditor or other person may impose a fee for obtaining a consumer's
credit history before the consumer receives the early disclosures.
Thus, TILA Section 128(b)(2) and Sec. 226.19(a)(1)(ii) help ensure
that consumers receive disclosures while they still are shopping for a
loan and before they pay significant fees.
Creditors and other persons have asked the Board what it means to
``impose'' a fee. To address that question, the Board proposes to add
commentary providing several examples of when a fee is imposed.
Proposed comment 19(a)(1)(ii)-4 clarifies that a fee is imposed if a
consumer is obligated to pay a fee or pays a fee, even if the fee is
refundable. This is consistent with the Board's statement when adopting
Sec. 226.19(a)(1)(ii) that the fee restriction applies to refundable
fees because ``[l]imiting the fee restriction to nonrefundable fees * *
* would likely undermine the intent of the rule.'' 74 FR 44522, 44592,
July 30, 2008.
Proposed comment 19(a)(1)(ii)-4 states, for example, that a fee is
imposed if a creditor takes a consumer's check for payment, whether or
not the check is post-dated and/or the creditor agrees
[[Page 58588]]
to wait until the consumer receives the disclosures required by Sec.
226.19(a)(1)(ii) to deposit the check. A consumer who gives a creditor
or other person a negotiable instrument such as a check for payment has
paid a fee. Post-dating a check for a date after the consumer is
expected to receive the early disclosures does not prevent the check
from being deposited immediately. A consumer's account may be charged
when a properly payable check is presented, even if the check is post-
dated, unless the consumer gives the bank notice of the post-dating and
describes the check with reasonable certainty. See U.C.C. 4-401(c).
Moreover, a consumer who provides to a consumer a check for payment of
fees may feel financially committed to the transaction before he or she
has had an opportunity to review the credit terms offered.
For further example, proposed comment 19(a)(1)(ii)-4 states that a
fee is imposed if a creditor uses a consumer's credit card or debit
card to initiate payment or places a hold on the consumer's account. A
hold for fees on a consumer's account may constrain a consumer from
applying for a mortgage and receiving early disclosures from multiple
creditors, contrary to the intent of Sec. 226.19(a)(1)(ii). A creditor
may take account information, however, as long as the creditor does not
initiate a charge to the consumer's account.
Many applications for mortgage credit request that a consumer
provide information identifying a consumer's accounts, including credit
card accounts and checking accounts likely linked to a debit card. The
Board believes that providing this information does not likely impede
consumers from shopping among credit alternatives, provided the
information is not used to initiate payment before the consumer
receives the early disclosures. Proposed comment 19(a)(1)(ii)-4
therefore states that a fee is not imposed if a creditor takes a
number, code, or other information that identifies a consumer's account
before a consumer receives the disclosures required by Sec.
226.19(a)(1)(i), but does not use the information to initiate payment
from or place a hold on the account until after the consumer receives
the required disclosures.
The Board also proposes to revise comment 19(a)(1)(ii)-1, regarding
the timing of fees, to cross-reference the right to a refund of fees
imposed within three days after a consumer receives the required
disclosures under proposed Sec. 226.19(a)(1)(iv), discussed below in
the section-by-section analysis of proposed Sec. 226.19(a)(1)(iv). In
addition, the Board proposes to revise comment 19(a)(1)(ii)-2,
regarding the types of fees that may not be imposed before a consumer
receives the early disclosures, to discuss the treatment of fees for
housing or credit counseling. Proposed comment 19(a)(1)(ii)-2 states
that under proposed Sec. 226.19(a)(1)(v), if housing or credit
counseling is required by applicable law, a bona fide and reasonable
charge imposed by a counselor or counseling agency is not a ``fee'' for
purposes of Sec. 226.19(a)(1)(ii).
The Board requests comment on the proposed commentary illustrating
circumstances where a fee is or is not imposed. In particular, the
Board requests comment on whether the proposed commentary appropriately
balances consumers' convenience and consumers' ability to shop among
loan offers without feeling financially committed to a particular
transaction.
Subsequent Creditors
The Board has received questions regarding whether a creditor may
accept a consumer's application made through a third party, such as a
mortgage broker, where the consumer previously has paid fees in
connection with two or more applications made through the third party
that were denied or withdrawn. Comment 19(a)(1)(ii)-3.iii addresses the
imposition of fees in a case where a third party submits a consumer's
written application to a second creditor following a prior creditor's
denial, or the consumer's withdrawal, of an application made to the
prior creditor. Comment 19(a)(1)(ii)-3.iii states that, if a fee
already has been assessed, the new creditor or third party complies
with Sec. 226.19(a)(1)(ii) if it does not collect or impose any
additional fee until the consumer receives an early mortgage loan
disclosure from the new creditor. That is, the fact that the consumer
previously has paid a fee in connection with a mortgage transaction
does not foreclose a new creditor or third party from accepting or
approving the consumer's application.
The Board proposes to revise comment 19(a)(1)(ii)-3.iii to clarify
that the comment applies not only to a second creditor, but to any
subsequent creditor. The Board also proposes to clarify that a
subsequent creditor may impose a fee for obtaining the consumer's
credit history before the consumer receives the early disclosures. That
proposed revision conforms comment 19(a)(1)(ii)-3.iii with comments
19(a)(1)(ii)-3.i and -3.ii.
Reverse Mortgages Subject to Sec. 226.33
The Board proposes to add a comment 19(a)(1)(ii)-5 to clarify that
three provisions regarding imposing fees apply to reverse mortgages.
Under current and proposed Sec. 226.19(1)(ii), fees generally may be
imposed after a consumer receives the disclosures required by Sec.
226.19(a)(1)(i). The Board is proposing, however, to prohibit the
imposition of a nonrefundable fee for three business days after a
consumer receives the early disclosures. This proposal is discussed in
detail below in the section-by-section analysis of proposed Sec.
226.19(a)(1)(iv). Moreover, under the proposal a creditor or any other
person may not impose a nonrefundable fee for a reverse mortgage
subject to Sec. 226.33 until after the third business day following
the consumer's completion of counseling required under proposed Sec.
226.40(b)(1), as discussed in detail below in the section-by-section
analysis of proposed Sec. 226.40(b). Proposed comment 19(a)(1)(ii)-5
clarifies that, for reverse mortgages subject to Sec. Sec. 226.19 and
226.33, creditors and other persons must comply with the restriction on
imposing a nonrefundable fee under Sec. 226.40(b)(2) in addition to
the restrictions on imposing fees under Sec. 226.19(a)(1)(ii) and
(iv). Proposed comment 19(a)(1)(ii)-5 also cross-references additional
clarifying commentary under comment 40(b)(2)-4.i.
19(a)(1)(iii) Exception to Fee Restriction
Currently, Sec. 226.19(a)(1)(iii) provides that a creditor or
other person may impose a fee for obtaining a consumer's credit history
before the consumer receives the disclosures required by Sec.
226.19(a)(1)(i), provided the fee is bona fide and reasonable in
amount. The Board now proposes to revise Sec. 226.19(a)(1)(iii) to
clarify that a bona fide and reasonable fee for obtaining a consumer's
credit history need not be refundable, notwithstanding the requirement
under proposed Sec. 226.19(a)(1)(iv) that neither a creditor nor any
other person may impose a nonrefundable fee for three business days
after a consumer receives the early disclosures required by Sec.
226.19(a)(1)(i), discussed below.
19(a)(1)(iv) Imposition of Nonrefundable Fees
Background
Section 226.19(a)(1)(ii) provides that neither a creditor nor any
other person may impose a fee (other than a fee for obtaining a
consumer's credit history) in connection with a consumer's application
for a closed-end, dwelling-secured transaction before the consumer
receives the early disclosures, as discussed above in the section-by-
section analysis of the provision.
[[Page 58589]]
Section 226.19(a)(1)(ii) also provides that if the early disclosures
are mailed to a consumer, the consumer is considered to have received
them three business days after they are mailed. In adopting the fee
imposition restriction, the Board stated that in most instances
consumers will receive the early disclosures within three business days
and that it is common industry practice to deliver mortgage disclosures
by overnight courier. 74 FR 44522, 44593, July 30, 2008. The Board
stated further that it had contemplated providing a timeframe longer
than three business days for the presumption that a consumer has
received the early disclosures but believed that the adopted time frame
struck a proper balance between enabling consumers to review their
credit terms before making a financial commitment and maintaining the
efficiency of automated and streamlined loan processing. Id.
Concerns have been raised, however, that under the current rule
consumers will not necessarily have adequate time to consider the early
disclosures before a fee is imposed. If a fee is imposed immediately
after a consumer receives the early disclosures, the consumer may feel
financially committed to a transaction he or she has not had adequate
time to consider. The restriction on imposing fees under the MDIA and
Regulation Z are intended to ensure that consumers are not discouraged
from comparison shopping by fees, such as an appraisal fee or a rate-
lock fee, that cause them to feel financially committed to the
transaction.
The Board's Proposal
To address the concerns discussed above, the Board proposes to
require that creditors and other persons refund any fees imposed within
three business days after the consumer receives the early disclosures
if the consumer decides not to proceed with the transaction. The Board
makes this proposal pursuant to the Board's authority under TILA
Section 105(a), which authorizes the Board to prescribe regulations to
carry out TILA's purposes and to prevent circumvention or evasion of
TILA's requirements. TILA's purposes include assuring a meaningful
disclosure of credit terms to enable consumers more readily to compare
available credit terms and to avoid the uninformed use of credit. 15
U.S.C. 1601(a) and 1604(a). Allowing consumers time to consider the
early disclosures without incurring fees would promote the informed use
of credit, consistent with TILA's purposes. Moreover, the Board
believes the proposed refund right is necessary to prevent the
frustration of MDIA's purposes. A consumer who pays an application fee
immediately upon receiving disclosures may feel committed to proceed on
the terms stated in the early disclosures rather than seek better loan
terms from the creditor or from other creditors.
Proposed Sec. 227.19(a)(1)(iv) provides that neither a creditor
nor any other person may impose a nonrefundable fee for three business
days after a consumer receives the early disclosures required by Sec.
226.19(a)(1)(i). (Proposed Sec. 226.19(a)(1)(iii) provides that a fee
for obtaining a consumer's credit history need not be refundable under
the proposal, however, as discussed above. This is because creditors
generally need to review a consumer's credit history to provide
meaningful early disclosures.) Proposed Sec. 226.19(a)(1)(iv) also
provides that a creditor or other person must refund any fees paid
within three business days after the consumer receives those
disclosures upon the consumer's request. Proposed Sec.
226.19(a)(1)(iv) provides, however, that the refund right applies only
to a refund request the consumer makes within three business days after
receiving the disclosures and only if the consumer decides not to enter
into the transaction. That is, under the proposal, a consumer does not
have a right to obtain a refund of fees if the consumer decides to
enter into the transaction. Moreover, after three business days have
elapsed after the consumer receives the early disclosures, a consumer
has no right to a refund under proposed Sec. 226.19(a)(1)(iv) even if
the consumer decides not to enter into the transaction.
The Board recognizes that the proposal may result in some
creditors' refraining from imposing any fees (other than a fee for
obtaining the consumer's credit history) until four days after a
consumer receives the early disclosures (or longer, if there are
intervening non-business days), to avoid having to refund fees. Some
creditors may not order an appraisal without collecting a fee from a
consumer; in such cases, the proposal may result in some delay in the
processing of a consumer's transaction. Further, some creditors may not
agree to lock-in an interest rate until a consumer pays a rate-lock
fee, and interest rates could increase during the refund period. Other
creditors may anticipate that few consumers will request a refund and
collect fees during the three-business-day refund period, however.
Moreover, the Board believes that the proposed refund right for closed-
end mortgages is necessary to implement the purposes of the MDIA. A
consumer who pays an application fee immediately upon receiving
disclosures likely feels constrained to proceed on the terms stated in
the early disclosures rather than seek better loan terms from the
creditor or from other creditors. In addition, the Board notes that
TILA Section 137(e) and Sec. 226.5b(h) provides a substantially
similar refund right for HELOCs. 15 U.S.C. 1647(e).
The Board requests comment on all aspects of the proposal to
require that any fee imposed within three business days after the
consumer receives the early disclosures for a closed-end loan secured
by real property or a dwelling be refundable, discussed in more detail
below. In particular, the Board requests comment on differences between
HELOCs and closed-end mortgages with respect to the timing of loan
processing and the types of fees imposed that may make it difficult for
creditors to comply with the proposed refund requirement. The Board
also requests comments on such differences that may cause the costs of
the proposed refund requirement to outweigh its benefits to consumers.
Business day. Section 226.2(a)(6) provides two definitions of
``business day.'' The general definition provides that 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. See Sec.
226.2(a)(6) and comment 2(a)(6)-1. For purposes of certain provisions,
however, a more precise definition applies; in those cases ``business
day'' means all calendar days except Sundays and specified Federal
legal holidays. See Sec. 226.2(a)(6) and comment 2(a)(6)-2.
For ease of compliance and for consistency with the refund right
for HELOCs under Sec. 226.5b(h), the Board proposes to apply the more
precise definition of ``business day'' for the proposed prohibition on
imposing a nonrefundable fee for three business days after a consumer
received the early disclosures required by Sec. 226.19(a)(1)(i).
Proposed comment 19(a)(1)(iv)-1 states that, for purposes of Sec.
226.19(a)(1)(iv), the term ``business day'' means all calendar days
except Sundays and the legal public holidays referred to in Sec.
226.2(a)(6). It is easier to determine when the refund period ends
using the more precise definition. Using the more precise definition
also would mean that the standard for determining when a waiting period
ends is the same for all creditors.
Using the more precise definition of ``business day'' would not
account for differences in when creditors and other persons are open
for business to receive a consumer's refund request, however
[[Page 58590]]
(although a creditor may provide for a refund request to be made when
the creditor is not open for business, for example, through the
creditor's Internet Web site). Saturday is a ``business day'' under the
more precise definition, and some persons' offices are not open on
Saturdays. Further, if a legal public holiday falls on a weekend, some
creditors' offices may observe the holiday on a weekday, but the
observed holiday is a ``business day'' under the more precise
definition. See comment 2(a)(6)-2. The Board requests comment on
whether general definition of a ``business day'' (a day on which a
creditor's offices are open to the public for carrying on substantially
all of its business functions) is more appropriate than the more
precise definition of a ``business day'' (all calendar days except
Sundays and legal public holidays) to use to determine the period
during which a consumer may request a refund.
Refund period. Proposed comment 19(a)(1)(iv)-2 states that a fee
may be imposed after the consumer receives the disclosures required
under Sec. 226.19(a)(1)(i) and before the expiration of three business
days, but the fee must be refunded if, within three business days after
receiving the required disclosures, the consumer decides not to enter
into a loan agreement and requests a refund. This is consistent with
comment 5b(h)-1, regarding collection of fees for home equity lines of
credit. Proposed comment 19(a)(1)(iv)-2 also states that, under Sec.
226.19(c), a notice of the right to receive a refund is provided in a
publication entitled ``Key Questions to Ask about Your Mortgage''
proposed under the August 2009 Closed-End Proposal.\30\ As previously
proposed, that publication must be provided at the time an application
form is provided to the consumer or before the consumer pays a
nonrefundable fee, whichever is earlier. See 74 FR 43232, 43329, Aug.
26, 2009. The proposed notice of the refund right is discussed in
detail below.
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\30\ The proposed publication was published at 74 FR 43232,
43425, Aug. 26, 2009.
---------------------------------------------------------------------------
Proposed comment 19(a)(1)(iv)-2 states further that a creditor or
other person may, but need not, rely on the presumption under Sec.
226.19(a)(1)(ii) that a consumer a receives the early disclosures three
business days after they are mailed to the consumer or delivered to the
consumer by means other than delivery in person. The proposed comment
clarifies that if a creditor or other person relies on that presumption
of receipt, a nonrefundable fee may not be imposed until after the end
of the sixth business day following the day disclosures are mailed or
delivered by means other than in person.
Proposed comment 19(a)(1)(iv)-2 also provides examples that
illustrate how to determine when the refund period ends. For example,
proposed comment 19(a)(1)(iv)-2.i illustrates a case where a creditor
receives a consumer's application on Monday, and the consumer receives
the early disclosures in person on Tuesday and pays an application fee
that same day. Proposed comment 19(a)(1)(iv)-2.i clarifies that the fee
must be refundable through the end of Friday, the third business day
after the consumer received the early disclosures. For further example,
proposed comment 19(a)(1)(iv)-2.ii illustrates a case where a creditor
receives a consumer's application on Monday, places the early
disclosures in the mail on Tuesday, and relies on the presumption of
receipt, such that the consumer is considered to receive the early
disclosures on Friday, the third business day after the disclosures are
mailed. Proposed comment 19(a)(1)(iv)-2.ii clarifies that if the
consumer pays an appraisal fee the next Monday, the fee must be
refundable through the end of Tuesday, the third business day after the
consumer received the early disclosures and the sixth business day
after the disclosures were mailed.
Proposed comment 19(a)(1)(iv)-2.iii illustrates a case where a
creditor receives a consumer's application on Monday and places the
early disclosures in the mail on Wednesday, and the consumer receives
the disclosures on Friday. Proposed comment 19(a)(1)(iv)-2.iii
clarifies that if the consumer pays an application fee the following
Wednesday, the fee need not be refundable because the refund period
expired at the end of the previous day, Tuesday, the third business day
after the consumer received the early disclosures.
Reverse mortgages subject to Sec. 226.33. The Board proposes to
add a comment 19(a)(1)(iv)-3 to clarify that two provisions regarding
imposing nonrefundable fees apply to reverse mortgages. The Board is
proposing to prohibit the imposition of a nonrefundable fee for three
business days after a consumer receives the early disclosures, as
discussed in detail below in the section-by-section analysis of
proposed Sec. 226.19(a)(1)(iv). Moreover, the Board is proposing to
prohibit the imposition of a nonrefundable fee for a reverse mortgage
subject to Sec. 226.33 until after the third business day following
the consumer's completion of counseling required under proposed Sec.
226.40(b)(1), as discussed in detail below in the section-by-section
analysis of proposed Sec. 226.40(b). Proposed comment 19(a)(1)(iv)-3
clarifies that, for reverse mortgages subject to Sec. Sec. 226.19 and
226.33, creditors and other persons must comply with the restriction on
imposing a nonrefundable fee under Sec. 226.40(b)(2) in addition to
the restriction on imposing a nonrefundable fee under Sec.
226.19(a)(1)(iv). Proposed comment 19(a)(1)(iv)-3 also cross-references
additional clarifying commentary under comment 40(b)(2)-4.ii.
Notice of refund right. The Board proposes to include a notice of
the refund right for closed-end mortgages in a proposed Board
publication entitled ``Key Questions to Ask About Your Mortgage,''
which under proposed Sec. 226.19(c)(1) and (d) of the August 2009
Closed-End Proposal is provided when an application form is provided to
a consumer. See 74 FR 43232, 43329, Aug. 26, 2009. The proposed notice
reads as follows: ``You cannot be charged a fee, other than a credit
history fee, until you get disclosures. If you do not want the loan,
you have a right to a fee refund, except for a credit history fee, for
three days after you get the disclosures.'' The Board requests comment
on the content of the proposed notice of the refund right under
proposed Sec. 226.19(a)(iv). See Attachment B.
The Board also solicits comment regarding the timing and placement
of the refund right notice for closed-end mortgages. On the one hand,
notifying consumers of a refund right in a ``Key Questions''
publication may help consumers to comparison shop with confidence,
knowing that they need not incur fees before they decide to proceed
with a transaction. On the other hand, if a consumer pays a fee within
three business days after receiving the early disclosures, the
consumers may not remember that the fee is refundable. The Board
requests comment regarding whether notice of the refund right under
proposed Sec. 226.19(iv) should be included in a ``Key Questions''
document provided when an application form is provided to the consumer,
in transaction-specific disclosures provided soon after a creditor
receives a consumer's application, in both documents, or in some other
manner.
19(a)(1)(v) Counseling Fee
The Board has received questions regarding whether Sec.
226.19(a)(2)(ii) prohibits the imposition of a fee for housing
counseling required before a creditor may process an application for a
reverse mortgage that is insured by the
[[Page 58591]]
Federal Housing Administration of HUD (known as a Home Equity
Conversion Mortgage or HECM), before the consumer receives the early
disclosures. The MDIA's prohibition of imposing fees (other than a fee
for obtaining a consumer's credit history) before a consumer receives
the early disclosures is designed to help ensure that consumers receive
the early disclosures without being financially committed to a
transaction. That prohibition can facilitate comparison shopping of
loans by consumers.
The housing counseling requirement for HECMs is intended to ensure
that consumers considering a reverse mortgage receive information about
the costs, benefits, and features of HECMs. This information may assist
consumers in deciding whether to apply for a reverse mortgage, or seek
other financial options. The Board believes that the information
consumers receive from HECM housing counseling improves their ability
to make such a decision, and to comparison shop for loans, as does the
MDIA's prohibition on imposing fees before a consumer receives the
early disclosures. The Board also believes that a fee assessed for HECM
housing counseling is not likely to constrain a consumer from applying
for loans with multiple creditors. In contrast with fees that different
creditors each may impose, such as an application fee, a fee for HECM
housing counseling need be paid only once. A consumer's completion of
HECM housing counseling satisfies the counseling requirement with
respect to any HECM application the consumer makes within 180 days, as
discussed below in the section-by-section analysis of proposed Sec.
226.40(b)(3).
For the foregoing reasons, the Board does not believe that Congress
intended the MDIA's fees restriction to apply to fees for HECM housing
counseling that are imposed before the consumer receives the early TILA
disclosures. Proposed Sec. 226.19(a)(1)(v) provides that if housing or
credit counseling is required by applicable law, a bona fide and
reasonable charge imposed by a counselor or counseling agency for such
counseling is not a ``fee'' for purposes of Sec. 226.19(a)(1)(ii).
Proposed Sec. 226.19(a)(1)(v) and proposed comment 19(a)(1)(v)-1 state
further that such a counseling fee need not be refundable under
proposed Sec. 226.19(a)(1)(iv). Proposed comment 19(a)(1)(v)-1 also
states that a HECM counseling fee is an example of a fee that may be
imposed before a consumer receives the early disclosures.
The example of a HECM counseling fee is illustrative and not
exclusive. Credit or housing counseling may be required by applicable
law for a closed-end mortgage transaction other than a HECM, to help
consumers make informed credit decisions. Proposed Sec.
226.19(a)(1)(ii) therefore applies broadly to a fee for credit or
housing counseling required by applicable law. The Board solicits
comment about whether there are other types of fees that should not be
considered imposed in connection with a consumer's application for a
mortgage transaction, for purposes of the fee imposition restriction
under Sec. 226.19(a)(1)(ii).
19(a)(2)
19(a)(2)(i) Seven-Business-Day Waiting Period
Section 226.19(a)(2)(i) provides that a creditor must deliver or
place in the mail the early disclosures required by Sec.
226.19(a)(1)(i) no later than the seventh business day before
consummation of the transaction. Comment 19(a)(2)(i)-1 states that the
seven-business-day waiting period begins when the creditor delivers the
early disclosures or places them in the mail, not when the consumer
receives or is deemed to have received the early disclosures. (By
contrast, the three-business-day waiting period after a creditor makes
corrected disclosures is determined based on when the consumer receives
the corrected disclosures. Sec. 226.19(a)(2)(ii); comments
19(a)(2)(ii)-1 and -3.) Comment 19(a)(2)(i)-1 states, for example, that
if a creditor delivers the early disclosures to a consumer in person or
places them in the mail on Monday, June 1, consummation may occur on or
after Tuesday, June 9, the seventh business day following delivery or
mailing of the early disclosures.
The Board has received questions regarding how delivering or
mailing the early disclosures on a Sunday or a legal public holiday
affects when the seven-business-day waiting period ends. The fact that
Sundays and legal public holidays are not business days for purposes of
waiting periods under Sec. 226.19(a)(2) (see comment 19(a)(2)-1) does
not affect when the seven-business-day waiting period ends, because the
first day of the waiting period is the first business day after the
early disclosures are delivered or placed in the mail. This is
clarified by the example provided in comment 19(a)(2)(i)-1, discussed
above. The Board proposes to revise comment 19(a)(2)(i)-1 for clarity.
The Board proposes further to revise the example in comment
19(a)(2)(i)-1 to be based on a case where the early disclosures are
delivered or placed in the mail on Sunday, for additional clarity.
Proposed comment 19(a)(2)(i)-1 states that the seven-business-day
waiting period after a creditor mails or delivers the early disclosures
is counted starting with ``the first business day after'' (rather than
``when'') the creditor delivers the early disclosures or places them in
the mail. Proposed comment 19(a)(2)(i)-1 states further, for example,
that if a creditor delivers the early disclosures to a consumer in
person or places them in the mail on Sunday, May 31, consummation may
occur on or after Monday, June 8, the seventh business day following
delivery or mailing of the early disclosures.
The proposed revisions are technical amendments for clarity and no
substantive change is intended. The examples provided in existing
commentary regarding when a consumer is presumed to receive disclosures
or when a waiting period ends illustrate that such period is counted
starting with the day after disclosures are mailed (not the day
disclosures are mailed). See, e.g., comments 19(a)(2)(ii)-1 and -4.
19(a)(2)(iii) Additional Three-Business-Day Waiting Period
Section 226.19(a)(2)(ii) provides that a creditor must make
corrected disclosures with all changed terms if the APR disclosed in
the early disclosures required by Sec. 226.19(a)(1)(i) becomes
inaccurate, as defined in Sec. 226.22. (Section 226.22 is discussed in
detail below in connection with proposed revisions.) Under the August
2009 Closed-End Proposal, the Board proposed to require creditors to
provide a ``final'' TILA disclosure in all cases for closed-end
mortgage transactions secured by a dwelling or real property; a
consumer would have to receive those disclosures at least three
business days before consummation.\31\ The Board also proposed two
alternative requirements for corrected disclosures thereafter, each
under proposed Sec. 226.19(a)(2)(iii). Under Alternative 1, a creditor
must provide corrected disclosures if any disclosed term becomes
inaccurate. Under Alternative 2, the creditor must provide corrected
disclosures only if the disclosed APR becomes inaccurate under Sec.
226.19(a)(2)(iv) or if a fixed-rate mortgage becomes an adjustable-rate
mortgage.\32\ The Board proposes
[[Page 58592]]
revisions to commentary under both Alternative 1 and Alternative 2,
discussed in detail below.
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\31\ For a detailed discussion of the proposed requirement for
final disclosures and alternative proposals for corrected disclosure
requirements, see 74 FR 43232, 43258-43262, Aug. 26, 2009.
\32\ Under proposed Sec. 226.19(a)(2)(iv), an APR disclosed
under proposed Sec. 226.19(a)(2)(ii) or (iii) is considered
accurate as provided by Sec. 226.22, except that in certain
specified circumstances the APR is considered accurate if the APR
decreases from the previously disclosed APR. See 74 FR at 43261,
43326-43327.
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Alternative 1--Proposed Sec. 226.19(a)(2)(iii)
Under Alternative 1, proposed comment 19(a)(2)(iii)-1 discusses
whether or not an APR change requires a creditor to provide corrected
disclosures, after providing final disclosures. The comment is intended
to clarify that if the APR changes but the disclosed APR is accurate
under the applicable tolerance, a creditor may provide corrected
disclosures at consummation. The Board proposes to revise proposed
comment 19(a)(2)(iii)-1 under Alternative 1 to clarify that the comment
is limited to cases where only the APR changes. If a term other than
the APR changes, the creditor must provide corrected disclosures that
the consumer must receive at least three business days before
consummation, even if the disclosed APR is accurate.
Alternative 2--Proposed Sec. 226.19(a)(2)(iii)
Section 226.19(a)(2)(ii) provides that a creditor must make
corrected disclosures with all changed terms if the APR disclosed in
the early disclosures required by Sec. 226.19(a)(1)(i) becomes
inaccurate, as defined in Sec. 226.22. The Board has clarified that
corrected disclosures are not required as a result of APR changes if
the disclosed APR is accurate under the tolerances in Sec. 226.22. 74
FR 23289, 23293, May 19, 2009 (final rule implementing the MDIA). The
Board also has explained that, under Sec. 226.22(a)(4), a disclosed
APR is considered accurate and does not trigger corrected disclosures
if it results from a disclosed finance charge that is greater than the
finance charge required to be disclosed (i.e., the finance charge is
overstated). 74 FR 43232, 43261, Aug. 26, 2009. Nevertheless, the Board
continues to receive questions regarding the application of the special
APR tolerances for mortgage transactions under Sec. 226.22(a)(4) and
(5) to the requirement to provide corrected disclosures under Sec.
226.19(a)(2)(ii).
To address those questions, the Board proposes to revise certain
examples in the commentary under Alternative 2 to reflect that all of
the tolerances under Sec. 226.22, not only the tolerances under Sec.
226.22(a)(2) and (3), apply in determining whether a disclosed APR is
accurate.\33\ As proposed under the August 2009 Closed-End Proposal,
comment 19(a)(2)(iii)-1 states that, if a disclosed APR changes so that
it is not accurate under Sec. 226.19(a)(2)(iv) or an adjustable-rate
feature is added, the creditor must make corrected disclosures of all
changed terms so that the consumer receives them not later than the
third business day before consummation. Proposed comment 19(a)(2)(iii)-
1 also contains an example that illustrates when consummation may occur
in such case. The Board proposes to remove the example from comment
19(a)(2)(iii)-1 and insert a cross-reference to a more detailed example
in comment 19(a)(2)(iii)-4.
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\33\ The proposed revision is not necessary in the commentary on
Sec. 226.19(a)(2)(iii) under Alternative 1, because Alternative 1
would require creditors to provide corrected disclosures if any
disclosed terms become inaccurate. A change that affects the APR
likely would affect other terms and trigger corrected disclosures
whether or not the disclosed APR becomes inaccurate. Therefore,
commentary that illustrates whether or not a creditor must provide
corrected disclosures where the APR changes is not provided under
Alternative 1.
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The Board also proposes to revise proposed comment 19(a)(2)(iii)-4
to clarify that an APR disclosed for a regular transaction is
considered accurate not only if the APR is accurate under the tolerance
of \1/8\ of 1 percentage point under Sec. 226.22(a)(2), but also if
the disclosed APR is accurate under the special tolerance for mortgage
transactions set forth in Sec. 226.22(a)(4) or (a)(5) (and no other
tolerance applies under proposed Sec. 226.19(a)(2)(iv)). Similarly, an
APR disclosed for an irregular transaction is accurate not only if the
APR is accurate under the tolerance of \1/4\ of 1 percentage point for
an irregular transaction under Sec. 226.22(a)(3), but also if the
disclosed APR is accurate under the special tolerance for mortgage
transactions set forth in Sec. 226.22(a)(4) or (a)(5) (and no other
tolerance applies under proposed Sec. 226.19(a)(2)(iv)).
Under the August 2009 Closed-End Proposal, proposed comment
19(a)(2)(iii)-2 states that, if corrected disclosures are required
under proposed Sec. 226.19(a)(2)(iii), a creditor may provide a
complete set of new disclosures or may redisclose only the changed
terms. This is consistent with current comment 19(a)(2)(ii)-2.
The Board proposes to revise proposed comment 19(a)(2)(iii)-2 under
Alternative 2 to state that if a creditor does not provide a complete
set of new disclosures, corrected disclosures must contain the changed
terms and certain general disclosures required by previously proposed
Sec. 226.38(f) and (g) (``no obligation,'' security interest, ``no
refinance guarantee,'' and tax deductibility statements) and the
identities of the creditor and loan originator.\34\ The Board believes
that requiring the foregoing disclosures in corrected disclosures would
provide important information to consumers and would impose minimal, if
any, burdens on creditors.
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\34\ For a discussion of those proposed general disclosures, see
74 FR 43232, 43309-43312, Aug. 26, 2009.
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19(a)(3) Consumer's Waiver of Waiting Period Before Consummation
TILA Section 128(b)(2)(E), added by the MDIA, provides that a
consumer may waive or modify the waiting periods between when a
creditor provides early disclosures or corrected disclosures and
consummation of a closed-end, dwelling-secured transaction, if the
consumer determines that the extension of credit is needed to meet a
bona fide personal financial emergency.\35\ 15 U.S.C. 1638(b)(2). The
waiver statement must bear the signature of ``all consumers entitled to
receive the disclosures'' required by TILA Section 128(b)(2). Id. The
Board implemented TILA Section 128(b)(2)(E) in Sec. 226.19(a)(3).
Section 226.19(a)(3) provides that, to modify or waive a waiting period
required by Sec. 226.19(a)(2), a consumer must give the creditor a
dated, written statement that describes the emergency, specifically
modifies or waives the waiting period, and bears the signature of all
the consumers primarily liable on the legal obligation.\36\ Printed
forms are prohibited.
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\35\ Currently, if the APR stated in early disclosures changes
beyond a specified tolerance, creditors must provide corrected
disclosures that the consumer must receive at least three business
days before consummation. Sec. 226.19(a)(2)(ii). Under the August
2009 Closed-End Proposal, the Board proposed to revise Sec.
226.19(a)(2)(ii) to require creditors, in all cases, to provide
final disclosures that a consumer must receive at least three
business days before consummation of a credit transaction secured by
real property or a dwelling, as discussed above.
\36\ A consumer need not waive a waiting period entirely and may
modify--that is, shorten--a waiting period. References in this
Supplementary Information and in commentary on Sec. 226.19(a)(3) to
waiver of a waiting period also refer to modification of a waiting
period.
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The requirements for waiving a pre-consummation waiting period
under Sec. 226.19(a)(3) are substantially similar to the requirements
for waiving a pre-consummation waiting period under Sec.
226.31(c)(1)(iii) and waiving the right to rescind under Sec. Sec.
226.15(e) and 226.23(e). Over the years, creditors have asked the Board
to clarify the procedures for waiver and provide additional examples of
a bona fide personal financial emergency.
[[Page 58593]]
For the reasons discussed in the section-by-section analysis of
Sec. 226.23(e), the Board proposes to provide additional guidance
regarding when a consumer may waive a waiting period. The proposed
revisions clarify the procedure to be used for a waiver. The proposed
revisions also provide new examples of a bona fide personal financial
emergency, in addition to the current example of an imminent
foreclosure sale. See comment 19(a)(3)-1. The Board proposes these new
examples as non-exclusive illustrations of other bona fide personal
financial emergencies that may justify a waiver of the right to
rescind. The Board also proposes examples of circumstances that are not
bona fide personal financial emergencies. The Board requests comment on
all aspects of the proposed revisions to Sec. 226.19(a)(3).
Procedures
Proposed Sec. 226.19(a)(3) and associated commentary clarify that
a consumer may modify or waive a waiting period, after the consumer
receives the notice required by Sec. 226.38, if each consumer
primarily liable on the obligation signs and gives the creditor a
dated, written statement that specifically modifies or waives the
waiting period and describes the bona fide personal financial
emergency. Currently, comment 19(a)(3)-1 clarifies that the bona fide
personal financial emergency is one in which loan proceeds are needed
before the waiting period ends. Proposed Sec. 226.19(a)(3)
incorporates that provision into the regulation. Other proposed
revisions to Sec. 226.19(a)(3) clarify that each consumer primarily
liable on the obligation may sign a separate waiver statement; a
proposed conforming amendment to comment 19(a)(3)-1 is discussed below.
(Disclosure requirements for closed-end credit transactions that
involve multiple consumers are discussed above in the section-by-
section analysis of proposed Sec. 226.17(d).)
Currently, comment 19(a)(3)-1 states that a consumer may modify or
waive the right to a waiting period required by Sec. 226.19(a)(2) only
after ``the creditor makes'' the disclosures required by Sec. 226.18.
(Under the August 2009 Closed-End Proposal, Sec. 228.38, rather than
Sec. 226.18, sets forth the required content for mortgage disclosures.
See 74 FR 43232, 43333, Aug. 26, 2009.) Both current and proposed Sec.
226.19(a)(3) provide that a consumer must receive the required
disclosures before waiving a waiting period. The Board therefore
proposes to revise comment 19(a)(3)-1 to clarify that waiver is
permitted only after ``the consumer receives'' the required
disclosures. The Board proposes further to revise comment 19(a)(3)-1 to
clarify that where multiple consumers are primarily liable on the legal
obligation and must sign a waiver statement, the consumers may, but
need not, sign the same waiver statement.
The Board also proposes to move the discussion of circumstances
that are a bona fide personal financial emergency in comment 19(a)(3)-1
to a new comment 19(a)(3)-2, to conform the waiver commentary under
Sec. 226.19(a)(3) with the waiver commentary under Sec. Sec.
226.15(e) and 226.23(e). Proposed comment 19(a)(3)-2 is discussed
below.
Bona Fide Personal Financial Emergency
Proposed comment 19(a)(3)-2 provides clarification regarding bona
fide personal financial emergencies. The proposed comment contains the
current guidance under existing comment 19(a)(3)-1, that whether the
conditions for a bona fide personal financial emergency are met is
determined by the facts surrounding individual circumstances.
Proposed comment 19(a)(3)-2 also states that a bona fide personal
financial emergency typically, but not always, will arise in situations
that involve imminent loss of or harm to a consumer's dwelling or
imminent harm to the health or safety of a consumer. Proposed comment
19(a)(3)-2 states further that a waiver is not effective if a
consumer's waiver statement is inconsistent with facts known to the
creditor. The comment is not intended to impose a duty to investigate
consumer claims.
In addition, proposed comment 19(a)(3)-2 states that creditors may
rely on examples and other commentary provided in comment 23(e)-2 to
determine whether circumstances are or are not a bona fide personal
financial emergency. That commentary is discussed in detail below in
the section-by-section analysis of Sec. 226.23(e).
19(b) Adjustable-Rate Loan Program Disclosures
Section 226.19(b) currently requires special disclosure for closed-
end transactions secured by a consumer's principal dwelling with a term
greater than one year for which the APR may increase after
consummation. Section 226.19(b) requires creditors to provide, among
other things, detailed disclosures about ARM programs (ARM program
disclosures) if a consumer expresses an interest in an ARM. ARM program
disclosures must disclose the index or formula used in making
adjustments and a source of information about the index or formula,
among other information. Sec. 226.19(b)(2)(ii). If interest rate
changes are at the creditor's discretion, this fact must be disclosed,
and if an index is internally defined, such as by a creditor's prime
rate, the ARM program disclosures should either briefly describe that
index or state that interest-rate changes are at the creditor's
discretion. Comment 19(b)(2)(ii)-2.
Under the August 2009 Closed-End Proposal, the Board proposed to
revise Sec. 226.19(b) to change the content and format of ARM program
disclosures required for ARMs defined in proposed Sec. 226.38(a)(3),
with certain exclusions.\37\ With respect to an ARM's index, the Board
proposed to require that ARM program disclosures state the index or
formula used in making adjustments, a source of information about the
index or formula, and an explanation of how the interest rate will be
determined when adjusted, including an explanation of how the index is
adjusted. See proposed Sec. 226.19(b)(1)(iii), 74 FR 43232, 43328,
Aug. 26, 2009. The August 2009 Closed-End Proposal retained comment
19(b)(2)(ii)-2, regarding interest rate changes based on an internally
defined index, and proposed to redesignate that comment as comment
19(b)(1)(iii)-2.
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\37\ For a discussion of the proposed revisions to the content
and format of ARM program disclosures, see 74 FR 43232, 43262-43269,
Aug. 26, 2009.
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As discussed in detail below, the Board requests comment on whether
to require the use of an index that is outside a creditor's control and
publicly available. The Board also proposes a minor conforming
amendment to comment 19(b)-1 consistent with the Board's proposal, for
reverse mortgages, to require creditors to provide disclosures specific
to reverse mortgages rather than general disclosures for closed-end
mortgages. That proposal is discussed below in the section-by-section
analyses of proposed Sec. 226.19(e) and 226.33(b).
Index Within Creditor's Control
TILA does not prohibit using an index within a creditor's control
for purposes of a closed-end ARM. For open-end credit transactions,
however, TILA restricts the use of such an index. TILA Sections 137(a)
and 171(a) and (b) prohibit a creditor from using an index within its
control, for purposes of a variable-rate HELOC or a credit card account
under an open-end consumer credit plan that is not home-secured (credit
card account). 15 U.S.C. 1647(a), 1666i-1(a), (b). TILA Section 137(a)
provides that, for variable-rate HELOCs, the index or other rate of
interest to
[[Page 58594]]
which changes in the APR are related must be ``based on an index or
rate of interest which is publicly available and is not under the
control of the creditor.'' 15 U.S.C. 1637(a). Section 226.5b(f)(1)
implements TILA Section 137(a). TILA Section 171(a) provides that, for
a credit card account, a card issuer may not increase any APR, rate,
fee, or finance charge applicable to any outstanding balance, except as
permitted under TILA Section 171(b). 15 U.S.C. 1666i-1(a). TILA Section
171(b)(2) provides an exception for an increase in a variable APR in
accordance with a credit card agreement that provides for changes in
the rate according to the operation of an index that is not under the
control of the creditor and is available to the general public. 15
U.S.C. 1666i-1(b)(2). Section 226.55(b)(2) implements TILA Section
171(b)(2).
The Board believes that use of an index within a creditor's
control, such as a creditor's own cost of funds, for closed-end
mortgages has not been common in recent years but does occur. Although
TILA does not prohibit using an index within a creditor's control,
federally chartered banks and thrifts may be subject to rules that
prohibit using such an index. OCC regulations generally require that an
ARM index used by a national bank be ``readily available to, and
verifiable by, the borrower and beyond the control of the bank.'' 12
CFR 34.22(a). Similarly, OTS regulations generally provide that any
index a Federal savings association uses for ARMs must be ``readily
available and independently verifiable'' and must be ``a national or
regional index.'' 12 CFR 560(d)(1). An exception applies if a national
bank or Federal savings association notifies the OCC or the OTS,
respectively, of its use of an index that does not meet the applicable
standard and the OCC or OTS does not notify the institution that such
use presents supervisory concerns or raises significant issues of law
or policy. 12 CFR 34.22(b); 12 CFR 560.35(d)(3). If the OCC or the OTS
notifies an institution of such concerns or issues, the institution may
not use the index without prior written approval. Id.
The Board solicits comment on whether Regulation Z should prohibit
the use of an index under a creditor's control for a closed-end ARM and
require the use of a publicly available index. What, if any, are the
potential benefits to consumers of using an index within a creditor's
control, such as a creditor's own cost of funds, for closed-end ARMs?
What are the risks to consumers of using such an index? Are interest
rates higher or more volatile when creditors base ARMs' interest rates
on their own internal index rather than on an index not under their
control and available to the general public? Is the use of an index
within a creditor's control more common with certain types of creditors
(for example, community banks), in certain regions of the country, or
for certain types of closed-end ARMs and if so, why?
Reverse Mortgages
Under the August 2009 Closed-End Proposal, the Board proposed to
expand the coverage of Sec. 226.19(b). Currently, Sec. 226.19(b)
applies to a closed-end credit transaction secured by the consumer's
principal dwelling with a term greater than one year, if the APR may
increase after consummation. Under the August 2009 Closed-End Proposal,
Sec. 226.19(b) generally would apply to a closed-end credit
transaction if the APR may increase and the transaction is secured by
real property or a consumer's dwelling.\38\ See proposed Sec. Sec.
226.19(b) and 226.38(a)(3), 74 FR 43232, 43327, 43333, Aug. 26, 2009.
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\38\ For a discussion of previously proposed exclusions from
coverage by proposed Sec. 226.19(b), see proposed comment 19(b)-3,
74 FR 43232, 43397, Aug. 26, 2009.
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Comment 19(b)-1 currently clarifies the coverage of Sec. 226.19(b)
and discusses particular transaction types. Under the August 2009
Closed-End Proposal, comment 19(b)-1 would be revised consistent with
the proposed expansion of the coverage of Sec. 226.19(b). The Board
now is proposing, however, to except reverse mortgages from the
requirement to provide ARM program disclosures, as discussed below in
the section-by-section analysis of proposed Sec. Sec. 226.19(e) and
226.33(b). The Board therefore now proposes a conforming amendment to
comment 19(b)-1 to state that Sec. 226.19(b) does not apply to reverse
mortgages subject to Sec. 226.33(a). For ease of reference, this
proposal republishes the previously proposed revisions to proposed
comment 19(b)-1.\39\ The Board requests that interested parties limit
the scope of their comments to the newly proposed change to comment
19(b)-1.
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\39\ No changes are proposed to previously proposed Sec.
226.19(b) or to previously proposed commentary, other than the
coverage commentary under proposed comment 19(b)-1. Therefore, only
the revisions previously proposed to comment 19(b)-1 are
republished.
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19(e) Exception for Reverse Mortgages
Section 226.19(b) currently requires creditors to provide detailed
disclosures about adjustable-rate loan programs and a booklet entitled
Consumer Handbook on Adjustable Rate Mortgages (CHARM booklet) if a
consumer expresses an interest in ARMs. Section 226.19(b) applies to
closed-end transactions secured by a consumer's principal dwelling with
a term greater than one year. Under the August 2009 Closed-End
Proposal, the Board proposed to revise the information required under
Sec. 226.19(b) for ARM program disclosures and to remove the
requirement to provide the CHARM booklet.\40\ The Board also proposed
to add a new Sec. 226.19(c) requiring creditors to provide two
proposed publications, ``Key Questions to Ask About Your Mortgage'' and
``Fixed vs. Adjustable Rate Mortgages,'' whether or not a consumer
expresses an interest in ARMs. Previously proposed Sec. 226.19(d)
provides timing requirements for the disclosures required by Sec.
226.19(c) and (d). For reverse mortgages, the Board is proposing to
require creditors to provide a separate ``Key Questions about Reverse
Mortgage Loans'' publication. The Board therefore proposes to except
reverse mortgages from the requirements of Sec. 226.19(b) through (d).
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\40\ For a discussion of the proposed revisions to the content
and format of ARM program disclosures, see 74 FR 43232, 43258-43262,
Aug. 26, 2009.
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Section 226.20 Subsequent Disclosure Requirements
20(a) Refinancings: Modifications to Terms by the Same Creditor
Background
For closed-end credit transactions, existing Sec. 226.20(a)
applies to ``refinancings'' undertaken by the original creditor or the
current holder or servicer of the original obligation. Section
226.20(a) provides that a refinancing by the original creditor or the
current holder or servicer of the original obligation is a new
transaction requiring the creditor to provide new TILA disclosures to
the consumer. A refinancing by any other person is, in all cases, a new
transaction under Regulation Z subject to a new set of disclosures, and
is not governed by the provisions in Sec. 226.20(a). For all
refinancings, the prohibitions in Sec. 226.35 apply if the new
transaction is a higher-priced mortgage loan, as defined in Sec.
226.35(a). See comments 20(a)-2, -5.
Under Sec. 226.20(a), a refinancing is generally deemed to occur
when an existing obligation is satisfied and replaced by a new
obligation involving the same parties, ``based on the parties' contract
and applicable law.'' See comment 20(a)-1. Any change to an agreement
by the same parties that does not result in satisfaction and
replacement of the existing obligation--
[[Page 58595]]
for example, a change in the loan's maturity date--does not require new
disclosures under Sec. 226.20(a), with two exceptions: (1) An increase
in a variable rate not previously disclosed; or (2) conversion from a
fixed rate to a variable rate. See comment 20(a)-3. These two
modifications to terms are always considered ``refinancings'' under
Regulation Z, even if the existing obligation is not satisfied and
replaced.
On the other hand, the following modifications to terms are not
treated as new transactions for purposes of Regulation Z, even if
``satisfaction and replacement'' has occurred: (1) Single payment
renewals with no changes in original terms; (2) APR reductions with a
corresponding change in payment schedule; (3) judicial proceeding
workouts; (4) workouts for delinquent or defaulting consumers, unless
the APR increases or new money is advanced; or (5) renewal of optional
insurance if disclosures were previously provided. See Sec.
226.20(a)(1)-(5).
The Board originally defined the term ``refinancing'' and
established it as an event requiring new disclosures to address the
practice of ``flipping,'' in which a loan involving pre-computed
financed charges was prepaid and replaced with a new obligation between
the same parties. See 34 FR 2009, Feb. 11, 1969. The Board believed
that disclosures for these refinancings would arm consumers with
information regarding the impact of ``flipping'' on their credit terms.
Under the 1969 definition of ``refinancing,'' almost any post-
consummation modification to terms created a ``new credit transaction''
that required new TILA disclosures, with few clear exceptions. This
standard proved complex and resulted in many requests for
interpretation and guidance. In response, the Board issued several
interpretive letters to clarify, for example, that judicial workouts
were exempt, but not workouts for delinquent or defaulting consumers.
In 1980, the Board re-examined the definition of refinancing in
connection with implementing the TILA Simplification Act. The Board
initially proposed a broad definition that depended largely on the
mutual intent of both parties to the agreement. See 45 FR 29726, 29749,
May 5, 1980. Many commenters, mostly from industry, asserted that the
definition was too broad, vague, and difficult to apply. 45 FR 80648,
80685, Dec. 5, 1980. The Board issued a second proposal in December
1980, ultimately adopted in 1981, setting forth the current definition:
``A refinancing occurs when an existing obligation that was subject to
this subpart is satisfied and replaced by a new obligation undertaken
by the same consumer.'' Sec. 226.20(a). The Board believed that this
definition would provide a more precise standard that aligned with
industry use of the term, and would cover modifications to terms that
are similar to new credit transactions. 46 FR 20882, 20903, Apr. 7,
1981.
Concerns With the Current Definition of ``Refinancing''
Since 1981, creditors have frequently requested guidance on the
types of modifications to an existing obligation that constitute a
refinancing under existing Sec. 226.20(a). As discussed above, whether
a refinancing occurs under Regulation Z depends on whether the existing
obligation is satisfied and replaced under applicable State law.
However, court decisions on satisfaction and replacement are
inconsistent. State courts take a case-by-case approach to ascertain
the parties' intent before deciding whether an existing note was
satisfied and replaced by a new note (i.e., novation).\41\ Many cases
focus on determining lien priorities and the equitable interests of
sureties or guarantors, not on protecting the interests of
consumers.\42\
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\41\ Compare Temores v. Overland Bond and Investment Corp., 1999
U.S. Dist. LEXIS 11878 (N.D. Ill. 1999) (finding that a change in
payment schedule resulted in ``satisfaction and replacement,'' and
therefore, was a ``refinancing''), with Hanson v. Central Savings
Bk., 2007 Mich. App. LEXIS 920 (Ct. App. MI 2007) (holding that a
consolidation of several notes, one of which was not originally
secured by the mortgage, was not a ``refinancing'' but a renewal).
\42\ See Citizens & Southern Nat'l Bank v. Scheider, 228 S.E.2d
611 (Ga. App. 1976) (involving the liability of a guarantor); see
also Metro Hampton Co. v. Dietrich et al., 1999 Mich. App. LEXIS
2274 (Ct. App. MI 1999) (involving the liabilities of guarantors).
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Reliance on State law to determine whether a refinancing occurs
under Regulation Z has led to inconsistent application of TILA and
Regulation Z and, in some cases, opportunities to circumvent disclosure
requirements. Compliance and enforcement are also difficult, as
creditors and examiners must monitor and interpret State case law. In
some states, promissory notes routinely include a statement that the
parties do not intend to extinguish (i.e., satisfy and replace) the
existing obligation. As a result, transactions involving the same
creditor are rarely considered refinancings in those states, even when
the creditor makes significant modifications to the terms of the
existing obligation. To avoid long-term interest rate risk, some
creditors that hold loans in portfolio will structure mortgage
transactions as short-term balloon loans, which they modify shortly
before the balloon comes due on the note. The modification may include
an increase in the consumer's interest rate, but may not be a
refinancing under current Regulation Z. Some creditors may provide TILA
disclosures in these circumstances, but they need not do so, and the
protections in Sec. 226.35 for higher-priced mortgage loans do not
apply. See 73 FR 44522, 44594, July 30, 2008.
In addition, in certain states, a refinancing may be structured as
a modification to avoid State taxes on the refinancing.\43\ The
modifications to the consumer's existing obligation can be significant,
and may even involve substitution of a new creditor for the existing
creditor through assignment of the note before the modification occurs.
Under some states' laws, however, satisfaction and replacement has not
occurred. These arrangements may help the consumer avoid paying taxes
associated with a refinancing in certain states, but consumers are not
entitled to new TILA disclosures to help them fully understand the
costs of the new transaction, and may not have a right to rescind under
Sec. 226.23 or the protections in Sec. 226.35 if the modified loan is
a higher-priced mortgage loan.
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\43\ For example, New York's mortgage recording tax rates are
comparatively high. Consolidations, extensions, and modifications
are typically used to allow consumers to avoid this tax; consumers
thus pay taxes only to the extent the refinancing exceeds the amount
of the original mortgage.
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The Board's Proposal
The Board is proposing a new standard for determining when new
disclosures are required. Under the proposal, new disclosures would be
required for mortgage transactions when the existing parties agree to
modify certain key terms, such as the interest rate or loan amount. The
proposal would replace the existing standard of ``satisfaction and
replacement,'' which requires an assessment of whether the existing
legal obligation is satisfied and replaced under applicable State law.
Instead, under the proposal, when existing parties to a mortgage
transaction agree to modify certain terms, the creditor would have to
give the consumer a complete new set of TILA disclosures. At the same
time, the proposal would expressly provide that changing certain other
terms does not require new disclosures, even if the existing obligation
is satisfied and replaced. For non-mortgage transactions, Regulation Z
continues to rely upon satisfaction and replacement to determine
whether a ``refinancing'' of the existing obligation between the same
[[Page 58596]]
parties is a new transaction that requires new disclosures.
Specifically, proposed Sec. 226.20(a)(1)(i) provides that a new
transaction results, and new disclosures are required, when the same
creditor and same consumer modify an existing obligation by: (1)
Increasing the loan amount; (2) imposing a fee on the consumer in
connection with the agreement to modify an existing legal obligation,
regardless of whether the fee is reflected in an agreement between the
parties; (3) changing the loan term; (4) changing the interest rate;
(5) increasing the periodic payment amount; (6) adding an adjustable-
rate feature or other risk factor identified in proposed Sec.
226.38(d)(1)(iii) or 226.38(d)(2), such as a prepayment penalty or
negative amortization; or (7) adding new collateral that is a dwelling
or real property.
Proposed Sec. 226.20(a)(1)(ii) provides three exceptions to the
general definition of a new transaction: (1) Modifications that occur
as part of a court proceeding; (2) modifications that occur in
connection with the consumer's default or delinquency, unless the loan
amount or interest rate is increased, or a fee is imposed on the
consumer in connection with the modification; and (3) modifications
that decrease the interest rate with no additional modifications to
terms other than a decrease in the periodic payment amount, an
extension of the loan term, or both, and where no fee is imposed on the
consumer.
Proposed Sec. 226.20(a)(1)(iii) defines the term ``same creditor''
for purposes of proposed Sec. 226.20(a)(1). These proposed provisions
are explained in further detail below.
Benefits of the proposal. The proposal is intended to bring
uniformity to creditors' practices, to facilitate compliance, and to
ensure that consumers receive disclosures in all cases in which the
loan terms change significantly, risky features are added, or fees are
imposed in connection with a modification. In addition, if the
transaction is a higher-priced mortgage loan, the proposal ensures that
the consumer will receive the protections in Sec. 226.35, including
the requirement that the creditor assess the consumer's ability to
repay the loan. Proposed Sec. 226.20(a)(1) is intended to ensure more
consistent application of TILA and Regulation Z and to diminish
possible circumvention of the disclosure requirements. Moreover, the
proposal should facilitate compliance and enforcement because creditors
and examiners would no longer need to monitor and apply State case law
to each transaction to determine whether the transaction requires new
disclosures.
The Board believes that when the same parties to an existing
closed-end mortgage transaction agree to modify key terms, the
modification is the functional equivalent of a ``refinancing,'' and
therefore, should be treated as a new credit transaction under TILA and
Regulation Z. To further TILA's purpose of promoting the informed use
of credit, this proposal requires that, in defined circumstances,
consumers receive new TILA disclosures to help them decide whether to
proceed with a modification or to shop and compare other available
credit options.
In particular, the proposed rule would ensure that consumers
receive important information about modifications to key terms of their
existing mortgage obligation, such as taking on new debt, a change in
the interest rate, or the addition of a risky feature (e.g., a
prepayment penalty), and the costs assessed by creditors to modify
these terms. These modifications would also be highlighted in the
revised TILA disclosures that the Board published for comment in August
2009. See 74 FR 43232, Aug. 26, 2009. Thus, the revised disclosures
assure a meaningful disclosure of credit terms to apprise consumers of
the impact that modifications have on their existing credit terms and
the costs of the transaction, and to enable them to compare the
modified terms to other credit options.
The Board believes that removing the standard of ``satisfaction and
replacement'' to determine whether a modification results in a ``new
credit transaction'' under TILA and Regulation Z will facilitate
compliance and diminish creditors' ability to circumvent TILA and
Regulation Z requirements. The proposed rule, however, would not limit
states' ability to set their own standards for determining when
recording taxes are required or for ordering lien priorities.
Impact of proposal on existing mortgage market. The Board
recognizes that proposed Sec. 226.20(a)(1) is comprehensive and would
increase the number of transactions requiring new disclosures.\44\ Most
changes in terms that are now only ``modifications'' would be new
transactions. For example, the Board estimates in those states where
refinancings are commonly structured as modifications or consolidations
to avoid State mortgage recording taxes, such as New York and Texas,
the number of transactions requiring new TILA disclosures could
potentially double.\45\ The Board does not believe, however, that
consumers located in these states would be unable to refinance their
mortgages simply because creditors would be required to provide TILA
disclosures under the proposal. The Board recognizes that requiring new
TILA disclosures in these cases would increase costs to creditors, and
that these costs would be passed on to consumers. However, outreach
conducted by the Board for this proposal revealed that some large
creditors in these states currently provide consumers with TILA
disclosures, regardless of whether the transaction is classified as a
``refinancing'' for purposes of Sec. 226.20(a). In this regard, the
proposal appears to align with current industry practice. In addition,
the Board emphasizes that the proposal is not intended to affect
applicable State law as it relates to the note and mortgage, or other
matters. For example, the proposal would not limit states' ability to
impose standards for determining when recording taxes are required or
the ordering of lien priorities.
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\44\ The Board estimates that the number of refinancings that
occur annually with the same creditor, and which would be impacted
by this proposal, represents approximately 26% of all loans made in
the mortgage market. This figure was calculated by taking a sample
of refinancing transactions that occurred between 2003 and 2008 from
the database of one of the three national consumer reporting
agencies, and identifying those transactions that used the same
mortgage subscriber code.
\45\ This figure was determined by comparing the share of
reported refinancing activity (obtained from credit record data
reported under HMDA for 2008) of counties located within New York
and Texas to counties directly bordering those states. The number of
refinancings reported in 2008 for New York was 95,434, and for
Texas, 141,733. Under the proposal, the number of refinancings
reported could increase up to 190,868 and 283,466, for New York and
Texas, respectively.
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The Board also recognizes that some creditors might decline to make
some modifications that are beneficial for consumers because of the
burden of giving new TILA disclosures and the potential exposure to
TILA remedies for errors, including rescission. The proposal seeks to
address this issue by providing several clear exceptions. For example,
agreements made in connection with consumers' delinquency or default on
existing obligations do not require new disclosures, unless the loan
amount or interest rate increases, or a fee is imposed on the consumer
in connection with the agreement. This exception is intended to ensure
that creditors are not discouraged from offering workouts to consumers
at risk of losing their homes and who likely do not have other credit
[[Page 58597]]
options. In addition, the proposal provides exceptions for judicial
proceeding workouts, and for decreases in the interest rate that lower
the periodic payment amount or lengthen the loan term but do not
involve an additional fee. The Board notes that the utility of some of
these exceptions is limited by the requirement that the creditor not
impose a fee on the consumer in connection with the agreement to modify
the existing obligation. The Board is seeking comment on the scope of
the fee restriction. See section-by-section analysis of proposed Sec.
226.20(a)(1)(i)(B) discussing fees, and Sec. 226.20(a)(1)(ii),
discussing exceptions.
Moreover, under the proposal, some modifications to the terms of an
existing legal obligation would not be new transactions under TILA and
Regulation Z, even if State law treats the existing obligation as being
satisfied and replaced. For example, a change in the payment schedule
that permits the consumer to make bi-weekly rather than monthly
payments would not require new TILA disclosures if no other
modification identified under the proposed definition of new
transaction occurred, even if applicable State law treats the
modification as a new transaction.
Certain informal arrangements by the same parties also remain
outside the scope of the proposed definition of new transaction for
mortgages. Generally, a change to the terms of the legal obligation
between the parties requires new disclosures. See Sec. 226.17(c)(1)
and corresponding commentary. The ``legal obligation'' is determined by
applicable State law or other law, and is normally presumed to be
contained in the note or contract that evidences the agreement. See
comment 17(c)(1)-2. Thus, if an arrangement between the same parties
does not rise to the level of a change to the terms of the legal
obligation under applicable State law (i.e., a change as evidenced in
the note or contract, or by separate agreement), then new disclosures
would not be required under proposed Sec. 226.20(a)(1)(i). However, in
all cases where a fee is imposed on the consumer in connection with the
arrangement, a new transaction requiring new disclosures occurs under
proposed Sec. 226.20(a)(1)(i), regardless of whether the fee is
reflected in any agreement between the parties. See proposed Sec.
226.20(a)(1)(i)(B) regarding fees. For example, new disclosures would
not be required if a creditor informally permits the consumer to defer
payments owed on an obligation from time to time, for instance to
account for holiday seasons. Under the same example, however, if a
creditor imposes a fee on the consumer in connection with the
arrangement, a new transaction requiring new disclosures would result
under proposed Sec. 226.20(a)(1)(i), regardless of whether the fee is
reflected in any agreement between the parties.
As discussed more fully below, the scope of proposed Sec.
226.20(a)(1)(i) is comprehensive and would increase the number of
modifications that would result in new transactions subject to the
right of rescission. The Board solicits comment on whether the features
identified under proposed Sec. 226.20(a)(1)(i)(A)-(G) that would
trigger new disclosures, and other applicable requirements under TILA
and Regulation Z, such as rescission, are appropriate, including
comment on whether the scope of the rule should be narrower or broader.
Authority. The Board is proposing to revise when modifications to
terms of an existing legal obligation result in a new credit
transaction that requires new TILA disclosures pursuant to its
authority under TILA Section 105(a). 15 U.S.C. 1604(a). TILA Section
105(a) authorizes the Board to prescribe regulations and make
adjustments or exceptions necessary or proper to carry out TILA's
purposes, which include informing consumers about their credit terms
and helping them shop for credit, to prevent circumvention or evasion,
or to facilitate compliance. TILA Section 102; 15 U.S.C. 1601(a),
1604(a).
Scope of proposed Sec. 226.20(a)(1). Proposed Sec. 226.20(a)(1)
applies only to closed-end mortgage transactions secured by real
property or dwellings, including vacant land and construction loans.
Covering these transactions would be consistent with the Board's August
2009 Closed-End Proposal to improve disclosure requirements and provide
other substantive consumer protections for closed-end mortgages secured
by real property or a dwelling. See 74 FR 43232, Aug. 26, 2009; 73 FR
44522, July 30, 2008.
The Board is not aware of concerns with the existing
``refinancing'' definition as it relates to non-mortgage transactions.
Thus, for closed-end non-mortgage transactions, current Sec. 226.20(a)
would be redesignated as Sec. 226.20(a)(2) and would continue to
provide that a ``refinancing'' is a new transaction that occurs upon
``satisfaction and replacement,'' as discussed in further detail below.
The Board will determine whether proposed Sec. 226.20(a)(1) should
also extend to non-mortgage credit in the next phase of the Board's
Regulation Z review.
Definitions for proposed Sec. 226.20(a)(1). Existing Sec.
226.20(a) provides that the ``same creditor'' is the original creditor,
holder or servicer. See comment 20(a)-5. Proposed Sec.
226.20(a)(1)(iii) defines ``same creditor'' as the current holder of
the original obligation or the servicer acting on behalf of the current
holder.
Proposed section 226.20(a)(1) applies to creditors. Under TILA
Section 103(f), a person is a ``creditor'' when it extends consumer
credit and is the person to whom the debt is originally payable (i.e.,
the original creditor). 15 U.S.C. 1602(f); Sec. 226.2(a)(17).
``Credit'' is defined as ``the right granted by a creditor to a debtor
to defer payment of debt or to incur debt and defer its payment.'' TILA
Section 103(e); 15 U.S.C. 1602(e); Sec. 226.2(a)(14). The Board
believes that any person who makes significant changes to the terms of
an existing legal obligation, such as the interest rate or the loan
amount, engages in extending credit to the consumer by continuing the
extension of debt on different terms and, therefore, is a ``creditor''
under TILA. Thus, pursuant to its authority under Section 105(a), the
Board proposes under Sec. 226.20(a)(1) to treat the current holder or
servicer as a creditor when it modifies key terms to the existing
obligation, whether the current holder is the original creditor, an
assignee or the servicer. 15 U.S.C. 1604(a). For a discussion of
differences between this proposal and the Secure and Fair Enforcement
for Mortgage Licensing Act (the SAFE Act),\46\ see ``Impact of Proposed
Sec. 226.20(a)(1) on Other Rules,'' below.
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\46\ The SAFE Act is contained in Sections 1501 through 1517 of
the Housing and Economic Recovery Act of 2008, Pub. L. 110-289 (July
30, 2008), codified at 12 U.S.C. 5101-5116.
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20(a)(1)(i)
Modifications to Terms--Mortgages
Proposed Sec. 226.20(a)(1)(i) provides that, for an existing
closed-end mortgage loan secured by real property or a dwelling subject
to TILA and Regulation Z, a new transaction requiring new disclosures
occurs when the same creditor and same consumer agree to modify the
terms of an existing obligation by: (1) Increasing the loan amount; (2)
imposing a fee on the consumer in connection with the modification of
an existing legal obligation, regardless of whether the fee is
reflected in any agreement between the parties; (3) changing the loan
term; (4) changing the interest rate; (5) increasing the periodic
payment amount; (6) adding an adjustable-rate feature or other risk
factor identified in
[[Page 58598]]
proposed Sec. 226.38(d)(1)(iii) or 226.38(d)(2); or (7) adding new
collateral that is a dwelling or real property. Each of these
modifications to terms is discussed below.
Proposed comment 20(a)(1)(i)-1 provides guidance about the scope of
Sec. 226.20(a)(1). Proposed Sec. 226.20(a)(1) applies only to certain
modifications to an existing legal obligation that are made by the same
creditor (i.e., the current holder or the servicer acting on behalf of
the current holder). This comment also clarifies that all other
creditors are not subject to Sec. 226.20(a)(1), but must provide TILA
disclosures when entering into an agreement to extend credit covered by
TILA, and are subject to all other applicable provisions of TILA and
Regulation Z.
Proposed comment 20(a)(1)(i)-2 provides that when the same creditor
and same consumer modify a term or add a condition that is not
identified under proposed Sec. 226.20(a)(1)(i), such a modification is
not a new transaction and therefore, new TILA disclosures are not
required. Proposed comment 20(a)(1)(i)-2 provides as an example, a
rescheduling of payments under an existing obligation from monthly to
bi-weekly with no other modifications to the terms listed under Sec.
226.20(a)(1)(i)(A)-(G).
Proposed comment 20(a)(1)(i)-2 also provides that Sec.
226.20(a)(1) applies only if the modification to terms rises to the
level of a change to the terms of an existing legal obligation, as
defined under applicable State law, unless a fee is imposed on the
consumer. Generally, a change to the terms of the legal obligation
between the parties requires new disclosures. See Sec. 226.17(c)(1)
and corresponding commentary. The ``legal obligation'' is determined by
applicable State law or other law, and is normally presumed to be
contained in the note or contract that evidences the agreement. See
comment 17(c)(1)-2. If the modification does not rise to the level of a
change to the terms of the legal obligation under applicable State law,
then new disclosures would not be required under proposed Sec.
226.20(a)(1)(i), unless a fee is imposed. However, in all cases where a
fee is imposed on the consumer in connection with the modification, a
new transaction requiring new disclosures occurs, regardless of whether
the fee is reflected in any agreement between the parties. See proposed
Sec. 226.20(a)(1)(i)(B). Proposed comment 20(a)(1)(i)-2 provides
several examples of informal arrangements that would not be new
transactions under proposed Sec. 226.20(a)(1).
Proposed comment 20(a)(1)(i)-3 clarifies that a new transaction
requires the creditor to provide the consumer with a complete set of
new disclosures and also to comply with other applicable provisions of
Regulation Z, such as the protections in Sec. 226.35 for higher-priced
mortgage loans and the notice of rescission in Sec. 226.23(b).
Proposed comment 20(a)(1)(i)-3 provides several examples of when other
applicable provisions of Regulation Z, such as the rescission notice
requirements under proposed Sec. 226.23(b), may apply.
For mortgage transactions subject to TILA and Regulation Z,
applicable disclosures must be provided in accordance with specific
timing requirements. For example, under proposed Sec. 226.19(a),
creditors must mail or deliver an early disclosure of credit terms to
the consumer within three business days after the creditor receives an
application and at least seven business days before consummation, and
before a fee is imposed on the consumer other than a fee for obtaining
the consumer's credit history. Proposed comment 20(a)(1)(i)-4 provides
guidance to creditors on when a written application is received for a
new transaction for purposes of meeting the timing requirements for
disclosures under TILA and Regulation Z. Proposed comment 20(a)(1)(i)-4
cross references existing comment 19(a)(1)(i)-3 (due to technical
revisions, now proposed comment 19(a)(1)(i)-2), which states that
creditors may rely on RESPA and Regulation X in deciding when a
``written application'' is received, regardless of whether the
transaction is subject to RESPA.
The Board is aware that consumers may not always formally apply for
a modification of the terms of an existing obligation. In many cases,
the creditor may have in its possession the information in the
definition of ``application'' under RESPA and Regulation X (e.g., the
consumer's name, monthly income, or property address). See 12 CFR
3500.2(b). Therefore, proposed comment 20(a)(1)(i)-4 also provides that
an application is deemed received in those instances where the creditor
has the information necessary to constitute an ``application'' as
defined under RESPA and Regulation X, whether the creditor requests the
information from the consumer anew or uses information on file.
Proposed comment 20(a)(1)(i)-5 clarifies that if, before the time
period provided for the early disclosure requirement expires, the
creditor decides it will not or cannot make the modification requested
or the consumer withdraws the application, then the creditor need not
make the early disclosure of credit terms required by Sec.
226.19(a)(1)(i). This proposed comment also cross references ECOA and
Regulation B regarding adverse action notice requirements, which may
apply. See 12 CFR 202.9(a).
Increase in the loan amount. Proposed Sec. 226.20(a)(1)(i)(A)
provides that a new transaction occurs when the loan amount is
increased. ``Loan amount'' is defined under proposed Sec. 226.38(a)(1)
as ``the principal amount the consumer will borrow as reflected in the
loan contract,'' and would be required to be disclosed on the revised
mortgage disclosures published in the Board's August 2009 Closed-End
Proposal. See 74 FR 43292, Aug. 26, 2009. An increase in the loan
amount represents new debt secured by the consumer's real estate or
dwelling. Thus, an increase in the loan amount presents risk to the
consumer and merits new disclosures and the protections afforded by
Regulation Z.
Under proposed Sec. 226.20(a)(1)(i)(A), the new loan amount would
include any cost of the transaction that is financed, but exclude
amounts attributable to capitalization of arrearages and funds advanced
for existing or newly established escrow accounts. Proposed comment
20(a)(1)(i)(A)-1 clarifies that an increase in the loan amount occurs
for purposes of Sec. 226.20(a)(1) when the new loan amount exceeds the
unpaid principal balance plus any earned unpaid finance charge or
earned unpaid non-finance charge (e.g., a late fee) on the existing
obligation. Under the proposal, even if a fee is not part of the new
loan amount, it would nevertheless result in a new transaction that
requires new disclosures. For example, if a creditor imposes an
application or modification fee on the consumer in connection with the
agreement to modify terms of an existing obligation, and the consumer
pays that fee directly in cash, a new transaction requiring new
disclosures would occur. See proposed Sec. 226.20(a)(1)(i)(B) for
further discussion of fees imposed on the consumer in connection with
the agreement, resulting in a new transaction requiring new
disclosures.
Proposed comment 20(a)(1)(i)(A)-2 provides that an increase in the
loan amount includes any costs of the transaction, such as points,
attorney's fees, or title examination and insurance fees that are
financed by the consumer, and provides an example of a transaction
where the loan amount is increased because fees are paid from loan
proceeds.
[[Page 58599]]
Proposed comment 20(a)(1)(i)(A)-3 clarifies that amounts that are
advanced to the consumer to fund either an existing escrow account, or
a newly established escrow account, are not considered in determining
whether an increase in loan amount has occurred under proposed Sec.
226.20(a)(1). RESPA limits the amount creditors may collect for
escrows, and therefore, it is unlikely that large advances will be
financed into the loan amount to establish or fund an escrow account.
See 24 CFR 3500.17(c)(1)-(9), (f), and (g). In addition, the Board
believes that a creditor is unlikely to establish an escrow account
without first notifying the consumer. Thus, the Board believes that any
benefit of new TILA disclosures in these instances is outweighed by the
burden imposed on creditors.
The Board solicits comment on whether to provide that a de minimis
increase in the loan amount owed on the existing legal obligation would
not trigger a requirement to give new disclosures. If the Board chose
to establish a de minimus increase, should the increase be stated in
terms of a dollar amount, a percentage of the loan, or both? What
increase in the loan amount should be considered de minimus?
Fees imposed on the consumer. Proposed Sec. 226.20(a)(1)(i)(B)
provides that a new transaction occurs when a creditor imposes a fee on
the consumer in connection with a modification. The Board believes that
including the imposition of fees as an action that results in a new
transaction is appropriate to ensure that consumers receive important
information about the terms and fees relating to the transaction. On
the revised mortgage disclosures published in the Board's August 2009
Closed-End Proposal, costs of the transaction would be disclosed as
``total settlement charges,'' together with required statements
regarding the amount of charges included in the loan amount. See 74 FR
43292, Aug. 26, 2009. Thus, providing new TILA disclosures when
consumers must pay a fee in connection with modifying a term of the
existing obligation would ensure that consumers are aware of and review
cost information associated with the modification. In this way,
consumers would have a meaningful opportunity to shop and compare other
available credit options.
Proposed comment 20(a)(1)(i)(B)-1 clarifies that a fee imposed on
the consumer in connection with a modification of an existing legal
obligation need not be part of a contractual arrangement between the
parties to result in a new transaction under Sec. 226.20(a)(1)(i)(B).
For example, a creditor may impose an application fee on the consumer,
but not reference that fee in the existing agreement or the agreement
to modify the terms of an existing obligation. Under the proposal,
imposing an application fee would result in a new transaction requiring
new disclosures.
Proposed comment 20(a)(1)(i)(B)-2 provides guidance that fees
imposed on the consumer in connection with the agreement include any
fee that the consumer pays out-of-pocket or from loan proceeds.
Proposed comment 20(a)(1)(i)(B)-2 also provides examples of fees under
Sec. 226.20(a)(1)(i)(B), such as points, underwriting fees, and new
insurance premiums. The commentary further clarifies that charging
insurance premiums to continue insurance coverage does not constitute
imposing a fee on the consumer under proposed Sec. 226.20(a)(1)(i)(B).
For example, where a creditor charges premiums for the continuation of
insurance coverage, but does not increase the premiums for existing
hazard insurance or require increased property insurance amounts, such
costs are not considered fees imposed on the consumer in connection
with the agreement. Proposed comment 20(a)(1)(i)(B)-3 states that
creditors may rely on proposed comment 19(a)(1)(i)-2 to determine when
an application is received for a new transaction subject to proposed
Sec. 226.20(a)(1).
The Board recognizes that including any fee imposed on the consumer
in connection with the modification as an event triggering disclosures
will likely result in a significant number of modifications being
deemed ``new credit transactions'' under TILA. The Board solicits
comment on the proposed scope of Sec. 226.20(a)(1)(i)(B) regarding
fees. Specifically, the Board seeks comment on whether fees imposed on
consumers in connection with a modification should include all costs of
the transaction or, for example, only those fees that are retained by
creditors or their affiliates. Should the rule further provide that
Sec. 226.20(a)(1)(i)(B) does not cover those instances where only a de
minimis fee is retained by the creditor? What fee amount should be
considered de minimis? And, should a de minimis fee be stated in terms
of a dollar amount, a percentage of the loan, or both?
As discussed in greater detail below, the Board proposes several
exceptions to the general definition of ``new transaction.'' For
example, agreements entered into in connection with the consumer's
delinquency or default on the existing obligation, or modifications
that decrease the rate are generally not ``new transactions'' under the
proposal. See proposed Sec. 226.20(a)(1)(ii)(B) and (C) discussing
these exceptions. However, these exceptions are unavailable if a
creditor imposes a fee on the consumer in connection with the agreement
to modify the existing legal obligation. The Board is aware that when
creditors modify existing obligations in these instances, reasonable
fees may be necessary to underwrite and process the loan modification,
and that requiring creditors to give a full set of new disclosures for
imposing these fees may discourage creditors from offering beneficial
arrangements to consumers. Thus, the Board solicits comment on whether
an exception should be made for reasonable fees imposed in connection
with these modifications. What types of fees, if any, are necessary for
these modifications and thus should be permitted under these
exceptions, and in what amounts? Are commenters aware of abuses
concerning these types of fees, suggesting that they should not be
permitted? Should the amount of any fee permitted under these
exceptions be stated in terms of a dollar amount, a percentage of the
loan, or both? The Board also seeks comment on whether adopting two
separate approaches regarding fees unnecessarily complicates the
regulatory scheme under TILA and Regulation Z, and whether creditors
would take advantage of any exception provided for fees.
Change in the loan term. Under proposed Sec. 226.20(a)(1)(i)(C), a
new transaction occurs when the creditor modifies the loan term of the
existing obligation. That is, a new transaction requiring new
disclosures would occur where the maturity date of the new transaction
will occur earlier or later than the maturity date of the existing
legal obligation. The loan term is a key piece of information that
consumers should be aware of when evaluating a loan offer, as shown by
the Board's consumer testing, and would be disclosed on the revised
mortgage disclosures published in the Board's August 2009 Closed-End
Proposal. See 74 FR 43292, 43299 Aug. 26, 2009. Changing the
amortization period of a loan can significantly impact the total
interest that a consumer must pay over the life of the mortgage. Thus,
the Board believes that consumers should receive new TILA disclosures
to compare the total cost (expressed as the APR) associated with
modifying the existing obligation over an extended or shortened period
of time.
Proposed comment 20(a)(1)(i)(C)-1 clarifies that a change in the
loan term occurs when the maturity date of the
[[Page 58600]]
new transaction is earlier or later than the maturity date of the
existing obligation, and provides an example of a change in the loan
term that would result in a new transaction. Proposed comment
20(a)(1)(i)(C)-1 also cross references proposed Sec. 226.38(a) for the
meaning of ``loan term.''
Change in the interest rate. Proposed Sec. 226.20(a)(1)(i)(D)
provides that a new transaction occurs when the creditor changes the
contractual interest rate of the existing obligation. The interest rate
is one of the most important pieces of information provided to
consumers, as shown by the Board's consumer testing, and would be
required to be disclosed on the revised mortgage disclosures published
in the Board's August 2009 Closed-End Proposal. See 74 FR 43239, 43299
Aug. 26, 2009. A change in the interest rate may increase or decrease
the cost of the loan and periodic payment obligation. In either case,
the Board believes that consumers may wish to explore other credit
alternatives before agreeing to a rate change, and therefore should
receive TILA disclosures before agreeing to the change.
Proposed comment 20(a)(1)(i)(D)-1 clarifies that, to determine
whether an increase or decrease in rate occurs, the creditor should
compare the interest rate of the new obligation (the fully-indexed rate
for an ARM) to the interest rate for the existing obligation that is in
effect within a reasonable period of time--for example, 30 calendar
days. The comment also gives examples of when a change in rate does and
does not occur. Proposed comment 20(a)(1)(i)(D)-2 clarifies that a rate
change stemming from changes in the index, margin, or rate does not
result in a new transaction under proposed Sec. 226.20(a)(1) if these
changes were disclosed as part of the existing obligation, and provides
an example. Proposed comment 20(a)(1)(i)(D)-2 clarifies further that if
the rate feature was not previously disclosed, a modification to the
rate would be a new transaction requiring new disclosures under
proposed Sec. 226.20(a)(1)(i).
Increase in the periodic payment amount. Proposed Sec.
226.20(a)(1)(i)(E) provides that a new transaction occurs when the same
creditor increases the periodic payment amount owed on an existing
legal obligation. Consumer testing consistently showed that consumers
shop for and evaluate a mortgage based on the monthly or periodic
payment, as well as the interest rate. See 74 FR 43239, 43299, Aug. 26,
2009. The monthly payment helps consumers to determine whether they can
afford the loan, and, accordingly, must be highlighted on the proposed
mortgage disclosures published in the Board's August 2009 Closed-End
Proposal. In keeping with the Board's findings about the importance of
the periodic payment amount to consumers, the Board believes that
consumers should receive a new TILA disclosure before agreeing to an
increase in their monthly or other periodic payment obligation.
The Board solicits comment on whether consumers would benefit from
having new TILA disclosures not only for increases in the periodic
payment amount, but also for decreases in the payment amount
obligation, when no other terms listed in Sec. 226.20(a)(1)(i)(A)-(G)
are modified. In addition, the Board solicits comment on whether to
allow for de minimis differences between the periodic payment amount of
an existing obligation and a new transaction, so that new disclosures
would not be required for nominal discrepancies between the periodic
payment amounts owed. What situations would suggest that a de minimis
threshold for differences in the periodic payment amount is needed? If
the Board adopts a de minimis threshold for differences in the periodic
payment amount owed, should the threshold be stated in terms of a
dollar amount, a percentage of the pre-existing payment, or both? What
differences in periodic payment amounts would be so nominal as to be de
minimus?
Proposed comment 20(a)(1)(i)(E)-1 clarifies that an increase in
periodic payment amount based on a payment change previously disclosed
on an existing legal obligation is not a new transaction under proposed
Sec. 226.20(a)(1)(i), and provides an example. Proposed comment
20(a)(1)(i)(E)-1 also clarifies that if the payment adjustment was not
previously disclosed, any change that increases the periodic payment
amount would be a new transaction requiring new disclosures under
proposed Sec. 226.20(a)(1)(i).
Proposed comment 20(a)(1)(i)(E)-2 clarifies that amounts that are
advanced to the consumer to fund either an existing escrow account, or
a newly established escrow account, are not considered in determining
whether an increase in the payment amount has occurred under proposed
Sec. 226.20(a)(1). For further discussion of the Board's rationale for
this exception, see the section-by-section analysis to proposed Sec.
226.20(a)(1)(A) (``Increase in the loan amount'') above, explaining
proposed comment 20(a)(1)(i)(A)-3.
Addition of a risk feature. Proposed Sec. 226.20(a)(1)(i)(F)
provides that a new transaction occurs when an adjustable-rate feature
one more of the risk features listed in Sec. 226.38(d)(1)(iii) or
226.38(d)(2) is added to the existing obligation, or is otherwise part
of the new transaction, as follows: (1) A prepayment penalty; (2)
interest-only payments; (3) negative amortization; (4) a balloon
payment; (5) a demand feature; (6) no documentation or low
documentation; and (7) shared equity or shared appreciation. These
features would be required to be disclosed to consumers under the
Board's August 2009 Closed-End Proposal, based on the Board's consumer
testing. See 74 FR 43304, 43335, Aug. 26, 2009. The Board believes that
these features can change the fundamental nature of a loan transaction
and may significantly increase the cost of the loan or risk to the
consumer. For example, some of these terms pose a significant risk of
payment shock, such as negative amortization; others, such as shared
equity or shared appreciation, entitle creditors to the consumer's
future equity. Consequently, the Board believes that when one or more
of these features is added to an existing obligation, the consumer
should receive new TILA disclosures and, if applicable, the right to
rescind and the special protections in Sec. 226.35.
Proposed comment 20(a)(1)(i)(F)-1 clarifies that changing the
underlying index or formula upon which the interest rate calculation is
based constitutes adding an adjustable-rate feature (unless the change
was previously disclosed, see proposed Sec. 226.20(a)(1)(i)(D)) and,
therefore, is a new transaction under proposed Sec.
226.20(a)(1)(i)(F). Proposed comment 20(a)(1)(i)(F)-1 provides further
guidance that a new transaction does not result where the original
index or formula becomes unavailable and is substituted by an
alternative index or formula with substantially similarly historical
rate fluctuations, and that produces a rate similar to the rate that
was in effect at the time the original index or formula became
unavailable.
Proposed comment 20(a)(1)(i)(F)-2 clarifies that if a creditor adds
a feature listed under proposed Sec. 226.38(d)(1)(iii) or
226.38(d)(2), such as a prepayment penalty, balloon payment, or
negative amortization, a new transaction requiring new TILA disclosures
occurs.
Addition of new collateral. Proposed Sec. 226.20(a)(1)(i)(G)
provides that adding real property or a dwelling as collateral to
secure the existing obligation results in a new transaction requiring
new disclosures. This approach ensures that consumers are notified of
modifications to key credit terms of an existing
[[Page 58601]]
obligation when they pledge assets as significant as a dwelling or real
estate.
20(a)(1)(ii)
Exceptions
Currently, Sec. 226.20(a) provides that, for closed-end credit
transactions, the following modifications to terms are not new
transactions even if ``satisfaction and replacement'' occurs: (1)
Single payment renewals with no changes in original terms; (2) APR
reductions with a corresponding change in payment schedule; (3)
judicial proceeding workouts; (4) workouts for delinquent or defaulting
consumers, unless the APR increases or new money is advanced; and (5)
renewal of optional insurance if disclosures were previously provided.
The Board is proposing under Sec. 226.20(a)(1)(ii) to eliminate
these provisions and to instead provide three exceptions to the general
definition of a new transaction for closed-end mortgages. The three
proposed exceptions are modifications that: (1) Occur as part of a
court proceeding; (2) occur in connection with the consumer's default
or delinquency, unless the loan amount or interest rate increases, or a
fee is imposed on the consumer in connection with the agreement to
modify the existing legal obligation; and (3) decrease the interest
rate with no other modifications to the terms, except a decrease in the
periodic payment amount, an extension of the loan term, or both, and no
fee is imposed on the consumer. Each of these proposed exceptions is
discussed below.
Judicial workouts. The Board proposes under Sec.
226.20(a)(1)(ii)(A) that modifications to terms agreed to as part of a
court proceeding are not new transactions. This proposed exception is
consistent with the existing exception from the definition of a
``refinancing'' under Sec. 226.20(a)(3). Consumers entering into these
arrangements typically are in bankruptcy and attempting to avoid
foreclosure, and consequently have few credit options. These workouts
occur with judicial oversight and benefit from safeguards associated
with court proceedings. Thus, the Board believes that in those
circumstances, the benefit to consumers of receiving new TILA
disclosures is relatively small, and is outweighed by the burden to
creditors of providing new disclosures. Proposed comment
20(a)(1)(ii)(A)-1 is adopted without revision from existing comment
20(a)(3).
Workout agreements for consumers in delinquency or default.
Existing Sec. 226.20(a)(4) provides an exception for workouts for
consumers in delinquency or default unless the rate is increased or
additional credit is advanced to the consumer (i.e., the new amount
financed is greater than the unpaid balance plus earned finance charge
and premiums for the continuation of certain insurance types). Under
this existing exception, fees imposed on the consumer in connection
with the agreement to modify an existing legal obligation, and which
the consumer pays directly or finances from loan proceeds, are not
considered to be additional credit advanced to the consumer.
Similarly, proposed Sec. 226.20(a)(1)(ii)(B) provides that
modifications to terms agreed to as part of a workout arrangement for
consumers in delinquency or default are not new transactions, unless
there is an increase in the loan amount or interest rate, or a fee is
imposed on the consumer in connection with the agreement to modify the
existing legal obligation. Consumers in delinquency or default are
unlikely to have other credit options available to them. The Board
believes that where creditors provide these consumers with certain
changes to terms, such as a decrease in rate and payment, and the
consumer does not take on new debt or pay any fee, the modification is
beneficial. In these instances, the benefit to consumers of a TILA
disclosure appears outweighed by the risk that creditors would be
discouraged from extending beneficial modifications (in lieu of
foreclosure) due to the burden of giving new TILA disclosures and the
potential exposure to TILA remedies for errors, including rescission.
Proposed Sec. 226.20(a)(1)(ii)(B) differs from the existing
exception from the definition of a ``refinancing'' under Sec.
226.20(a)(4) in two respects. First, the term ``loan amount,'' rather
than the term ``amount financed,'' is used to determine whether the
consumer is taking on new debt in connection with the modification. For
further discussion of the loan amount, see proposed Sec.
226.20(a)(1)(i)(A). Using the term ``loan amount'' simplifies
determining whether new debt is involved, but does not create a
substantive change in the exception.
Second, the proposed exception under Sec. 226.20(a)(1)(ii)(B) is
unavailable to creditors if any fee is imposed on the consumer in
connection with the agreement to modify the existing legal obligation.
Anecdotal evidence suggests that excessive or abusive fees may be
imposed as part of loan modifications or other workouts offered to
consumers in delinquency or default. The Board believes that, although
consumers in delinquency or default may not have other credit options
available to them, they should be aware of the costs incurred in
modifying any term of the existing legal obligation. Providing new TILA
disclosures in these instances will make these consumers aware of, and
help them to verify, the changes being made to their existing
obligation and the costs of the modification; this serves TILA's
purpose of helping consumers ``avoid the uninformed use of credit.'' 15
U.S.C. 1601(a).
At the same time, the Board recognizes that charging some fees for
underwriting or processing a modification may be necessary, and is
concerned that requiring new disclosures whenever necessary and
reasonable fees are charged could discourage creditors from offering
workouts. As discussed above, the Board solicits comment on whether
proposed Sec. 226.20(a)(1)(i)(B) should permit creditors to rely on
the exceptions to the requirement to give new disclosures (such as
where the consumer is in delinquency or default under proposed Sec.
226.20(a)(1)(ii)(B)), even if they charge certain fees. Specifically,
the Board solicits comment on whether there are any fees that creditors
should be allowed to charge without triggering the requirement to give
new disclosures. Should permitted fees, if any, include only those paid
to third parties (who are not affiliates of the creditor), or should
certain fees retained by the creditor or the creditor's affiliates be
permitted without triggering the requirement to give new disclosures?
Should the Regulation Z provide that creditors can retain a de minimis
fee without triggering disclosure requirements? What amount would be
appropriate for exclusion? Should the amount be stated in terms of a
dollar amount, a percentage of the loan, or both?
Proposed comment 20(a)(1)(ii)(B)-1 clarifies that this exception is
available for all types of workout arrangements offered to consumers in
delinquency or default, such as forbearance, repayment or loan
modification agreements, unless the loan amount or the interest rate
increase, or a fee is imposed on the consumer in connection with the
agreement. Proposed comment 20(a)(1)(ii)(B)-1 also cross references
Sec. 226.20(a)(1)(i)(B) and corresponding commentary regarding fees.
The Board believes that most workout arrangements will involve fees
imposed on the consumer and therefore, will be covered under the
proposed definition of new transaction for mortgages and require new
disclosures. However, depending on the scope of fees that may or may
not be allowed under this
[[Page 58602]]
proposed exception, some workout agreements might not be covered and
new disclosures would not be required. Outreach conducted in connection
with this proposal revealed that lack of information regarding the
terms of the modified loan offered to consumers is a concern with many
of the loan modifications offered to delinquent or defaulting
consumers. Although modification agreements contain the final credit
terms, they are typically contracts in dense prose that use legal terms
unfamiliar to most consumers. As a result, many consumers may not be
able to determine readily how much is actually owed on the new loan, or
may simply be unaware of their new monthly payment amount.
Thus, the Board is concerned that the exception for modifications
in circumstances of delinquency or default under proposed Sec.
226.20(a)(1)(ii)(B) may result in some consumers not receiving new
disclosures, and therefore not knowing how their terms are being
modified. To address this concern, the Board could adopt a rule
requiring servicers to provide a full TILA disclosure for every
modification that occurs in cases of delinquency or default. At the
same time, however, disclosures required under existing TILA and
Regulation Z may not offer a clear comparison of existing terms to
changed terms and, therefore, may not help consumers to understand the
impact of the modification on their credit terms. Thus, the Board
solicits comment on whether to require a new, streamlined disclosure
that highlights changed terms in an effort to ensure that consumers are
aware of changes made to their existing legal obligation. Although
delinquent or defaulting consumers may not have an opportunity to shop
for other credit options, a streamlined disclosure provided in these
instances could enable a consumer to compare the changed terms that are
offered to other alternatives, such as a short sale or a deed-in-lieu
of foreclosure.
The Board recognizes that servicers would incur significant
operational and compliance costs to implement a requirement to give a
new, streamlined disclosure for modifications in the context of
delinquency or default. Thus, the Board solicits comment on whether
modifying the proposed exception under Sec. 226.20(a)(1)(ii)(B) and
requiring a new, streamlined disclosure that highlights changed terms
would be preferable to eliminating the exception under proposed Sec.
226.20(a)(1)(ii)(B) entirely. Eliminating the exception would require
servicers to provide a full TILA disclosure in all cases. The Board
seeks comment on the relative benefits and costs associated with either
approach.
In addition, the Board considered, but does not propose, extending
the exception under proposed Sec. 226.20(a)(1)(ii)(B) to consumers who
are in ``imminent'' delinquency or default. The Board is aware that
current government-sponsored modification programs specifically address
consumers in imminent ``danger'' of default or delinquency. However,
the Board believes that these consumers are more likely to have other
financing options than those who are already delinquent or in default.
Thus, a new TILA disclosure would apprise these consumers of new credit
terms and allow them to compare other available credit options, which
serves TILA's purpose to inform consumers about their credit terms and
help them shop for credit. TILA Section 102(a); 15 U.S.C. 1601(a).
Moreover, the Board believes it would be difficult to define the term
``imminent default'' with sufficient clarity to facilitate compliance
and avoid undue litigation risk. Nevertheless, the Board seeks comment
on whether providing an exception for consumers who are in ``imminent''
delinquency or default is appropriate, and whether such an exception
could be crafted with sufficient clarity to facilitate compliance and
avoid posing undue litigation risk to creditors.
Decreases in the interest rate. Section 226.20(a)(2) currently
provides an exception from the definition of a ``refinancing'' for
closed-end credit transactions that decrease the APR with a
corresponding decrease in the payment schedule (i.e., a decrease in the
payment amount or number of payments), even if the change in term
results in ``satisfaction and replacement'' of the existing legal
obligation. See comments 20(a)(2)-1 and -2.
Proposed Sec. 226.20(a)(1)(ii)(C) provides that, for mortgage
credit, a decrease in the contractual interest rate is not a new
transaction under the following circumstances: (1) No other
modifications are made, except a decrease in the periodic payment
amount, an extension of the loan term, or both, and (2) no fee is
imposed on the consumer in connection with the modification. This
proposed exception differs from the existing exception under Sec.
226.20(a)(2) because it would: (1) Be available only for decreases in
the contract note rate (not the APR), (2) allows for decreasing the
periodic payment amount and extending (rather than shortening) the loan
term, and (3) does not allow any fees to be imposed on the consumer as
part of the change. For example, as indicated in proposed comment
20(a)(1)(ii)(C)-1, the exception under proposed Sec.
226.20(a)(1)(ii)(C) would be unavailable to creditors who decrease the
interest rate, but then add a prepayment penalty and impose a fee on
the consumer.
Exempting creditors from the requirement to provide a complete new
set of disclosures in situations specified in proposed Sec.
226.20(a)(1)(ii)(C) is intended to facilitate changes that are helpful
to consumers. The Board believes that where creditors decrease the
consumer's note rate and the periodic payment amounts, the modification
is beneficial to the consumer. The Board also believes that decreasing
the note rate and increasing the loan term can benefit consumers at
risk of default or delinquency, because creditors may give consumers
the option to defer payments for a period of time and make them after
the existing maturity date. By contrast, shortening the loan term may
increase periodic payment amounts even if the interest rate is
decreased, making it more difficult for consumers to meet payment
obligations. Transactions such as deferrals, forbearance agreements, or
renewals, are typically entered into in response to a request by a
consumer who is suffering a temporary financial hardship, or for
consumers with seasonal income. These transactions may simply extend
the loan term or provide for new payment due dates. For these reasons,
the Board believes that where the interest rate is increased, but no
other modifications to the terms are made except for an extension of
the loan term, the benefit of the TILA disclosure to the consumer is
outweighed by the risk that creditors may be discouraged from extending
these types of beneficial modifications. Again, however, in all cases
where a fee is imposed on the consumer in connection with a
modification, a new transaction requiring new disclosures occurs,
regardless of whether the fee is reflected in any agreement between the
parties. See proposed Sec. 226.20(a)(1)(i)(B) and (a)(1)(ii)(C).
Outreach efforts revealed that, apart from loss mitigation, rate
decreases are typically offered as part of customer retention programs
in a falling rate environment, and that these programs may offer
consumers some savings in closing costs, such as lower or no title
insurance fees. However, in exchange for decreasing the interest rate,
a consumer may have to pay other significant closing costs (such as
application or origination fees) or accept new terms that pose risk,
such as a prepayment penalty or shared-equity feature. The Board
believes that in these
[[Page 58603]]
cases, consumers should be afforded a meaningful opportunity to review
the credit terms offered and compare them to other available credit
options. For example, where consumers must pay a fee to modify a key
term of an existing mortgage, they should be aware of this cost, and be
able to compare the cost of the modification and its terms to other
available credit options. Thus, the Board believes that in these
instances consumers should receive new TILA disclosures and be afforded
the right to rescind and the special protections in Sec. 226.35, if
applicable. As discussed in greater detail above, the Board solicits
comment on whether some fees, such as third party fees, should be
permitted without triggering disclosure requirements, or whether all
fees paid by the consumer out of loan proceeds or out-of-pocket in
connection with these transactions should trigger the requirement to
provide new TILA disclosures.
Proposed comment 20(a)(1)(ii)(C)-1 explains that a decrease in the
interest rate occurs if the contractual interest rate (the fully-
indexed rate for an adjustable-rate mortgage) for the new loan at the
time the new transaction is consummated is lower than the interest rate
(the fully-indexed rate for an adjustable-rate mortgage) of the
existing obligation in effect at the time of the modification. This
comment clarifies that a decrease in the interest rate is not a new
transaction under Sec. 226.20(a)(1) under the following circumstances:
no additional fees or other changes are made to the existing legal
obligation, except that the payment schedule may reflect lower periodic
payments or a lengthened maturity date. The comment further clarifies
that the exception in Sec. 226.20(a)(1)(ii)(C) does not apply if the
maturity date is shortened, or if the payment amount or number of
payments is increased beyond that remaining on the existing
transaction.
Proposed comment 20(a)(1)(ii)(C)-1 also provides examples of
modifications to terms that would and would not result in a new
transaction requiring new disclosures under proposed Sec.
226.20(a)(1). First, if a creditor lowers the interest rate of an
existing legal obligation and retains the existing loan term of 30
years (resulting in lower monthly payments), no new disclosures are
required. Second, if a creditor lowers the interest rate and also
enters into a six-month payment forbearance arrangement with the
consumer, with those six months of payments to be added to the end of
the loan term (resulting in a longer loan term), no new disclosures are
required. However, the comment indicates that a new transaction
requiring new disclosures occurs if the creditor lowers the interest
rate and shortens the loan term from, for example, 30 to 20 years.
Moreover, a new transaction requiring new disclosures also occurs if
the creditor lowers the interest rate but adds a new term, such as a
prepayment penalty, or imposes a fee on the consumer.
Finally, this comment cross references proposed comments
20(a)(1)(i)(C)-1, 20(a)(1)(i)(D)-1, and 20(a)(1)(i)(B)-1 to provide
further guidance to creditors regarding changes in the loan term,
interest rate, and imposition of fees, respectively. To reflect the
revisions related to rate changes discussed above, the Board proposes
to eliminate the existing exception for APR reductions under existing
Sec. 226.20(a)(2) and corresponding commentary as unnecessary for
mortgage credit, but to retain this exception for non-mortgage credit,
which was not subject to review as part of this proposal. See proposed
Sec. 226.20(a)(2)(ii) and accompanying commentary.
Renewals. The Board proposes to eliminate the current exception for
renewals under existing Sec. 226.20(a)(1) for closed-end mortgages.
This exception appears to have limited applicability to closed-end
mortgages because it relates principally to single payment obligations.
Typically, mortgages are not structured as single payment obligations
or periodic payments of interest with no principal reduction. However,
the Board seeks comment on whether there are any circumstances under
which this exception may be appropriate for closed-end mortgages.
Optional insurance. The Board proposes to eliminate the current
exception for optional insurance under existing Sec. 226.20(a)(5) as
unnecessary under the proposal. Proposed Sec. 226.20(a)(1)(i) does not
treat as a new transaction the renewal of an expired insurance policy.
The Board believes that renewing an expired insurance policy that was
originally disclosed at consummation does not, by itself, create a new
``credit'' transaction.
20(a)(2) and (3)
Refinancings by the Same Creditor--Non-mortgage Credit; Unearned
Finance Charge
As noted above, the Board is proposing to redefine when
modifications to terms result in new transactions for closed-end credit
secured by real property or a dwelling under new Sec. 226.20(a)(1).
Accordingly, the Board is proposing to redesignate existing Sec.
226.20(a) as new Sec. 226.20(a)(2), which would apply to transactions
not secured by real property or a dwelling, and proposes conforming and
technical revisions, as discussed more fully below.
Current Sec. 226.20(a) would be redesignated as new Sec.
226.20(a)(2) and would continue to provide that a ``refinancing''
occurs upon ``satisfaction and replacement'' for all non-mortgage
closed-end credit transactions; no substantive change is intended.
Existing Sec. 226.20(a)(2), regarding treatment of unearned finance
charges that are not credited to the existing obligation, would be
redesignated as new Sec. 226.20(a)(3) and revised to clarify that the
rule applies to all closed-end credit transaction types, including
mortgages; no other substantive change is intended.
In technical revisions, comments 20(a)-1 through -3, which
generally address the definition of ``satisfaction and replacement,''
would be redesignated as new comments 20(a)(2)-1 through -3 and revised
to reflect their coverage of transactions not secured by real property
or a dwelling; no substantive change is intended. Current comment
20(a)(1)-4 addresses treatment of unearned finance charges not credited
to the existing obligation and would be redesignated as new comment
20(a)(3)-1, and revised to reflect that it also applies to the proposed
definition of ``new transaction'' for closed-end credit secured by real
property or a dwelling; no other substantive change is intended.
Current comment 20(a)-5 addresses coverage of the general definition of
refinancing and would be redesignated as comment 20(a)(2)-4; no
substantive change is intended.
Existing Sec. 226.20(a)(1)-(5) addresses exceptions to the general
definition of refinancing under current Sec. 226.20(a). In technical
revisions, Sec. 226.20(a)(1)-(5) would be redesignated as new Sec.
226.20(a)(2)(i)-(v), and corresponding commentary 20(a)(1)-(5) would be
redesignated as new comments 20(a)(2)(i)-(v); no substantive change is
intended.
Impact of Proposed Sec. 226.20(a)(1) on Other Rules
Interaction of proposed Sec. 226.20(a)(1) with the right of
rescission. Currently, only certain refinancings are subject to the
right of rescission. Specifically, refinancings that provide a ``new
advance of money'' or add a security interest in the consumer's
principal dwelling are subject to rescission, whether the same creditor
(i.e., current holder) is the original creditor or an assignee. See
comment 23(f)-4. Refinancings that occur with the original creditor or
its successor are
[[Page 58604]]
exempt under Sec. 226.23(f)(2). As discussed more fully in the
section-by-section analysis to Sec. 226.23(f)(2), the Board is
proposing to narrow the exemption from rescission to only those
refinancings that involve the original creditor who is also the current
holder. Thus, the exemption from rescission under proposed Sec.
226.23(f)(2) would be available only for refinancings with the original
creditor that is also the current holder of the note, and which do not
advance new money or add a security interest in the principal dwelling.
Proposed Sec. 226.20(a)(1) would expand the number of closed-end
mortgage transactions considered ``new transactions'' generally subject
to rescission. Under existing Sec. 226.20(a), many modifications
currently do not result in ``satisfaction and replacement'' under
applicable State law, and therefore are currently not ``refinancings''
that trigger new disclosures and the right to rescind. Proposed Sec.
226.20(a)(1)(i) for closed-end mortgage transactions, however, would
result in many of these modifications being ``new transactions'' that
require TILA disclosures. In addition, the scope of proposed Sec.
226.20(a)(1)(i) would continue to apply to modifications with the same
creditor, which would be defined as the current holder or servicer
acting on behalf of the current holder. Thus, ``new transactions'' with
the current holder, or servicer acting on behalf of the current holder,
would be subject to the consumer's right to rescind under Sec. 226.23,
unless exempt from the right of rescission under Sec. 226.23(f)(2),
because they involve the original creditor who is also the current
holder of the note and do not entail advancing new money or adding a
security interest in the consumer's principal dwelling.
To illustrate, assume that a consumer and the original creditor,
who is also the current holder of the note, agree to modify an existing
obligation secured by the consumer's principal dwelling to (a) Reduce
the consumer's interest rate, (b) advance the consumer $10,000 to
consolidate bills, and (c) finance $3,000 in closing costs. This
transaction is a ``new transaction'' requiring TILA disclosures, even
if the existing obligation is not satisfied and replaced, because the
loan amount increased by $13,000. See proposed Sec.
226.20(a)(1)(i)(A). In addition, the consumer may rescind the
transaction to the extent of the new advance of money, i.e., the
$10,000 advanced to the consumer to consolidate bills. In the same
example, if the original creditor did not advance $10,000, the consumer
would not have the right to rescind because there would be no ``new
advance of money'' as defined in comment 23(f)-4. However, a new
transaction would still occur, and new disclosures would be required,
because the loan amount increased by $3,000. See proposed Sec.
226.20(a)(1)(i)(B). As noted above, the Board solicits comment on
whether the scope of modifications under proposed Sec. 226.20(a)(1)
that would result in new transactions being subject to the right of
rescission is appropriate, or should be narrower or broader.
The Home Mortgage Disclosure Act (HMDA) and Regulation C. HMDA
requires financial institutions to report data on ``refinancings.''
Under Regulation C, a refinancing occurs when the existing obligation
is satisfied and replaced; the regulation and commentary do not refer
to the parties' contract or applicable law.\47\ As a result,
``refinancings'' must be reported, whereas mere renewals and
modifications are not. Although consistency between the rules
facilitates compliance, the Board notes that the purposes of TILA and
HMDA differ. TILA is focused on promoting the informed use of credit
through meaningful disclosure of credit terms. HMDA requires financial
institutions to provide data to the public to aid in determining how
well the institution is serving the housing needs of its community, and
to aid in fair lending enforcement. However, some creditors have
indicated that they currently treat transactions similarly for purposes
of both Regulation Z and Regulation C, except for consolidation,
extension, and modification agreements (CEMAs).\48\ The Board
anticipates reviewing HMDA and Regulation C at a later date, and seeks
comment on whether ``refinancing'' in Regulation C should be defined
the same or differently than ``refinancing'' under proposed Sec.
226.20(a)(1), and the operational and compliance difficulties raised by
either approach.
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\47\ 12 CFR 203.2(k).
\48\ In 2002, the Board clarified that CEMAs are not reportable
under Regulation C. See 67 FR 7227, Feb. 15, 2002.
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The Secure and Fair Enforcement for Mortgage Licensing Act of 2008
(SAFE Act). Congress enacted the SAFE Act on July 30, 2008, to mandate
a nationwide licensing and registration system for mortgage loan
originators.\49\ On July 28, 2010, the Board, the Office of the
Comptroller of the Currency, the Office of Thrift Supervision, the Farm
Credit Administration, and the National Credit Union Administration
(the agencies) issued joint final rules to implement the SAFE Act for
individuals employed by agency-regulated institutions.\50\ The joint
final rule requires individuals that meet the definition of ``mortgage
loan originator'' to be licensed and registered in the Nationwide
Mortgage Licensing System and Registry (``Registry'') in order to
engage in residential mortgage transactions. For purposes of this
licensing and registration requirement, ``mortgage loan originator'' is
defined as an individual who takes a residential mortgage loan
application and offers or negotiates terms of a residential mortgage
loan for compensation or gain.\51\ In the preamble to the final rule,
the agencies state that the term ``mortgage loan originator'' generally
does not include individuals who engage in transactions such as
modifications or assumptions that do not result in the extinguishment
of the existing loan and the replacement by a new loan (i.e.,
satisfaction and replacement).\52\ Thus, under the SAFE Act and
implementing regulations, individuals that modify the terms of existing
loans, or allow existing loans to be assumed, are generally not
considered ``mortgage loan originators,'' and do not need to obtain a
license or register in the Registry.
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\49\ 12 U.S.C. 5101-5116.
\50\ 75 FR 44656, July 28, 2010. Mortgage loan originators not
employed by agency-regulated institutions must license and register
in accordance with the regime provided by the applicable state
within the timeframes prescribed under the SAFE Act.
\51\ See, e.g., 24 CFR 208.102(b), implementing Sec. 1503(3) of
the SAFE Act, 12 U.S.C. 5102(3), and App. A to Subpart I of Pt 208,
which provides examples of mortgage loan originator activities.
\52\ 75 FR at 44662-44663, July 28, 2010.
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In contrast to the SAFE Act, under this proposal modifications to
certain loan terms would be new transactions requiring new TILA
disclosures even if not satisfied and replaced under applicable State
law. See proposed Sec. 226.20(a)(1). The Board recognizes that
proposed Sec. 226.20(a)(1) takes a different approach to modifications
than the SAFE Act regulations, but notes that the purposes of the SAFE
Act and TILA differ. The SAFE Act seeks to improve communications among
regulators, increase accountability of loan originators, reduce fraud,
and provide consumers with free and easily accessible information
regarding the employment history of, and certain disciplinary and
enforcement actions against, mortgage loan originators. TILA, on the
other hand, focuses on promoting the informed use of credit through
meaningful disclosure of credit terms in order to facilitate consumers'
ability to compare available credit options. TILA Section 102(a); 15
U.S.C. 1601(a). The
[[Page 58605]]
Board believes that proposed Sec. 226.20(a)(1) serves TILA's purposes.
Thus, under the proposal, when the parties to an existing agreement
modify key loan terms, TILA disclosures should be provided to the
consumer. However, the Board seeks comment on any operational and
compliance difficulties raised by the approach proposed under Sec.
226.20(a)(1), specifically in relation to the definition of ``mortgage
loan originator'' under the SAFE Act for purposes of its licensing and
registration requirements.
20(c) Rate Adjustments
Background
Currently, Sec. 226.20(c) requires that disclosures be provided
when adjustments are made to the interest rate of an ARM subject to
Sec. 226.19(b).\53\ The timing of the disclosures required by Sec.
226.20(c) depends on whether or not a payment adjustment accompanies an
interest rate adjustment. If a payment adjustment accompanies an
interest rate adjustment, a creditor must deliver or mail disclosures
regarding the interest rate and payment adjustment at least 25, but no
more than 120, days before payment at a new level is due. If interest
rate adjustments are made during the year without accompanying payment
adjustments, a creditor must disclose the rates charged at least once
during that year.
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\53\ Section 226.19(b) currently requires certain disclosures
before application for closed-end loans secured by a consumer's
principal dwelling with a term greater than one year, if the APR may
increase after consummation. Under the August 2009 Closed-End
Proposal, proposed Sec. 226.19(b) applies generally to an
``adjustable-rate mortgage'' described in Sec. 226.38(a)(3), i.e.,
to a closed-end mortgage secured by real property or a dwelling if
the APR may increase after consummation, with certain exclusions.
See proposed Sec. 226.19(b) and comment 19(b)-3, 74 FR 43232,
43327, 44333, Aug. 26, 2009. For a discussion of proposed Sec.
226.19(b), see 74 FR at 43262-43268.
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In the August 2009 Closed-End Proposal, the Board proposed to
revise Sec. 226.20(c) to require that disclosures be provided between
60 and 120 calendar days before payment at a new level is due, if a
payment adjustment accompanies an interest rate adjustment.\54\ That
proposal is designed to ensure that consumers have adequate advance
notice of a payment change to seek to refinance or modify the loan if
they cannot afford the adjusted payment. The Board also proposed to
revise the content and format of disclosures required by Sec.
226.20(c), based on consumer testing, to improve consumer understanding
of pending interest and payment adjustments and provide additional
important information.\55\ In addition, the Board proposed to replace
the term ``variable-rate mortgage'' with the more commonly understood
term ``adjustable-rate mortgage.''
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\54\ For a discussion of the proposed amendments to timing
requirements for ARM adjustment notices under Sec. 226.20(c), see
74 FR at 43269-43271.
\55\ For a discussion of proposed revisions to the required
content of disclosures under Sec. 226.20(a), see 74 FR at 43271-
43273.
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In this proposal, the Board proposes to clarify that proposed Sec.
226.20(c) applies to ARM adjustments that are based on interest rate
adjustments provided for under the terms of an existing legal
obligation. On the other hand, disclosures are not required under
proposed Sec. 226.20(c) when an ARM adjustment is not made pursuant to
an existing loan agreement, such as if the parties modify the terms of
their loan agreement. If the parties increase the interest rate or
payment or a fee is imposed in connection with the modification,
however, proposed Sec. 226.20(a) requires that new TILA disclosures be
provided unless an exception applies. A detailed discussion of the
proposed rules for modifications is set forth in the section-by-section
analysis of proposed Sec. 226.20(a).
The Board's Proposal
Proposed Sec. 226.20(c) provides that, if an adjustment is made to
an ARM's interest rate, with or without a corresponding adjustment to
the payment, disclosures must be provided to the consumer. Proposed
Sec. 226.20(c) provides further that disclosures are required only for
ARMs subject to Sec. 226.19(b) and to adjustments made based on the
terms of the existing legal obligation between the parties.\56\ The
Board believes that it is not necessary to provide disclosures under
Sec. 226.20(c) when adjustments not provided for under the existing
legal obligation are made, because more comprehensive disclosures are
required under proposed Sec. 226.20(a) if a loan modification
increases a loan's interest rate or payment or a fee is imposed in
connection with a loan modification. In some circumstances, moreover,
providing disclosures under Sec. 226.20(c) 60 to 120 days before
payment at a new level is due may delay beneficial modifications to a
consumer's loan terms or otherwise may be impractical.
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\56\ Under the August 2009 Closed-End Proposal, Sec. 226.19(b)
does not apply to ``price level adjusted mortgages'' and certain
other mortgages for which the APR may increase after consummation.
Therefore, disclosures are not required for such mortgages under
Sec. 226.20(c). For a discussion of such mortgages, see 74 FR
43232, 43264, August 26, 2009.
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Proposed Sec. 226.20(c) clarifies that an interest rate adjustment
for which disclosures are required under Sec. 226.20(c) includes an
interest rate adjustment made when an ARM subject to Sec. 226.19(b) is
converted to a fixed-rate transaction as provided under the existing
legal obligation between the parties. The requirement to provide
disclosures under Sec. 226.20(c) in connection with conversion of an
ARM to a fixed-rate transaction is consistent with current comment
20(c)-1, which the Board proposed to incorporate into Sec. 226.20(c)
under the August 2009 Closed-End Proposal.
Proposed comment 20(c)-1 clarifies that Sec. 226.20(c) applies
only if adjustments are made under the terms of the existing legal
obligation between the parties. Typically, these adjustments will be
made based on a change in the value of the applicable index or on the
application of a formula. Proposed comment 20(c)-1 also clarifies that
if an interest rate adjustment is not based on the terms of the
existing legal obligation, then no disclosures are required under Sec.
226.20(c). Proposed comment 20(c)-1 clarifies that an interest rate
adjustment not based on the terms of the existing legal obligation
likely would require new TILA disclosures under proposed Sec.
226.20(a). For example, proposed comment 20(c)-1 states that no
disclosures are required under Sec. 226.20(c) when an adjustment to
the interest rate is made pursuant to a modification of the legal
obligation, but such modification may be a new transaction for which
the creditor must provide new disclosures under Sec. 226.20(a).
Proposed comment 20(c)-1 states further that disclosures must be given
under Sec. 226.20(c) if that new transaction is an adjustable-rate
mortgage subject to Sec. 226.20(c) and the interest rate is adjusted
based on a change in the index value or on the application of a formula
as provided in the modified legal obligation.
Examples. Proposed comment 20(c)-1 provides examples to illustrate
whether or not disclosures are required under Sec. 226.20(c) in
different circumstances. Proposed comment 20(c)-1.i provides an example
of a case where disclosures are required under Sec. 226.20(c),
assuming that: (1) The loan agreement provides that the interest rate
on an ARM subject to Sec. 226.19(b) will be determined by the 1-year
LIBOR plus a margin of 2.75 percentage points; (2) the consumer's
current interest rate is 6%, based on the index and margin; (3) the
loan agreement provides that the interest rate will adjust annually and
the corresponding payment will be due on October 1; and (4) when the
adjusted interest rate is determined, the 1-year LIBOR for 2010 has
increased by 2 percentage points over the 1-year LIBOR
[[Page 58606]]
for 2009. Under the terms of the loan agreement, therefore, the
interest rate will be adjusted to 8%, and the corresponding payment
will be due on October 1, 2010. Proposed comment 20(c)-1 provides that,
in the case illustrated by the example, the notice required by Sec.
226.20(c)(1) must be provided 60 to 120 days before the corresponding
payment is due, that is, between June 3 and August 2, 2010.
Proposed comment 20(c)-1.ii provides an example of a case where
disclosures are not required under Sec. 226.20(c), assuming the same
loan agreement and facts as in the previous example, except that on
January 4, 2010 the parties modify the loan agreement and the consumer
pays a $500 modification fee. Proposed comment 20(c)-1.ii provides the
additional assumptions that: (1) The parties agree that the consumer's
current interest rate will be reduced temporarily from 6% to 4.5%, with
the corresponding payment due on February 1, 2010; (2) after
modification, interest rate adjustments will continue to be made based
on adjustments to the 1-year LIBOR and the corresponding payment will
continue to be due on October 1; and (3) when the adjusted interest
rate is determined, the 1-year LIBOR for 2010 has increased by 2
percentage points over the 1-year LIBOR for 2009. Under those
assumptions, the payment due on October 1, 2010 will be based on an
interest rate of 8% applied because of an adjustment in the 1-year
LIBOR. Proposed comment 20(c)-1.ii states that, in the example, notice
need not be provided under Sec. 226.20(c)(1) 60 to 120 days before
payment based on the interest rate of 4.5% is due on February 1,
because that payment change is not made based on an interest rate
adjustment provided for in the original loan agreement. Proposed
comment 20(c)-1.ii clarifies that disclosures may be required before
modification under Sec. 226.20(a), however. Moreover, proposed comment
20(c)-1.ii states that notice must be provided under Sec. 226.20(c)(1)
60 to 120 days before payment based on the interest rate of 8% is due
on October 1 (that is, the creditor must send a notice between June 3
and August 2, 2010); this is because the payment due on October 1 is
made based on change in the value of the index applied as provided for
in the modified loan agreement.
Mortgages not covered. Currently, comment 20(c)-2 states that Sec.
226.20(c) does not apply to ``shared-equity,'' ``shared-appreciation,''
or ``price level adjusted'' or similar mortgages. Under the August 2009
Closed-End Proposal, the Board proposed to remove the references to
``shared-equity'' and ``shared-appreciation'' mortgages. Under the
August 2009 Closed-End Proposal, these types of mortgages are
adjustable-rate mortgages only if the loan has an adjustable rate. For
example, a fixed-rate mortgage with an equity sharing feature would not
be an adjustable-rate mortgage under the August 2009 Closed-End
Proposal. Thus, whether or not ARM adjustment notices are required for
shared-equity or shared-appreciation mortgages depends on whether the
mortgage has an adjustable rate or a fixed rate.\57\ The Board also
proposed to add a cross-reference to comment 19(b)-3, which under the
August 2009 Closed-End Proposal clarifies that ``price level adjusted''
mortgages and certain other mortgages whose APR may change after
consummation are not ARMs subject to Sec. 226.19(b) and therefore are
not subject to Sec. 226.20(c). The Board now proposes to revise
comment 20(c)-2 further for clarity.
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\57\ See 74 FR 43232, 43270, 43405, Aug. 26, 2009.
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Conversion. Under the Board's August 2009 Closed-End Proposal, the
Board proposed to incorporate into Sec. 226.20(c) commentary stating
that the requirements of Sec. 226.20(c) apply when the interest rate
and payment adjust following conversion of an ARM subject to Sec.
226.19(b) to a fixed-rate mortgage.\58\ See comment 20(c)-1. The Board
now proposes to clarify that Sec. 226.20(c) applies if such a
conversion is made in accordance with an existing legal obligation.
Proposed Sec. 226.20(c) states that interest rate adjustments made
pursuant to the terms of an existing legal obligation include
adjustments made upon conversion of an ARM to a fixed-rate transaction.
---------------------------------------------------------------------------
\58\ See id. 43270, 43329-43330.
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Proposed comment 20(c)-4 clarifies that Sec. 226.20(c) applies to
adjustments made when an adjustable-rate mortgage is converted to a
fixed-rate mortgage if the existing legal obligation provides for such
conversion and establishes a specific index and margin or formula to be
used to determine the new interest rate. Proposed comment 20(c)-4
clarifies further, however, that if the existing legal obligation does
not provide for conversion or provides for conversion but does not
state a specific index and margin or formula to be used to determine
the new interest rate, or if the parties agree to change the index,
margin, or formula to be used to determine the interest rate upon
conversion, new disclosures instead may be required under Sec.
226.20(a). Proposed comment 20(c)-4 clarifies further that disclosures
may be required under Sec. 226.20(a) if a conversion fee is charged,
whether or not the legal obligation establishes the amount of the
conversion fee, or loan terms other than the interest rate and
corresponding payment are modified. Finally, proposed comment 20(c)-4
clarifies that if an open-end account is converted to a closed-end
transaction subject to Sec. 226.19(b), disclosures need not be
provided under Sec. 226.20(c) until adjustments subject to Sec.
226.20(c) are made following conversion. This is consistent with
current comment 20(c)-1.
The Board solicits comment on whether, when an ARM is converted to
a fixed-rate transaction as provided in an existing legal obligation,
new TILA disclosures under Sec. 226.20(a) should be provided instead
of notice of an interest rate adjustment under Sec. 226.20(c). Would
new TILA disclosures be more useful to consumers who are deciding
whether to convert an ARM into a fixed-rate mortgage on terms
established under an existing legal obligation or to seek a fixed-rate
mortgage from a different creditor? Would potential liability risk from
providing new disclosures under Sec. 226.20(a), including rescission
in rescindable transactions, discourage creditors from providing ARMs
with a conversion option?
Previously proposed revisions. The new revisions the Board now
proposes address the applicability of Sec. 226.20(c) and would be made
only to the introductory text of Sec. 226.20(c) and commentary
associated with that introductory text. For ease of reference, however,
this proposal republishes proposed revisions to disclosure timing,
content, and format requirements under Sec. 226.20(c)(1) through (5)
and associated commentary proposed previously under the August 2009
Closed-End Proposal. The Board requests that interested parties limit
the scope of their comments to the newly proposed changes to the
introductory text of Sec. 226.20(c) and proposed comments 20(c)-1
through -4.
Section 226.22 Determination of Annual Percentage Rate
22(a) Accuracy of Annual Percentage Rate
The APR is a measure of the cost of credit, expressed as a yearly
rate, that relates the amount and timing of value received by a
consumer to the amount and timing of payments made. Sec. 226.22(a)(1).
The APR must be determined in accordance with either the actuarial
method or the United States Rule method. Id. TILA Section 107(c)
provides a general tolerance for the accuracy of a disclosed APR. 15
[[Page 58607]]
U.S.C. 1606(c). TILA Section 106(f) provides special tolerances for
disclosure of a finance charge ``and other disclosures affected by any
finance charge'' for a closed-end credit transaction secured by real
property or a dwelling. 15 U.S.C. 1605(f). TILA Section 107(c) is
implemented in Sec. 226.22(a)(2) and (3), and TILA Section 106(f) is
implemented in Sec. 226.22(a)(4) and (5).
The Board proposes to add examples to illustrate whether the APR
disclosed for a mortgage transaction is considered accurate where the
finance charge and APR are overstated. The Board proposes further to
clarify that the tolerances under proposed Sec. 226.23(a)(5)(ii),
applicable for purposes of rescission, do not apply in determining
under Sec. 226.19(a) whether a creditor must provide corrected
disclosures that a consumer must receive at least three business days
before consummation. (The Board proposes to redesignate Sec. 226.23(g)
and (h)(2), as discussed below in the section-by-section analysis of
proposed Sec. 226.23(a)(5)(ii).) The Board also proposes minor
clarifying amendments to Sec. 226.22(a).
In addition, the Board proposes several technical amendments to
Sec. 226.22(a). The Board proposes to integrate footnote 45d into
Sec. 226.22(a)(1) and to redesignate existing regulatory text. The
Board proposes further to revise Sec. 226.22(a) to use the term
``interest and settlement charges'' instead of ``finance charge'' when
referring to a disclosed finance charge, consistent with a terminology
change proposed for closed-end mortgage transactions in proposed Sec.
226.38(e)(5)(ii) under the August 2009 Closed-End Proposal.\59\ Also,
the Board proposes to add headings to Sec. 226.22(a)(1), (a)(2), and
(a)(3), to clarify that those provisions address a closed-end credit
transaction's actual APR, a tolerance for a regular transaction, and a
tolerance for an irregular transaction, respectively. Finally, the
Board proposes conforming amendments to headings for commentary on
Sec. 226.22(a)(1), (a)(2), and (a)(3).
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\59\ For a discussion of the proposed terminology change, see 74
FR 43232, 43307-43308, Aug. 26, 2009.
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22(a)(1) Actual Annual Percentage Rate
Section 226.22(a)(1) states that the APR for a closed-end credit
transaction is a measure of the cost of credit, expressed as a yearly
rate, that relates to the amount and timing of value received by the
consumer to the amount and timing of payments made. Section
226.22(a)(1) states further that the APR for a closed-end credit
transaction is to be determined in accordance with the actuarial method
or the United States Rule method. Footnote 45d to Sec. 226.22(a)(1)
states that an error in disclosure of an APR or finance charge shall
not, in itself, be considered a violation of this regulation if: (1)
The error resulted from a corresponding error in a calculation tool
used in good faith by the creditor; and (2) upon discovery of the
error, the creditor promptly discontinues use of that calculation tool
for disclosure purposes and notifies the Board in writing of the error
in the calculation tool. The Board has stated that footnote 45d
protects creditors from administrative enforcement, including
restitution, for errors in a calculation tool used in good faith. See
48 FR 14883, Apr. 3, 1983. (TILA Section 130(c) protects creditors from
civil liability for violations resulting from such errors. 15 U.S.C.
1640(c).)
The Board proposes to integrate the text of footnote 45d into Sec.
226.22(a) and to remove the footnote. First, the Board proposes to
redesignate the existing text of Sec. 226.22(a)(1) as proposed Sec.
226.22(a)(1)(i). The Board also proposes to redesignate comment
22(a)(1)-2 as comment 22(a)(1)(i)-2 and revise the comment to clarify
that a previously proposed requirement that disclosures for closed-end
mortgage transactions use the term ``interest and settlement charges''
in place of the term ``finance charge,'' discussed above, does not
affect how an APR is calculated using the actuarial method.
Next, the Board proposes to add a new Sec. 226.22(a)(1)(ii) that
contains the text of footnote 45d. However, proposed Sec.
226.22(a)(1)(ii) omits a statement in footnote 45d that could be read
to mean that an error in the disclosure of the APR or finance charge
resulting from an error in a calculation tool used in good faith (but
no longer used) is a violation of Regulation Z if a creditor does not
notify the Board in writing of the error in the calculation tool. That
statement is inconsistent with TILA Section 130(c), which provides that
a creditor or assignee may not be held liable in any action brought
under TILA Section 125 or TILA Section 130 if the creditor or assignee
shows by a preponderance of the evidence that the violation was not
intentional and resulted from a bona fide error, notwithstanding the
maintenance of procedures reasonably adapted to avoid any such error.
15 U.S.C. 1640(c). Examples of a bona fide error include calculation
errors and computer malfunction and programming errors. Id.
The Board also proposes to redesignate comment 22(a)(1)-5,
regarding good faith reliance on faulty calculation tools, as comment
22(a)(1)(ii)-1, and to revise the comment to clarify that the ``finance
charge'' is disclosed as ``interest and settlement charges'' for
purposes of mortgage transaction disclosures. The Board further
proposes to add a conforming heading, and update a cross-reference to
footnote 45d.
22(a)(2) Regular Transaction
Section 226.22(a)(2) provides that, as a general rule, an APR for a
closed-end credit transaction is considered accurate if the APR is not
more than \1/8\ of 1 percentage point above or below the APR determined
in accordance with Sec. 226.22(a)(1). The Board also proposes minor
revisions to Sec. 226.22(a)(2) for clarity.
22(a)(3) Irregular Transaction
Section 226.22(a)(3) provides that, in an irregular transaction, a
disclosed APR is considered accurate if it is not more than \1/4\ of 1
percentage point above or below the actual APR. Footnote 46 to Sec.
226.22(a)(3) clarifies that, for purposes Sec. 226.22(a)(3), an
irregular transaction is one that includes any of the following
features: Multiple advances, irregular payment periods, or irregular
payment amounts, other than an irregular first period or an irregular
first or final payment. The Board proposes to integrate footnote 46
into proposed Sec. 226.22(a)(3) and to set forth several types of
``irregular transactions'' currently described in comment 22(a)(3)-1.
Specifically, proposed Sec. 226.22(a)(3)(i) states that the term
``irregular transaction'' includes: (1) A construction loan for which
advances are made as construction progresses; (2) a transaction where
payments vary to reflect the consumer's seasonal income; (3) a
transaction where payments vary due to changes in a premium for or
termination of mortgage insurance; and (4) a transaction with a
graduated payment schedule where the contract commits the consumer to
several series of payments in different amounts. Proposed Sec.
226.22(a)(3)(ii) provides that the term ``irregular transaction'' does
not include a loan with a variable-rate feature that has regular
payment periods, however. The Board also proposes minor revisions to
Sec. 226.22(a)(3) for clarity.
The examples of transactions that are and are not irregular
transactions are incorporated from current comment 22(a)(3)-1, with the
exception of proposed Sec. 226.22(a)(3)(i)(C). Proposed
[[Page 58608]]
Sec. 226.22(a)(3)(i)(C) (currently footnote 45d) provides that an
irregular transaction includes a transaction where payments vary due to
changes in a premium for or termination of mortgage insurance. No
substantive change is intended by incorporating this example of an
irregular transaction into the regulation text, however.
22(a)(4) Mortgage Loans
Under TILA Section 106(f), a special tolerance for the disclosed
finance charge and ``other disclosures affected by any finance charge''
applies for closed-end credit transactions secured by real property or
a dwelling, in addition to the general tolerance for a regular
transaction under Sec. 226.22(a)(2) or for an irregular transaction
under Sec. 226.22(a)(3), as applicable. 15 U.S.C. 1605(f). TILA
Section 106(f)(1) states that, in closed-end credit transactions
secured by real property or a dwelling, the disclosure of the finance
charge and other disclosures affected by the finance charge shall be
treated as accurate if the amount disclosed as the finance charge (1)
does not vary from the actual finance charge by more than $100; or (2)
is greater than the amount required to be disclosed. 15 U.S.C.
1605(f)(1). (TILA Section 106(f) establishes a different tolerance for
these transactions for purposes of rescission under TILA Section 125,
as discussed below. 15 U.S.C. 1605(f)(2)). The APR is a disclosure
``affected by'' the finance charge. When implementing the special
tolerance for mortgage loans in Sec. 226.22(a)(4), the Board stated
that if the APR is not considered to be a disclosure affected by the
finance charge, ``transactions in which the disclosed finance charge is
misstated but considered accurate under the new tolerance would remain
subject to legal challenge based on the disclosed APR, which seems
inconsistent with the legislative intent.'' 61 FR 49237, 49242, Sept.
19, 1996.
Under Sec. 226.22(a)(4), if the APR disclosed in a transaction
secured by real property or a dwelling varies from the actual APR
determined in accordance with Sec. 226.22(a)(1), the disclosed APR is
considered accurate if (1) the disclosed APR results from the disclosed
finance charge, and (2) the disclosed finance charge would be
considered accurate under Sec. 226.18(d)(1). (Under the August 2009
Closed-End Proposal, Sec. 226.38(e)(5)(ii) rather than Sec.
226.18(d)(1) would set forth the accuracy tolerance for a finance
charge disclosed for a closed-end mortgage transaction.\60\) Comment
22(a)(4)-1 currently provides an example of the APR tolerance where a
disclosed APR results from a disclosed finance charge that is
understated by $100 or less and therefore considered accurate under
Sec. 226.18(d)(1). The Board proposes to redesignate the current
comment as comment 22(a)(4)-1.i and add an example that illustrates the
operation of the APR tolerance where the disclosed finance charge and
APR are overstated.
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\60\ Regarding the proposal to change where the finance charge
tolerance for closed-end mortgage transaction is set forth, see the
discussion of proposed revisions to Sec. 226.18(d)(1) at 74 FR
43232, 43256, Aug. 26, 2009.
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Proposed comment 22(a)(4)-1.ii provides that, if a creditor
improperly includes a $200 fee in the interest and settlement charges
on a regular transaction, the overstated interest and settlement
charges are considered accurate under Sec. 226.38(e)(5)(ii), and the
APR that results from those overstated interest and settlement charges
is considered accurate even if it falls outside the tolerance of \1/8\
of 1 percentage point provided under Sec. 226.22(a)(2). Proposed
comment 22(a)(4)-1.ii clarifies that because the interest and
settlement charges were overstated by $200 in the example, an APR
corresponding to a $225 overstatement of the interest and settlement
charges will not be considered accurate. Although the proposed example
describes a regular transaction to which the \1/8\ of 1 percentage
point tolerance applies under Sec. 226.22(a)(2), the same principles
apply for an irregular transaction to which the \1/4\ of 1 percentage
point tolerance applies under Sec. 226.22(a)(3).
Special tolerances for rescission. TILA Sections 106(f)(2) and
125(i)(2) provide special tolerances for the finance charge and all
related disclosures when a consumer asserts the right to rescind a
closed-end mortgage transaction under TILA Section 125. 15 U.S.C.
1605(f)(2), 1635(i)(2). TILA Section 106(f)(2) provides that, for
purposes of the right to rescind, the finance charge and disclosures
affected by the finance charge are treated as accurate if the disclosed
finance charge does not vary from the actual finance charge by more
than an amount equal to one-half of one percent of the loan amount.\61\
TILA Section 125(i)(2) provides a different tolerance if rescission is
asserted as a defense to foreclosure. In that circumstance, the finance
charge and all related disclosures are considered accurate if the
disclosed finance charge does not vary from the actual finance charge
by more than $35 or is greater than the actual finance charge. TILA
Sections 106(f)(2) and 125(i)(2) are implemented in Sec. 226.23(g) and
(h) (proposed to be redesignated as Sec. 226.23(a)(5)(ii)). The
tolerances under TILA Sections 106(f)(2) and 125(i)(2) are larger than
the tolerance of \1/8\ of one percentage point provided for a regular
transaction under TILA Section 107(c). Therefore, those tolerances
limit the circumstances in which a consumer may rescind a loan based on
inaccurate TILA disclosures.\62\ 15 U.S.C. 1606(c).
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\61\ For rescission of a refinancing of a principal balance made
without a new consolidation or new advance, TILA Section 106(f)(2)
provides a tolerance of one percent of the loan amount, provided the
loan is not a high-cost HOEPA loan under TILA Section 103(aa), 15
U.S.C. 1602(aa). 15 U.S.C. 1605(f)(2).
\62\ The tolerance for a regular transaction under TILA Section
107(c) is implemented in Sec. 226.22(a)(2). TILA Section 107(c)
provides that the Board may allow a greater tolerance to simplify
compliance where irregular payments are involved. 15 U.S.C. 1606(c).
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With respect to the special APR tolerances for mortgage
transactions under Sec. 226.22(a)(4), proposed Sec.
226.22(a)(4)(ii)(B) provides that, for purposes of rescission, the
finance charge and all related disclosures are accurate if the finance
charge is accurate under proposed Sec. 226.23(a)(5)(ii), as
applicable. Some creditors have asked the Board whether the larger
tolerances under Sec. 226.23(g) and (h) (proposed Sec.
226.23(a)(5)(ii)) apply under Sec. 226.19(a)(2) in determining whether
a consumer must receive corrected disclosures at least three business
days before consummation of a rescindable transaction. Section
226.19(a)(1)(i) requires creditors to provide good faith estimates of
the TILA disclosures for all loans secured by a dwelling, within three
business days of receiving a consumer's application. Section
226.19(a)(2) provides that if the difference between the actual APR and
the disclosed APR exceeds the applicable tolerance, the creditor must
provide corrected TILA disclosures that the consumer must receive at
least three business days before consummation. In light of that
requirement, some creditors have asked the Board whether, for a
rescindable transaction, they need not provide corrected disclosures
and wait three business days to consummate a transaction if a disclosed
APR would be considered accurate under Sec. 226.23(g) or (h) (proposed
Sec. 226.23(a)(5)(ii)) if the consumer tries to rescind in the future.
Proposed comment 22(a)(4)-2 clarifies that Sec.
226.22(a)(4)(ii)(B) does not establish a special tolerance for
determining whether corrected disclosures are required under
[[Page 58609]]
Sec. 226.19(a)(2) for rescindable mortgage transactions. The
tolerances for the finance charge (interest and settlement charges)
under Sec. 226.23(g) and (h) (proposed Sec. 226.23(a)(5)(ii)), apply
only when the consumer actually asserts the right of rescission under
Sec. 226.23, as discussed above.
Conforming amendments. The Board proposes certain conforming
amendments to Sec. 226.22(a)(4). Section 226.22(a)(4) incorporates by
reference finance charge tolerances under Sec. 226.18(d)(1), as
discussed above. Under the August 2009 Closed-End Proposal, proposed
Sec. 226.38(e)(5)(ii) instead of Sec. 226.18(d)(1) would set forth
the tolerances for the finance charge for a closed-end mortgage
transaction, as discussed above. The Board proposes to revise Sec.
226.22(a)(4) and comment 22(a)(4)-1 to replace the references to Sec.
226.18(d)(1) with references to proposed Sec. 226.38(e)(5)(ii). The
Board also proposes to revise Sec. 226.22(a)(4) and comment 22(a)(4)-1
to reflect that the term ``interest and settlement charges'' is used
instead of the term ``finance charge'' for closed-end mortgage
disclosures under the August 2009 Closed-End Proposal, as discussed
above.
22(a)(5) Additional Tolerance for Mortgage Loans
Section 226.22(a)(5) provides an additional tolerance for
transactions secured by real property or a dwelling. This additional
tolerance avoids the anomalous result of imposing liability on a
creditor for a disclosed APR that is not the actual APR but is closer
to the actual APR than the APR that would be considered accurate under
the statutory tolerance in Sec. 226.22(a)(4). See 61 FR 49237, 49243,
Sept. 19, 1996 (discussing the adoption of Sec. 226.22(a)(5)). Section
226.22(a)(5), as proposed to be revised, states that if the disclosed
interest and settlement charges are calculated incorrectly but
considered accurate under proposed Sec. 226.38(e)(5)(ii) or Sec.
226.23(g) or (h) (proposed Sec. 226.23(a)(5)(ii)), the disclosed APR
is considered accurate if: (1) the disclosed interest and settlement
charges are understated and the disclosed APR also is understated, but
is closer to the actual APR than the APR that would be considered
accurate under Sec. 226.22(a)(4); or (2) the disclosed interest and
settlement charges are overstated and the disclosed APR also is
overstated but is closer to the actual APR than the rate that would be
considered accurate under Sec. 226.22(a)(4). Comment 22(a)(5)-1
illustrates the APR tolerance for mortgage transactions under Sec.
226.22(a)(5), where a $75 omission from the finance charge for an
irregular transaction occurs. The Board proposes to revise comment
22(a)(5)-1 for clarity and to reflect that the term ``interest and
settlement charges'' is used instead of the term ``finance charge'' for
closed-end mortgage disclosures under the August 2009 Closed-End
Proposal.
New example for overstated APR. The Board also proposes to add an
example that illustrates the APR tolerance in Sec. 226.22(a)(5) where
a disclosed APR is based on overstated interest and settlement charges.
Proposed comment 22(a)(5)-1.ii provides the example of an irregular
transaction for which the actual APR is 9.00 percent and the interest
and settlement charges improperly include a $500 fee corresponding to a
disclosed APR of 9.40 percent. That is, the disclosed APR of 9.40%
results from disclosed interest and settlement charges that are
considered accurate under previously proposed Sec. 226.38(e)(5)(ii)
because they are greater than the interest and settlement charges
required to be disclosed and therefore are considered accurate under
Sec. 226.22(a)(4). Proposed Sec. 226.22(a)(5)-1.ii clarifies that, in
that case, a disclosed APR of 9.30 is within the tolerance in Sec.
226.22(a)(5) because it is closer to the actual APR of 9.00% than the
9.40% APR that would be considered accurate under Sec. 226.22(a)(4).
Proposed comment 22(a)(5)-1.ii clarifies further that, for purposes of
the example, an APR below 8.75 percent (corresponding to the \1/4\ of
one percentage point tolerance for an irregular transaction) or above
9.40 percent (corresponding to the APR that results from the disclosed
interest and settlement charges) will not be considered accurate.
Section 226.23 Right of Rescission
23(a) Consumer's Right to Rescind
23(a)(1) Coverage
Section 226.23(a)(1), which implements TILA Section 125(a),
provides that in a credit transaction in which a security interest is
or will be retained or acquired in a consumer's principal dwelling,
each consumer whose ownership interest is or will be subject to the
security interest shall have the right to rescind the transaction,
except for transactions exempted under Sec. 226.23(f). 15 U.S.C.
1635(a). Footnote 47 to Sec. 226.23(a)(1) currently provides that for
purposes of rescission, the addition to an existing obligation of a
security interest in a consumer's principal dwelling is a transaction.
The right of rescission applies only to the addition of the security
interest and not the existing obligation. When adding a security
interest, the creditor must deliver the notice of the right of
rescission required under Sec. 226.23(b), but need not deliver new
material disclosures. Delivery of the required rescission notice begins
the rescission period.
The Board proposes to move the first two sentences of footnote 47
to the text of Sec. 226.23(a)(1) in order to make clear that the
addition of a security interest in a consumer's principal dwelling is a
rescindable transaction. However, the last two sentences of footnote 47
regarding the creditor's obligation to provide a rescission notice
would be moved to comment 23(a)(1)-5.
Currently, comment 23(a)(1)-5 states that the addition of a
security interest in a consumer's principal dwelling to an existing
obligation is rescindable even if the existing obligation is not
satisfied and replaced by a new obligation, and even if the existing
obligation was previously exempt (because it was credit over $25,000
not secured by real property or a consumer's principal dwelling). The
right of rescission applies only to the added security interest, and
not to the original obligation. In those situations, only the Sec.
226.23(b) notice need be delivered, not new material disclosures; the
rescission period begins to run from the delivery of the notice.
The Board proposes to revise comment 23(a)(1)-5 to reflect changes
under proposed Sec. 226.20(a). As discussed in more detail in the
section-by-section analysis for proposed Sec. 226.20 above, proposed
Sec. 226.20(a)(1) would provide that the addition of new collateral
that is real property or a dwelling to an existing legal obligation
secured by real property or a dwelling would be a ``new transaction''
requiring new TILA disclosures. Thus, for example, if a creditor adds a
security interest in the consumer's principal dwelling to an existing
loan secured by vacant land, then the creditor would have to provide
the consumer with new TILA disclosures. Accordingly, comment 23(a)(1)-5
would be revised to state that if the addition of a security interest
in the consumer's principal dwelling is a new transaction under Sec.
226.20(a)(1), then the creditor must deliver new material disclosures
in addition to the Sec. 226.23(b) notice.
For an existing obligation not secured by real property or a
dwelling, proposed Sec. 226.20(a)(2) would provide that new TILA
disclosures are required if the existing obligation is satisfied and
replaced by a new obligation. Thus, for example, if a creditor
satisfies and replaces an existing auto loan and adds
[[Page 58610]]
a security interest in the consumer's principal dwelling, then the
creditor must deliver new material disclosures in addition to the Sec.
226.23(b) notice. Comment 23(a)(5)-1 would be revised to reflect this
requirement. As in the current comment, if the existing obligation is
not satisfied and replaced, then the creditor need only deliver the
Sec. 226.23(b) notice, not new material disclosures.
Finally, comment 23(a)(1)-5 would be revised to clarify that the
rescission period will begin to run from the delivery of the rescission
notice and, as applicable, the delivery of the material disclosures.
23(a)(2) Exercise of the Right
Background
TILA permits a consumer to assert rescission against the creditor
or any assignee of the loan obligation. TILA Sections 125(a), 131(c);
15 U.S.C. 1635(a), 1641(c). To exercise the right of rescission, the
consumer must send notification to the creditor or the creditor's agent
designated on the notice of the right of rescission provided by the
creditor. TILA Section 125(a); 15 U.S.C. 1635(a); Sec. 226.23(a)(2),
(b)(iii); comment 23(a)(2)-1. If the creditor fails to provide the
consumer with a designated address for sending the notification of
rescission, delivering notification to the person or address to which
the consumer has been directed to send payments (i.e., the loan
servicer) constitutes delivery to the creditor or assignee. See comment
23(a)(2)-1.
This regulatory framework for asserting the right to rescind is
applicable to most transactions that are rescinded within the initial
three-business-day period. TILA and Regulation Z provide that the right
of rescission expires three business days after the later of (1)
consummation, (2) delivery of the notice of the right to rescind, or
(3) delivery of the material disclosures. TILA Section 125(a); 15
U.S.C. 1635(a); Sec. 226.23(a)(3). The creditor may not, directly or
through a third party, disburse money, perform services, or deliver
materials until the initial three-day rescission period has expired and
the creditor is reasonably satisfied that the consumer has not
rescinded. Sec. 226.23(c); comment 23(c)-1. Within the three-business-
day period, a consumer normally would send the notice to the creditor
or the creditor's agent whose address appears on the rescission notice.
The consumer's notification asserting the right against the
``creditor'' (as defined in Sec. 226.2(a)(17)) in most cases would be
effective because, as the Board understands, loans typically are not
assigned within the three-business-day period. Under current comment
23(a)(2)-1, if no address were listed for the creditor or the
creditor's agent on the rescission notice, the consumer could assert
rescission against the creditor by notifying the servicer.
The current regulations, however, do not as readily apply to the
exercise the right of rescission during the extended right to rescind.
If the creditor fails to deliver the notice of the right to rescind or
the material disclosures, the right to rescind expires three years from
the date of consummation (or upon the sale or transfer of the
property). TILA Section 125(f); 15 U.S.C. 1635(f); Sec. 226.23(a)(3).
In the case of certain administrative proceedings, the right to rescind
may be further extended. See id. The principal problem during the
extended rescission period is that the party against which a consumer
must assert may no longer be the creditor on the original notice of
rescission. TILA Section 125 and Sec. 226.23 set forth the steps the
consumer must take to assert that right only with respect to the
creditor, yet, during the extended period, a notice to the creditor
listed on the original rescission notice may be ineffective. The
original creditor may have transferred the obligation shortly after
consummation, and, if the loan is securitized, it may have been
transferred several times. In addition, the original creditor may no
longer exist because of dissolution, bankruptcy, or merger. Moreover,
some courts have held that notice is ineffective when the consumer
notifies the original creditor and the current servicer, but not the
current holder.\63\ For practical reasons, a consumer that has an
extended right of rescission should assert the right directly against
the assignee (the current holder of the loan), because only the
assignee is in a position to cancel the transaction.
---------------------------------------------------------------------------
\63\ See, e.g., Roberts v. WMC Mortgage Corp., 173 Fed. Appx.
575 (9th Cir. 2006) (unpublished); Meyer v. Argent Mortgage Co., 379
B.R. 529 (Bankr. E.D. Pa. 2007).
---------------------------------------------------------------------------
Unfortunately, consumers have difficulty identifying the assignee
that currently holds their loan. Recognizing this problem, Congress
recently amended TILA to help consumers determine who the current owner
of their loan is and how to contact the owner.\64\ The amendments,
which the Board implemented in new Sec. 226.39, require an assignee to
provide its name and contact information to the consumer within 30 days
of acquiring the loan. Consumers can also obtain this information under
TILA Section 131(f)(2), which requires loan servicers, upon request
from a consumer, to provide the name, address, and telephone number of
the owner or master servicer of a loan. 15 U.S.C. 1641(f)(2). The Board
is proposing new Sec. 226.41 to require servicers to provide the
information the consumer requests under TILA Section 131(f)(2) within a
reasonable time. 15 U.S.C. 1641(f)(2).
---------------------------------------------------------------------------
\64\ See Helping Families Save Their Homes Act, Public Law 111-
22, tit. IV, Sec. 404(a), 123 Stat. 1632, 1658 (2009).
---------------------------------------------------------------------------
Despite these improvements, a consumer may still send notification
of exercise to the incorrect party because they mistakenly believe that
the original creditor or an assignee that once held the loan continues
to hold the loan. This reasonable mistake has the most serious
consequences for consumers with an extended right that will soon
expire; they may lose their right to rescind entirely because of a time
lag in the consumer's receipt of information provided pursuant to Sec.
226.41 or Sec. 226.39. Some consumers may never be informed of a
certain transfer of their loan because the Sec. 226.39 notice was lost
in the mail or the provision of a Sec. 226.39 notice was not required
(for instance, when a transferee assigns the loan within 30 days of
acquisition). Other consumers may receive a Sec. 226.39 notice
identifying the current holder, but fail to read or to keep it,
possibly because few consumers will recognize the importance of the
information contained in a Sec. 226.39 notice for exercising the right
to rescind. Finally, many consumers do not understand the difference
between the servicer and the owner of a loan, and may attempt to
exercise their right by notifying the servicer.
The Board's Proposal
To address some of these problems, the Board proposes to revise
Sec. 226.23(a)(2) and associated commentary. Revised Sec.
226.23(a)(2) would describe: (1) How the consumer must exercise the
right of rescission; (2) whom the consumer must notify during the
three-business-day period following consummation and after that period
has expired (the extended right); and (3) when the creditor or current
owner will be deemed to receive the consumer's notice. Comment
23(a)(2)-1 would be divided into three comments and the sentence
regarding the start of the time period for the creditor's performance
under Sec. 226.23(d)(2) would be moved into new comment
23(a)(2)(ii)(B)-1.
23(a)(2)(i) Provision of Written Notification
Proposed Sec. 226.23(a)(2)(i) contains the same requirements as
current Sec. 226.23(a)(2) with respect to the form of
[[Page 58611]]
and timing for provision of notification. The reference to notices sent
by telegram would be removed from the listed methods of transmitting
written communication in the regulation and associated commentary as
obsolete. No other substantive changes are intended.
23(a)(2)(ii) Party the Consumer Shall Notify
Proposed Sec. 226.23(a)(2)(ii) provides that the party the
consumer must notify depends on whether the right of rescission is
exercised during the three-business-day period following consummation
of the transaction or after expiration of that period. Proposed Sec.
226.23(a)(2)(ii)(A) states that, during the three-business-day period
following consummation of the transaction, the consumer must notify the
creditor or the creditor's agent designated on the rescission notice.
Proposed Sec. 226.23(a)(2)(ii)(A) also includes the guidance from
current comment 23(a)(2)-1, that if the notice does not designate the
address of the creditor or its agent, the consumer may mail or deliver
notification to the servicer, as that term is defined in Sec.
226.36(c)(3). The proposed rule is intended to ensure that the notice
is sent to the person who most likely still will own the debt
obligation. Generally, loans are not transferred during the three-
business-day period following consummation.
Proposed Sec. 226.23(a)(2)(ii)(B) is intended to ensure that
consumers can exercise the extended right of rescission if the creditor
has transferred the consumer's debt obligation. Under proposed Sec.
226.23(a)(2)(ii)(B), the consumer must mail or deliver notification to
the current owner of the debt obligation; however, notice to the
servicer would also constitute delivery to the current owner. As
discussed above, consumers may have difficulty identifying the current
owner of their loan, and may reasonably be confused as to whom they
should correspond with about rescinding their loan. In contrast,
consumers usually know the identity of their servicer. They may
regularly receive statements or other correspondence from their
servicer, for example, and many consumers continue to mail monthly
mortgage payments to the servicer rather than have these payments
automatically debited from their checking or savings account. For these
reasons, the Board believes that consumers who exercise the extended
right of rescission by notifying their servicers should not be deprived
of this important consumer remedy. Moreover, servicers are generally
agents of the owner concerning correspondence and other communications
to and from the consumer. The Board expects that it would not be unduly
burdensome for the servicer to receive a consumer's notification of
rescission on behalf of the owner and to inform the owner of the
rescission. Proposed comment 23(a)(2)(ii)(B)-1 clarifies that when a
consumer provides the servicer with notification of exercise of the
extended right of rescission under proposed Sec. 226.23(a)(2)(ii)(B),
the period for the creditor's or owner's actions in Sec. 226.23(d)(2)
begins to run from the time the servicer receives the consumer's
notification.
The Board requests comment on whether the proposal to permit
consumers to exercise the right to rescind by notifying the servicer,
even if the servicer is not the current owner of the loan, could create
any operational or other compliance issues. In particular, the Board
seeks comment on whether it is feasible for a servicer to inform the
creditor or owner of the debt obligation that the consumer has
rescinded on the same day as the servicer receives the consumer's
notification, or if the servicer could contractually be responsible for
handling the rescission process.
23(a)(3) Rescission Period
Section 226.23(a)(3), which implements TILA Section 125(a),
provides that a consumer may exercise the right to rescind until
midnight after the third business day following consummation, delivery
of all material disclosures, or delivery of the rescission notice,
whichever occurs last. 15 U.S.C. 1635(a). If the required notice and
material disclosures are not delivered, Sec. 226.23(a)(3) further
states that the right of rescission expires three years after the date
of consummation of the transaction, upon transfer of all of the
consumer's interest in the property, or upon sale of the property,
whichever occurs first.
23(a)(3)(i) Three Business Days
Questions have been raised about when the three-business-day
rescission period starts if the creditor provided an incorrect or
incomplete rescission notice or material disclosures. Some courts have
held that the three-business-day rescission period starts when the
creditor delivers corrected material disclosures and a new notice of
the right to rescind.\65\ Some industry representatives, however,
maintain that delivery of the corrected material disclosures
retroactively triggers the three-business-day rescission period to
start when the transaction was consummated. Accordingly, these
representatives believe that a new notice of the right to rescind is
unnecessary and that the consumer is not entitled to a ``second''
three-business-day rescission period that starts from delivery of the
corrected material disclosures.
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\65\ See, e.g., Smith v. Wells Fargo Credit Corp., 713 F. Supp.
354 (D. Ariz. 1989); In re Underwood, 66 B.R. 656 (Bankr. W.D. Va.
1986).
---------------------------------------------------------------------------
To address these questions, the Board is proposing to add a new
comment 23(a)(3)(i)-1.iii. The proposed comment explicitly states that
the provision of incorrect or incomplete material disclosures or an
incorrect or incomplete notice of the right to rescind does not
constitute delivery of the material disclosures or notice. The comment
explains that, if the creditor originally provided incorrect or
incomplete material disclosures, the three-business-day rescission
period starts only when the creditor delivers complete, correct
material disclosures \66\ together with a complete, correct, updated
notice of the right to rescind. An updated rescission notice is
required because the notice that the creditor previously provided would
have contained an incorrect date of expiration of the right, calculated
from the later of the date that the transaction was consummated, that
the first notice of the right of rescission was provided, or that the
incorrect or incomplete material disclosures were provided, instead of
the date from which the correct, complete material disclosures were
delivered (which had not yet occurred). Of course, if the creditor
originally delivered correct, complete material disclosures, but
provided a defective notice of the right to rescind, the creditor must
deliver to the consumer a complete, correct, updated notice of the
right to rescind to commence the three-business-day rescission period.
---------------------------------------------------------------------------
\66\ In its August 2009 Closed-End Proposal, the Board proposed
two alternative requirements under Sec. 226.19(a)(2)(iii) for
creditors to provide corrected disclosures to the consumer three
business days before consummation when a subsequent event makes the
final disclosures inaccurate. The Board's final rule under Sec.
226.19(a)(2)(iii) will determine whether a creditor providing
corrected material disclosures to comply with this proposed Sec.
226.23(a)(3)(i) must redisclose just the changed terms or all of the
terms of the loan.
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Proposed comment 23(a)(3)(i)-1.iii also states that the consumer
would have the right of rescission until midnight after the third
business day following the date of either (1) delivery of the correct
and complete material disclosures and correct, complete, updated notice
of the right of rescission, or (2) delivery of only the correct,
complete, updated notice of the right of rescission, as appropriate.
Such delivery
[[Page 58612]]
would also terminate the consumer's extended right to rescind arising
from the creditor's original provision of defective material
disclosures and/or notice of the right of rescission.
The Board is also proposing to move the final sentence of existing
comment 23(a)(3)-1, which clarifies that the consumer must place the
rescission notice in the mail or deliver it to the creditor's place of
business within the three-business-day period, to proposed Sec.
226.23(a)(2). The Board further proposes to move the remainder of
existing comment 23(a)(3)-1, explaining the calculation of the three-
business-day period, to proposed comment 23(a)(3)(i)-1.iii. The example
of a calculation of the three-business-day period where the notice of
right to rescind was delivered after consummation would be omitted
because proposed Sec. 226.23(b)(5) requires delivery of the notice of
right to rescind prior to consummation.
23(a)(3)(ii) Unexpired Right of Rescission
Implementing TILA Section 125(a), Sec. 226.23(a)(3) currently
states that if the material disclosures and rescission notice are not
delivered, the right of rescission expires ``three years after
consummation, upon transfer of all of the consumer's interest in the
property, or upon sale of the property, whichever occurs first.'' 15
U.S.C. 1635(a). Concerns have been raised about whether certain
occurrences, such as the consumer's death, filing for bankruptcy,
refinancing the loan, or paying off the loan, would terminate an
unexpired right to rescind. The Board is proposing to revise Sec.
226.23(a)(3) and associated commentary to clarify these issues. In
addition, portions of comment 23(a)(3)-3 would be removed because they
simply repeat the regulation. Finally, footnote 48 and comment
23(a)(3)-2 would be moved to the new provision in the proposed Sec.
226.23(a)(5) addressing material disclosures.
Consumer's death. Proposed comment 23(a)(3)(ii)(A)-1 clarifies that
the consumer's death terminates an unexpired right to rescind. Through
the operation of law, upon the consumer's death all of the consumer's
interest in the property is transferred to the consumer's heirs or the
estate. Thus, the consumer's death results in a ``transfer of all of
the consumer's interest in the property,'' which, as noted above,
terminates the right to rescind under Sec. 226.23(a)(3).
Bankruptcy. Proposed comment 23(a)(3)(ii)(A)-1 also clarifies that
the consumer's filing for bankruptcy generally does not terminate the
unexpired right to rescind, if the consumer still retains an interest
in the property after the bankruptcy estate is formed. In a Chapter 7
bankruptcy, most consumers will claim a homestead or other exemption in
their residences and, thus, retain an interest in the property. In a
Chapter 13 bankruptcy, the consumer retains a right of possession of
all property of the bankruptcy estate.\67\ Upon confirmation of the
Chapter 13 bankruptcy plan, unless otherwise provided, all of the
property of the estate is vested in the debtor (consumer).\68\ Thus, in
those cases, the consumer does not transfer ``all of the consumer's
interest in the property,'' so the right to rescind should not expire
under Sec. 226.23(a)(3).
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\67\ 11 U.S.C. 1306(b).
\68\ 11 U.S.C. 1327(b).
---------------------------------------------------------------------------
Refinancing. Proposed Sec. 226.23(a)(3)(ii)(A) clarifies that a
refinancing with a creditor other than the current holder of the
obligation terminates the unexpired right to rescind. Refinancing a
consumer credit transaction extinguishes the prior creditor's lien on
the consumer's property, and terminates the consumer's obligation to
repay the creditor under the promissory note through satisfaction of
that obligation. These results are the same as those of a ``sale of the
property,'' which, as noted above, terminates the right of rescission
under TILA and Regulation Z. TILA Section 125(a); 15 U.S.C. 1635(a);
Sec. 226.23(a)(3). The Board also believes that continuance of the
unexpired right is unnecessary when refinancing with a new creditor,
because the results are substantively similar to those of rescission--
namely, voiding of the prior creditor's security interest, release of
the borrower from the obligation to make payments to that creditor, and
return to the creditor of money borrowed.
Under proposed Sec. 226.23(a)(3)(ii)(A), not all refinancings
would terminate the extended right to rescind--the right to rescind
would still apply to refinancings with the current holder of the credit
obligation. The Board is concerned that if all refinancings terminate
the extended right to rescind, including refinancings with the same
creditor, some creditors may abuse the refinancing process to profit
without benefiting the consumer. In particular, some unscrupulous
creditors might refinance their own loans on terms that are no better
for the consumer than the terms of the prior loan to purposely
terminate the consumer's right to rescind the previous loan in which
material disclosures or the notice of the right was not delivered. A
creditor might do this repeatedly, charging fees and stripping the
consumer's equity. Unless these creditors are subject to the consumer
remedy of rescission, the Board believes that consumers would not be
adequately protected.
Loan pay off. Under proposed Sec. 226.23(a)(3)(ii)(A), paying off
a loan would also terminate the unexpired right to rescind. Similar to
a refinancing, paying off a consumer credit transaction extinguishes
the creditor's prior lien on the consumer's property, and terminates
the consumer's obligation to repay the creditor under the promissory
note through satisfaction of that obligation. Again, these results are
the same as those of a ``sale of the property,'' which, as noted above,
terminates the right of rescission under TILA and Regulation Z. TILA
Section 125(a); 15 U.S.C. 1635(a); Sec. 226.23(a)(3). The Board also
believes that continuance of the unexpired right is unnecessary once a
loan is paid off, because paying off the loan largely accomplishes the
results of rescission--namely, voiding of the prior creditor's security
interest, release of the borrower from the obligation to make payments
to that creditor, and return to the creditor of money borrowed.
Proposed comments 23(a)(3)(ii)(A)-2 and -3 regarding the sale or
transfer of property are adopted from current comment 23(a)(3)-3. No
substantive change is intended. Proposed Sec. 226.23(a)(3)(ii)(B)
regarding the extension of the right to rescind in connection with
certain administrative proceedings is adopted from the current Sec.
226.23(a)(3). No substantive change is intended. The sentence regarding
the extension of the right to rescind in connection with certain
administrative proceedings in current comment 23(a)(3)-3 does not
appear in a proposed comment because it simply repeats the regulation.
No substantive change is intended.
The Board solicits comment on the proposed clarifications that the
consumer's death, bankruptcy (when the consumer retains an interest in
the securing property), refinancings (with a new creditor), and paying
off the loan terminate the unexpired right to rescind.
23(a)(4) Joint owners
Section 226.23(a)(4) provides that when more than one consumer in a
transaction has the right to rescind, the exercise of the right by one
consumer shall be effective as to all consumers. Comment 23(a)(4)-1
provides that when more than one consumer has the right to rescind a
transaction, any one of them may exercise that right and cancel the
transaction on behalf of all. For example, if both a husband and wife
[[Page 58613]]
have the right to rescind a transaction, either spouse acting alone may
exercise the right and both are bound by the rescission. The Board
proposes technical edits to these provisions. No substantive change is
intended.
23(a)(5) Material Disclosures
Background
TILA and Regulation Z provide that a consumer may exercise the
right to rescind until midnight of the third business day after the
latest of (1) Consummation, (2) delivery of the notice of right to
rescind, or (3) delivery of all material disclosures. TILA Section
125(a); 15 U.S.C. 1635(a); Sec. 226.23(a)(3). Thus, the right to
rescind does not expire until the notice of right to rescind and the
material disclosures are properly delivered. This ensures that
consumers are notified of their right to rescind, and that they have
the information they need to decide whether to exercise the right. If
the rescission notice or the material disclosures are not delivered, a
consumer's right to rescind may extend for up to three years from
consummation. TILA Section 125(f); 15 U.S.C. 1635(f); Sec.
226.23(a)(3).
TILA defines the following as ``material disclosures'': (1) The
annual percentage rate, (2) the amount of the finance charge, (3) the
amount to be financed, (4) the total of payments, (5) the number and
amount of payments, (6) the due dates or periods of payments scheduled
to repay the indebtedness, (7) the disclosures required by HOEPA, and
(8) the inclusion of a provision in a mortgage that is prohibited by
HOEPA, such as negative amortization. TILA Sections 103(u), 129(j); 15
U.S.C. 1602(u), 1639(j).
Congress first added the definition of ``material disclosures'' to
TILA in 1980 so that creditors would be ``in a better position to know
whether a consumer may properly rescind a transaction.'' \69\ The
mortgage market has changed considerably since Congress created this
definition of ``material disclosures.'' For example, many creditors now
offer nontraditional mortgage products that contain complex or risky
features, such as negative amortization or interest-only payments. In
the August 2009 Closed-End Proposal, the Board proposed comprehensive
revisions to the disclosures for closed-end mortgages that would
reflect these changes in the mortgage market. 74 FR 43232, Aug. 26,
2009. The proposed disclosures and revised model forms were developed
after extensive consumer testing to determine which credit terms
consumers find the most useful in evaluating credit transactions. Based
on consumer testing, the August 2009 Closed-End Proposal would add
certain new disclosures, such as the interest rate and whether a loan
has negative amortization or permits interest-only payments, while
making certain other disclosures less prominent, such as the amount
financed and the total and number of payments. The proposed rule would
also add certain formatting requirements, such as font size and tabular
format, to facilitate consumers' understanding of the disclosures.
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\69\ S. Rep. No. 368, 98 Cong. 2d Sess. 29, reprinted in 1980
U.S.C.A.N.N. 236, 264.
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The Board's Proposal
The Board now proposes to revise the definition of material
disclosures to include the information that is critical to consumers in
evaluating loan offers, and to remove information that consumers do not
find to be important. The proposal is intended to ensure that consumers
have the information they need to decide whether to rescind a loan.
Proposed Sec. 226.23(a)(5) would retain the following as material
disclosures:
The special HOEPA disclosures and the HOEPA prohibitions
referred to in Sec. Sec. 226.32(c) and (d) and 226.35(b)(2);
The annual percentage rate;
The payment summary; and
The finance charge, renamed the ``interest and settlement
charges.''
The following disclosures would be added to the list of material
disclosures:
The loan amount;
The loan term;
The loan type (such as an adjustable-rate mortgage);
The loan features (such as negative amortization);
The total settlement charges;
The prepayment penalty; and
The interest rate.
The following disclosures would be removed from the list of
material disclosures:
The amount financed;
The number of payments; and
The total of payments.
Proposed comment 23(a)(5)(i)-1 would state that the right to
rescind generally does not expire until midnight after the third
business day following the latest of (1) consummation; (2) delivery of
the notice of right to rescind, as set forth in Sec. 226.23(b); or (3)
delivery of all material disclosures, as set forth in Sec.
226.23(a)(5)(i). A creditor must make the material disclosures clearly
and conspicuously consistent with the requirements of Sec. Sec.
226.32(c) and 226.38. The proposed comment would clarify that a
creditor may satisfy the requirements for Sec. 226.32(c) by using the
Section 32 Loan Model Clauses in Appendix H-16, or providing
substantially similar disclosures. In addition, a creditor may satisfy
the requirements for proposed Sec. 226.38 by providing the appropriate
model form in Appendix H or, for reverse mortgages, Appendix K, or a
substantially similar disclosure, which is properly completed with the
disclosures required by proposed Sec. 226.38. Failure to provide the
non-material disclosures does not affect the right of rescission,
although such failure may be a violation subject to the liability
provisions of TILA Section 130, or administrative sanctions. 15 U.S.C.
1640.
A material disclosure that is clear and conspicuous but contains a
formatting error, such as failure to use bold text, is unlikely to
impair a consumer's ability to determine whether to exercise the right
to rescind. Thus, proposed comment 23(a)(5)(i)-2 would clarify that
failing to satisfy any specific terminology or format requirements set
forth in proposed Sec. 226.33 or Sec. 226.37 or in the proposed model
forms in Appendix H or Appendix K is not by itself a failure to provide
material disclosures. Nonetheless, a creditor must provide the material
disclosures clearly and conspicuously, as described in proposed Sec.
226.37 and proposed comments 37(a)-1 and 37(a)(1)-1 and -2.
Legal authority to add disclosures. The Board proposes to revise
the definition of material disclosures pursuant to its authority under
TILA Section 105. 15 U.S.C. 1604. Although Congress specified in TILA
the disclosures that constitute material disclosures, Congress gave the
Board broad authority to make adjustments to TILA requirements based on
its knowledge and understanding of evolving credit practices and
consumer disclosures. Under TILA Section 105(a), the Board may make
adjustments to TILA to effectuate the purposes of TILA, to prevent
circumvention or evasion, or to facilitate compliance. 15 U.S.C.
1604(a). The purposes of TILA include ensuring the ``meaningful
disclosure of credit terms'' to help consumers avoid the uninformed use
of credit. 15 U.S.C. 1601(a), 1604(a).
The Board has considered the purposes for which it may exercise its
authority under TILA Section 105(a) and, based on that review, believes
that the proposed adjustments are appropriate. The Board believes that
the proposed amendments to the definition of ``material disclosures''
are warranted by the complexity of mortgage products offered today and
the number of
[[Page 58614]]
disclosures that are critical to the consumer's evaluation of a loan
offer. Some of those features did not exist when Congress created the
definition of ``material disclosures'' in 1980, and the Board does not
believe that Congress intended to omit critical mortgage features from
the definition. Consumer testing has shown that changes in the mortgage
marketplace have made certain disclosures more important to consumers.
Defining these disclosures as ``material disclosures'' would ensure the
``meaningful disclosure of credit terms'' so that consumers would have
the information they need to make informed decisions about whether to
rescind the credit transaction. The proposed definition may also
prevent circumvention or evasion of the disclosure rules set forth in
proposed Sec. 226.38 because creditors would have a greater incentive
to ensure that the material disclosures are accurate.
Legal authority to add tolerances. The Board recognizes that
increasing the number of material disclosures could increase the
possibility of errors resulting in extended rescission rights. Although
the creditor must re-disclose any changed terms before consummation,
consistent with Sec. 226.17(f), there may still be errors in the final
TILA disclosure. To ensure that inconsequential disclosure errors do
not result in extended rescission rights, the Board proposes to add
tolerances for accuracy of disclosures of the loan amount, the total
settlement charges, the prepayment penalty, and the payment summary.
The proposal would retain the existing tolerances for the interest
and settlement charges (currently referred to as the ``finance
charge''). The tolerances for disclosure of the finance charge were
created by Congress in 1995,\70\ and implemented by the Board in
1996.\71\ Thus, TILA and Regulation Z provide a general tolerance for
disclosure of the finance charge, a special tolerance for a refinancing
with no new advance, and a special tolerance for foreclosures. TILA
Sections 106(f)(2), 125(i)(2); 15 U.S.C. 1605(f)(2), 1635(i)(2); Sec.
226.23(g), (h). Under the general rule, the finance charge is
considered accurate if the disclosed finance charge is understated by
no more than \1/2\ of 1 percent of the face amount of the note or $100,
whichever is greater; or is greater than the amount required to be
disclosed. There is a greater tolerance for a refinancing with a new
creditor if there is no new advance and no consolidation of existing
loans. In that case, the finance charge is considered accurate if the
disclosed finance charge is understated by no more than 1 percent of
the face amount of the note or $100, whichever is greater; or is
greater than the amount required to be disclosed. Finally, there is a
stricter tolerance after the initiation of foreclosure on the
consumer's principal dwelling that secures the credit transaction. In
that case, the finance charge is considered accurate if it is
understated by no more than $35; or is greater than the amount required
to be disclosed. The APR is treated as accurate if the disclosed APR is
based on a finance charge that would be considered accurate under the
rule.
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\70\ Public Law No. 104-29 Sec. Sec. 3 and 8, 109 Stat. 274,
272 and 275 (1995), codified at 15 U.S.C. 1605(f)(2) and 1635(i)(2).
\71\ 61 FR 49237, Sept. 19, 1996; Sec. 226.23(g), (h).
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The Board proposes to model the tolerances for the loan amount, the
total settlement charges, the prepayment penalty, and the payment
summary on the tolerances provided by Congress in 1995 for the
disclosure of the finance charge. As discussed in more detail in the
section-by-section analyses below, the loan amount would be considered
accurate if the disclosed loan amount is understated by no more than
\1/2\ of 1 percent of the face amount of the note or $100, whichever is
greater; or is greater than the amount required to be disclosed. In a
refinancing with no new advance, the loan amount would be considered
accurate if the disclosed loan amount is understated by no more than 1
percent of the face amount of the note or $100, whichever is greater;
or is greater than the amount required to be disclosed. The total
settlement charges, the prepayment penalty, and the payment summary
would be considered accurate if each of the disclosed amounts is
understated by no more than $100; or is greater than the amount
required to be disclosed.
The Board proposes the new tolerances for the loan amount, the
total settlement charges, the prepayment penalty, and the payment
summary pursuant to its authority in TILA Section 121(d) to establish
tolerances for numerical disclosures that the Board determines are
necessary to facilitate compliance with TILA and that are narrow enough
to prevent misleading disclosures or disclosures that circumvent the
purposes of TILA. 15 U.S.C. 1631(d). The Board does not believe that an
extended right of rescission is appropriate if a creditor overstates or
slightly understates the loan amount, the total settlement charges, the
prepayment penalty, or the payment summary. Creditors would incur
litigation and other costs of unwinding transactions based on the
extended right of rescission, even though the overstatement or slight
understatement of the disclosure was not critical to a consumer's
decision to enter into the credit transaction, and in turn, to rescind
the transaction. The overstatement or slight understatement is unlikely
to influence the consumer's decision of whether to rescind the loan.
The Board believes that the proposed tolerances are broad enough to
alleviate creditors' compliance concerns regarding minor disclosure
errors, and narrow enough to prevent misleading disclosures.
Legal authority to remove disclosures. The proposal would remove
the following disclosures from the definition of ``material
disclosures'': the amount financed, the number of payments, and the
total of payments. The Board proposes to remove these disclosures from
the definition of ``material disclosures,'' under its exception and
exemption authority under TILA Section 105. 15 U.S.C. 1604. Although
Congress specified in TILA the disclosures that constitute material
disclosures that extend rescission, the Board has broad authority to
make exceptions to or exemptions from TILA requirements based on its
knowledge and understanding of evolving credit practices and consumer
disclosures. Under TILA Section 105(a), the Board may make adjustments
to TILA to effectuate the purposes of TILA, to prevent circumvention or
evasion, or to facilitate compliance. 15 U.S.C. 1604(a). The purposes
of TILA include ensuring ``meaningful disclosure of credit terms'' to
help consumers avoid the uninformed use of credit. 15 U.S.C. 1601(a),
1604(a).
TILA 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). The Board is proposing to exempt closed-end
credit transactions secured by real property or a dwelling from the
part of TILA Section 103(u) that includes the amount financed, the
number of payments, and the total of payments as material disclosures.
TILA Section 105(f) directs the Board to make the determination of
whether coverage of such transactions provides a meaningful benefit to
consumers in light of specific factors. 15 U.S.C. 1604(f)(2). These
factors are (1) The amount of the loan and whether the disclosures,
right of rescission, and other provisions provide a benefit to
consumers who are parties to the transactions involving a loan of such
amount; (2) the extent to
[[Page 58615]]
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 and, based on that
review, believes that the proposed exceptions and exemptions are
appropriate. Mortgage loans generally are the largest credit obligation
that most consumers assume. Most of these loans are secured by the
consumer's principal residence. Consumer testing of borrowers with
varying levels of financial sophistication shows that certain
disclosures are not likely to significantly impact a consumer's
decision to enter into a mortgage transaction or to exercise the right
to rescind. Treating the amount financed and the number and total of
payments as ``material disclosures'' would not provide a meaningful
benefit to consumers in the form of useful information or protection.
However, retaining these disclosures as material disclosures can
increase the cost of credit when failure to provide these disclosures
or technical violations due to calculation errors results in an
extended right to rescind. Revising the definition of ``material
disclosures'' to reflect the disclosures that are most critical to the
consumer's evaluation of credit terms would better ensure that the
compliance costs are aligned with disclosure requirements that provide
meaningful benefits for consumers.
An analysis of the disclosures retained, added, and removed from
the definition of ``material disclosures'' is set forth below.
23(a)(5)(i) HOEPA and Higher-Priced Mortgage Disclosures and
Limitations
In 1994, Congress enacted HOEPA as an amendment to TILA, and added
to the definition of ``material disclosures'' the special disclosures
for HOEPA loans.\72\ TILA Section 103(u); 15 U.S.C. 102(u). Congress
also provided that the inclusion of a provision in a HOEPA loan that is
prohibited by HOEPA, such as negative amortization, is deemed to be a
failure to deliver the material disclosures. TILA Section 129(j); 15
U.S.C. 1639(j). Currently, the following disclosures for HOEPA loans
are material disclosures: (1) A statement that the consumer is not
obligated to complete the agreement merely because the consumer has
received the disclosures or signed an application; (2) a statement that
the consumer could lose the home if the consumer does not meet the loan
obligations; (3) the annual percentage rate; (4) the amount of the
regular payment and any balloon payment; (5) for variable-rate
transactions, a statement that the interest rate and monthly payment
may increase, and a disclosure of the maximum monthly payment; and (6)
the amount borrowed. TILA Sections 103(u), 129(a); 15 U.S.C. 1602(u),
1639(a); Sec. Sec. 226.23(a)(3) n.48, 226.32(c). In addition, TILA and
Regulation Z prohibit certain loan terms in connection with mortgage
loans covered by HOEPA, including some prepayment penalties, balloon
payments, negative amortization, and rate increases upon default. TILA
Section 129(c)-(g), (j); 15 U.S.C. 1639(c)-(g), (j); Sec. Sec.
226.23(a)(3) n.48, 226.32(d), 226.35(b)(2). Because of the importance
of these disclosures and limitations for high-cost loans, the Board
proposes to retain their inclusion in the definition of ``material
disclosures.''
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\72\ HOEPA was contained in the Riegle Community Development and
Regulatory Improvement Act of 1994, Public Law 103-325, 108 Stat.
2160 (1994). Section 152 of HOEPA added a new section 129 to TILA.
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23(a)(5)(i)(A) Loan Amount
Currently, TILA and Regulation Z do not require creditors to
disclose the loan amount, except in connection with HOEPA loans. For
those loans, creditors must disclose the amount borrowed, which is a
material disclosure. TILA Sections 103(u), 129; 15 U.S.C. 1602(u),
1639; Sec. Sec. 226.23(a)(3) n.48, 226.32(c)(5). The amount borrowed
is treated as accurate if it is not more than $100 above or below the
amount required to be disclosed. Section 226.32(c)(5). The Board
adopted this requirement in December 2001, noting that the disclosure
responded to concerns that consumers sometimes seek a modest loan
amount only to discover at closing (or after) that the note amount is
substantially higher due to fees and insurance premiums that are
financed along with the requested loan amount. 66 FR 65611, Dec. 20,
2001.
For non-HOEPA loans, disclosure of the loan amount is not currently
required under TILA or Regulation Z. Consumers testing showed, however,
that participants could not ascertain the loan amount from other
currently-required disclosures, such as the total of payments or the
amount financed, which is generally the loan amount less the prepaid
finance charge. The August 2009 Closed-End Proposal would require
creditors to disclose the loan amount, defined as the principal amount
the consumer will borrow as reflected in the loan contract. See
proposed Sec. 226.38(a)(1). Participants in consumer testing were able
to identify the exact loan amount based on this disclosure. 74 FR
43292, Aug. 26, 2009. The Board noted that the loan amount is a core
loan term that the consumer should be able to verify readily from the
disclosure. Furthermore, the disclosure would alert the consumer to the
financing of points and fees.
Accordingly, the Board proposes Sec. 226.23(a)(5)(i)(A) to include
the loan amount disclosed under Sec. 226.38(a)(1) in the definition of
``material disclosures.'' This would not significantly increase
creditors' burden because this amount presumably is reflected in other
documents, such as the promissory note. However, to reduce the
likelihood of rescission claims based on minor discrepancies between
the disclosure and loan documents that are unlikely to affect a
consumer's decision-making, the Board proposes to provide a tolerance
for the disclosure of the loan amount.
Tolerances. As discussed above, this proposal would provide a
tolerance for the loan amount modeled after the tolerances for the
finance charge created by Congress in 1995. Specifically, proposed
Sec. 226.23(a)(5)(iii)(A) would provide that the loan amount
disclosure would be considered accurate for purposes of rescission if
the disclosed loan amount (1) is understated by no more than [frac12]
of 1 percent of the face amount of the note or $100, whichever is
greater; or (2) is greater than the amount required to be disclosed.
Proposed Sec. 226.23(a)(5)(iii)(B) would provide a special tolerance
for a refinancing with a creditor other than the current holder of the
debt obligation if there is no new advance and no consolidation of
existing loans. Under those circumstances, the loan amount would be
considered accurate if the disclosed loan amount (1) is understated by
no more than 1 percent of the face amount of the note or $100,
whichever is greater; or (2) is greater than the amount required to be
disclosed. These tolerances would be consistent with the tolerances
applicable to the credit limit disclosed for HELOCs under proposed
Sec. 226.15(a)(5)(iii).
Proposed comment 23(a)(5)(iii)-2 would clarify that if there is no
new advance of money and no consolidation of existing loans, a
refinancing with the current holder who is not the original creditor is
subject to the special
[[Page 58616]]
tolerance for the loan amount set forth in Sec. 226.23(a)(5)(iii)(B).
However, a new transaction under Sec. 226.20(a)(1) with the original
creditor who is also the current holder is exempt from rescission under
Sec. 226.23(f)(2). Proposed comment 23(a)(5)(iii)-3 would clarify that
the term ``new advance'' would have the same meaning as in proposed
Sec. 226.23(f)(2)(ii).
Proposed comment 23(a)(5)(iii)-1 would clarify that if the mortgage
is a HOEPA loan, then the tolerance for the amount borrowed as provided
in Sec. 226.32(c)(5) would apply to the disclosure of the loan amount
for purposes of rescission. For example, the loan amount for a HOEPA
loan would be treated as accurate if it is not more than $100 above or
below the amount required to be disclosed.
As stated above, the Board proposes to model the tolerance for the
loan amount on the tolerances provided by Congress in 1995 for
disclosure of the finance charge. However, the Board recognizes that
the loan amount is typically smaller than the finance charge. The Board
requests comment on whether it should decrease the tolerance in light
of the difference between the amount of the finance charge and the loan
amount. On the other hand, the Board recognizes that Congress set the
$100 in 1995 and a higher dollar figure may be more appropriate at this
time. Alternatively, it may be more appropriate to link the dollar
figure to an inflation index, such as the Consumer Price Index. Thus,
the Board also requests comments on whether the tolerance should be set
at a higher dollar figure, or linked to an inflation index, such as the
Consumer Price Index. In addition, due to compliance concerns, the
Board has not proposed a special tolerance for the loan amount in
connection with foreclosures as is provided for the finance charge. The
Board solicits comment on this approach. Finally, the Board solicits
comment on whether the proposed tolerances should conform to the
tolerance for HOEPA loans, which would mean that the loan amount would
be treated as accurate if it is not more than $100 above or below the
amount required to be disclosed.
23(a)(5)(i)(B) Loan Term
Currently, TILA and Regulation Z do not require disclosure of the
loan term, although a consumer could conceivably calculate the loan
term from the number of payments and the due dates or periods of
payments, which are material disclosures. TILA Sections 103(u),
128(a)(6); 15 U.S.C. 1602(u), 1638(a)(6); Sec. Sec. 226.18(g),
226.23(a)(3) n.48. The loan term is the period of time to repay the
obligation in full. However, consumer testing showed that consumers
were not able to readily identify the loan term from the number of
payments and due dates, particularly for loans such as adjustable-rate
mortgages that have multiple payment levels. 74 FR 43292, Aug. 26,
2009. Accordingly, the August 2009 Closed-End Proposal would require
creditors to disclose prominently the loan term, while making the
disclosure of the number of payments less prominent than it is under
the current regulation. See proposed Sec. 226.38(a)(2), (e)(5)(i). The
disclosure of the loan term would clearly convey the time period for
repayment, which would help consumers evaluate whether the loan is
appropriate for them. For example, the loan term would alert consumers
to a balloon payment. For a 10-year loan with a balloon payment due in
year 10 and an amortization schedule of 30 years, the proposed
disclosure would state that the loan term was for 10 years. A consumer
considering this loan could then evaluate whether that loan term is
appropriate for his or her situation.
Therefore, the Board proposes Sec. 226.23(a)(5)(i)(B) to include
the loan term disclosed under Sec. 226.38(a)(2) in the definition of
``material disclosures,'' and, for the reasons discussed below, to
remove the number of payments from the definition. Including the loan
term as a material disclosure should not expose creditors to increased
risk, because it is the same concept as the number of payments, which
is currently a material disclosure. Moreover, the loan term is a fixed
number that is not dependent on other aspects of the transaction, such
as the interest rate. The Board does not believe a tolerance for loan
term is necessary, but seeks comment on this issue.
23(a)(5)(i)(C) Loan Type
Currently, Sec. 226.18(f) requires creditors to disclose certain
information about variable-rate features, as applicable. Current
comment 23(a)(3)-2 provides that the failure to provide information
about the APR also includes the failure to inform the consumer of the
existence of a variable-rate feature, which is a material disclosure.
Consumer testing showed, however, that the current variable-rate
disclosure did not clearly convey whether the loan had a fixed- or
variable-rate. 74 FR 43292, Aug. 26, 2009. Accordingly, the August 2009
Closed-End Proposal would require the creditor to disclose whether a
loan is a fixed-rate, adjustable-rate, or step-rate loan. See proposed
Sec. 226.38(a)(3)(i). This proposed loan type disclosure would be
broader than the current requirement because it would require the
creditor to identify a loan that has a fixed or step rate, not just a
loan with a variable rate. Consumer testing showed that whether a
loan's rate is fixed or adjustable is very important to consumers
because they want to know whether their loan rate and payments may
increase. The loan type disclosure would alert consumers to the
potential for payment shock in an adjustable-rate or step-rate loan.
Accordingly, the Board proposes Sec. 226.23(a)(5)(i)(C) to include
the loan type disclosed under Sec. 226.38(a)(3)(i) in the definition
of ``material disclosures.'' The Board does not believe that correctly
disclosing the loan type would significantly increase creditors' burden
because creditors are already required to disclose a variable-rate
feature. Moreover, the Board believes the risk of incorrectly
disclosing the loan type is low, as it does not depend on mathematical
calculations, and is a major feature of the loan agreement, which the
creditor can easily identify.
23(a)(5)(i)(D) Loan Features
To inform consumers of risky loan features, the August 2009 Closed-
End Proposal would require creditors to disclose the following loan
features, as applicable: Step-payments, payment options, negative
amortization, or interest-only payments. See proposed Sec.
226.38(a)(3)(ii). Through disclosures of the loan features,
participants in consumer testing were able to easily identify the type
of loan being offered. 74 FR 43292, Aug. 26, 2009. To avoid information
overload, the creditor would be limited to disclosure of two of the
risky features. The Board noted that disclosures should clearly alert
consumers to these features before the consumer becomes obligated on
the loan. 74 FR at 43293, Aug. 26, 2009. Therefore, the Board proposes
Sec. 226.23(a)(5)(i)(D) to include the loan features disclosed under
Sec. 226.38(a)(3)(ii) in the definition of ``material disclosures.''
The loan features would inform consumers about risky features and help
consumers decide whether to rescind a loan that might be unsuitable for
their situation.
23(a)(5)(i)(E) Total Settlement Charges
Currently, TILA and Regulation Z do not require creditors to
disclose the total settlement charges, except as part of the disclosure
of the finance charge. The disclosure of settlement charges is governed
by RESPA, 12 U.S.C. 2601-2617, and implemented by HUD under Regulation
X, 24 CFR Part 3500. Under RESPA and Regulation X, creditors must
[[Page 58617]]
provide a Good Faith Estimate (GFE) of settlement costs within three
business days of application for a mortgage. Creditors must also
provide a statement of the final settlement costs at loan closing in
the HUD-1 or HUD-1A settlement statement. The GFE is subject to certain
tolerances, absent changed circumstances. RESPA and Regulation X do
not, however, provide any remedies for a violation of the accuracy
requirements.
Consumer testing conducted for the Board consistently showed that
participants wanted information about settlement costs on the TILA
disclosure to verify the loan costs and to avoid surprise costs at
closing. 74 FR 43293, Aug. 26, 2009. Accordingly, the August 2009
Closed-End Proposal would require the creditor to disclose on the final
TILA the sum of the final settlement charges as disclosed on the HUD-1
or HUD-1A settlement statement. Alternatively, the creditor could
provide the consumer with a copy of the final HUD-1 or HUD-1A
settlement statement. See proposed Sec. 226.38(a)(4). In either case,
the proposal would require the creditor to provide a disclosure of the
total settlement charges so that the consumer receives it three days
before consummation.
Because of the importance of this disclosure to consumers, the
Board proposes Sec. 226.23(a)(5)(i)(E) to include the total settlement
charges disclosed under Sec. 226.38(a)(4) in the definition of
``material disclosures.'' Correctly disclosing total settlement charges
may impose a burden on creditors, but the Board believes that any
burden on creditors would be outweighed by the benefit to consumers of
knowing their total final settlement charges before deciding whether to
rescind the transaction.
Tolerances. To reduce the likelihood that rescission claims would
arise because of minor discrepancies in the disclosure of the total
settlement charges, the Board proposes a tolerance in Sec.
226.23(a)(5)(iv). As discussed above, this tolerance would be modeled
after the tolerance for the finance charge created by Congress in 1995.
Specifically, proposed Sec. 226.23(a)(5)(iv) would provide that the
total settlement charges reflected on the TILA disclosure would be
considered accurate for purposes of rescission if the total settlement
charges disclosed are understated by no more than $100, or are greater
than the amount required to be disclosed. These tolerances would be
consistent with the proposed tolerances applicable to the disclosure of
the total of all one-time fees imposed by the creditor and any third
parties for opening a HELOC plan under proposed Sec. 226.15(a)(5)(ii).
The Board proposes to model the tolerance for the disclosure of the
total settlement charges on the narrow tolerances provided by Congress
in 1995. However, due to compliance concerns, the Board has not
proposed a special tolerance for foreclosures as is provided for the
finance charge. The Board solicits comment on this approach. Moreover,
the Board recognizes that the total settlement charges are typically
much smaller than the finance charge, and for this reason has proposed
a tolerance based on a dollar figure, rather than a percentage of the
loan amount. The Board requests comment on whether it should increase
or decrease the dollar figure. The Board also requests comment on
whether the tolerance should be linked to an inflation index, such as
the Consumer Price Index.
The Board recognizes that Regulation X contains tolerances that
limit creditors' and settlement service providers' ability to impose
charges at closing that exceed the amounts previously disclosed on the
GFE. Regulation X generally provides that certain charges may not
exceed the amount disclosed on the GFE, the sum of other charges may
not be greater than 10 percent above the sum of the amounts disclosed
on the GFE, and certain other charges are permitted to change at
settlement. See 12 CFR 3500.7(e). However, the Board does not believe
that it would be feasible to adopt this approach for the TILA
disclosure. First, the Regulation X and Regulation Z tolerances serve
different purposes. The Regulation X tolerances determine the extent to
which the amounts charged at closing can vary from the amounts
disclosed on the GFE. The Regulation Z tolerances would determine the
extent to which the total settlement charges actually disclosed can
vary from the total settlement charges required to be disclosed.
Second, the tolerances differ in the level of detail required for
analysis. The Regulation X tolerances require an analysis of specific
line items on the HUD-1, whereas the proposed Regulation Z tolerance
would be based on the total of all settlement charges as provided on
the TILA disclosure. This proposal does not currently contemplate that
the creditor or consumer would need to review the itemized list of
charges on the HUD-1 to determine whether the disclosure of the total
settlement charges is accurate for purposes of rescission under TILA.
The Board solicits comment on whether the Regulation X tolerances, or
some other tolerance based on a percentage, would be appropriate for
the disclosure of the total settlement charges on the TILA disclosure
for purposes of rescission.
23(a)(5)(i)(F) Prepayment Penalty
For HOEPA loans and higher-priced mortgage loans, prepayment
penalties are subject to certain restrictions, and the inclusion in a
HOEPA loan of a prohibited prepayment penalty is deemed a failure to
deliver a material disclosure. TILA Section 129(c), (j); 15 U.S.C.
1639(c), (j); Sec. Sec. 226.23(a)(3) n.48, 226.32(d)(3), 226.35(b)(2).
For all other mortgages, TILA and Regulation Z require disclosure of
whether or not the consumer may pay a penalty if the obligation is
prepaid in full, but this is not a material disclosure. TILA Section
128(a)(11); 15 U.S.C. 1638(a)(11); Sec. 226.18(k)(1).
Consumer testing showed that the current prepayment penalty
disclosure does not adequately inform consumers of the existence of a
penalty, the magnitude of the penalty, and under what circumstances it
would apply. 74 FR 43294, Aug. 26, 2009. Consumers with adjustable-rate
mortgages, in particular, need to be informed of the potential payment
shock of a prepayment penalty before they accept a loan, as they may be
planning to refinance the loan before the rate and payment adjust. The
August 2009 Closed-End Proposal would require all mortgage loans to
indicate the amount of the maximum prepayment penalty and the
circumstances and period in which the creditor may impose the penalty.
See proposed Sec. 226.38(a)(5). Therefore, the Board proposes Sec.
226.23(a)(5)(i)(F) to include the prepayment penalty disclosed under
Sec. 226.38(a)(5) in the definition of ``material disclosures.''
Tolerances. The Board recognizes that there is some risk of error
in disclosing the maximum penalty amount. Moreover, it does not appear
consumers need to know the exact amount of the prepayment penalty to
make a decision about whether to rescind the loan. To reduce the
likelihood that rescission claims would arise because of minor
discrepancies in the disclosure of the prepayment penalty, the Board
proposes a tolerance in Sec. 226.23(a)(5)(iv). As discussed above,
this tolerance would be modeled after the tolerances for the finance
charge created by Congress in 1995. Specifically, proposed Sec.
226.23(a)(5)(iv) would provide that the prepayment penalty would be
considered accurate for purposes of rescission if the disclosed
prepayment penalty: (1) Is understated by no more
[[Page 58618]]
than $100; or (2) is greater than the amount required to be disclosed.
The Board proposes to model the tolerance for the disclosure of the
prepayment penalty on the narrow tolerances provided by Congress in
1995 for disclosure of the finance charge. However, due to compliance
concerns, the Board has not proposed a special tolerance for
foreclosures as is provided for the finance charge. The Board solicits
comment on this approach. Moreover, the Board recognizes that the
prepayment penalty is typically much smaller than the finance charge,
and for this reason has proposed a tolerance based on a dollar figure,
rather than a percentage of the loan amount. The Board requests comment
on whether it should increase or decrease the dollar figure. The Board
also requests comment on whether the tolerance should be linked to an
inflation index, such as the Consumer Price Index.
23(a)(5)(i)(G) Annual Percentage Rate
Currently, TILA and Regulation Z require disclosure of the finance
charge expressed as an ``annual percentage rate,'' which is a material
disclosure. TILA Sections 103(u), 128(a)(4); 15 U.S.C. 1602(u),
1638(a)(4); Sec. Sec. 226.18(e), 226.23(a)(3) n.48. Sections 226.23(g)
and (h) provide tolerances for disclosure of the APR.
The APR is the only disclosure that combines interest and fees to
express the overall cost of the credit in a single number that
consumers can use to compare different terms. Consumer testing showed
that consumers did not understand the current APR disclosure, and did
not use it to evaluate loan offers. 74 FR 43296, Aug. 26, 2009. The
August 2009 Closed-End Proposal, however, would improve the disclosure
of the APR by making it a more inclusive measure of the cost of credit.
See proposed Sec. 226.38(b). The proposal would also improve the
manner in which the APR is disclosed on the TILA statement by showing
the APR in the context of other rates being offered in the market for
similar loan products. Accordingly, the Board proposes Sec.
226.23(a)(5)(i)(G) to retain the APR disclosed under Sec. 226.38(b)(1)
as a material disclosure.
The Board proposes to move the tolerances applicable to finance
charges (now called interest and settlement charges) and the APR in
current Sec. 226.23(g) and (h)(2) to proposed Sec. 226.23(a)(5)(ii)
and to make technical revisions. Specifically, proposed Sec.
226.23(a)(5)(ii) would provide a general tolerance for disclosure of
the interest and settlement charges and the APR, a special tolerance
for a refinancing with no new advance, and a special tolerance for
foreclosures. Under the general rule, the interest and settlement
charges and the APR would be considered accurate if the disclosed
interest and settlement charges are understated by no more than \1/2\
of 1 percent of the face amount of the note or $100, whichever is
greater; or are greater than the amount required to be disclosed. There
is a greater tolerance for a refinancing with a new creditor if there
is no new advance and no consolidation of existing loans. In that case,
the interest and settlement charges and the APR would be considered
accurate if the disclosed interest and settlement charges are
understated by no more than 1 percent of the face amount of the note or
$100, whichever is greater; or are greater than the amount required to
be disclosed. Finally, there is a stricter tolerance after the
initiation of foreclosure on the consumer's principal dwelling that
secures the credit transaction. In that case, the interest and
settlement charges and the APR would be considered accurate if the
disclosed interest and settlement charges are understated by no more
than $35; or are greater than the amount required to be disclosed.
Thus, the APR is treated as accurate if the disclosed APR is based on
interest and settlement charges that would be considered accurate under
the rule.
23(a)(5)(i)(H) Interest Rate and Payment Summary
Currently, TILA and Regulation Z do not require disclosure of the
interest rate, but do require disclosure of the number, amount, and due
dates or period of payments scheduled to repay the total of payments,
which are material disclosures. TILA Sections 103(u), 128(a)(6); 15
U.S.C. 1602(u), 1638(a)(6); Sec. Sec. 226.18(g), 226.23(a)(3) n.48.
The recent MDIA amendments to TILA also provide that, for ``adjustable-
rate or payment loans,'' creditors must disclose examples of the
interest rates and payments, including the maximum possible interest
rate and payment under the loan's terms. TILA Section 128(b)(2)(C); 15
U.S.C. 1638(b)(2)(C). HOEPA loans are subject to additional payment
disclosures, which are material disclosures. TILA Sections 103(u),
129(a)(2)(A); 15 U.S.C. 1602(u), 1639(a)(2)(A); Sec. Sec. 226.23(a)(3)
n.48, 226.32(c)(3), (4). For HOEPA loans, the creditor must disclose
the amount of the regular monthly (or other periodic) payment and the
amount of any balloon payment. The regular payment disclosed is
accurate if it is based on an amount borrowed that is not more than
$100 above or below the amount required to be disclosed. Section
226.32(c)(3) and (5). In addition, for HOEPA loans that are variable-
rate transactions, the creditor must disclose a statement that the
interest rate and monthly payment may increase, and the amount of the
maximum monthly payment.
Consumer testing consistently showed that consumers shop for and
evaluate a mortgage based on the interest rate and monthly payment. 74
FR 43299, Aug. 26, 2009. Consumer testing also indicated that the
current TILA payment schedule is ineffective at communicating to
consumers what could happen to their interest rate and payments for an
adjustable-rate mortgage. Thus, the August 2009 Closed-End Proposal
would add the interest rate to the TILA statement and revise the
disclosure of the payment. See proposed Sec. 226.38(c). For
adjustable-rate or step-rate loans, the proposal would require
disclosure of the interest rate and payment at consummation, the
maximum interest rate and payment at first adjustment, and the highest
possible maximum interest rate and payment. Special disclosures would
be required for loans with negatively-amortizing payment options,
introductory interest rates, interest-only payments, and balloon
payments.
Accordingly, the Board proposes Sec. 226.23(a)(5)(i)(H) to include
the interest rate and payment summary disclosed under Sec. 226.38(c)
in the definition of ``material disclosures.'' The Board believes that
adding the interest rate to the definition of material disclosures
would not unduly increase creditor burden, as the interest rate is a
key term of the loan agreement. In addition, payment information,
particularly for adjustable-rate transactions, is critical to the
consumer's evaluation of the affordability of the loan and decision of
whether to rescind.
Tolerances. Although creditors may face some risk for incorrectly
disclosing payments, the Board believes such risk is outweighed by the
benefit to consumers of knowing the payment or payments due over the
life of the loan. However, to mitigate the risk that insignificant
errors in the payment disclosures would result in an extended right to
rescind, the Board proposes a tolerance for the payments. As discussed
above, this tolerance would be modeled after the tolerance for the
finance charge created by Congress in 1995. Specifically, proposed
Sec. 226.23(a)(5)(iv) would provide that the payment summary would be
considered accurate for purposes of rescission if the
[[Page 58619]]
disclosed payment is understated by not more than $100, or is greater
than the amount required to be disclosed.
Proposed comment 23(a)(5)(iv)-1 would clarify that if the mortgage
is a HOEPA loan, then the tolerance for the regular payment as provided
in Sec. 226.32(c)(3) would apply. In a HOEPA loan, there is no
tolerance for a payment other than the regular payment. Thus, the
disclosure of the regular payment in the payment summary for a HOEPA
loan is accurate if it is based on a loan amount that is not more than
$100 above or below the amount required to be disclosed. The disclosure
of any other payment, such as the maximum monthly payment, is not
subject to a tolerance.
The Board proposes to model the tolerance for the disclosure of the
payment summary on the narrow tolerances for the finance charge
provided by Congress in 1995. However, due to compliance concerns, the
Board has not proposed a special tolerance for foreclosures as is
provided for the finance charge. The Board solicits comment on this
approach. Moreover, the Board recognizes that the payments are
typically much smaller than the finance charge, and for this reason has
proposed a tolerance based on a dollar figure, rather than a percentage
of the loan amount. The Board requests comment on whether it should
increase or decrease the dollar figure. The Board also requests comment
on whether the tolerance should be linked to an inflation index, such
as the Consumer Price Index.
23(a)(5)(i)(I) Finance Charge; Interest and Settlement Charges
TILA Section 106(a) provides that the finance charge is the sum of
all charges, payable by the consumer and imposed by the creditor as a
condition of or incident to the extension of credit. 15 U.S.C. 105(a).
The finance charge is meant to represent the cost of credit in dollar
terms, and is used to calculate the APR. Currently, TILA and Regulation
Z require disclosure of the finance charge, which is a material
disclosure. TILA Sections 103(u), 128(a)(3); 15 U.S.C. 1602(u),
1638(a)(3); Sec. Sec. 226.18(d), 226.23(a)(3) n.48. In 1995, Congress
amended TILA to provide tolerances for disclosure of the finance charge
in connection with a rescission claim.\73\ Sections 226.23(g) and (h)
currently implement these tolerances.
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\73\ Public Law 104-29 Sec. Sec. 3 and 8, 109 Stat. 274, 272
and 275 (1995), codified at 15 U.S.C. 1605(f)(2) and 1635(i)(2).
---------------------------------------------------------------------------
The August 2009 Closed-End Proposal makes the disclosure less
prominent, but would revise the disclosure to aid consumer
understanding. See proposed Sec. 226.38(e)(5)(ii). Consumer testing
showed that participants did not understand the term ``finance
charge,'' so the finance charge would be referred to as ``interest and
settlement charges.'' 74 FR 43307, Aug. 26, 2009. The proposal would
also require a brief statement that the interest and settlement charges
represent part of the total payments amount. Consumer testing suggests
that providing the interest and settlement charges in the context of
the total payments improves consumers' comprehension of the total cost
of credit.
Therefore, the Board proposes Sec. 226.23(a)(5)(i)(I) to retain
the finance charge (interest and settlement charges) disclosed under
Sec. 226.38(e)(5)(ii) as a material disclosure. Although consumer
testing suggested that the interest and settlement charges disclosure
is not as important to consumers as certain other information, the
disclosure is still important to understanding the total cost of
credit.
The Board proposes to move the tolerances applicable to finance
charges (now called interest and settlement charges) and the APR in
current Sec. 226.23(g) and (h)(2) to proposed Sec. 226.23(a)(5)(ii)
and to make technical revisions. Specifically, proposed Sec.
226.23(a)(5)(ii) would provide a general tolerance for disclosure of
the interest and settlement charges and the APR, a special tolerance
for a refinancing with no new advance, and a special tolerance for
foreclosures. Under the general rule, the interest and settlement
charges and the APR would be considered accurate if the disclosed
interest and settlement charges are understated by no more than \1/2\
of 1 percent of the face amount of the note or $100, whichever is
greater; or are greater than the amount required to be disclosed. There
is a greater tolerance for a refinancing with a new creditor if there
is no new advance and no consolidation of existing loans. In that case,
the interest and settlement charges and the APR would be considered
accurate if the disclosed interest and settlement charges are
understated by no more than 1 percent of the face amount of the note or
$100, whichever is greater; or are greater than the amount required to
be disclosed. Finally, there is a stricter tolerance after the
initiation of foreclosure on the consumer's principal dwelling that
secures the credit transaction. In that case, the interest and
settlement charges and the APR would be considered accurate if the
disclosed interest and settlement charges are understated by no more
than $35; or are greater than the amount required to be disclosed.
The Board believes these tolerances should mitigate any risk
resulting from insignificant disclosure errors related to the finance
charges (interest and settlement charges) and the APR. In the August
2009 Closed-End Proposal, the Board proposed to require more third-
party charges be included in the finance charge. See proposed Sec.
226.4(g). In light of that proposal, the Board solicits comment on
whether it should increase the finance charge tolerance, or whether the
tolerance should be linked to an inflation index, such as the Consumer
Price Index. Disclosures That Would Be Removed from the Definition of
``Material Disclosures''
As discussed above, the Board proposes to remove the following
disclosures from the definition of ``material disclosures:'' the amount
financed, the total of payments, and the number of payments. Consumer
testing has shown that these disclosures are not likely to
significantly impact a consumer's decision to enter into a mortgage
transaction. Thus, these disclosures are not likely to influence a
consumer's decision of whether to rescind.
Amount financed. Currently, TILA and Regulation Z require
disclosure of the ``amount financed,'' which is a material disclosure.
TILA Sections 103(u), 128(a)(2); 15 U.S.C. 1602(u), 1638(a)(2);
Sec. Sec. 226.18(b), 226.23(a)(3) n.48. The August 2009 Closed-End
Proposal would require disclosure of the amount financed, but the
disclosure would be less prominent than it is under the current
regulation. See proposed Sec. 226.38(e)(5)(iii). During consumer
testing, participants had difficulty understanding the disclosure of
the amount financed and some mistook it for the loan amount (thereby
under-estimating the loan amount). 74 FR 43308, Aug. 26, 2009.
Consumers stated that they would not be likely to use the disclosure to
shop for loans or to understand their loan terms. For these reasons,
the Board proposes to remove the amount financed from the definition of
``material disclosures.'' The Board believes that requiring the loan
amount as a material disclosure provides better protection for
consumers.
Total of payments. Currently, TILA and Regulation Z require
disclosure of the total of payments, which is a material disclosure.
TILA Section 103(u), 128(a)(5); 15 U.S.C. 1602(u), 1638(a)(5);
Sec. Sec. 226.18(h), 226.23(a)(3) n.48. The August 2009 Closed-End
Proposal would require disclosure of the number and total of payments,
but the
[[Page 58620]]
disclosures would be less prominent than they are under the current
regulation. Consumer testing showed that most participants did not find
the total of payments to be helpful in evaluating a loan offer. 74 FR
43306, Aug. 26, 2009. For this reason, the Board proposes to remove the
total of payments from the definition of ``material disclosures.''
Number of payments. Currently, TILA and Regulation Z require
disclosure of the number of payments, which is a material disclosure.
TILA Sections 103(u), 128(a)(6); 15 U.S.C. 1602(u), 1638(a)(6);
Sec. Sec. 226.18(g), 226.23(a)(3) n.48. The August 2009 Closed-End
Proposal would require disclosure of the number and total of payments,
but the disclosures would be less prominent than they are under the
current regulation. Consumer testing showed that most consumers did not
use the number and total of payments to evaluate a loan offer. 74 FR
43306, Aug. 26, 2009. Moreover, consumers were not able to readily
identify the loan term from the number of payments, particularly for
loans that had multiple payment levels. 74 FR 43292, Aug. 26, 2009. For
these reasons, the Board proposes to remove the number of payments from
the definition of ``material disclosures.'' As discussed above, the
Board believes that the addition of the loan term to the definition of
``material disclosures'' would provide a more meaningful benefit to
consumers.
Material Disclosures for Reverse Mortgages
The Board is proposing disclosures for open-end reverse mortgages
in Sec. 226.33 that would incorporate many of the disclosures required
by proposed Sec. 226.38 for all closed-end mortgages into the reverse
mortgage specific disclosures. Proposed Sec. 226.23(a)(5)(i) would
contain cross-references to analogous provisions in proposed Sec.
226.33. In addition, as discussed in the section-by-section analysis to
Sec. 226.33, some of the proposed new material disclosures for closed-
end mortgages do not apply to reverse mortgages and would not be
required. Thus, for reverse mortgages, the loan amount, loan term, loan
features, and payment summary would not be material disclosures because
the disclosures do not apply to, and would not be required for, reverse
mortgages. The Board requests comment on whether any of these, or
other, disclosures should be material disclosures for reverse
mortgages.
23(b) Notice of Right to Rescind
TILA Section 125(a) requires the creditor to disclose clearly and
conspicuously the right of rescission to the consumer, and requires the
creditor to provide appropriate forms for the consumer to exercise the
right to rescind. 15 U.S.C. 1635(a). Section 226.23(b) implements TILA
Section 125(a) by setting forth format, content, and timing of delivery
standards for the notice of the right to rescind for closed-end
mortgage transactions subject to the right. Section 226.23(b) also
states that the creditor must deliver two copies of the notice of the
right to rescind to each consumer entitled to rescind (one copy if the
notice is delivered in electronic form in accordance with the E-Sign
Act). The right to rescind generally does not expire until midnight
after the third business day following the latest of: (1) Consummation
of the transaction, (2) delivery of the rescission notice, or (3)
delivery of the material disclosures. TILA Section 125(a); 15 U.S.C.
1635(f); Sec. 226.23(a)(3). If the rescission notice or the material
disclosures are not delivered, a consumer's right to rescind may extend
for up to three years from consummation. TILA Section 125(f); 15 U.S.C.
1635(f); Sec. 226.23(a)(3).
As part of the 1980 Truth in Lending Simplification and Reform Act,
Congress added TILA Section 105(b), requiring the Board to publish
model disclosure forms and clauses for common transactions to
facilitate creditor compliance with the disclosure obligations and to
aid borrowers in understanding the transaction by using readily
understandable language. 12 U.S.C. 1615(b). The Board issued its first
model forms for the notice of the right to rescind certain closed-end
transactions in 1981. 46 FR 20848, Apr. 7, 1981. While the Board has
made some changes to the content of the model forms over the years, the
current Model Forms H-8 and H-9 in Appendix H to part 226 are generally
the same as when they were adopted in 1981.
The Board has been presented with a number of questions and
concerns regarding the notice requirements and the model forms.
Creditors have raised concerns about the two-copy rule (as described in
the section-by-section analysis for 15(b) above), indicating this rule
can impose litigation risks when a consumer alleges an extended right
to rescind based on the creditor's failure to deliver two copies of the
notice. In addition, particular problems with the format, content, and
timing of delivery of the notice were highlighted during the Board's
outreach and consumer testing conducted for this proposal. To address
these problems and concerns, the Board proposes to revise Sec.
226.23(b) and the related commentary. As discussed in more detail
below, the Board proposes to revise Sec. 226.23(b) to require
creditors to provide one notice of the right to rescind to each
consumer entitled to rescind. In addition, the Board proposes to revise
significantly the content of the rescission notice by setting forth new
mandatory and optional disclosures for the notice. The Board also
proposes new format and timing requirements for the notice. Moreover,
as discussed in more detail in the section-by-section analysis to
Appendix H to part 226, the Board proposes to revise significantly
Model Forms H-8 (redesignated as proposed H-8(A)) and H-9, and to add
Sample H-8(B).
23(b)(1) Who Receives Notice
TILA Section 125(a) provides that the creditor must notify ``any
obligor in a transaction subject to this section [of] the rights of the
obligor under this section.'' 15 U.S.C. 1635(a). Section 226.23(b)(1)
currently states that the creditor must deliver two copies of the
notice of the right to rescind to each consumer entitled to rescind
(one copy if the notice is delivered in electronic form in accordance
with the E-Sign Act). Obtaining from the consumer a written
acknowledgment of receipt of the notice creates a rebuttable
presumption of delivery. See 15 U.S.C. 1635(c). Comment 23(b)-1 states
that in a transaction involving joint owners, both of whom are entitled
to rescind, both must receive two copies of the notice of the right of
rescission.
The Board originally issued the two-copy rule in 1968, and opted to
retain the rule in 1981 to ensure that consumers would be able to use
one copy to rescind the loan and retain the other copy with information
about their rights. See 34 FR 2002, 2010, Feb. 11, 1969; 46 FR 20848,
20884, Apr. 7, 1981. The Board continues to believe that consumers who
rescind should be able to keep the written explanation of their rights.
However, since 1981, the need for the two-copy rule seems to have
diminished while litigation involving the two-copy rule has increased.
First, technological advances have made it easier for consumers to
retain a copy of the notice of right to rescind, which discloses their
rights. Today, consumers generally have greater access to copy
machines, scanners, and electronic mail. In consumer testing conducted
for the Board, almost all participants said that they would make and
keep a copy of the form if they decided to exercise the right.
Moreover, the two-copy rule can
[[Page 58621]]
impose litigation risks when a consumer alleges an extended right to
rescind based on the creditor's failure to deliver two copies of the
notice.\74\ Creditors have expressed concern that it is difficult to
prove, if challenged, that the consumer received two copies of the
notice at loan closing. Such case-by-case determinations consume
judicial resources and increase credit costs. Finally, the two-copy
rule would be less necessary because the Board is proposing a model
rescission notice that would include a notification of rescission at
the bottom, which the consumer could separate and deliver to the
creditor while retaining the top portion of the notice containing the
description of the consumer's rights.
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\74\ See, e.g., Smith v. Argent Mortgage Co., LLC, 2009 U.S.
App. LEXIS 10702 at *4 (10th Cir. 2009); American Mortgage Network,
Inc. v. Shelton, 486 F.3d 815, 817 (4th Cir. 2007); Wells Fargo
Bank, N.A. v. Jaaskelainen, 407 B.R. 449, 452 (D. Mass. 2009); Singh
v. Washington Mutual Bank, 2009 U.S. Dist. LEXIS 73315 at *3 (N.D.
Cal. 2009); Jobe v. Argent Mortgage Co, LLC, 2009 U.S. Dist. LEXIS
70311 at *1 (M.D. Pa. 2009); Lippner v. Deutsche Bank National Trust
Co., 544 F. Supp. 2d 695, 697 (N.D. Ill. 2008); In re Merriman, 329
B.R. 710, 714 (D. Kan. 2005).
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For these reasons, the Board proposes to revise Sec. 226.23(b)(1)
to require creditors to provide one notice of the right to rescind to
each consumer entitled to rescind. Comment 23(b)-1 would be revised to
delete references to the two-copy requirement. The Board further
proposes to remove the references to the E-Sign Act from Sec.
226.23(b)(1) and comment 23(b)-1. The requirement to provide one notice
of the right to rescind would be the same for electronic and non-
electronic disclosures. Requirements related to the E-Sign Act appear
elsewhere in Regulation Z. See Sec. Sec. 226.5(a), 226.17(a),
226.31(b).
23(b)(2) Format of Notice
The current formatting requirements for the notice of the right of
rescission appear in Sec. 226.23(b)(1) and are elaborated upon in
comment 23(b)-2. Section 226.23(b)(1) states that the notice shall be
on a separate document and the required information shall be disclosed
clearly and conspicuously. Comment 23(b)-2 provides that the notice
must be on a separate piece of paper, but may appear with other
information such as the itemization of the amount financed. Comment
23(b)-2 additionally states that the required information must be clear
and conspicuous, but no minimum type size or other technical
requirements are imposed. Comment 23(b)-2 also refers to the forms in
Appendix H to part 226 as models that the creditor may use in giving
the notice.
For the reasons discussed in the section-by-section analysis to
proposed Sec. 226.15(b), the Board proposes new format rules in Sec.
226.23(b)(2) and related commentary intended to (1) Improve consumers'
ability to identify disclosed information more readily; (2) emphasize
information that is most important to consumers who wish to exercise
the right of rescission; and (3) simplify the organization and
structure of required disclosures to reduce complexity and
``information overload.'' The Board proposes these format requirements
pursuant to its authority under TILA Section 105(a). 15 U.S.C. 1604(a).
Section 105(a) authorizes the Board to make exceptions and adjustments
to TILA to effectuate the statute's purpose, which include facilitating
consumers' ability to compare credit terms and helping consumers avoid
the uninformed use of credit. 15 U.S.C. 1601(a), 1604(a). The Board
believes that the proposed formatting rules described below would
facilitate consumers' ability to understand the rescission right and
avoid the uninformed use of credit.
Specifically, proposed Sec. 226.23(b)(2) requires the mandatory
and optional disclosures to appear on the front side of a one-page
document, separate from all other unrelated material, and to be given
in a minimum 10-point font. Proposed Sec. 226.23(b)(2) also requires
that most of the mandatory disclosures appear in a tabular format.
Moreover, the notice would contain a ``tear off'' section at the bottom
of the page, which the consumer could use to exercise the right of
rescission. Information unrelated to the mandatory disclosures would
not be permitted to appear on the notice.
Proposed comment 23(b)(2)-1 states that the creditor's failure to
comply with the format requirements set forth in Sec. 226.23(b)(2)
does not by itself constitute a failure to deliver the notice to the
consumer. However, to deliver the notice properly for purposes of Sec.
226.23(a)(3), the creditor must provide the mandatory disclosures
appearing in the notice clearly and conspicuously, as described in
proposed Sec. 226.23(b)(3) and proposed comment 23(b)(3)-1.
Section 226.17(a) generally requires that creditors must make the
disclosures required by subpart C regarding closed-end credit
(including the rescission notice) in writing in a form that the
consumer may keep. Proposed comment 23(b)(2)-2 cross references these
requirements in Sec. 226.17(a) to clarify that they apply to the
rescission notice.
23(b)(2)(i) Grouped and Segregated
Current Sec. 226.23(b)(1) states that the notice shall be on a
separate document. Comment 23(b)-2 provides that the notice must be on
a separate piece of paper, but may appear with other information such
as the itemization of the amount financed. The Board is concerned that
allowing creditors to combine the right of rescission disclosures with
other unrelated information, in any format, will diminish the clarity
of this key material, potentially cause ``information overload,'' and
increase the likelihood that consumers may not read the notice of the
right of rescission.
To address these concerns, proposed Sec. 226.23(b)(2)(i) requires
the mandatory and any optional rescission disclosures to appear on the
front side of a one-page document, separate from any unrelated
information. Only information directly related to the mandatory
disclosures may be added.
The proposal also requires that certain information be grouped
together. Proposed Sec. 226.23(b)(2)(i) requires that disclosure of
the security interest, the right to cancel, the refund of fees upon
cancellation, the effect of cancellation on the previous loan with the
same creditor, how to cancel, and the deadline for cancelling be
grouped together in the notice. This information was grouped together
in forms the Board tested, and participants generally found the
information easy to identify and understand. In addition, this proposed
grouping ensures that the information about the consumer's rights would
be separated from information at the bottom of the notice, which is
designed for the consumer to detach and use to exercise the right of
rescission.
23(b)(2)(ii) Specific Format
Current comment 23(b)-2 states that the information disclosed in
the notice must be clear and conspicuous, but no minimum type size or
other technical requirements are imposed. The Board proposes to impose
formatting requirements for this information, to improve consumers'
comprehension of the required disclosures. See proposed Sec.
226.23(b)(2)(i) and (ii). For example, some information would be
required to be in tabular format. The current model forms for the
rescission notice provide information in narrative form, which consumer
testing participants found difficult to read and understand. However,
consumer testing showed that when rescission information was presented
in a tabular format, participants found the information
[[Page 58622]]
easier to locate and their comprehension of the disclosures improved.
The proposal requires the title of the notice to appear at the top
of the notice. Certain mandatory disclosures (i.e., the security
interest, the right to cancel, the refund of fees upon cancellation,
the effect of cancellation on the previous loan with the same creditor,
how to cancel, and the deadline for cancelling in proposed Sec.
226.23(b)(3)(i)-(vi)) must appear beneath the title and be in the form
of a table. If the creditor chooses to place in the notice one or both
of the optional disclosures (e.g., regarding joint owners and
acknowledgement of receipt as permitted in proposed Sec.
226.23(b)(4)), the text must appear after the disclosures required by
proposed Sec. 226.23(b)(3)(i)-(vi), but before the portion of the
notice that the consumer may use to exercise the right of rescission
required by proposed Sec. 226.23(b)(3)(vii). If both optional
disclosures are inserted, the statement regarding joint owners must
appear before the statement acknowledging receipt. If the creditor
chooses to insert an acknowledgement as described in Sec.
226.23(b)(4)(ii), the acknowledgement must appear in a format
substantially similar to the format used in proposed Forms H-8(A) or H-
9 in Appendix H to part 226. Proposed Sec. 226.23(b)(2)(ii) also
requires the mandatory disclosures required under proposed Sec.
226.23(b)(3) and the optional disclosures permitted under Sec.
226.23(b)(4) to be given in a minimum 10-point font.
23(b)(3) Required Content of Notice
TILA Section 125(a) and current Sec. 226.23(b)(1) require that all
disclosures of the right to rescind be made clearly and conspicuously.
15 U.S.C. 1635(a). Proposed comment 23(b)(3)-1 clarifies that, to meet
the clear and conspicuous standard, disclosures must be in a reasonably
understandable form and readily noticeable to the consumer.
Current Sec. 226.23(b)(1) provides the list of disclosures that
must appear in the notice: (i) An identification of the transaction;
(ii) the retention or acquisition of a security interest in the
consumer's principal dwelling; (iii) the consumer's right to rescind
the transaction; (iv) how to exercise the right to rescind, with a form
for that purpose, designating the address of the creditor's (or it's
agent's) place of business; (v) the effects of rescission, as described
in current Sec. 226.23(d); and (vi) the date the rescission period
expires. Current comment 23(b)-3 states that the notice must include
all of the information described in Sec. 226.23(b)(1)(i)-(v). It also
provides that the requirement to identify the transaction may be met by
providing the date of the transaction. Current Model Forms H-8 and H-9
contain these disclosures. However, consumer testing of the model forms
conducted by the Board for this proposal suggests that the amount and
complexity of the information currently required to be disclosed in the
notice would result in information overload and discourage consumers
from reading the notice carefully. The Board also is concerned that
certain terminology in the current model forms would impede consumer
comprehension of the information.
To address these concerns, the Board proposes to revise the
requirements for the notice in new Sec. 226.23(b)(3). Proposed Sec.
226.23(b)(3) removes information required under current Sec.
226.23(b)(1)(i)-(v) that consumer testing indicated is unnecessary for
the consumer's comprehension and exercise of the right of rescission.
The proposed section also simplifies the information disclosed and
presents key information in plain language instead of legalistic terms.
The Board proposes these revisions pursuant to its authority in TILA
Section 125(a) which provides that creditors shall clearly and
conspicuously disclose, in accordance with regulations of the Board, to
any obligator in a transaction subject to rescission the rights of the
obligor. 15 U.S.C. 1635(a).
Identification of transaction. Current Sec. 226.23(b)(1) requires
a creditor to identify the transaction in the rescission notice;
current comment 23(b)-3 provides that the requirement that the
transaction be identified may be met by providing the date of the
transaction. As discussed in more detail in the section-by-section
analysis to proposed Sec. 226.15(b)(3)(vii), creditors, servicers and
their trade associations noted that creditors might be unable to
provide an accurate transaction date when a transaction is conducted by
mail or through an escrow agent, as is customary in some states. They
noted that in these cases, the date of the transaction cannot be
identified accurately before it actually occurs. For example, for a
transaction by mail, the creditor cannot know at the time of mailing
the rescission notice when the consumer will sign the loan documents
(i.e., the date of the transaction).
To address these concerns, the Board proposes not to require that
the transaction be identified in the rescission notice for closed-end
mortgages. Accordingly, the provision in current comment 23(b)-3 about
the date of the transaction satisfying this requirement would be
deleted as obsolete. Unlike rescission rights for HELOCs, which may
often arise for events occurring after account opening such as
increasing the credit limit, the right of rescission for closed-end
mortgages normally arises only at consummation. See section-by-section
analysis to proposed Sec. 226.15(b). In addition, as discussed in more
detail in the section-by-section analysis to proposed Sec.
226.23(b)(5), the Board proposes to require creditors to provide the
notice of the right to rescind before consummation of the transaction,
which would tie the creditor's provision of the rescission notice to
consummation of the transaction. See proposed Sec. 226.23(b)(5)(i). As
a result, the Board believes that consumers are likely to understand
from the context in which the notice is given that it is the closed-end
mortgage transaction that is giving rise to the right of rescission,
even if this is not explicitly stated in the notice.
Addition of a security interest to an existing obligation. Section
226.23(a)(1) describes two situations where a right to rescind
generally arises under Sec. 226.23: (1) a credit transaction in which
a security interest is or will be retained or acquired in a consumer's
principal dwelling; and (2) the addition to an existing obligation of a
security interest in a consumer's principal dwelling. Where a security
interest is being added to an existing obligation, consumers only have
the right to rescind the addition of the security interest and not the
existing obligation. See proposed Sec. 226.23(a)(1). The Board
believes that the right to rescind typically arises because of a credit
transaction, not because the creditor adds a security interest to an
existing obligation. Thus, for simplicity, the proposed content of the
required disclosures reference the right to cancel ``the loan.'' See
proposed Sec. 226.23(b)(3) and proposed Model Form H-8(A). The Board
solicits comment, however, on how often the right of rescission arises
from the addition to an existing obligation of a security interest in a
consumer's principal dwelling, and whether the Board should issue an
additional model form to address this situation.
23(b)(3)(i) Security Interest
Current Sec. 226.23(b)(1)(i) requires the creditor to disclose
that a security interest will be retained or acquired in the consumer's
principal dwelling. Model Forms H-8 and H-9 currently disclose the
retention or acquisition of a security interest by stating that ``[the]
transaction will result in a [mortgage/lien/security interest] [on/in]
your home'' and ``[y]our home is the security for this new
transaction,'' respectively.
[[Page 58623]]
The Board's consumer testing of a similar statement regarding a
security interest for its August 2009 Closed-End Proposal showed that
very few participants understood the statement. 74 FR 43232, Aug. 26,
2009. The Board is concerned that the current language in Model Forms
H-8 and H-9 for disclosure of the retention or acquisition of a
security interest might not alert consumers that the creditor has the
right to take the consumer's home if the consumer defaults. To clarify
the significance of the security interest, proposed Sec.
226.23(b)(3)(i) requires a creditor to provide a statement that the
consumer could lose his or her home if the consumer does not make
payments on the loan. Consumer testing of this plain-language version
of the security interest disclosure showed high comprehension by
participants.
23(b)(3)(ii) Right to Cancel
Current Sec. 226.23(b)(1)(ii) requires the creditor to disclose
the consumer's right to rescind the transaction. In a section entitled
``Your Right to Cancel,'' current Model Forms H-8 and H-9 disclose the
right by stating that the consumer has a legal right under Federal law
to cancel the transaction, without costs, within three business days
from the latest of the date of the transaction (followed by a blank to
be completed by the creditor with a date), the date the consumer
received the Truth in Lending disclosures, or the date the consumer
received the notice of the right to cancel. Consumer testing of
language similar to the disclosure in current Model Forms H-8 and H-9
showed that the current description of the right was unnecessarily
wordy and too complex for most consumers to understand and use.
In addition, during outreach regarding this proposal, industry
representatives remarked that consumers often overlook the disclosure
that the right of rescission is provided by Federal law. They also
noted that the rule requiring creditors to delay remitting funds to the
consumer until the rescission period has ended, also imposed by Federal
law, is not a required disclosure and not included in the current model
forms. See Sec. 226.23(c). Industry representatives indicated that
consumers should be notified of this delay in funding so they are not
surprised when they must wait for at least three business days after
signing the loan documents to receive any funds. To address these
problems and concerns, proposed Sec. 226.23(b)(3)(ii) requires two
statements: (1) a statement that the consumer has the right under
Federal law to cancel the loan on or before the date provided in the
notice; and (2) a statement that Federal law prohibits the creditor
from making any funds available to the consumer until after the stated
date.
23(b)(3)(iii) Fees
Current Sec. 226.23(b)(1)(iv) requires the creditor to disclose
the effects of rescission, as described in current Sec. 226.23(d). The
disclosure of the effects of rescission in current Model Forms H-8 and
H-9 is essentially a restatement of the rescission process set forth in
current Sec. 226.23(d)(1)-(3). This information consumes one-third of
the space in the model forms, is dense, and uses legalistic phrases.
Moreover, in most cases, this information is unnecessary to understand
or exercise the right of rescission.
In addition, consumer testing showed that the current model forms
do not adequately communicate that the consumer would not be charged a
cancellation fee for exercising the right of rescission. Also, the
language of the current model forms did not convey that all fees the
consumer had paid in connection with obtaining the loan (such as fees
charged by the creditor to obtain a credit report and appraisal of the
home) would be refunded to the consumer.
To clarify the results of rescission for the consumer, the Board
proposes in Sec. 226.23(b)(3)(iii) to require a plain-English
statement regarding fees, instead of restating the rescission process
in current Sec. 226.23(d). Proposed Sec. 226.23(b)(3)(iii) requires a
statement that if the consumer cancels, the creditor will not charge
the consumer a cancellation fee and will refund any fees the consumer
paid to obtain the loan. Most participants in the Board's consumer
testing of these proposed statements understood that the creditor had
to return all fees to the consumer, and could not charge fees for
rescission. The Board believes that the statement about the refund of
fees communicates important information to consumers about their rights
if they choose to cancel the transaction. In addition, the Board is
concerned that without this disclosure, consumers might believe that
they would not be entitled to a refund of fees. This mistaken belief
might discourage consumers from exercising the right to rescind where a
consumer has paid a significant amount of fees in connection with the
loan.
23(b)(3)(iv) New Advance of Money With the Same Creditor Under Sec.
226.23(f)(2)
As discussed in more detail above in the section-by-section
analysis to proposed Sec. 226.23(b)(3)(iii), current Sec.
226.23(b)(1)(iv) requires the creditor to disclose the effects of
rescission, as described in current Sec. 226.23(d). Currently,
Regulation Z provides that a consumer may rescind a refinancing with
the same creditor only to the extent of any new advance of money. Sec.
226.23(f)(2); comment 23(f)-4. If the consumer has a valid right to
rescind, the creditor must return costs made by the consumer for the
refinancing, and take any action necessary to terminate the security
interest. Sec. 226.23(d)(2); comment 23(f)-4. Then the consumer must
tender back the amount of the new advance. Sec. 226.23(d)(3); comment
23(f)-4. The consumer remains obligated to repay the previous balance
under the terms of the previous note. Accordingly, as part of
satisfying the requirement to disclose the effects of rescission,
current Model Form H-9 includes a statement that if the consumer
cancels the new loan, it will not affect the amount the consumer
presently owes, and the consumer's home is the security for that
amount.
The proposal retains a special disclosure for a new advance of
money with the same creditor (as defined in Sec. 226.23(f)(2)).
Specifically, proposed Sec. 226.23(b)(3)(iv) requires creditors to
disclose that if the consumer cancels the new loan, all of the terms of
the previous loan will still apply, the consumer will still owe the
creditor the previous balance, and the consumer could lose his or her
home if the consumer does not make payments on the previous loan.
Proposed comment 23(b)(3)-6 cross-references Sec. 226.23(f)(2) for
an explanation of when there is a new advance of money with the same
creditor, as discussed in the section-by-section analysis to proposed
Sec. 226.23(f)(2) below. In addition, proposed comment 23(b)(3)-6
clarifies that the transaction is rescindable only to the extent of the
new advance and the creditor must provide the consumer with the
information in proposed Sec. 226.23(b)(3)(iv). Finally, the proposed
comment clarifies that proposed Model Form H-9 is designed for a new
advance of money with the same creditor. See proposed Model Form H-9 in
Appendix H.
23(b)(3)(v) How to Cancel
Current Sec. 226.23(b)(1)(iii) requires the creditor to disclose
how to exercise the right to rescind, with a form for that purpose,
designating the address of the creditor's (or its agent's) place of
business. Current Model Forms H-8 and H-9 contain a statement that the
consumer may cancel by notifying the
[[Page 58624]]
creditor in writing; the form contains a blank for the creditor to
insert its name and business address. The current model forms state
that if the consumer wishes to cancel by mail or telegram, the notice
must be sent ``no later than midnight of,'' followed by a blank for the
creditor to insert a date, followed in turn by the language ``(or
midnight of the third business day following the latest of the three
events listed above).'' If the consumer wishes to cancel by another
means of communication, the notice must be delivered to the creditor's
business address listed in the notice ``no later than that time.''
Current comment 23(a)(2)-1 states that the creditor may designate
an agent to receive the rescission notification as long as the agent's
name and address appear on the notice. The Board proposes to remove
this comment, but insert similar language into proposed Sec.
226.23(b)(3)(v) and proposed comment 23(b)(3)-3. Specifically, proposed
Sec. 226.23(b)(3)(v) requires a creditor to disclose the name and
address of the creditor or of the agent chosen by the creditor to
receive the consumer's notice of rescission and a statement that the
consumer may cancel by submitting the form located at the bottom
portion of the notice to the address provided. Proposed comment
23(b)(3)-3 states that if a creditor designates an agent to receive the
consumer's rescission notice, the creditor may include its name along
with the agent's name and address in the notice.
Proposed comment 23(b)(3)-2 clarifies that the creditor may, at its
option, in addition to providing a postal address for regular mail,
describe other methods the consumer may use to send or deliver written
notification of exercise of the right, such as overnight courier, fax,
e-mail, or in-person. The Board requires the notice to include a postal
address to ensure that an easy and accessible method of sending
notification of rescission is provided to all consumers. Nonetheless,
the Board would provide flexibility to creditors to provide in the
notice additional methods of sending or delivering notification, such
as fax and e-mail, which consumers might find convenient.
23(b)(3)(vi) Deadline to Cancel
Current Sec. 226.23(b)(1)(v) requires the creditor to disclose the
date on which the rescission period expires. Current Model Forms H-8
and H-9 disclose the expiration date in the section of the notice
entitled ``How to Cancel.'' The current model forms provide a blank for
the creditor to insert a date followed by the language ``(or midnight
of the third business day following the latest of the three events
listed above)'' as the deadline by which the consumer must exercise the
right. The three events referenced are the date of the transaction, the
date the consumer received the Truth in Lending disclosures, and the
date the consumer received the notice of the right to cancel.
For the reasons set forth in the section-by-section analysis to
proposed Sec. 226.15(b), the Board proposes to eliminate the
statements about the three events and require instead that the creditor
provide the calendar date on which the three-business-day period for
rescission expires. See proposed Sec. 226.23(b)(3)(vi). Many
participants in the Board's consumer testing had difficulty using the
three events to calculate the deadline for rescission. Moreover,
participants in the Board's consumer testing strongly preferred forms
that provided a specific date over those that required them to
calculate the deadline themselves. Also, parties consulted during the
Board's outreach on this proposal stated that the model forms should
provide a date certain for the expiration of the three-business-day
period.
To ensure that consumers can readily identify the deadline for
rescinding a loan, proposed Sec. 226.23(b)(3)(vi) specifies that a
creditor must disclose in the rescission notice the calendar date on
which the three-business-day rescission period expires. If the creditor
cannot provide an accurate calendar date on which the three-business-
day rescission period expires, the creditor must provide the calendar
date on which it reasonably and in good faith expects the three-
business-day period for rescission to expire. If the creditor provides
a date in the notice that gives the consumer a longer period within
which to rescind than the actual period for rescission, the notice
shall be deemed to comply with proposed Sec. 226.23(b)(3)(vi), as long
as the creditor permits the consumer to rescind through the end of the
date in the notice. If the creditor provides a date in the notice that
gives the consumer a shorter period within which to rescind than the
actual period for rescission, the creditor shall be deemed to comply
with the requirement in proposed Sec. 226.23(b)(3)(vi) if the creditor
notifies the consumer that the deadline in the first notice of the
right of rescission has changed and provides a second notice to the
consumer stating that the consumer's right to rescind expires on a
calendar date which is three business days from the date the consumer
receives the second notice. Proposed comment 23(b)(3)-4 provides
further guidance on these proposed provisions.
The proposed approach is intended to provide consumers with
accurate notice of the date on which their right to rescind expires
while ensuring that creditors do not face liability for providing a
deadline in good faith, that later turns out to be incorrect. The Board
recognizes that this approach will further delay access to funds for
consumers in certain cases where the creditor must provide a corrected
notice. Nonetheless, the Board believes that a corrected notice is
appropriate; otherwise consumers would believe based on the first
notice that the rescission period ends earlier than the actual date of
expiration. The Board, however, solicits comment on the proposed
approach and on alternative approaches for addressing situations where
the transaction date is not known at the time the rescission notice is
provided.
Extended right to rescind. Under TILA and Regulation Z, the right
to rescind generally does not expire until midnight after the third
business day following the latest of: (1) Consummation of the
transaction, (2) delivery of the rescission notice, or (3) delivery of
the material disclosures. If the rescission notice or the material
disclosures are not delivered, a consumer's right to rescind may extend
for up to three years from consummation. TILA Section 125(f); 15 U.S.C.
1635(f); Sec. 226.23(a)(3).
For the reasons set forth in the section-by-section analysis to
proposed Sec. 226.15(b), the Board proposes a disclosure regarding the
extended right to rescind. Specifically, proposed Sec.
226.23(b)(3)(vi) requires creditors to include a statement that the
right to cancel the loan may extend beyond the date disclosed in the
notice, and in such a case, a consumer wishing to exercise the right
must submit the form located at the bottom of the notice to either the
current owner of the loan or the person to whom the consumer sends his
or her payments. A creditor may meet these disclosure requirements by
placing an asterisk after the sentence disclosing the calendar date on
which the right of rescission expires along with a sentence starting
with an asterisk that states ``In certain circumstances, your right to
cancel this loan may extend beyond this date. In that case, you must
submit the bottom portion of this notice to either the current owner of
your loan or the person to whom you send payments.'' See proposed Model
Forms H-8(A) and H-9. Without this statement, the notice would imply
that the period for exercising the right is always three business days.
In addition, this
[[Page 58625]]
statement would inform consumers to whom they should submit
notification of exercise when they have this extended right to rescind.
See proposed Sec. 226.23(a)(2). The Board requests comment on the
proposed approach to making the consumer aware of the extended right.
23(b)(3)(vii) Form for Consumer's Exercise of Right
Current Sec. 226.23(b)(1)(iii) requires the creditor to disclose
how to exercise the right to rescind, and to provide a form that the
consumer can use to rescind. Current comment 23(b)-3 permits the
creditor to provide a separate form that the consumer may use to
exercise the right or to combine that form with the other rescission
disclosures, as illustrated by the model forms in Appendix H. Current
Model Forms H-8 and H-9 explain a consumer may cancel by using any
signed and dated written statement or may use the notice by signing and
dating below the statement, ``I WISH TO CANCEL.'' Section 226.23(b)(1)
currently requires a creditor to provide two copies of the notice of
the right (one copy if delivered in electronic form in accordance with
the E-Sign Act) to each consumer entitled to rescind. The current Model
Forms contain an instruction to the consumer to keep one copy of the
two notices because it contains important information regarding the
right of rescission.
For the reasons set forth in the section-by-section analysis to
proposed Sec. 226.15(b), proposed Sec. 226.23(b)(2)(ii) and (3)(vii)
require creditors to provide a form at the bottom of the notice that
the consumer may use to exercise the right to rescind. Current comment
23(b)-3, which permits the creditor to provide a form for exercising
the right that is separate from the other rescission disclosures, would
be deleted. The creditor would be required to provide two lines on the
form for entry of the consumer's name and property address. The
creditor would have the option to pre-print on the form the consumer's
name and property address. Proposed comment 23(b)(3)-5 elaborates that
creditors are not obligated to complete the lines in the form for the
consumer's name and property address, but may wish to do so to identify
accurately a consumer who uses the form to exercise the right. Proposed
comment 23(b)(3)-5 further explains that at its option, a creditor may
include the loan number on the form. A creditor would not, however, be
allowed to request or to require that the consumer provide the loan
number on the form, such as by providing a space for the consumer to
fill in the loan number. A consumer might not be able to locate the
loan number easily and the Board is concerned that allowing creditors
to request a consumer to provide the loan number might mislead the
consumer into thinking that he or she must provide the loan number to
rescind.
Current Model Forms H-8 and H-9 contain a statement that the
consumer may use any signed and dated written statement to exercise the
right to rescind. The Board does not propose to retain such a statement
on the rescission notice because consumer testing showed that this
disclosure is unnecessary. In fact, the Board's consumer testing
results suggested that the statement might cause some consumers to
believe that they must prepare a second statement of cancellation.
Moreover, the Board believes it is unlikely that consumers who misplace
the form, and later decide to rescind, would remember the statement
about preparing their own documents. Based on consumer testing, the
Board expects that consumers would use the form provided at the bottom
of the notice to exercise the right of rescission. Participants in the
Board's testing said that if they lost the form, they would contact the
creditor to get another copy.
In addition, current Model Forms H-8 and H-9 contain a statement
that the consumer should ``keep one copy'' of the notice because it
contains information regarding the consumer's rescission rights. This
statement would be deleted as obsolete. As discussed in the section-by-
section analysis to proposed Sec. 226.23(b)(1), the proposal requires
creditors to provide only a single copy of the notice to each consumer
entitled to rescind. The notice would be revised to permit a consumer
to detach the bottom part of the notice to use as a form for exercising
the right of rescission while retaining the top portion of the notice
containing the explanation of the consumer's rights.
23(b)(4) Optional Content of Notice
Current comment 23(b)-3 states that the notice of the right of
rescission may include information related to the required information,
such as: a description of the property subject to the security
interest; a statement that joint owners may have the right to rescind
and that a rescission by one is effective for all; and the name and
address of an agent of the creditor to receive notification of
rescission.
The Board proposes to continue to allow creditors to include
additional information in the rescission notice that is directly
related to the required disclosures. Proposed Sec. 226.23(b)(4) sets
forth two optional disclosures that are directly related to the
mandatory rescission disclosures: (1) a statement that joint owners may
have the right to rescind and that a rescission by one owner is
effective for all owners; and (2) a statement acknowledging the
consumer's receipt of the notice for the consumer to initial and date.
In addition, proposed comment 23(b)(4)-1 clarifies that, at the
creditor's option, other information directly related to the
disclosures required by Sec. 226.23(b)(3) may be included in the
notice. For instance, an explanation of the use of pronouns or other
references to the parties to the transaction is directly related
information that the creditor may choose to add to the notice.
The Board notes, however, that under the proposal, only information
directly related to the disclosures may be added to the notice. See
proposed Sec. 226.23(b)(2)(i). The Board is concerned that allowing
creditors to combine disclosures regarding the right of rescission with
other unrelated information, in any format, will diminish the clarity
of this key material, potentially cause ``information overload,'' and
increase the likelihood that consumers may not read the rescission
notice.
23(b)(5) Time of Providing Notice
TILA and Regulation Z currently do not specify when the consumer
must receive the notice of the right to rescind. Current comment 23(b)-
4 states that the creditor need not give the notice to the consumer
before consummation of the transaction, but notes, however, that the
rescission period will not begin to run until the notice is given to
the consumer. As a practical matter, most creditors provide the notice
to the consumer along with the Truth in Lending disclosures and other
loan documents at loan closing.
The Board proposes to require creditors to provide the notice of
the right of rescission before consummation of the transaction. See
proposed Sec. 226.23(b)(5). The Board proposes this new timing
requirement pursuant to the Board's authority under TILA Section
105(a), which authorizes the Board to make exceptions and adjustments
to 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. 15 U.S.C. 1601(a), 1604(a). The Board
believes that the proposed timing rule would facilitate consumers'
ability to consider the rescission right and avoid the uninformed use
of credit.
[[Page 58626]]
General timing rule. Except as discussed below, the Board proposes
to require creditors generally to provide the notice of the right to
rescind before consummation of the transaction. See proposed Sec.
226.23(b)(5)(i). TILA and Regulation Z provide that a consumer may
exercise the right to rescind until midnight after the third business
day following the latest of (1) consummation, (2) delivery of the
notice of right to rescind, or (3) delivery of all material
disclosures. TILA Section 125(a); 15 U.S.C. 1635(a); Sec.
226.23(a)(3). Creditors typically use the final TILA disclosures to
satisfy the requirement to provide material disclosures, and under the
August 2009 Closed-End Proposal, the final TILA disclosures must be
provided no later than three business days before consummation.
Requiring that the rescission notice be given prior to consummation
would better ensure that consummation will be the latest of the three
events that trigger the three-business-day rescission period (assuming
that the TILA disclosures were given no later than three business days
prior to consummation). In this way, the three-business-day period
would occur directly after consummation of the transaction, a time
during which the consumer may be most focused on the transaction and
most concerned about the right to rescind it. By tying a creditor's
provision of the rescission notice to an event in the lending process
of primary importance to the consumer--consummation--this rule might
lead consumers to assess the TILA disclosures and other loan documents
with a more critical eye.
The proposal should not significantly increase compliance burden
because, as noted, currently most creditors provide the rescission
notice at loan closing, along with the TILA disclosures. As noted
above, under the August 2009 Closed-End Proposal, a creditor would be
required to provide the final TILA disclosures no later than three
business days prior to consummation. Under this proposal, a creditor
could provide the rescission notice with the final TILA disclosures,
but would not be required to do so. The creditor could provide the
notice at any time before consummation, separately from the final TILA
disclosures. The Board solicits comment on whether the rescission
notice should be required to be provided with the final TILA
disclosures. The Board also invites comment on any compliance or other
operational difficulties the proposal might cause.
Comment 23(b)-4 would be removed as inconsistent with the proposed
timing requirement. Proposed comment 23(b)(5)-1 clarifies that delivery
of the notice after consummation would violate the timing requirement
of Sec. 226.23(b)(5)(i), and that the right of rescission does not
expire until three business days after the day of late delivery if the
notice was complete and correct.
Addition of a security interest. If the right to rescind arises
from the addition of a security interest to an existing obligation as
described in proposed Sec. 226.23(a)(1), a creditor would be required
to provide the rescission notice prior to the addition of the security
interest. See proposed Sec. 226.23(b)(5)(ii). Tying a creditor's
provision of the rescission notice to the event that gives rise to the
right of rescission--the addition of the security interest--might lead
consumers to consider more closely the right to rescind. The Board
solicits comment on any compliance or other operational difficulties
this proposed rule might cause.
23(b)(6) Proper Form of Notice
Current Sec. 226.23(b)(2) states that to satisfy the disclosure
requirements of current Sec. 226.23(b)(1), the creditor must provide
the appropriate model form in current Appendix H or a substantially
similar notice. As discussed above, Appendix H currently provides Model
Form H-8 for most rescindable transactions, and Model Form H-9 for a
new advance of money by the same creditor with a new advance of money.
Before 1995, there was uncertainty about which model form to use. One
court held that a creditor could create its own nonstandard notice
form, if neither of the Board's two model forms fit the
transaction.\75\ In 1995, Congress amended TILA to provide that a
consumer would not have rescission rights based solely on the form of
written notice used by the creditor, if the creditor provided the
appropriate form published by the Board, or a comparable written
notice, that was properly completed by the creditor, and otherwise
complied with all other requirements regarding the notice. TILA Section
125(h); 15 U.S.C. 1635(h). When the Board implemented these amendments
to TILA, it revised Model Form H-9 to ease compliance and clarify that
it may be used in loan refinancings with the original creditor, without
regard to whether the creditor is the holder of the note at the time of
the refinancing. As discussed in the section-by-section analysis to
Sec. 226.23(b)(3)(iv) above, the Board now proposes to rename Model
Form H-9 as ``Rescission Model Form (New Advance of Money with the Same
Creditor)'' to further clarify the purpose of the form and ease
compliance.
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\75\ See, e.g., In re Porter, 961 F.2d 1066, 1076 (3d Cir.
1992).
---------------------------------------------------------------------------
Consumer advocates have expressed concern about creditors failing
to complete the model forms properly. For example, some courts have
held that notices with incorrect or omitted dates for the
identification of the transaction and the expiration of the right are
nevertheless adequate to meet the requirement of delivery of notice of
the right to the consumer.\76\
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\76\ See, e.g., Melfi v. WMC Mortgage Corp. 568 F.3d 309 (1st
Cir. 2009).
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To address these concerns, proposed Sec. 226.23(b)(6) provides
that a creditor satisfies Sec. 226.23(b)(3) if it provides the
appropriate model form in Appendix H, or a substantially similar
notice, which is properly completed with the disclosures required by
Sec. 226.23(b)(3). Proposed comment 23(b)(6)-1 explicitly states that
a notice is not properly completed if it lacks a calendar date or has
an incorrectly calculated calendar date for the expiration of the
rescission period. Such a notice would not fulfill the requirement to
deliver the notice of the right to rescind. As discussed in the
section-by-section analysis to proposed Sec. 226.23(b)(3)(vi) above,
however, a creditor who provides a date reasonably and in good faith
that later turns out to be incorrect would be deemed to have complied
with the requirement to provide the notice if the creditor provides a
corrected notice as described in proposed Sec. 226.23(b)(3)(vi) and
comment 23(b)-4.
23(c) Delay of Creditor's Performance
Section 226.23(c) provides that, unless the consumer has waived the
right of rescission under Sec. 226.23(e), no money may be disbursed
other than in escrow, no services may be performed, and no materials
delivered until the rescission period has expired and the creditor is
reasonably satisfied that the consumer has not rescinded. Comment
23(c)-4 states that a creditor may satisfy itself that the consumer has
not rescinded by obtaining a written statement from the consumer that
the right has not been exercised. The comment does not address the
timing of providing or signing the written statement.
Concerns have been raised that some creditors provide the consumer
with a certificate of nonrescission at closing, which is the same time
at which the consumer receives the notice of right to rescind and signs
all of the closing documents. In some cases, the consumer
[[Page 58627]]
mistakenly signs the nonrescission certificate in the rush to complete
closing. In other cases, creditors may specifically require or
encourage the consumer to sign the nonrescission certificate at
closing, rather than after the expiration of the right of rescission.
This may cause the consumer to believe that the right to rescind has
been waived or the rescission period has expired. During outreach
conducted by the Board for this proposal, industry representatives
stated that the majority of creditors have abandoned the practice of
providing a nonrescission certificate at closing. In addition, the
majority of courts to consider this issue have held that having a
consumer sign a nonrescission certificate at closing violates the
requirement under TILA and Regulation Z that the creditor provide the
notice of right to rescind ``clearly and conspicuously.'' \77\ TILA
Section 125(b); 15 U.S.C. 1635(b); Sec. 226.23(b)(1). On the other
hand, some consumers have advised the Board that their creditors
provided a nonrescission certificate at closing, which the consumers
have signed. Also, a few courts have held that having the consumer sign
a nonrescission certificate at closing is permissible under TILA and
Regulation Z.\78\ The Board is concerned that permitting consumers to
sign and date a nonrescission certificate at closing will undermine
consumers' understanding of their right to rescind.
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\77\ See, e.g., Rand Corp. v. Moua, 449 F.3d 842, 847 (8th Cir.
2009) (``Requiring borrowers to sign statements which are
contradictory and demonstrably false is a paradigm for
confusion.''); Rodash v. AIB Mortgage Co., 16 F.3d 1142, 1146 (11th
Cir. 1994), abrogated on other grounds by Veale v. Citibank, 85 F.3d
557 (11th Cir. 1996) (holding that the ``primary effect'' of
providing a nonrescission certificate at closing was to confuse the
consumer about her right to rescind).
\78\ See, e.g., ContiMortgage Corp. v. Delawder, 2001 Ohio App.
LEXIS 3410 at *12 (Ohio Ct. App. July 30, 2001) (holding that
``nothing in the statute or administrative regulations expressly
prohibits the signing of a post-dated waiver of the right of
rescission'').
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To address these concerns, the Board proposes to revise comment
23(c)-4 to state that a creditor may satisfy itself that the consumer
has not rescinded by obtaining a written statement from the consumer
that the right has not been exercised. The statement must be signed and
dated by the consumer only at the end of the three-day period. The
Board acknowledges that some creditors and consumers may be
inconvenienced by waiting three days after consummation to provide a
nonrescission certificate, but believes that this burden is outweighed
by the benefit to consumers of a better understanding of the right to
rescind.
23(d) Effects of Rescission
Background
TILA and Regulation Z provide that the right of rescission expires
three business days after the later of (1) consummation, (2) delivery
of the notice of the right to rescind, or (3) delivery of the material
disclosures. TILA Section 125(a); 15 U.S.C. 1635(a); Sec.
226.23(a)(3). During the initial three-day rescission period, the
creditor may not, directly or through a third party, disburse money,
perform services, or deliver materials. Section 226.23(c); comment
23(c)-1. If the creditor fails to deliver the notice of the right to
rescind or the material disclosures, a consumer's right to rescind may
extend for up to three years from the date of consummation. TILA
Section 125(f); 15 U.S.C. 1635(f); Sec. 226.23(a)(3).
TILA Section 125(b) and Sec. 226.23(d) set out the process for
rescission. 15 U.S.C. 1635(b). The regulation specifies that ``[w]hen a
consumer rescinds a transaction, the security interest giving rise to
the right of rescission becomes void and the consumer shall not be
liable for any amount, including any finance charge.'' Section
226.23(d)(1). The regulation also states that ``[w]ithin 20 calendar
days after receipt of a notice of rescission, the creditor shall return
any money or property that has been given to anyone in connection with
the transaction and shall take any action necessary to reflect the
termination of the security interest.'' Section 226.23(d)(2). Finally,
the regulation provides that when the creditor has complied with its
obligations, ``the consumer shall tender the money or property to the
creditor * * *.'' Section 226.23(d)(3).
TILA and Regulation Z allow a court to modify the process for
rescission. TILA Section 125(b); 15 U.S.C. 1635(b); Sec. 226.23(d)(4).
After passage of TILA in 1968, courts began to use their equitable
powers to modify the rescission procedures so that a creditor would be
assured of the consumer's valid right to rescind and ability to tender
before the creditor was required to refund costs and release its
security interest and lien position.\79\ In 1980, Congress codified
this judicial authority in the Truth in Lending Simplification and
Reform Act by providing that the rescission procedures ``shall apply
except when otherwise ordered by a court.'' \80\ Regulation Z states
that ``[t]he procedures outlined in paragraphs (d)(2) and (3) of this
section may be modified by court order.'' Section 226.23(d)(4).
---------------------------------------------------------------------------
\79\ See Williams v. Homestake Mortgage Co., 968 F.2d 1137, 1140
(11th Cir. 1992) (citing cases from the Fourth, Sixth, Ninth and
Tenth Circuits permitting judicial modification prior to Congress
enacting the judicial modification provisions of TILA).
\80\ Truth in Lending Simplification and Reform Act, Public Law
96-221, tit. VI, Sec. 612(a)(4), 94 Stat. 168, 172 (1980).
---------------------------------------------------------------------------
Concerns with the Rescission Process
The rescission process is straightforward if the consumer exercises
the right to rescind within three business days of consummation. During
this three-day period, the creditor is prohibited from disbursing any
money or property and, in most cases, the creditor has not yet recorded
its lien. Section 226.23(c). Thus, if the creditor receives a
rescission notice from the consumer, the creditor simply returns any
money paid by the consumer, such as a document preparation fee.
If the consumer exercises the right to rescind after the initial
three-day post-consummation period, however, the process is
problematic. The parties may not agree that the consumer still has a
right to rescind. For example, the creditor may believe that the
consumer's right to rescind has expired or that the creditor properly
delivered the notice of right to cancel and material disclosures.
Typically, the creditor will not release the lien or return interest
and fees to the consumer until the consumer establishes that the right
to rescind has not expired and that the consumer can tender the amount
provided to the consumer. Both consumer advocates and creditors have
urged the Board to clarify the operation of the rescission process in
the extended right context. Following is a discussion of the issues
that arise when the right to rescind is asserted after the initial
three-day period, including the effect of the consumer's notice, the
creditor's obligations upon receipt of a consumer's notice, judicial
modification, and the form of the consumer's tender.
Effect of the consumer's notice. Consumer advocates and creditors
have asked the Board to clarify the effect of the provision of the
consumer's notice of rescission on the security interest once the
initial three-day period has passed. Some consumer advocates maintain
that when a consumer sends a notice to the creditor exercising the
right to rescind, the creditor's security interest is automatically
void. A few courts have held that the security interest is void as soon
as the creditor receives the notice of rescission, regardless of the
consumer's ability to tender. However, these courts have still
[[Page 58628]]
required the consumer to repay the obligation in full.\81\
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\81\ See, e.g., Bell v. Parkway Mortgage, Inc., 309 B.R. 139
(Bankr. E.D. Pa. 2004) (holding that the court cannot modify the
automatic voiding of the security interest, but ordering the
consumer to file an amended bankruptcy plan to classify the
creditor's unsecured claim separately and provide payment in full
over the life of the plan); Williams v. BankOne, N.A., 291 B.R. 636
(Bankr. E.D. Pa. 2003) (same). Cf. Williams v. Homestake Mortgage
Co., 968 F.2d 1137, 1140 (11th Cir. 1992) (holding that rescission
of the security interest is automatic but may be conditioned on the
consumer's tender).
---------------------------------------------------------------------------
Industry representatives, on the other hand, state that courts may
condition the release of the security interest upon the consumer's
tender. Several courts have held that the creditor's receipt of a valid
notice of rescission does not automatically void the creditor's
security interest and terminate the consumer's liability for
charges.\82\ In addition, the majority of Federal circuit courts hold
that a court may condition the creditor's release of the security
interest on proof of the consumer's ability to tender.\83\
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\82\ See, e.g., American Mortgage Network v. Shelton, 486 F.3d
815, 821 (4th Cir. 2007) (``This Court adopts the majority view of
reviewing courts that unilateral notification of cancellation does
not automatically void the loan contract.''); Yamamoto v. Bank of
New York, 329 F.3d 1167, 1172 (9th Cir. 2003) (``[I]t cannot be that
the security interest vanishes immediately upon the giving of
notice. Otherwise, a borrower could get out from under a secured
loan simply by claiming TILA violations, whether or not the lender
had actually committed any.''); Large v. Conseco Fin. Servicing
Corp., 292 F.3d 49, 54-55 (1st Cir. 2002) (``The natural reading of
[15 U.S.C. 1635(b)] is that the security interest becomes void when
the obligor exercises a right to rescind that is available in a
particular case, either because the creditor acknowledges that the
right of rescission is available, or because the appropriate
decision maker has so determined.'').
\83\ See American Mortgage Network v. Shelton, 486 F.3d 815, 820
(4th Cir. 2007); Yamamoto v. Bank of New York, 329 F.3d 1167, 1172
(9th Cir. 2003); Williams v. Homestake Mortgage Co., 968 F.2d 1137,
1140 (11th Cir. 1992); FDIC v. Hughes Development Co., 938 F.2d 889,
890 (8th Cir. 1991); Brown v. Nat'l Perm. Fed. Sav. and Loan Ass'n,
683 F.2d 444, 447 (D.C. Cir. 1982); Rudisell v. Fifth Third Bank,
622 F.2d 243, 254 (6th Cir. 1980).
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Creditor's obligations upon receipt of notice. Consumer advocates
and creditors have expressed confusion about the creditor's obligations
upon receiving the consumer's notice of rescission once the initial
three-day period has passed. Some creditors use the judicial process to
resolve rescission issues. For example, some creditors seek a
declaratory judgment whether the consumer's right to rescind has
expired. Other creditors concede the consumer has a right to rescind,
but tender the refunded costs and the release of the lien to the court
with a request that the court release the funds and the lien after the
consumer tenders. Although these approaches follow the text of the
statute, they increase costs for creditors and consumers. Other
creditors do not use the judicial process. For example, some creditors
notify the consumer that the refunded costs and release of the lien
will be held in escrow until the consumer is prepared to tender. If the
consumer tenders, the creditor refunds the costs and releases the lien.
Although this process saves the parties the time and expense of a court
proceeding, concerns have been raised about creditors conditioning
rescission on tender.\84\ Finally, some creditors do not respond to the
notice of rescission, requiring consumers to go to court to enforce
their rights. Courts are divided on whether use of this approach
violates of TILA.\85\
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\84\ Compare Personias v. HomeAmerican Credit, Inc., 234 F.
Supp. 2d 817 (N.D. Ill. 2002) (upholding the creditor's rescission
offer conditioned on the consumer's tender), with Velazquez v.
HomeAmerican Credit, Inc., 254 F. supp. 2d 1043 (N.D. Ill. 2003)
(holding that neither TILA nor Regulation Z permitted the creditor
to condition rescission on the consumer's tender).
\85\ Compare Garcia v. HSBC Bank USA, N.A., 2009 U.S. Dist.
LEXIS 114299 at *15 (N.D. Ill. 2009) (holding an assignee liable
under TILA for failing to respond to a notice of rescission within
20 days), with Rudisell v. Fifth Third Bank, 622 F.2d 243, 254 (6th
Cir. 1980) (``The statute does not say what should happen if the
creditor does not tender back the property within ten days as
required under the statute due to a good faith belief that the
debtor has no right to rescind.'').
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Judicial modification. As noted above, when the consumer provides a
notice of rescission after the initial three-day period, the consumer
and creditor typically dispute whether the consumer has a right to
rescind. The parties often seek to resolve the issue in court. It
appears that most courts determine first whether the consumer's right
to rescind has expired. If the consumer's right has not expired, then
the court determines the amounts owed by the consumer and creditor, and
then the procedures for the consumer to tender.\86\ However, a minority
of courts have dismissed the case if the consumer does not first
establish the ability to tender.\87\ Courts may seek to conserve
judicial resources in cases where the consumer would not be able to
tender any amount. As a practical matter, a court might determine under
certain circumstances that a consumer would be unable to tender even
after the loan balance is reduced.
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\86\ See, e.g., Dawson v. Thomas, 411 B.R. 1, 43 (Bankr. D.C.
2008) (determining that the consumer had an extended right to
rescind because the creditor failed to deliver the material
disclosures and notice of right to rescind, then determining the
amount of consumer's tender based on the loan amount less any
amounts paid by the consumer, and permitting the consumer to tender
after the sale of the house).
\87\ See, e.g., Yamamoto v. Bank of New York, 329 F.3d 1167,
1173 (9th Cir. 2003) (affirming the district court's decision to
dismiss a case prior to determination of the merits of the
rescission claim because the consumer could not tender).
---------------------------------------------------------------------------
Consumer advocates have expressed concern that conditioning the
determination of the right to rescind on the consumer's tender can
impose a hardship on consumers. Consumers may have trouble obtaining a
refinancing for the entire outstanding loan balance, rather than a
reduced amount based on the loan balance less any interest, fees or
damages. Moreover, consumers often assert the right to rescind in
foreclosure or bankruptcy proceedings, when it is difficult for them to
obtain a refinancing.
To address these concerns, the Board in 2004 amended the Official
Staff Commentary to provide that ``[t]he sequence of procedures under
Sec. 226.23(d)(2) and (3) or a court's modification of those
procedures under Sec. 226.23(d)(4), does not affect a consumer's
substantive right to rescind and to have the loan amount adjusted
accordingly. Where the consumer's right to rescind is contested by the
creditor, a court would normally determine whether the consumer has a
right to rescind and determine the amounts owed before establishing the
procedures for the parties to tender any money or property.'' See
comment 23(d)(4)-1; 69 FR 16769, March 31, 2004. Notwithstanding this
comment, some courts have stated that the court may condition its
determination of the consumer's rescission claim on proof of the
consumer's ability to tender.\88\
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\88\ See, e.g., Mangindin v. Washington Mutual Bank, 637 F.
Supp. 2d 700 (N.D. Cal. 2009) (granting the creditor's motion to
dismiss in a rescission claim because the consumer failed to plead
the ability to tender); ING Bank v. Korn, 2009 U.S. Dist. LEXIS
73329 at *4 (W.D. Wash. May 22, 2009) (same).
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Consumer tender. As noted, consumers often assert the right to
rescind in foreclosure or bankruptcy proceedings. These consumers may
have difficulty tendering because most creditors will not refinance a
loan in such circumstances. Consumer advocates report that this problem
has worsened due to the drop in home values in the last few years. A
consumer may, however, be able to tender in installments or through
other means, such as a modification, deed-in-lieu of foreclosure, or
short sale of the property. Industry representatives, on the other
hand, have expressed concern about consumers tendering less than the
full amount due and note that these alternatives are not contained in
the statutory provisions. Several courts have permitted consumers to
tender in
[[Page 58629]]
installments,\89\ but other courts have held that a consumer must
tender the full amount due in a lump sum.\90\ Consumer advocates have
urged the Board to address whether a court may modify the consumer's
obligation to tender.
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\89\ See, e.g., Sterten v. OptionOne Mortgage Co., 352 B.R. 380
(Bankr. E.D. Pa. 2006) (permitting tender in installments); Shepeard
v. Quality Siding & Window Factory, Inc., 730 F. Supp. 1295 (D.Del.
1990) (same); Smith v. Capital Roofing, 622 F. Supp. 191 (S.D. Miss.
1985) (same).
\90\ See, e.g., Bustamante v. First Fed. Sav. & Loan Ass'n, 619
F.2d 360 (5th Cir. 1980) (holding that tender of installments into
escrow is not proper tender). Cf. American Mortgage Network, Inc. v.
Shelton, 486 F. 3d 815, 820 n.5 (4th Cir. 2007) (``This Court does
not believes that the [consumers'] offer to sell their residence to
[the creditor] for an amount determined by a non-independent
appraiser constituted `reasonable value.' '').
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The Board's Proposal
To address the problems that arise when the consumer asserts the
right to rescind after the initial three-day period has passed and to
facilitate compliance, the Board proposes to revise Sec. 226.23(d) to
provide two processes for rescission. Proposed Sec. 226.23(d)(1) would
apply only if the creditor has not, directly or indirectly through a
third party, disbursed money or delivered property, and the consumer's
right to rescind has not expired. Generally, this process would apply
during the initial three-day waiting period. Rescission in these
circumstances is self-effectuating.
Proposed Sec. 226.23(d)(2) would apply in all other cases, when
the consumer asserts the right to rescind after the initial three-day
period has expired and the loan proceeds have been disbursed or
property has been delivered. In these cases, the consumer's ability to
rescind depends on certain facts that may be disputed by the parties.
Proposed Sec. 226.23(d)(2)(i) would address how the parties may agree
to resolve a rescission claim outside of a court proceeding. The Board
believes that the parties should have flexibility to resolve a
rescission claim. As noted above, some creditors do not respond to a
consumer's notice of rescission. Thus, the proposal would require that
the creditor provide an acknowledgment of receipt within 20 calendar
days after receiving the consumer's notice of rescission and a written
statement of whether the creditor will agree to cancel the transaction.
The proposal would also set forth a process for the consumer to tender
and the creditor to release its security interest.
Proposed Sec. 226.23(d)(2)(ii) would address the effects of
rescission if the parties are in a court proceeding that has
jurisdiction over the disputed rescission claim. Consistent with the
holding of the majority of courts that have addressed this issue, the
proposal would require the consumer to tender before the creditor
releases its security interest. As in TILA and the current regulation,
the court may modify these procedures.
Legal authority. The Board proposes Sec. 226.23(d)(2) pursuant to
its authority in TILA Section 105(a). Section 105(a) authorizes the
Board to prescribe regulations to effectuate the statute's purposes and
facilitate compliance. 15 U.S.C. 1601(a), 1604(a). TILA's purposes
include facilitating consumers' ability to compare credit terms and
helping consumers avoid the uninformed use of credit. Section 105(a)
also authorizes the Board to make adjustments to the statute for any
class of transactions as in the judgment of the Board are necessary or
proper to effectuate the purposes of the statute, prevent circumvention
or evasion of the statute, or facilitate compliance with the statute.
As discussed above, the process for rescission functions well when
rescission is asserted within three days of consummation. 15 U.S.C.
1635. The Board believes TILA Section 125 was designed for consumers to
use primarily during the initial three-day period. The process set out
in TILA Section 125 does not work well, however, after the initial
three-day period when the creditor has disbursed funds and perfected
its lien, and the consumer's right to rescind may have expired. Most
creditors are reluctant to release a lien under these conditions,
particularly if the consumer is in default or in bankruptcy and would
have difficulty tendering. Thus, when a creditor receives a consumer's
notice after the initial three-day period, the rescission process is
unclear and courts are frequently called upon to resolve rescission
claims.
To address issues that arise when rescission is asserted after the
initial three-day period, the Board is proposing rules to effectuate
the statutory purpose and facilitate compliance using its authority
under TILA Section 105(a). 15 U.S.C. 1604(a). First, if the parties are
not in a court proceeding, the proposal would require the creditor to
acknowledge receipt of a notice of rescission and would provide a clear
process for the parties to resolve the rescission claim. The Board
believes that requiring creditors to acknowledge receipt of the
consumer's notice of rescission would effectuate the consumer
protection purpose of TILA. Currently, it is not clear whether a
creditor must take action upon receipt of a consumer's notice because
there may be a good faith dispute as to whether the consumer's right to
rescind has expired. The proposal would clarify that a creditor must
send a written acknowledgement within 20 calendar days of receipt of
the notice. In addition, under the proposal, the creditor must provide
the consumer with a written statement that indicates whether the
creditor will agree to cancel the transaction and, if so, the amount
the consumer must tender. This statement should assist the consumer in
deciding whether to seek to resolve the matter with the creditor or to
take other action, such as initiating a court action. Also, if the
creditor agrees to cancel the transaction, under the proposal the
creditor must release its security interest upon the consumer's tender
of the amount provided in the creditor's written statement. Thus, the
proposal would facilitate compliance with, and prevent circumvention of
TILA. Consumers would be promptly and clearly informed about the status
of their notice of rescission, and better prepared to take appropriate
action.
Second, the proposal would adjust the procedures described in TILA
Section 125 to ensure a clearer and more equitable process for
resolving rescission claims that are raised in court proceedings after
the initial three-day period has passed. 15 U.S.C. 1635. The proposal
would provide that when the parties are in a court proceeding, the
creditor's release of the security interest is not required until the
consumer tenders the principal balance less interest and fees, and any
damages and costs, as determined by the court. The Board believes that
this adjustment for transactions subject to rescission after the
initial three-day period has passed would facilitate compliance. The
sequence of procedures set forth in TILA Section 125 would seem to
require the creditor to release its security interest whether or not
the consumer can tender the funds provided to the consumer after the
initial three-day period has passed. The Board does not believe that
Congress intended for the creditor to lose its status as a secured
creditor if the consumer does not return the amount of money provided
or the property delivered. Indeed, the majority of courts that have
considered the issue condition the creditor's release of the security
interest on the consumer's proof of tender. The proposal would provide
clear rules regarding the consumer's obligation to tender before the
creditor releases its security interest.
23(d)(1) Effects of Rescission prior to the Creditor Disbursing Funds
Proposed Sec. 226.23(d)(1) would apply only if the creditor has
not, directly or
[[Page 58630]]
indirectly through a third party, disbursed money or delivered
property, and the consumer's right to rescind has not expired. The
Board believes that rescission is self-effectuating in these
circumstances. Accordingly, under proposed Sec. 226.23(d)(1)(i), when
a consumer provides a notice of rescission to a creditor, the security
interest would become void and the consumer would not be liable for any
amount, including any finance charge. Proposed comment 23(d)(1)(i)-1,
adopted from current comment 23(d)(1)-1, would emphasize that ``[t]he
security interest is automatically negated regardless of its status and
whether or not it was recorded or perfected.''
As in the current regulation, the creditor would be required to
return money paid by the consumer and take whatever steps are necessary
to terminate its security interest within 20 calendar days after
receipt of the consumer's notice. Accordingly, current Sec.
226.23(d)(2), and existing commentary would be retained and re-numbered
as proposed Sec. 226.23(d)(1)(ii). Proposed comment 23(d)(1)(ii)-3 is
adopted from current comment 23(d)(2)-3 and revised for clarity. The
proposed comment would state that the necessary steps include the
cancellation of documents creating the security interest, and the
filing of release or termination statements in the public record. If a
mechanic's or materialman's lien is retained by a subcontractor or
supplier of a creditor-contractor, the creditor-contractor must ensure
that the termination of that security interest is also reflected. The
20-calendar-day period for the creditor's action refers to the time
within which the creditor must begin the process. It does not require
all necessary steps to have been completed within that time, but the
creditor is responsible for ensuring that the process is completed.
Proposed comment 23(d)(1)(ii)-4 would clarify that the 20-calendar-
day period begins to run from the date the creditor receives the
consumer's notice. The comment would also clarify that, consistent with
proposed Sec. 226.23(a)(2)(ii)(A), the creditor is deemed to have
received the consumer's notice of rescission if the consumer provides
the notice to the creditor or the creditor's agent designated on the
notice. Where no designation is provided, the creditor is deemed to
have received the notice if the consumer provides it to the servicer.
Finally, current Sec. 226.23(d)(3) and (d)(4) and associated
commentary would be deleted to remove references to the consumer's
obligations and judicial modification, which are not applicable in the
initial three-day rescission period.
23(d)(2) Effects of Rescission After the Creditor Disburses Funds
Proposed Sec. 226.23(d)(2) would apply if the creditor has,
directly or indirectly through a third party, disbursed money or
delivered property, and the consumer's right to rescind has not expired
under Sec. 226.23(a)(3)(ii). Generally, this process would apply after
the initial three-day period has expired.
23(d)(2)(i) Effects of Rescission if the Parties Are Not in a Court
Proceeding
23(d)(2)(i)(A) Creditor's Acknowledgment of Receipt
Proposed Sec. 226.23(d)(2)(i) would address the effects of
rescission if the parties are not in a court proceeding. Proposed
comment 23(d)(2)(i)-1 would clarify that the process set forth in Sec.
226.23(d)(2)(i) does not affect the consumer's ability to seek a remedy
in court, such as an action to recover damages under section 130 of the
act, and/or an action to tender in installments. In addition, a
creditor's written statement, as described in Sec. 226.23(d)(2)(i)(B),
is not an admission by the creditor that the consumer's claim is a
valid exercise of the right to rescind.
As noted above, some creditors do not respond to the consumer's
notice of rescission. To address this issue, proposed Sec.
226.23(d)(2)(i)(A) would require that within 20 calendar days after
receiving a consumer's notice of rescission, the creditor must mail or
deliver to the consumer a written acknowledgment of receipt of the
consumer's notice. The acknowledgment must include a written statement
of whether the creditor will agree to cancel the transaction.
Proposed comment 23(d)(2)(i)(A)-1 would clarify that the 20-
calendar-day period begins to run from the date the creditor receives
the consumer's notice. The comment would also cross-reference comment
23(a)(2)(ii)(B)-1 to further clarify that the creditor is deemed to
have received the consumer's notice of rescission if the consumer
provides the notice to the servicer. TILA's legislative history
indicates that Congress intended for creditors to promptly respond to a
consumer's notice of rescission. Originally, Congress provided the
creditor with 10 days to address these matters.\91\ As part of the
Truth in Lending Simplification and Reform Act of 1980, however,
Congress increased this time period from 10 to 20 days.\92\ The
legislative history states: ``This section also increases from 10 to 20
days the time in which the creditor must refund the consumer's money
and take possession of property sold after a consumer exercises his
right to rescind. This will give creditors a better opportunity to
determine whether the right of rescission is available to the consumer
and whether it was properly exercised.'' \93\ Nonetheless, the Board
recognizes the complexities of evaluating the creditor's course of
action after receiving the consumer's notice of rescission, and
solicits comments as to whether a period greater than 20 calendar days
should be provided to the creditor particularly because the proposal
would require the creditor to provide a written statement of whether it
will agree to cancel the transaction.
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\91\ Truth in Lending Act, Public Law 90-321, tit. I, Sec.
125(b), 82 Stat. 146, 153 (1968).
\92\ Truth in Lending Simplification and Reform Act, Public Law
96-221, tit. VI, Sec. 612(a)(3), 94 Stat. 168, 175 (1980).
\93\ See S. Rep. No. 96-368, at 29 (1979), as reprinted in 1980
U.S.C.A.N.N. 236, 264.
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23(d)(2)(i)(B) Creditor's Written Statement
Proposed Sec. 226.23(d)(2)(i)(B) would set forth the requirements
for creditors who agree to cancel the transaction. The proposal would
state that if the creditor agrees to cancel the transaction, the
acknowledgment of receipt must contain a written statement, which
provides: (1) As applicable, the amount of money or a description of
the property that the creditor will accept as the consumer's tender,
(2) a reasonable date by which the consumer may tender, and (3) that
within 20 calendar days after receipt of the consumer's tender, the
creditor will take whatever steps are necessary to terminate its
security interest. Proposed comment 23(d)(2)(i)(B)-1 would clarify that
if the creditor disbursed money to the consumer, then the creditor's
written statement must state the amount of money that the creditor will
accept as the consumer's tender. For example, suppose the principal
balance owed at the time the creditor received the consumer's notice of
rescission was $165,000, the costs paid directly by the consumer at
closing were $8,000, and the consumer made interest payments totaling
$20,000 from the date of consummation to the date of the creditor's
receipt of the consumer's notice of rescission. The creditor's written
statement could provide that the acceptable amount of tender is
$137,000, or some amount higher or lower than that amount.
[[Page 58631]]
Proposed comment 23(d)(2)(i)(B)-2 would provide an example that it
would be reasonable under most circumstances to require the consumer's
tender within 60 days of the creditor mailing or delivering the written
statement. The Board seeks to balance the consumer's need for
sufficient time to seek a refinancing or other means of securing
tender, with the creditor's need to resolve the matter and possibly
resume interest charges. The Board seeks comment on whether such a time
period should be provided and, if so, whether it should be shorter or
longer.
23(d)(2)(i)(C) Consumer's Response
Proposed Sec. 226.23(d)(2)(i)(C) would set forth the requirements
for the consumer's actions in response to the creditor's written
statement described in Sec. 226.23(d)(2)(i)(B). If the creditor
disbursed money to the consumer in connection with the credit
transaction, proposed Sec. 226.23(d)(2)(i)(C)(1) would provide that
the consumer may respond by tendering to the creditor the money
described in the written statement by the date stated in the written
statement. Currently, Regulation Z requires the consumer to tender
money at the creditor's designated place of business. Section
226.23(d)(3). However, the proposal would permit the consumer to tender
money at the creditor's place of business, or any reasonable location
specified in the creditor's written statement. The Board does not
believe that the consumer's tender of money must be limited to the
creditor's place of business if tender can be accomplished at another
reasonable location, such as a settlement office.
If the creditor delivered property to the consumer, proposed Sec.
226.23(d)(2)(i)(C)(2) would provide that the consumer may respond by
tendering to the creditor the property described in the written
statement by the date stated in the written statement. As provided in
TILA and Regulation Z, the proposal would state that where this tender
would be impracticable or inequitable, the consumer may tender its
reasonable value. TILA Section 125(b); 15 U.S.C. 1635(b); Sec.
226.23(d)(3). Proposed comment 23(d)(2)(i)(C)-1, adopted from current
comment 23(d)(3)-2, would clarify that if returning the property would
be extremely burdensome to the consumer, the consumer may offer the
creditor its reasonable value rather than returning the property
itself. For example, if aluminum siding has already been incorporated
into the consumer's dwelling, the consumer may pay its reasonable
value. As provided in TILA and Regulation Z, the proposal would further
provide that at the consumer's option, tender of property may be made
at the location of the property or at the consumer's residence. TILA
Section 125(b); 15 U.S.C. 1635(b); Sec. 226.23(d)(3). Proposed comment
23(d)(2)(i)(C)-2, adopted from current comment 23(d)(3)-1, would
provide an example that if aluminum siding or windows have been
delivered to the consumer's home, the consumer may tender them to the
creditor by making them available for pick-up at the home, rather than
physically returning them to the creditor's premises.
TILA and Regulation Z provide that if the creditor does not take
possession of the money or property within 20 calendar days after the
consumer's tender, the consumer may keep it without further obligation.
TILA Section 125(b); 15 U.S.C. 1635(b); Sec. 226.23(d)(3). The Board
does not believe that this situation is likely to arise in the context
of resolving a claim outside a court proceeding and therefore, is not
proposing to include this provision. That is, the Board believes that
if the consumer provides the creditor with the amount of money or
property described in the written statement by the date requested, it
seems unlikely that the creditor would choose not to accept it. The
Board seeks comment on this approach.
23(d)(2)(i)(D) Creditor's Security Interest
Proposed Sec. 226.23(d)(2)(i)(D) would require that within 20
calendar days after receipt of the consumer's tender, the creditor must
take whatever steps are necessary to terminate its security interest.
Proposed comment 23(d)(2)(i)(D)-1 would cross-reference comment
23(d)(1)(ii)-3, described above, regarding reflection of the security
interest termination.
23(d)(2)(ii) Effect of Rescission in a Court Proceeding
23(d)(2)(ii)(A) Consumer's Obligation
Proposed Sec. 226.23(d)(2)(ii) would address the effects of
rescission if the creditor and consumer are in a court proceeding, and
the consumer's right to rescind has not expired as provided in Sec.
226.23(a)(3)(ii). With respect to the validity of the right to rescind,
proposed comment 23(d)(2)(ii)-1 would clarify that the procedures set
forth in Sec. 226.23(d)(2)(ii) assume that the consumer's right to
rescind has not expired as provided in Sec. 226.23(a)(3)(ii). Thus, if
the consumer provides a notice of rescission more than three years
after consummation of the transaction, then the consumer's right to
rescind has expired and these procedures do not apply.
Proposed Sec. 226.23(d)(2)(ii)(A) would set forth the requirements
for the consumer's obligation to tender. The consumer would be required
to tender after the creditor receives the consumer's valid notice of
rescission, but before the creditor releases its security interest. If
the creditor disbursed money to the consumer, proposed Sec.
226.23(d)(2)(ii)(A)(1) would require the consumer to tender to the
creditor the principal balance then owed less any amounts the consumer
has given to the creditor or a third party in connection with the
transaction. Tender of money may be made at the creditor's designated
place of business, or other reasonable location.
Proposed comment 23(d)(2)(ii)(A)-1 would clarify that the consumer
must tender to the creditor the principal balance owed at the time the
creditor received the consumer's notice of rescission less any amounts
the consumer has given to the creditor or a third party in connection
with the transaction. For example, suppose the principal balance owed
at the time the creditor received the consumer's notice of rescission
was $165,000, the costs paid directly by the consumer at closing were
$8,000, and the consumer has made interest payments totaling $20,000
from the date of consummation to the date the creditor received the
consumer's notice of rescission. The amount of the consumer's tender
would be $137,000. This amount may be reduced by any amounts for
damages, attorney's fees or costs, as the court may determine. Proposed
comments 23(d)(2)(ii)(A)-2 and -3 are adopted from current comments
23(d)(2)-1 and -2 regarding the creditor's obligations to refund money.
The comments are revised for clarity; no substantive change is
intended.
Proposed comment 23(d)(2)(ii)(A)-4 would clarify that there may be
circumstances where the consumer has no obligation to tender and
therefore, the creditor's obligations would not be conditioned on the
consumer's tender. For example, in the case of a new transaction with
the same creditor and a new advance of money, the new transaction is
rescindable only to the extent of the new advance. See Sec.
226.23(f)(2)(ii). Suppose the amount of the new advance was $3,000, but
the costs paid directly by the consumer at closing were $5,000. The
creditor would need to provide $2,000 to the consumer. In that case,
within 20 calendar days after the creditor's receipt of the consumer's
notice of rescission, the
[[Page 58632]]
creditor would refund the $2,000 and terminate the security interest.
As stated above, if the creditor delivered property to the
consumer, proposed Sec. 226.23(d)(2)(ii)(A)(2) would require the
consumer to tender the property to the creditor, or where this tender
would be impracticable or inequitable, tender its reasonable value. At
the consumer's option, tender of property may be made at the location
of the property or at the consumer's residence. Proposed comments
23(d)(2)(ii)(A)-5 and -6 would cross-reference comments 23(d)(2)(i)(C)-
1 and -2, described above, regarding the reasonable value and location
of property. Proposed Sec. 226.23(d)(2)(ii)(A)(3) would state that if
the creditor does not take possession of the money or property within
20 calendar days after the consumer's tender, the consumer may keep it
without further obligation.
23(d)(2)(ii)(B) Creditor's Obligation
Proposed Sec. 226.23(d)(2)(ii)(B) would require that within 20
calendar days after receipt of the consumer's tender, the creditor must
take whatever steps are necessary to terminate its security interest.
If the consumer tendered property, the creditor must return to the
consumer any amounts the consumer has given to the creditor or a third
party in connection with the transaction. Proposed comment
23(d)(2)(ii)(B)-1 would cross-reference comment 23(d)(1)(ii)-3,
described above, regarding the reflection of the security interest
termination.
23(d)(2)(ii)(C) Judicial Modification
As in the current regulation, proposed Sec. 226.23(d)(2)(ii)(C)
would recognize that a court has the authority to modify the creditor's
or consumer's obligations under the rescission procedures. Existing
comment 23(d)(4)-1 would be re-numbered as proposed comment
23(d)(2)(ii)(C)-1, and revised to clarify that the comment is meant to
address concerns about conditioning the determination of the rescission
claim on proof of the consumer's ability to tender. The comment would
clarify, consistent with the holding of the majority of courts, that
where the consumer's right to rescind is contested by the creditor, a
court would normally determine first whether the consumer's right to
rescind has expired, then the amounts owed by the consumer and the
creditor, and then the procedures for the consumer to tender any money
or property.
Proposed comment 23(d)(2)(ii)(C)-2 would provide examples of ways
the court might modify the rescission procedures. To address concerns
about whether a court may modify the consumer's obligation to tender,
the proposed comment would provide an example that a court may modify
the consumer's form or manner of tender, such as by ordering payment in
installments or by approving the parties' agreement to an alternative
form of tender.
23(e) Consumer's Waiver of Right to Rescind
Background
TILA Section 125(d) provides that the Board may authorize the
modification or waiver of any rights created under TILA's rescission
provisions, if the Board finds such action necessary to permit
homeowners to meet bona fide personal financial emergencies. 15 U.S.C.
1635(d). The Board exercised that authority under Sec. Sec. 226.15(e)
and 226.23(e), for open-end and closed-end mortgage transactions,
respectively. Those provisions state that to modify or waive the right
to rescind, a consumer must give a creditor a dated, written statement
that describes the emergency, specifically modifies or waives the right
to rescind, and bears the signature of all the consumers entitled to
rescind.\94\ Printed forms are prohibited.\95\
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\94\ Waiver of the right to rescind is more common than
modification of that right, but a consumer may modify the right to
rescind to shorten the rescission period. References in this
SUPPLEMENTARY INFORMATION and in commentary on Sec. Sec. 226.15(e)
and 226.23(e) to waiver of the right to rescind also refer to
modification of that right.
\95\ The Board authorized the use of printed waiver forms for
certain natural disasters occurring in 1993 and 1994. See Sec.
226.23(e)(2)-(4).
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Congress also has used the bona fide personal financial emergency
standard for the consumer's waiver of pre-consummation waiting periods
in HOEPA and recently in the MDIA. Sections 226.19(a) and
226.31(c)(1)(iii) implement the waiver provisions under the MDIA and
HOEPA, respectively.
Over the years, creditors have asked the Board to clarify the
procedures for waiver of rescission rights and to provide additional
examples of a bona fide personal financial emergency. Currently, the
only example of a bona fide personal financial emergency is provided in
the commentary to the waiver provisions for the pre-consummation
waiting periods required by the MDIA and HOEPA. See comments 19(a)(3)-1
and 31(c)(1)(iii)-1. The example states that the imminent sale of a
consumer's home at foreclosure is a bona fide personal financial
emergency.
Creditors have expressed concerns that consumers may have other
types of bona fide personal financial emergencies, but, given the
potential liability for failure to comply with rescission rules,
creditors are reluctant to accept waivers that do not conform to the
foreclosure example provided in the commentary. During the MDIA
rulemaking, creditors asked for additional guidance and examples of
bona fide personal financial emergencies that would allow a consumer to
waive the MDIA's pre-consummation waiting periods. Creditors offered
several examples, including the need to pay for college tuition, an
emergency medical expense, home repairs after a natural disaster, and
avoidance of late charges or an interest rate increase on an existing
home mortgage. Consumer advocates, by contrast, stated that the
definition of a bona fide personal financial emergency should be
narrowly construed, to avoid routine waivers of the right to rescind.
Consumer advocates stated that pre-consummation waiting periods should
be waived only in the case of imminent foreclosure, tax, or
condemnation sale.
When the Board finalized the MDIA rule, it stated that whether a
bona fide personal financial emergency exists is determined based on
the facts associated with individual circumstances, and that ``waivers
should not be used routinely to expedite consummation for reasons of
convenience.'' 74 FR 23289, 23296, May 19, 2009. The Board did not
adopt new examples or guidance in the final MDIA rule.
The Board's Proposal
The Board proposes to provide additional guidance regarding when a
consumer may waive the right to rescind. The proposed revisions clarify
the procedure to be used for a waiver. In addition, new examples of a
bona fide personal financial emergency would be added to the current
example of an imminent foreclosure sale. The Board proposes these new
examples as non-exclusive illustrations of other bona fide personal
financial emergencies that may justify a waiver of the right to
rescind. The Board also proposes new examples of circumstances that are
not bona fide personal financial emergencies.
Procedures. Proposed Sec. 226.23(e) and the associated commentary
clarify that the consumer may modify or waive the right to rescind if:
(1) The creditor delivers to each consumer entitled to rescind the
rescission notice required by Sec. 226.23(b), the credit term
disclosures required by Sec. 226.38 and, if applicable, the special
disclosures required by Sec. 226.32(c) for high-cost mortgage
[[Page 58633]]
transactions under HOEPA; and (2) each consumer entitled to rescind
signs and gives the creditor a dated, written statement that describes
the bona fide personal financial emergency and specifically modifies or
waives the right to rescind. Currently, comment 23(e)-1 clarifies that
the bona fide personal financial emergency must be such that loan
proceeds are needed before the rescission period ends. Proposed Sec.
226.23(e) incorporates that requirement into the regulation.
Proposed Sec. 226.23(e) provides that delivery of the disclosures
required by Sec. 226.38 and, if applicable, 226.32(c), must occur
before a consumer may waive the right to rescind. This change is
proposed for clarity and to conform Sec. 226.23(e) with waiver
provisions under Sec. Sec. 226.19(a)(3) and 226.31(c)(1)(iii).
Proposed Sec. 226.23(e) also provides that delivery of the notice of
the right of rescission required by Sec. 226.23(b) must occur before a
consumer may waive the right to rescind. This ensures that consumers
are properly informed of the right, so they can make an informed
decision whether to waive the right. Other proposed revisions to Sec.
226.23(e) clarify that each consumer entitled to rescind need not sign
the same waiver statement; a proposed conforming revision to comment
23(e)-2 is discussed below. Obsolete references in the regulation to
the use of printed forms for natural disasters occurring in 1993 and
1994 are deleted.
The Board proposes to revise comment 23(e)-2 to clarify that where
multiple consumers are entitled to rescind, the consumers may, but need
not, sign the same waiver statement. The Board proposes further to
revise a discussion in existing comment 23(e)-2 of waiver by multiple
consumers to refer to Sec. 226.2(a)(11), which establishes which
natural persons are consumers with the right to rescind. (Disclosure
requirements for closed-end credit transactions that involve multiple
consumers are discussed above in the section-by-section analysis of
proposed Sec. 226.17(d).) In addition, the Board proposes to revise
comment 23(e)-2 to conform the comment with proposed Sec. 226.23(e)
and for clarity and to redesignate the comment as comment 23(e)-1.
Bona fide personal financial emergency. Proposed comment 23(e)-2
provides additional clarification regarding bona fide personal
financial emergencies. The proposed comment contains the current
guidance under existing comments 19(a)(3)-1 and 31(c)(1)(iii)-1, that
whether the conditions for a bona fide personal financial emergency are
met is determined by the facts surrounding individual circumstances.
Proposed comment 23(e)-2 incorporates existing comment 23(e)-1 but
omits the last sentence of existing comment 23(e)-1 (``The existence of
the consumer's waiver will not, of itself, automatically insulate the
creditor from liability for failing to provide the right of
rescission.''). The Board believes this general statement regarding
liability is not helpful in determining what constitutes a bona fide
personal financial emergency.
To provide more guidance and ensure that waivers do not become
routine, proposed comment 23(e)-2 provides that a bona fide personal
financial emergency is most likely to arise in situations that involve
imminent loss of or harm to a dwelling or imminent harm to the health
or safety of a natural person. The proposal does not limit a bona fide
personal financial emergency to situations involving property damage,
health, or safety, however. Instead, the proposal is intended to
provide creditors with a general standard to use in determining whether
a particular circumstance constitutes a bona fide personal financial
emergency. Other circumstances that are similar to those described in
the proposed comment might be bona fide personal financial emergencies
under the facts presented. The proposal provides, however, that the
conditions for a waiver are not met where the consumer's statement is
inconsistent with facts known to the creditor.
Proposed comments 23(e)-2.i and -2.ii provide examples of what may
or may not constitute a bona fide personal financial emergency.
Proposed comment 23(e)-2.i provides the following as examples of a bona
fide personal financial emergency: (1) The imminent sale of the
consumer's home at foreclosure; (2) the need to fund immediate repairs
to ensure that a dwelling is habitable, such as structural repairs
needed due to storm damage; and (3) the imminent need for health care
services, such as in-home nursing care for a patient recently
discharged from the hospital. Each example assumes that the emergency
cannot be addressed unless the loan proceeds are disbursed during the
rescission period, consistent with existing comment 23(e)-1 and
proposed comment 23(e)-2. Proposed comment 23(e)-2.ii provides the
following as examples of what would not constitute a bona fide personal
financial emergency: (1) The consumer's desire to purchase goods or
services not needed on an emergency basis, even though the price may
increase if purchased after the rescission period ends; and (2) the
consumer's desire to invest immediately in a financial product, such as
purchasing securities.
In addition, proposed comment 23(e)-2.iii provides an example of a
case where the waiver conditions are not met because a waiver statement
is inconsistent with facts known to the creditor. The example provides
that, where the waiver statement claims that loan proceeds are needed
during the rescission period to abate flooding in a consumer's basement
but the creditor is aware that there is no flooding, the conditions for
waiver are not met. This example is not an exhaustive statement of
situations in which a waiver would not be valid. The comment is not
intended to impose a duty to investigate consumer claims.
The Board solicits comment regarding the proposed revisions to
Sec. 226.23(e) and accompanying commentary. In particular, the Board
requests comment on then proposed examples of circumstances that are
and are not a bona fide personal financial emergency and then proposed
an example of a case where the conditions for waiver are not met under
the proposal.
23(f) Exempt Transactions
23(f)(2)
Currently, the right of rescission does not apply to a refinancing
or consolidation by the same creditor of an extension of credit already
secured by the consumer's principal dwelling. TILA Section 125(e)(2);
15 U.S.C. 1635(e)(2); Sec. 226.23(f)(2). The ``same creditor'' means
the original creditor to whom the written agreement was initially made
payable. Comment 23(f)-4. The right of rescission applies, however, to
the extent the new amount financed exceeds the unpaid principal
balance, any earned unpaid finance charge on the existing debt, and
amounts attributed solely to the costs of the refinancing or
consolidation.
Definition of ``refinancing.'' Concerns have been raised about the
scope of the exemption because the term ``refinancing'' is not defined
and the term ``same creditor'' needs clarification. Congress added the
exemption for a same-creditor refinancing as part of the 1980 Truth in
Lending Simplification and Reform Act,\96\ but did not define
``refinancing'' or the ``same creditor.'' Regulation Z contains a
definition of ``refinancing'' for purposes of disclosures required
subsequent to consummation under Sec. 226.20(a), but does not state
[[Page 58634]]
whether this definition should be applied for purpose of the exemption
from rescission in Sec. 226.23(f). In addition, under new proposed
Sec. 226.20(a)(1), a same-creditor refinancing of a mortgage would now
be referred to as a ``new transaction.'' This change may make it more
difficult for practitioners to determine where to locate a definition
of same-creditor ``refinancing.''
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\96\ Public Law 96-221, tit. VI, Sec. 6, 94 Stat. 145, 176
(1980).
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To address this problem, the Board proposes to specifically
reference in Sec. 226.23(f)(2) the term ``new transaction'' that would
be used in proposed Sec. 226.20(a)(1). That is, instead of
``refinancing or consolidation,'' proposed Sec. 226.23(f)(2) would
reference ``a new transaction under Sec. 226.20(a)(1).'' The Board
believes that these proposed revisions to Sec. Sec. 226.20(a) and
226.23(f)(2) will clarify the scope of the rescission exemption for
consumers and creditors.
Definition of ``same creditor.'' The Board also proposes to revise
the definition of the ``same creditor'' to clarify that the exemption
applies to the original creditor who is also the current holder of the
debt obligation. Over time, the definition of the ``same creditor'' as
the ``original creditor'' has become less meaningful as fewer creditors
originate and hold mortgage loans. The Board believes that when the
exemption for a refinancing by the ``same creditor'' was written in
1980, Congress likely intended for the exemption to apply to a
portfolio lender who originated the existing mortgage with the consumer
and retained the risk for the mortgage. Presumably, in that situation,
the consumer would have developed some trust in, or at least
familiarity with, the practices of the creditor. In addition, the
current definition does little to reduce creditors' risk of rescission.
During outreach conducted by the Board for this proposal, the Board was
informed that few creditors use this exemption because they are not
certain that they were the ``original creditor'' for the transaction.
Creditors can incur liability for mistakenly using Model Form H-9 for a
new advance of money with the same creditor when they were not the
``original creditor.''
To address this problem, the Board proposes Sec. 226.23(f)(2)(i)
to define the term ``same creditor'' to mean ``the original creditor
that is also the current holder of the debt obligation.'' The proposal
would also move the definition of ``original creditor'' from the
commentary to the regulatory text. The Board believes that this
proposal would benefit consumers by limiting the exemption to only the
creditor who holds the loan's risk and with whom the consumer has an
existing relationship. Furthermore, the proposal may ease the
compliance burden and litigation risk for creditors by providing clear
guidance on the definition of the ``same creditor.''
Definition of ``new advance of money.'' The Board also proposes to
simplify the definition of a ``new advance of money.'' Currently, the
right of rescission applies to a same-creditor refinancing to the
extent the new amount financed exceeds the unpaid principal balance,
any earned unpaid finance charge on the existing debt, and amounts
attributed solely to the costs of the refinancing or consolidation.
TILA Section 125(e)(2); 15 U.S.C. 1635(e)(2); Sec. 226.23(f)(2).
Proposed Sec. 226.23(f)(2)(ii) would substitute the ``loan amount''
for the ``amount financed.'' As stated in the August 2009 Closed-End
Proposal, the Board believes that this change would simplify the
determination of the new advance; no substantive change is intended.
Proposed comment 23(f)(2)-1 would cross-reference Sec. 226.38(a)(1)
for a definition of the ``loan amount.'' As stated in the August 2009
Closed-End Proposal, proposed Sec. 226.38(a)(1) would define the
``loan amount'' as the principal amount the consumer will borrow as
reflected in the loan contract. The proposal would also clarify in the
regulation, rather than in the commentary, that if the new transaction
with the same creditor involves a new advance of money, the new
transaction is rescindable only to the extent of the new advance.
The proposal contains two changes to the commentary to clarify the
meaning of a ``new advance.'' Currently, comment 23(f)-4 states that a
new advance does not include amounts attributed solely to the costs of
the refinancing, and refers to amounts included under Sec.
226.4(c)(7), such as attorney's fees and title examination and
insurance fees, if bona fide and reasonable in amount. Under the August
2009 Closed-End Proposal, Sec. 226.4(c)(7) would no longer apply to
closed-end mortgages. Thus, proposed comment 23(f)(2)-2 would clarify
that a new advance does not includes amounts attributed solely to ``any
bona fide and reasonable'' cost of the new transaction. In addition,
proposed comment 23(f)(2)-4 would clarify that amounts that are
financed to fund an existing or newly-established escrow account do not
constitute a new advance. The term ``escrow amount'' would have the
same meaning as in 24 CFR 3500.17.
To address compliance concerns regarding use of the model forms, as
discussed in the section-by-section analysis for Sec. 226.23(b)(e)(iv)
above, Model Form H-9 would be renamed ``Rescission Model Form (New
Advance of Money with the Same Creditor).'' Proposed comment 23(f)(2)-
5, adopted from current comment 23(f)-4, would clarify that Model Form
H-9 should be used for a new advance of money with the same creditor.
Otherwise, the general rescission notice (Model Form H-8) is the
appropriate form for use by creditors.
The proposal also contains a number of revisions to the regulation
and commentary to improve clarity, but no substantive change is
intended. In particular, the commentary is revised and re-numbered to
correspond to the specific exemption.
23(f)(5)
Currently, Sec. 226.23(f)(5) provides that the right of rescission
does not apply to ``[a] renewal of optional insurance premiums that is
not considered a refinancing under Sec. 226.20(a)(5).'' Under section
226.20(a)(5), a ``refinancing'' does not include ``[t]he renewal of
optional insurance purchased by the consumer and added to an existing
transaction, if disclosures relating to the initial purchase were
provided as required by this subpart.'' The Board proposes to move this
definition to the text of proposed Sec. 226.23(f)(5). In addition, the
Board proposes to treat the renewal of optional debt cancellation
coverage and debt suspension coverage the same as the renewal of
optional insurance premiums. The Board has recently proposed to revise
and update several sections of Regulation Z to extend its provisions to
debt cancellation and debt suspension products.\97\ Thus, proposed
Sec. 226.23(f)(5) would provide that the right of rescission does not
apply to ``[a] renewal of optional credit insurance premiums, debt
cancellation coverage or debt suspension coverage, provided that the
disclosures relating to the initial purchase were provided as required
under Sec. 226.38(h).''
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\97\ See, e.g., August 2009 Closed-End Proposal, 74 FR 43232,
43278, Aug. 26, 2009 (treating debt suspension coverage in the same
manner as debt cancellation coverage for purposes of disclosing the
amount borrowed for a HOEPA loan).
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23(g) and (h)
Section 226.23(g) and (h)(2) currently provide tolerances for
disclosure of the finance charge and the APR for purposes of
rescission. As discussed in the section-by-section analysis to proposed
Sec. 226.23(a)(5), these tolerances would be moved to Sec.
226.23(a)(5)(ii).
Section 226.23(h)(1) currently provides that after the initiation
of foreclosure on the consumer's principal dwelling that secures the
credit obligation, the consumer shall have the
[[Page 58635]]
right to rescind the transaction if: (1) a mortgage broker fee that
should have been included in the finance charge was not included; or
(2) the creditor did not provide the properly completed appropriate
model form in appendix H of this part, or a substantially similar
notice of rescission. The Board proposes to move this provision and
associated commentary to proposed Sec. 226.23(g) and make technical
revisions. No substantive change is intended.
Section 226.24 Advertising
24(f) Disclosure of Rates and Payments in Advertisements for Credit
Secured by a Dwelling
24(f)(3) Disclosure of Payments
The Board is proposing to amend Sec. 226.24(f)(3) to remove an
erroneous cross reference to Sec. 226.24(c). Section 226.24(f)(3)
imposes certain requirements on advertisements for credit secured by a
dwelling that state the amount of any payment.\98\ Section
226.24(f)(3)(i) contains the introductory language, ``In addition to
the requirements of paragraph (c) of this section,'' before prescribing
the applicable requirements. Section 226.24(c), however, imposes
certain requirements on advertisements that state a rate of finance
charge, not the amount of any payment. Accordingly, proposed Sec.
226.24(f)(3)(i) would omit the inappropriate reference to ``paragraph
(c) of this section.'' No substantive change is intended.
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\98\ The Board added Sec. 226.24(f) as part of the July 2008
HOEPA Final Rule. See 73 FR 44522, 44601-44602; Jul. 30, 2008.
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Section 226.31 General Rules
Section 226.31 provides general rules that relate to the
disclosures for reverse mortgages under Sec. 226.33 and for high-cost
mortgages under Sec. 226.32.
31(b) Form of Disclosures
Under Sec. 226.31(b), a creditor may give a consumer the
disclosures required by Sec. Sec. 226.32 and 226.33 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.). The proposal would revise Sec. 226.31(b) to permit,
under certain circumstances, the proposed disclosures required for
reverse mortgage under Sec. 226.33(b) (the ``Key Questions'' document)
to be provided to a consumer in electronic form without regard to the
requirements of the E-Sign Act.
Current Sec. Sec. 226.5(a)(1) and 226.17(a)(1) contain similar
exceptions to the E-Sign Act's notice and consent requirements for
(among others) the application disclosures required by Sec. Sec.
226.5b and 226.19(b), respectively. The Board also proposed similar
exceptions for the ``Key Questions'' disclosures in the August 2009
Closed-End and HELOC Proposals. See 74 FR 43232, 43323, Aug. 26, 2009;
74 FR 43428, 43442, Aug. 26, 2009. The purpose of this exception from
the E-Sign Act's notice and consent requirements is to facilitate
credit shopping. When proposing the current 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, Nov. 9, 2007.
This exception would not be extended to the disclosures that would
be provided within three business days after application under proposed
Sec. 226.33(d)(1) and (d)(3). The credit shopping process takes place
primarily when a consumer reviews applications and associated
disclosures and decides whether to 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 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.
31(c) Timing of Disclosure
31(c)(1) Disclosures for Certain Closed-End Home Mortgages
31(c)(1)(iii) Consumer's Waiver of Waiting Period Before Consummation
Background
TILA Section 103(aa) establishes a category of high-cost, closed-
end mortgage loans generally referred to as ``HOEPA loans''. 15 U.S.C.
1602(aa). TILA Section 129(b)(1) provides that a creditors must make
special disclosures required for HOEPA loans at least three business
days before consummation. 15 U.S.C. 1639(b)(1). The Board implemented
that requirement in Sec. 226.31(c)(1).
TILA Section 129(b)(3) provides that the Board may authorize the
modification of or waiver of rights provided for HOEPA loans if the
Board finds such action necessary to permit homeowners to meet bona
fide personal financial emergencies. 15 U.S.C. 1639(b)(3). The Board
exercised that authority to allow a consumer to modify or waive the
requirement under Sec. 226.31(c)(1) that consumers receive special
disclosures for HOEPA loans at least three business days before
consummation. Sec. 226.31(c)(1)(iii). To waive the right, the consumer
must give the creditor a dated, written statement that describes the
bona fide personal financial emergency, specifically modifies or waives
the waiting period, and bears the signature of all the consumers
entitled to the waiting period.\99\ Printed forms are prohibited.\100\
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\99\ A consumer need not waive a waiting period entirely and may
modify--that is, shorten--a waiting period. References to waiver of
a waiting period in this Supplementary Information and in commentary
Sec. 226.31(c)(1)(iii) also refer to modification of a waiting
period.
\100\ The Board authorized the use of printed waiver forms for
certain natural disasters occurring in 1993 and 1994. See Sec. Sec.
226.23(e)(2)-(4) and Sec. 226.31(c)(1)(iii).
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The requirements for modifying or waiving a pre-consummation
waiting period under Sec. 226.31(c)(1)(iii) are substantially similar
to the requirements for waiving a pre-consummation waiting period under
Sec. 226.19(a)(3) and the right to rescind under Sec. Sec. 226.15(e)
and 226.23(e). Over the years, creditors have asked the Board to
clarify the procedures for waiver and provide additional examples of a
bona fide personal financial emergency, as discussed in detail above in
the section-by-section analysis of Sec. 226.23(e).
The Board's Proposal
For the reasons discussed above in the section-by-section analysis
of proposed
[[Page 58636]]
Sec. 226.23(e), the Board proposes to clarify the procedure to be used
for a waiver. The Board also proposes to provide new examples of
circumstances that are a bona fide personal financial emergency (in
addition to the current example of an imminent foreclosure sale, see
comment 31(c)(1)(iii)-1) and circumstances that are not a bona fide
personal financial emergency.
Procedures. Proposed Sec. 226.31(c)(1)(iii) and the associated
commentary clarify that the consumer may modify or waive a waiting
period, after the consumer receives the HOEPA loan disclosures required
by Sec. 226.31(c)(1), if each consumer primarily liable on the legal
obligation signs and gives the creditor a dated, written statement that
describes the bona fide personal financial emergency, specifically
modifies or waives the waiting period, and bears the consumer's
signature. Proposed Sec. 226.31(c)(1)(iii) provides that loan proceeds
must be needed during the waiting period. This is consistent with
comment 31(c)(1)(iii)-1, which incorporates by reference a
substantially similar requirement under Sec. 226.23(e).
The Board proposes to revise Sec. 226.31(c)(1)(iii) and comment
31(c)(1)(iii)-1 to state that each consumer primarily liable on the
obligation (rather than ``each consumer entitled to the waiting
period'') must sign a waiver statement for a waiver to be effective,
for clarity and conformity with Sec. 226.19(a)(3). Other proposed
revisions to Sec. 226.31(c)(1)(iii) and comment 31(c)(1)(iii)-1
clarify that each consumer primarily liable on the obligation may sign
a separate waiver statement.
The Board also proposes to move the discussion of circumstances
that are a bona fide personal financial emergency in comment
31(c)(1)(iii)-1 to a new comment 31(c)(1)(iii)-2, to conform the waiver
commentary under Sec. 226.31(c)(1)(iii) with the waiver commentary
under Sec. Sec. 226.15(e) and 226.23(e). Proposed comment
31(c)(1)(iii)-2 is discussed below.
Bona fide personal financial emergency. Proposed comment
31(c)(1)(iii)-2 provides clarification regarding bona fide personal
financial emergencies. The comment contains the current guidance under
existing comment 31(c)(1)(iii)-1, that whether the conditions for a
bona fide personal financial emergency are met is determined by the
facts surrounding individual circumstances.
To provide additional guidance, proposed comment 31(c)(1)(iii)-2
also states that a bona fide personal financial emergency typically,
but not always, will involve imminent loss of or harm to a dwelling or
harm to the health or safety of a natural person. Proposed comment
31(c)(1)(iii)-2 also states that a waiver is not effective if a
consumer's waiver statement is inconsistent with facts known to the
creditor. Further, proposed comment 31(c)(1)(iii)-2 states that
creditors may rely on the examples and other commentary provided in
comment 23(e)-2 to determine whether circumstances are or are not a
bona fide personal financial emergency. Those examples are discussed
above in the section-by-section analysis of proposed Sec. 226.23(e).
Written waiver statement. The Board also proposes to revise comment
31(c)(1)(iii)-1 to state that a waiver statement must be ``written''
rather than ``handwritten''. Since the time comment 31(c)(1)(iii)-1 was
adopted, use of personal computers and printers has increased
significantly. The commentary on other waiver provisions under
Regulation Z uses the term ``written'' rather than ``handwritten'',
moreover. See comments 15(e)-2, 19(a)(3)-1, and 23(e)-2. Using the term
``written'' would promote consistency among the waiver comments. A
consumer (or a consumer's designee, such as a housing counselor,
unrelated to the creditor or loan originator) may write a waiver
statement by hand, typewriter, computer, or some other means.
Nevertheless, Sec. 226.31(c)(1)(iii) and the other waiver provisions
continue to prohibit the use of printed forms.
The Board solicits comment regarding the proposed revisions to
Sec. 226.31(c)(1)(iii). In particular, the Board requests comment
regarding the proposed commentary stating that creditors may rely on
commentary on Sec. 226.23(e) for proposed examples of circumstances
that are and are not a bona fide personal financial emergency.
31(c)(2) Disclosures for Reverse Mortgages
The proposed rule would remove the timing rules for reverse
mortgage disclosures from Sec. 226.31(c)(2) and instead cross-
reference the timing rules in proposed Sec. 226.33(d), discussed in
the section-by-section analysis of that section.
31(d) Basis of Disclosures and Use of Estimates
31(d)(2) Estimates
Section 226.31(d)(2) provides for the use of estimates in
disclosures. Under this section, if any information necessary for an
accurate disclosure is unknown to the creditor, the creditor must make
the disclosure based on the best information reasonably available at
the time the disclosure is provided, and state clearly that the
disclosure is an estimate. Proposed Sec. 226.19(a)(2) in the Board's
August 2009 Closed-End Proposal would limit a creditors' use of
estimates in certain closed-end mortgage disclosures. Under the
proposal, the rules in Sec. 228.19(a), including the limits on using
estimated disclosures in Sec. 226.19(a)(2), would apply to the
disclosures for closed-end reverse mortgages, as discussed in the
section-by-section analysis to Sec. 226.33(d)(3). Accordingly, Sec.
226.31(d)(2) would be revised and comment 31(d)(2)-2 added to clarify
that the use of estimates would be subject to the restrictions in
proposed Sec. 226.19(a)(2). The Board requests comment on whether
there are specific terms required to be disclosed for reverse mortgages
in Sec. 226.33(c) that a creditor may need to estimate in final
closed-end reverse mortgage disclosures.
Section 226.32 Requirements for Certain Closed-End Mortgages
32(a) Coverage
32(a)(1)
32(a)(1)(ii)
As discussed in detail below, the Board is proposing to revise the
definition of ``points and fees'' for purposes of HOEPA coverage, in
Sec. 226.32(b)(1). Under the points and fees test in Sec.
226.32(a)(1)(ii), HOEPA coverage is determined by calculating whether
the total points and fees exceeds 8 percent of the total loan amount
(or a fixed-dollar alternative). Comment 32(a)(1)(ii)-1 explains how to
determine the total loan amount for this purpose and provides several
examples. The Board is proposing to revise the comment to be consistent
with the proposed revisions to Sec. 226.32(b)(1). Proposed comment
32(a)(1)(ii)-1 would state that, for purposes of determining the total
loan amount, a transaction's prepaid finance charge and amount financed
are determined without applying Sec. 226.4(g).
32(a)(2)
32(a)(2)(ii)
Section 226.32 implements TILA Section 129 by providing rules for
certain high-cost mortgages. TILA Section 129 exempts reverse mortgage
transactions as defined in TILA Section 103(bb). 15 U.S.C. 1639. Among
the restrictions on high-cost mortgage loans are restrictions on
balloon payments and negative amortization. In reverse mortgages,
consumers do not make
[[Page 58637]]
regular periodic payments. Instead, interest charges and fees are added
to the consumer's loan balance, causing negative amortization. In
addition, consumers repay a reverse mortgage in a single payment when
the loan becomes due. For these reasons, a closed-end reverse mortgage
that meets the definition of a high-cost mortgage loan (because the
annual percentage rate or points and fees exceed those specified in
Sec. 226.32(a)(1)) would be prohibited by Section 129 of TILA.
Consequently, Congress exempted reverse mortgages from Section 129 and
instead imposed the disclosure requirements in TILA Section 138. (In
addition, open-end reverse mortgages are covered by TILA Section 138
even though open-end credit plans are exempt from TILA Section 129.)
TILA Section 103(bb) defines the term ``reverse mortgage
transaction'' to mean, among other things, a nonrecourse transaction.
15 U.S.C. 1602(bb). That is, the reverse mortgage must limit the
homeowner's liability under the contract to the proceeds of the sale of
the home (or a lesser amount specified in the contract). Consequently,
if a closed-end reverse mortgage allows recourse against the consumer,
and the transaction is a high-cost mortgage loan under Sec. 226.32,
the transaction is subject to all the requirements of Sec. 226.32
including the limitations concerning balloon payments and negative
amortization.
As discussed in the section-by-section analysis to Sec. 226.33
below, the proposed rule would modify the definition of a reverse
mortgage for the purposes of disclosures and other substantive
protections to include reverse mortgages that allow recourse against
the consumer (that is, that do not limit the consumer's liability under
the contract to the proceeds from the sale of the home or a lesser
specified amount). Reverse mortgages that allow for recourse against
the consumer present even greater consumer protection concerns than
nonrecourse reverse mortgages because the consumer or consumer's estate
could be liable for significantly more than the home is worth when such
a reverse mortgage becomes due. In addition, for these same reasons,
the proposed rule would preserve the narrow exemption for nonrecourse
reverse mortgages from the high-cost loan provisions in Sec.
226.32(a)(2)(ii). Current comment 33(a)-1, which discusses the
nonrecourse limitation, would be moved to comment 32(a)(2)(ii)-1.
32(b) Definitions
32(b)(1)
In the August 2009 Closed-End Proposal, the Board proposed to
expand the definition of the finance charge and APR to include most
closing costs, including third-party closing costs. 74 FR 43232, 43241,
Aug. 26, 2009. The Board also proposed to include these costs in the
``points and fees'' definition for purposes of HOEPA coverage. The
Board is now proposing to amend Sec. 226.32(b)(1) to preserve the
existing treatment of certain closing costs in the ``points and fees''
definition for HOEPA coverage purposes, which does not cover most
third-party charges. Under proposed Sec. 226.32(b)(1), points and fees
would include all items included in the finance charge pursuant to
Sec. 226.4 (other than interest or time-price differential), except
that, for purposes of this definition, Sec. 226.4(g) would not apply.
Background
Under Sec. 226.32(b)(1), ``points and fees'' includes (i) Items
required to be disclosed under Sec. Sec. 226.4(a) and 226.4(b), except
interest or the time-price differential; (ii) all compensation paid to
mortgage brokers; (iii) all items listed in Sec. 226.4(c)(7) (other
than amounts held for future payment of taxes) unless the charge is
reasonable, the creditor receives no direct or indirect compensation in
connection with the charge, and the charge is not paid to an affiliate
of the creditor; and (iv) premiums or other charges for credit life,
accident, health, or loss-of-income insurance, or debt-cancellation
coverage (whether or not the debt-cancellation coverage is insurance
under applicable law) that provides for cancellation of all or part of
the consumer's liability in the event of the loss of life, health, or
income or in the case of accident, written in connection with the
credit transaction.
In the August 2009 Closed-End Proposal, the Board proposed to amend
Sec. 226.4 to provide a simpler, more inclusive definition of the
finance charge. See 74 FR 43232, 43321-23, Aug. 26, 2009. The Board's
objective was to improve the utility of the APR as a single number that
consumers can use to compare the costs of loan offers, and to
facilitate compliance and reduce litigation costs for creditors. Under
the August 2009 Closed-End Proposal, the finance charge and APR would
include most closing costs, including many third-party costs such as
appraisal fees and premiums for title insurance. The Board also
proposed to amend the definition of ``points and fees'' in Sec.
226.32(b)(1) to conform to the more inclusive finance charge
definition. The Board noted that, as a result of the more inclusive
finance charge, APRs and points and fees would increase, and more loans
would potentially qualify as higher-priced mortgage loans, HOEPA loans
covered by Sec. Sec. 226.32 and 226.34, and loans subject to certain
State anti-predatory lending laws. 74 FR 43344-45, Aug. 26, 2009.
Nevertheless, the Board concluded, based on the limited data it had,
that the proposal to improve the APR would be in consumers' interests.
Comment was solicited on the potential impact of the proposed rule.
Numerous mortgage creditors and their trade associations commented
on the proposal to make the finance charge and APR more inclusive. Most
expressed agreement in principle with the proposed finance charge
definition. Nevertheless, most industry commenters opposed the
proposal, stating that it would cause many prime loans to be
incorrectly classified as higher-priced mortgage loans under Sec.
226.35 and that it would inappropriately expand the coverage of HOEPA
and similar State laws. These commenters indicated that the more
inclusive finance charge would have a much more significant impact
under the points and fees tests than under the APR tests. One creditor
estimated that 30 to 50 percent of its subprime loans, which currently
are higher-priced mortgage loans but not HOEPA loans, would become
HOEPA (or state ``high-cost'') loans under the proposal.
Consumer advocates uniformly supported the proposal to make the
finance charge and APR more inclusive. They recognized the resulting
expansion of coverage under Sec. Sec. 226.32 and 226.35, and under
similar State laws, but they argued that any such expanded coverage
would be appropriate. Consumer advocates stated that the more inclusive
finance charge and APR only would reveal newly covered loans for what
they have always been, namely, HOEPA loans and higher-priced mortgage
loans. Accordingly, they argued, the increase in the coverage of
Sec. Sec. 226.32 and 226.35, as well as affected State laws, would be
warranted.
The Board's Proposal
The Board is proposing to amend Sec. 226.32(b)(1) to retain the
existing treatment of third-party charges in the points and fees
definition. Under proposed Sec. 226.32(b)(1)(i), points and fees would
include all items included in the finance charge pursuant to Sec.
226.4, except interest or the time-price differential and except that
Sec. 226.4(g) would not apply. Thus, Sec. 226.4(g), as
[[Page 58638]]
proposed in the August 2009 Closed-End Proposal, still would include
most third-party charges in the finance charge, but proposed Sec.
226.32(b)(1)(i) would preserve the existing treatment of such charges
for purposes of points and fees. As discussed above, the Board is also
proposing to amend comment 32(a)(1)(ii)-1 to make the determination of
the total loan amount consistent with this proposal.
As discussed above, the Board recognized when it issued the August
2009 Closed-End Proposal that the more inclusive finance charge would
have some impact on HOEPA coverage. At the time, the Board lacked
adequate data to quantify the impact, but believed that the more
inclusive finance charge would benefit consumers. Based on the
comments, the Board now believes that the changes to Sec. 226.32(b)(1)
in the August 2009 Closed-End Proposal would have a substantial impact
on HOEPA coverage. The objectives of the more inclusive finance charge
are to enhance the APR's utility to consumers as a comparison shopping
tool, as well as to eliminate compliance burden and legal risk for
industry. See 74 FR 43232, 43243, Aug. 26, 2009. The Board does not
believe those objectives support an expansion of HOEPA coverage under
the points and fees test.
Relatively few loans are made that meet HOEPA's coverage tests. The
lack of lending activity above HOEPA's thresholds may be attributable
to HOEPA's substantive restrictions on loan terms, additional liability
for violations under TILA Section 130(a)(4), 15 U.S.C. 1640(a)(4), and
concerns about HOEPA's assignee liability provision. The Board is
concerned that significantly expanding the loans covered by HOEPA would
result in reduced access to credit. Accordingly, the Board now proposes
to amend Sec. 226.32(b)(1) to retain the existing treatment of certain
charges in the definition of points and fees.\101\ Charges that would
be excluded from points and fees under proposed Sec. 226.32(b)(1)
include closing agent charges under Sec. 226.4(a)(2); miscellaneous
charges under Sec. 226.4(c), including application fees charged to all
applicants under Sec. 226.4(c)(1), and the real estate related fees
listed in Sec. 226.4(c)(7) when reasonable and paid to third parties;
and certain government recording and related charges and insurance
premiums incurred in lieu of such charges under Sec. 226.4(e).\102\
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\101\ The Board notes that this proposal is consistent with the
recently enacted Dodd-Frank Wall Street Reform and Consumer
Protection Act, Public Law 111-203, 124 Stat. 1376 (July 21, 2010),
which amends TILA Section 103(aa)(1) to exclude all ``bona fide
third party charges'' from points and fees. The Dodd-Frank Act makes
numerous other changes to HOEPA, including changes to the definition
of points and fees and to the points and fees test itself. This
proposal is intended only to preserve the existing treatment under
the points and fees test of third-party charges, virtually all of
which generally are excluded, notwithstanding the Board's proposal
to include those charges in the finance charge. The Board expects to
propose for comment additional revisions to Regulation Z in a future
rulemaking to implement the amendments to HOEPA under the Dodd-Frank
Act.
\102\ Credit insurance premiums and similar charges that are
disclosed in accordance with Sec. 226.4(d)(1) or (d)(3), as
applicable, would be added to the finance charge under the Board's
proposal, but those charges already are included in points and fees
under Sec. 226.32(b)(1)(iv).
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Although this proposal would avoid improper coverage of certain
loans under HOEPA, many such loans nevertheless would remain higher-
priced mortgage loans under Sec. 226.35. As a result, they still would
be subject to the Board's substantive protections for such loans,
including the prohibition of lending based on the value of the
collateral without regard to the consumer's repayment ability,
significant restrictions on prepayment penalties, and the requirement
that an escrow account for taxes and insurance be established. The
Board believes that the mortgage industry's reluctance to make HOEPA
loans does not extend to the same degree to higher-priced mortgage
loans. Nevertheless, the Board also is concerned that the coverage of
Sec. 226.35 not be unduly expanded by the more inclusive finance
charge and annual percentage rate and is therefore proposing revisions
to Sec. 226.35(a), discussed below.
This proposal would reorganize and revise the staff commentary
under Sec. 226.32(b)(1) to conform to the proposed changes to the
regulation. The commentary's substantive guidance would be retained to
the extent it remains pertinent. Proposed comment 32(b)(1)(i)-1 would
clarify that loans that are secured by a consumer's principal dwelling
and therefore potentially subject to Sec. 226.32 are subject to the
special rules for the finance charge calculation for transactions
secured by real property or a dwelling. The comment also would explain,
however, that the special rules in Sec. 226.4(g) govern only a
transaction's finance charge and have no effect on the transaction's
points and fees, and it would illustrate the difference with an
example. Proposed comment 32(b)(1)(ii)-1 would note that points and
fees always includes mortgage broker compensation paid by the consumer,
but the comment would clarify that compensation that is not paid by the
consumer is excluded. For example, compensation paid to a mortgage
broker by a creditor, including a yield spread premium, is not included
in points and fees.
The August 2009 Closed-End Proposal also would have amended Sec.
226.32(b)(1)(i) to follow more closely the provision of TILA that it
implements, TILA Section 103(aa)(4)(A), 15 U.S.C. 1602(aa)(4)(A). The
proposed changes were for clarity, with no substantive effect intended.
For ease of reference, this proposal republishes those proposed
changes. The Board requests that interested parties limit the scope of
their comments to the newly proposed changes to Sec. 226.32(b)(1) and
associated commentary discussed in the SUPPLEMENTARY INFORMATION to
this proposed rule.
Section 226.33 Requirements for Reverse Mortgages
Introduction
Reverse mortgage products enable eligible borrowers to exchange the
equity in their homes for cash without requiring borrowers to repay the
loan while they live in their homes. Reverse mortgage proceeds may used
for a variety of purposes. According to a recent GAO study, the most
common uses of reverse mortgage proceeds are for paying off an existing
mortgage, home repairs or improvements, or improving quality of
life.\103\ For many borrowers, a reverse mortgage may provide the only
funds available to pay for health care needs and other living expenses.
As a result, reverse mortgages, if offered appropriately, could become
an increasingly important mechanism for financial institutions to
address the credit needs of an aging population.
---------------------------------------------------------------------------
\103\ U.S. Government Accountability Office, Reverse Mortgages:
Product Complexity and Consumer Protection Issues Underscore Need
for Improved Controls Over Counseling for Borrowers, GAO-09-606, 7-8
(June 2009) (citing AARP, Reverse Mortgages: Niche Product or
Mainstream Solution? Report on the 2006 AARP Nat'l Survey of Reverse
Mortgage Shoppers (Washington, DC: Dec. 2007)).
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The need to provide consumers with adequate information about
reverse mortgages and to ensure appropriate consumer protections is
high. Reverse mortgages are complex loan products that present a wide
range of complicated options to borrowers. Moreover, they are typically
secured by the borrower's primary asset--his or her home.
Reverse mortgage products. The reverse mortgage market currently
consists of two types of products: proprietary products offered by
individual lenders and FHA-insured reverse mortgages offered under
HUD's HECM program. A HECM loan is subject
[[Page 58639]]
to HUD regulations that establish a range of consumer protections and
other requirements.
Reverse mortgages generally are nonrecourse, home-secured loans
that provide one or more cash advances to borrowers and require no
repayments until a future event. Both HECMs and proprietary reverse
mortgages generally must be repaid only when the last surviving
borrower dies, all borrowers permanently move to a new principal
residence, or the loan is in default. For example, repayment would be
required when the borrower sells the home or has not resided in the
home for a year. A borrower may be in default on a reverse mortgage
when the borrower fails to pay property taxes, fails to maintain hazard
insurance, or lets the property fall into disrepair.
When a reverse mortgage becomes due, the home must be sold or,
alternatively, the borrower (or surviving heirs) may repay the full
amount of the loan including accrued interest. If the home is sold,
however, the borrower or estate generally is not liable to the lender
for any amounts in excess of the value of the home.
To obtain a reverse mortgage, the borrower must occupy the home as
a principal residence and generally be at least 62 years of age.
Reverse mortgages are typically structured as first lien mortgages and
require that any prior mortgage be paid off either before obtaining the
reverse mortgage or with the funds from the reverse mortgage. The funds
from a reverse mortgage may be disbursed in several different ways:
A single lump sum that distributes up to the full amount
of the principal credit limit in one payment;
A credit line that permits the borrower to decide the
timing and amount of the loan advances;
A monthly cash advance, either for a fixed number of years
selected by the borrower or for as long as the borrower lives in the
home; or
Any combination of the above selected by the borrower.
Generally, the amount of money the consumer may borrow will be
larger when the consumer is older, the home is more valuable, or
interest rates are lower. Interest rates on a reverse mortgage may be
fixed or variable.
Most reverse mortgages have been structured as open-end lines of
credit. For example, in fiscal year 2008, 89 percent of HECM borrowers
chose to receive money solely as a line of credit and another 6 percent
chose to receive a line of credit combined with a monthly payment.
Generally, those choosing a line of credit withdrew about 60 percent of
their funds at account opening.\104\ In addition, most HECMs have had
variable interest rates.\105\ However, in 2008 HUD issued a mortgagee
letter regarding the availability of fixed-rate HECMs.\106\ Since then,
originations of fixed-rate HECMs have grown and in recent months have
been the majority of HECM originations.\107\ Fixed-rate HECMs are
generally structured as closed-end credit and borrowers usually may
receive loan proceeds only as a lump sum of the full principal amount
at closing.
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\104\ Id. at 8.
\105\ HUD Single Family Portfolio Snap Shot--HECM Loans, data
for Inception 1989-Dec. 2008 http://www.hud.gov/offices/hsg/comp/rpts/hecmsfsnap/hecmsfsnap.cfm.
\106\ HUD Mortgagee Letter 2008-08, March 28, 2008.
\107\ HUD Single Family Portfolio Snap Shot--HECM Loans, data
for Jan. 2010-May 2010 http://www.hud.gov/offices/hsg/comp/rpts/hecmsfsnap/hecmsfsnap.cfm.
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Reverse mortgage market trends. The volume of reverse mortgages has
grown considerably over the years. HECM originations, which account for
over 90 percent of the market, have grown from 157 loans in fiscal year
1990 to more than 112,000 loans in fiscal year 2008.\108\ A substantial
portion of this growth has occurred in recent years, with HECM
originations nearly tripling between 2005 and 2008.\109\ A secondary
market for HECMs exists, with Fannie Mae having purchased 90 percent of
HECM loans as of 2008.\110\ In addition, in 2007 Ginnie Mae developed
and implemented a HECM mortgage-backed security with issuance growing
to $1.5 billion for 2009.\111\
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\108\ U.S. Government Accountability Office, Reverse Mortgages:
Policy Changes Have Had Mostly Positive Effects on Lenders and
Borrowers, but These Changes and Market Developments Have Increased
HUD's Risk, GAO-09-836, 4-5 (July 2009).
\109\ Id.
\110\ Id at 7.
\111\ Ginnie Mae, Ginnie Mae Finishes 2009 Strong, January 22,
2010, http://www.ginniemae.gov/news2010/01-22presshud.pdf.
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Proprietary reverse mortgages have also experienced growth, but
that growth has stalled in the last few years due to market
conditions.\112\ A key feature of proprietary reverse mortgages is that
they generally offer loans in amounts greater than the HECM loan
limits.\113\ The Housing and Economic Recovery Act of 2008 raised the
HECM loan limit.\114\ As a result, at least one lender, Fannie Mae,
discontinued its proprietary reverse mortgage product in 2008.\115\
However, a report by the GAO in 2009 found that most lenders with
proprietary products planned to offer them again, depending on the
availability of funding in the secondary market.\116\
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\112\ U.S. Government Accountability Office, GAO-09-836 at 18.
\113\ Id.
\114\ Housing and Economic Recovery Act of 2008 (HERA), Public
Law 110-289 (July 30, 2008), Sec. 2122(a)(5) (amending Section 255
of the National Housing Act, 12 U.S.C. 1715z-20(g)).
\115\ Fannie Mae Reverse Mortgage Lender Letter 2008-3:
Announcement to Terminate Purchase of Home Keeper[reg] Reverse
Mortgages (Sept. 3, 2008).
\116\ U.S. Government Accountability Office, GAO-09-836 at 18.
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Interagency supervisory guidance. In December 2009, the Federal
banking agencies, through the Federal Financial Institutions
Examination Council (FFIEC), published proposed supervisory guidance on
reverse mortgage products (Proposed Reverse Mortgage Guidance).\117\
The FFIEC finalized this Guidance in August 2010 (Final Reverse
Mortgage Guidance or Guidance).\118\ The Final Reverse Mortgage
Guidance is designed to help financial institutions ensure that their
risk management and consumer protection practices adequately address
the compliance and reputation risks raised by reverse mortgage lending.
The Guidance addresses the consumer protection concerns raised by
reverse mortgages, and focuses on the need for banks, thrifts, and
credit unions to provide clear and balanced information to consumers
about the risks and benefits of reverse mortgages while consumers are
shopping for these products.
---------------------------------------------------------------------------
\117\ Reverse Mortgage Products: Guidance for Managing
Compliance and Reputation Risks, 74 FR 66652, Dec. 16, 2009
(Proposed Reverse Mortgage Guidance).
\118\ Reverse Mortgage Products: Guidance for Managing
Compliance and Reputation Risks, 75 FR 50801, Aug. 17, 2010 (Final
Reverse Mortgage Guidance).
---------------------------------------------------------------------------
Specifically, the Final Reverse Mortgage Guidance states that
lenders offering proprietary products should require counseling from
``qualified independent counselors'' before a consumer submits an
application or pays an application fee for a reverse mortgage product.
The Guidance also states that institutions should take steps to avoid
any appearance of a conflict of interest. Accordingly, the Guidance
advises institutions to adopt clear policies stating that borrowers are
not required to purchase other financial products to obtain a reverse
mortgage. Institutions are also advised to guard against inappropriate
compensation or incentive policies that encourage loan originators to
link reverse mortgage products to other financial products.\119\
---------------------------------------------------------------------------
\119\ Id. at 50811.
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Current Reverse Mortgage Disclosures
TILA Section 103(bb) defines the term ``reverse mortgage
transaction'' as a
[[Page 58640]]
nonrecourse transaction in which a mortgage, deed of trust, or
equivalent consensual security interest is created against the
consumer's principal dwelling securing one or more advances. 15 U.S.C.
1602(bb). In addition, the payment of any principal, interest and
shared appreciation or equity is due and payable (other than in the
case of default) only after the transfer of the dwelling, the consumer
ceases to occupy the dwelling as a principal dwelling, or the death of
the consumer.
TILA Section 138 requires disclosures for reverse mortgages in
addition to the other disclosures required by TILA. 15 U.S.C. 1648.
Specifically, TILA Section 138 requires disclosure of a good faith
estimate of the projected total cost of the reverse mortgage to the
consumer expressed as a table of annual interest rates, to be provided
at least three business days before consummation. Each annual interest
rate in the table is to be based on a projected total future credit
balance under a projected appreciation rate for the dwelling and a term
for the mortgage. The statute calls for at least three projected
appreciation rates and at least three credit transaction periods as
determined by the Board. The periods are to include a short-term
reverse mortgage, a term equaling the consumer's life expectancy, and a
longer term as the Board deems appropriate. The disclosure must also
include a statement that the consumer is not obligated to complete the
reverse mortgage transaction merely because the consumer has received
the disclosure or signed an application.
Under TILA Section 138, the projected total cost of the reverse
mortgage used to calculate the table of annual interest rates includes
all costs and charges to the consumer, including the costs of any
associated annuity that the consumer will or is required to purchase as
part of the reverse mortgage. The projected total costs also includes
any shared appreciation or equity that the legal obligation entitles
the lender to receive, and any limitation on the liability of the
consumer under the reverse mortgage, such as nonrecourse limits and
equity conversion agreements. In addition, the total cost projection
also reflects all payments to and for the benefit of the consumer. If
the consumer purchases an annuity (whether or not required by the
lender as a condition of making a reverse mortgage), any annuity
payments received by the consumer and financed from the proceeds of the
loan are considered the payments to the consumer, rather than the
reverse mortgage proceeds that were used to finance the annuity.
Sections 103(bb) and 138 of TILA are implemented in Sec. Sec.
226.31(c)(2) and 226.33. Section 226.31(c)(2) requires the creditor to
furnish the disclosures for reverse mortgages at least three business
days before consummating a closed-end credit transaction or the first
transaction under an open-end credit plan. Section 226.33 contains the
statutory definition of ``reverse mortgage transaction'' and the
content of the reverse mortgage disclosures. Under Section 226.33, the
reverse mortgage disclosures must include a statement that the consumer
is not obligated to complete the transaction, a good-faith projection
of the total cost of credit expressed as a table of ``total-annual-
loan-cost rates'' (TALC rates) and an explanation of the table. The
disclosures must also include an itemization of loan terms, charges,
the age of the youngest borrower, and the appraised property value.
Appendix K to Regulation Z provides instructions on how to calculate
the TALC rates required to be disclosed, based on the calculation
method used in Appendix J for the closed-end APR, and provides a model
and sample disclosure form. Appendix L to Regulation Z contains the
loan periods creditors must use in disclosing the TALC rates and a
table of life expectancies that must be used to determine loan periods
based on the consumer's life expectancy.
Section 226.33 requires that the table show TALC rates for assumed
annual appreciation rates of 0%, 4%, and 8%. It also requires that TALC
rates be provided for the assumed loan periods of: two years; the
consumer's actuarial life expectancy; and the consumer's actuarial life
expectancy multiplied by a factor of 1.4. In addition, at the
creditor's option, the table may contain a fourth assumed loan period
based on the consumer's actuarial life expectancy multiplied by 0.5.
The commentary to Sec. 226.33 contains a number of clarifications.
Comment 33(a)-1 clarifies that a transaction must be nonrecourse to
meet the definition of a reverse mortgage in section 226.33(a). That
is, the consumer's liability must be limited to the proceeds from the
sale of the home. Comment 33(a)-1 clarifies, however, that if a closed-
end reverse mortgage does not limit the consumer's liability to the
proceeds of the sale of the home, and the transaction meets the
definition of a high-cost mortgage loan under Sec. 226.32, the
transaction is subject to all the requirements of Sec. Sec. 226.32 and
226.34. Comment 33(a)(2)-1 clarifies that the term ``default'' is not
defined by the statute or regulation, but rather by the legal
obligation and state or other applicable law. Comment 33(a)(2)-2
clarifies that to meet the definition of a reverse mortgage
transaction, a creditor cannot require principal, interest, or shared
appreciation or equity to be due and payable (other than in the case of
a default) until after the consumer's death, transfer of the dwelling,
or the consumer ceases to occupy the dwelling as a principal dwelling.
This comment further clarifies that the reverse mortgage obligation may
state a specific maturity date or term of repayment and still meet the
definition of a reverse mortgage, as long as the maturity date or term
will not cause maturity prior to the occurrence of any of the maturity
events recognized in the regulation. For example, the obligation could
state a term but automatically extend the term for consecutive periods
if no recognized maturity event has occurred.
Comment 33(c)(1)-1 clarifies that all costs and charges the
consumer incurs in a reverse mortgage are included in the projected
total cost whether or not the cost or charge is a finance charge under
Sec. 226.4. Current comment 33(c)(1)-2 clarifies that the amount paid
by the consumer for an annuity is a cost to the consumer. Comment
33(c)(1)-3 clarifies that costs incurred in connection with the sale or
transfer of the property subject to the reverse mortgage are not
included in the cost to the consumer.
Comment 33(c)(2)-1 clarifies that certain contingent payments to
the consumer are excluded from the total cost projection. Comments
33(c)(3)-1 and 33(c)(4)-1 clarify that shared appreciation or shared
equity, and limitations on the consumer's liability, respectively, are
included in the projected total cost. Comment 33(c)(4)-2 provides a
uniform assumption that, if the consumer's liability is limited to the
``net proceeds'' from the sale of the home, the costs associated with
selling the dwelling should be assumed to be 7 percent of the projected
total sale price, unless another amount is specified in the legal
obligation.
Commentary to Appendix K and Appendix L provides further guidance
on calculating TALC rates and on the clear and conspicuous standard for
the model disclosure form.
Current Open-End and Closed-End Disclosures
Reverse mortgages are subject to the disclosure requirements for
other home-secured credit. Sec. 226.31(a). Reverse mortgages
structured as open-end credit are subject to the provisions in Subpart
B of Regulation Z, including the provisions in Sec. Sec. 226.5b and
226.6
[[Page 58641]]
applicable to HELOCs. Closed-end reverse mortgages are subject to
Subpart C of Regulation Z.
The current disclosures required for HELOCs and closed-end
mortgages require creditors to provide information about costs and
repayment amounts that must be calculated using a specific loan term.
For example, even though reverse mortgages are single-payment
transactions, they are currently subject to the requirements to
disclose the payment schedule for closed-end loans under Sec.
226.18(g), or the repayment example for a $10,000 HELOC draw under
Sec. 226.5b(d)(5)(iii). To disclose the single payment amount, the
creditor must know when the loan will become due in order to calculate
the amount of interest that will be charged. Yet reverse mortgage
creditors must base these disclosures on an assumed repayment period,
because the exact date that a reverse mortgage will become due and
payable is unknown. The current commentary provides guidance on
assumptions creditors must use. See comments 5b(d)(5)(iii)-4,
5b(d)(12)(xi)-10 and 17(c)(1)-14. For instance, creditors are
instructed to base disclosures on the term of the reverse mortgage if a
definite term exists, even though the consumer may not actually repay
the loan at the end of the term. If no term exists, the disclosures
must be based on the consumer's life expectancy.
The August 2009 Proposals
The Board's August 2009 proposals on closed-end mortgages and
HELOCs were developed based on consumer testing that focused on the
more common (forward) versions of those products. As a result, the
proposed disclosures focus on terms, such as monthly payment amounts
that are not as relevant or useful to reverse mortgage consumers. Yet
these disclosures contain information about other terms that are
relevant to reverse mortgage consumers. The Board requested comment in
the August 2009 HELOC Proposal about how the proposed disclosures could
be modified for reverse mortgages. Commenters who addressed the issue
suggested that the Board develop a single disclosure form for reverse
mortgages that would combine the disclosures under Sec. 226.33 with
those under Sec. Sec. 226.5b and 226.6 for HELOCs, or Sec. 226.18 for
closed-end credit, as appropriate.
Proposed Reverse Mortgage Disclosures
The Board is proposing three consolidated reverse mortgage
disclosure forms: an early disclosure for open-end reverse mortgages,
an account-opening disclosure for open-end reverse mortgages, and a
closed-end reverse mortgage disclosure. The Board's proposal would
ensure that consumers receive meaningful information in an
understandable format using forms that are designed, and have been
consumer tested, for reverse mortgage consumers. Rather than receive
two or more disclosures under TILA that come at different times and
have different formats, consumers would receive all the disclosures in
a single format that is similar regardless of whether the reverse
mortgage is structured as open-end or closed-end credit. The Board's
proposal would also facilitate compliance with TILA by providing
creditors with a single set of forms that are specific to and designed
for reverse mortgages, rather than requiring creditors to modify and
adapt disclosures designed for forward mortgages.
33(a) Definition
As discussed above in the section-by-section analysis to Sec.
226.32, TILA section 103(bb), implemented by current Sec. 226.33(a),
defines a ``reverse mortgage transaction'' as, among other things, a
nonrecourse transaction. See 15 U.S.C.1602(bb). The proposal would
simplify the defined term from ``reverse mortgage transaction'' to
``reverse mortgage.'' The proposed rule would also modify the
definition of a reverse mortgage to include both nonrecourse and
recourse transactions whether structured as open-end or closed-end
credit. Currently, any reverse mortgage that allows recourse against
the consumer (that is, that does not limit the consumer's liability to
the proceeds from the sale of the home) is not covered by Sec. 226.33.
The proposal would ensure that the disclosures and other substantive
protections apply to all reverse mortgages regardless of whether or not
they contain a nonrecourse provision.
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. 15 U.S.C. 1601(a),
1604(a). As discussed above in the section-by-section analysis to Sec.
226.32, TILA's definition of a ``reverse mortgage transaction'' was
added in the context of a excluding reverse mortgages from coverage
under TILA Section 129's high-cost loan provisions. TILA Section 129
prohibits high-cost loans with negative amortization and balloon
payments, both of which are features of reverse mortgages. 15 U.S.C.
1639. Thus, by defining a ``reverse mortgage transaction'' as only a
nonrecourse reverse mortgage, the statute prohibits making high-cost
reverse mortgages that do not limit recourse against the consumer.
However, reverse mortgages that allow for recourse against the consumer
and are not prohibited by TILA Section 129 (either because they are
open-end or because they are not high-cost reverse mortgages) present
even greater consumer protection concerns than nonrecourse reverse
mortgages. The consumer or the consumer's estate could be liable for
significantly more than the home is worth when a reverse mortgage that
allows for recourse against the consumer becomes due. (For this reason
the proposal would modify Sec. 226.32 to preserve the current narrow
exemption for only reverse mortgages that are nonrecourse.) As
discussed in the section-by-section analysis to Sec. 226.33(c) below,
the proposed reverse mortgage disclosures would require specific
statements about the consumer's liability under a reverse mortgage that
allows recourse against the consumer. The Board believes this
information, and the other proposed consumer protections for reverse
mortgages, are appropriate for all reverse mortgages.
33(b) Reverse Mortgage Document Provided On or With the Application
Based on the results of consumer testing and similar to the Board's
August 2009 Closed-End Mortgage and HELOC Proposals, this proposal
would require creditors to provide consumers with a Board publication,
or a substantially similar document, for reverse mortgages. The
publication, entitled ``Key Questions to Ask about Reverse Mortgage
Loans,'' discusses how a reverse mortgage works and describes loan
terms and conditions that are important for consumers to consider when
deciding whether to pursue a reverse mortgage.
In addition, the document would disclose to consumer that they are
not obligated to purchase any other financial product or service, along
with explanatory information. Proposed Sec. 226.40(a), discussed in
the section-by-section analysis to that section below, would prohibit a
creditor or loan originator from requiring a consumer to purchase any
financial or insurance product as a condition of obtaining a reverse
mortgage. The Board believes that providing information to consumers
about this protection will help them avoid potential deception or
misunderstanding about whether the
[[Page 58642]]
purchase of an offered financial or insurance product is required. 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. 15 U.S.C. 1601(a), 1604(a).
The Board proposes to require creditors to provide this publication
at the time a consumer is given an application form or before the
consumer pays a nonrefundable fee (except a fee for reverse mortgage
counseling), whichever is earlier. Special rules under proposed Sec.
226.33(b)(2)-(4) for when the consumer accesses an application form
electronically and when the creditor receives a consumer's application
from an intermediary agent or broker are modeled after the Board's TILA
proposals for HELOCs and closed-end mortgages. See 74 FR 43428, 43446-
43450, Aug. 26, 2009; 74 FR 43232, 43268-43269, Aug. 26, 2009.
33(c) Content of Disclosures for Reverse Mortgages
Current Sec. 226.33(b) details the content of disclosures for
reverse mortgages. It requires a notice that the consumer is not
obligated to complete the reverse mortgage merely because the consumer
has received the disclosures or has signed an application as required
by TILA Section 138(a)(2). 15 U.S.C. 1648(a)(2). It also requires an
itemization of loan terms and charges, and disclosure of the age of the
youngest borrower and the appraised property value. Finally, it
requires a good faith projection of the total cost of credit in the
form of a table of ``total-annual-loan-cost rates'' and an explanation
of the table.
Under the proposed rule, the content of the reverse mortgage
disclosures would be moved to Sec. 226.33(c). The proposed rule would
retain the no-obligation notice in Sec. 226.33(c)(1) and would add a
requirement that if the creditor provides space for the consumer's
signature, the creditor must state that the signature only confirms
receipt of the disclosure statement. Section 226.33(c)(2) would require
certain identification information for the creditor and loan
originator. Section 226.33(c)(3) would require the itemization of the
consumer's name, address, account number, the age of each borrower, and
the appraised property value. As discussed in the section-by-section
analysis below, the proposed rule would also require a number of new
disclosures about reverse mortgages. The Board proposes these new
disclosures 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.
Table of Total-Annual-Loan-Cost Rates
Based on consumer testing the Board is proposing to replace the
disclosure of the table of total-annual-loan-cost (TALC) rates with
other information that is likely to be more meaningful to and better
understood by consumers.
The table of TALC rates is designed to show consumers how the cost
of the reverse mortgage varies over time and with house price
appreciation. Generally, the longer a consumer keeps a reverse mortgage
the lower the relative cost will be because the upfront costs of the
reverse mortgage will be amortized over a longer period of time. In
addition, home-value appreciation can lower the total cost of the
reverse mortgage if the consumer eventually benefits from a limitation
on the consumer's liability, such as a nonrecourse limit.
In order to show the effect of time and home-value appreciation on
the cost of the reverse mortgage, current Sec. 226.33(c) requires a
disclosure for three periods: two years; the consumer's life
expectancy; and the consumer's life expectancy multiplied by 1.4. In
addition, creditors have the option of including a loan period based on
the consumer's life expectancy multiplied by 0.5. Creditors must also
show TALC rates for assumed annual appreciation rates of 0%, 4%, and
8%. As a result, the table of TALC rates must show at least nine TALC
rates and may show twelve TALC rates. Usually, the TALC rates will
decline over time even though the total dollar cost of the reverse
mortgage is rising due to interest and fees being charged and added to
an increasing loan balance.
In the consumer testing conducted for the Board on reverse mortgage
disclosures, participants were shown a disclosure with the table of
TALC rates that is currently required. Very few consumers understood
the table of TALC rates.\120\ Although participants seemed to
understand the paragraphs explaining the TALC table, the vast majority
could not explain how the description related to the percentages shown
in the TALC table. A number of participants could not even attempt to
explain what the TALC table was showing. Those consumers who attempted
to explain the TALC table could not explain why the TALC rates were
declining over time even though the reverse mortgage's loan balance was
rising. Most participants thought the TALC rates shown were interest
rates, and interpreted the table as showing that their interest rate
would decrease if they held their reverse mortgage for a longer period
of time. When asked whether the information in the TALC table would
make a reverse mortgage easier or more difficult to understand, the
vast majority of participants stated that this information would make
their reverse mortgage more difficult to understand. Consumers,
including those who currently have a reverse mortgage (and thus
presumably received the TALC disclosure), consistently stated that they
would not use the disclosure to decide whether to obtain a reverse
mortgage.
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\120\ See ICF Macro International, Inc., Design and Testing of
Truth in Lending Disclosures for Reverse Mortgages, 11, 18, 27, 35-
26 (July 2010) available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20100816_Reverse_Mortgage_Report_(7-
28)--(FINAL).pdf.
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These results are consistent with the Board's consumer testing of
the APR for closed-end mortgages and student loans. The TALC rates
express loan costs as annualized percentage rates, similar to the
closed-end APR. Yet consumer testing conducted by the Board has found
that the closed-end APR--the cost of credit expressed as a single
percentage rate--is difficult for many consumers to understand even
when an explanation is provided. To understand the table of TALC rates,
not only must consumers understand the concept of expressing total loan
costs as an annualized rate, they must further be able to evaluate the
TALC rates along two other dimensions (time and home-value
appreciation). The consumer testing conducted for the Board does not
indicate that simplifying the table of TALC rates, such as by removing
the dimension of home-value appreciation, would materially improve
consumers' understanding of the disclosure. Instead, consumers
consistently expressed a preference for a disclosure providing total
costs as a dollar amount.
For these reasons, the proposed rule would remove the table of TALC
rates from the reverse mortgage disclosure. Under the Board's exception
and exemption authorities under TILA Sections 105(a) and 105(f) the
Board is proposing to make an exception to the requirement in TILA
Section 138 that the table of TALC rates be provided. The Board
believes that by removing a disclosure that almost all consumers found
to be unhelpful, and that appeared to be misleading to some, will
[[Page 58643]]
effectuate the purposes of TILA by providing meaningful disclosure of
credit terms to the consumer and assisting consumers in avoiding the
uninformed use of credit. The Board has considered that reverse
mortgages are secured by the consumer's principal dwelling and are
likely to be made for relatively large amounts. The Board also
considered that reverse mortgage borrowers may lack financial
sophistication relative to the complexity of the reverse mortgage
transaction, the importance of the credit and supporting property to
the borrower, and whether the goal of consumer protection would be
undermined by an exception. In addition, the Board considered the
extent to which the requirement to provide the table of TALC rates
complicates, hinders, or makes more expensive the credit process for
reverse mortgages. Given the importance of the reverse mortgage to the
borrower and the fact that the table of TALC rates provides no
meaningful benefit in the form of useful information or protection, the
Board believes that an exemption is warranted. As discussed below, the
Board is proposing new disclosures to explain the total cost of a
reverse mortgage more effectively pursuant to its authority in TILA
Section 105(a) to effectuate the statute's purposes, which include
facilitating consumers' ability to compare credit terms and helping
consumers avoid the uniformed use of credit.
33(c)(4) Information about the Reverse Mortgage
Proposed Sec. 226.33(c)(4) requires a statement that the consumer
does not have to repay the reverse mortgage while remaining in the
home. It would also require a description of the types of payments the
consumer may receive, such as an initial advance, a monthly payment, or
discretionary cash advances in which the consumer controls the timing
of advances. This section would require a statement that the consumer
will retain title to the home and must pay property taxes and insurance
and maintain the property. The proposal also requires a statement that
the consumer will have access to the loan funds and continue to receive
any payments even if the loan's principal balance exceeds the value of
the home, as long as the consumer does not default. Finally, it would
require a description of the events that cause the reverse mortgage to
become due and payable, and a statement that the consumer must repay
the loan including interest and fees once such an event occurs. In the
consumer testing conducted for the Board, many consumers indicated that
this information was new to them, and that they found it to be
important. 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.
33(c)(5) Payment of Loan Funds
Proposed Sec. 226.33(c)(5) requires an itemization of the types of
payments the creditor will make to the consumer. The disclosure must
include the label ``Initial Advance'' along with the amount of any
initial advance made to the consumer at consummation or, in the case of
an open-end reverse mortgage, once the consumer becomes obligated on
the plan. See proposed Sec. 226.33(c)(5)(i)(A). The disclosure must
also include a statement that the funds will be paid to the consumer
after the consumer accepts the reverse mortgage. In addition, the
creditor must disclose the amount of any monthly or other regular
periodic payment of funds labeled ``Monthly Advance,'' and include a
statement that the funds will be paid to the consumer each month while
the consumer remains in the home. See proposed Sec.
226.33(c)(5)(i)(B). Finally, the creditor must disclose any amount made
available to the consumer as discretionary cash advances in which the
consumer controls the timing of advances. Comment 33(c)(5)-1 clarifies
that the creditor must label this type of payment as a ``Line of
Credit,'' regardless of whether the reverse mortgage is structured as
open-end or closed-end credit. See proposed Sec. 226.33(c)(5)(i)(C).
The disclosure must also include a statement that the funds will be
available to the consumer at any time while the consumer remains in the
home. The creditor must also disclose that the consumer may change the
type of payments, if applicable. See proposed Sec. 226.33(c)(5)(iii).
In some cases, the consumer may not have chosen the types of
payments he wishes to receive at the time the disclosures are provided.
In these cases, the creditor must follow the rules in Sec.
226.33(c)(5)(ii) as discussed in comment 33(c)(5)-2. The creditor must
disclose the maximum amount the consumer could receive in discretionary
cash advances. The creditor must also state that the consumer may
choose to take some or all of the funds in an initial advance or as a
monthly or periodic payment, as applicable.
If the creditor does not provide the consumer with the option to
receive funds as discretionary cash advances, the creditor must
disclose the total amount the consumer may receive as an initial
advance and state that the consumer may choose to take some or all of
the funds in the form of a monthly or other periodic payment, if
applicable. As discussed above in the Introduction to the section-by-
section analysis to Sec. 226.33, historically consumers have tended to
take reverse mortgage proceeds as a line of credit. Because this has
tended to be the most common consumer choice, the proposal would
require creditors to disclose how much the consumer could get through
discretionary advances. If a discretionary advance option is not
available to the consumer, a disclosure of the total amount the
consumer could get in an initial advance would provide the closest
substitute. The Board requests comment on other approaches for
disclosing how much the consumer could receive if the consumer has not
chosen a payment type.
33(c)(6) Annual Percentage Rate
33(c)(6)(i) Open-End Annual Percentage Rate
Proposed Sec. 226.33(c)(6)(i) is modeled after Sec. Sec.
226.5b(c)(10) and 226.6(a)(2)(vi) and the associated commentary in the
Board's August 2009 HELOC Proposal, which would implement TILA Section
127A(a)(1). See 74 FR 43428, 43472-43478 and 43501-43502, Aug. 26,
2009; 15 U.S.C. 1637a(a)(1). Accordingly, proposed Sec.
226.33(c)(6)(i) would require disclosure of each periodic interest rate
applicable to the reverse mortgage that may be used to compute the
finance charge on an outstanding balance, expressed as an annual
percentage rate (as determined by Sec. 226.14(b)). The annual
percentage rates would be required to be in at least 16-point type,
except for: (1) any minimum or maximum annual percentage rates that may
apply; and (2) any disclosure of rate changes set forth in the initial
agreement that would not generally apply after the expiration of an
introductory rate, such as a rate that would apply when an employee
preferred rate is terminated because the borrower-employee leaves the
creditor's employ.
For variable rate open-end reverse mortgages, proposed Sec.
226.33(c)(6)(i)(A) would require disclosure of the fact that the annual
percentage rate may change due to the variable-rate feature, using the
term ``variable rate.'' It would require an explanation of how the
annual percentage rate will be determined by
[[Page 58644]]
identifying the type of index used and the amount of any margin, and
the frequency of changes in the annual percentage rate. It would also
require disclosure of any rules relating to changes in the index value
and the annual percentage rate and a statement of any limitations on
changes in the annual percentage rate, including the minimum and
maximum annual percentage rate that may be imposed. If no annual or
other periodic limitations apply to changes in the annual percentage
rate, the creditor would be required to disclose a statement that no
annual limitation exists. In addition, the proposed provision specifies
that a variable rate is considered accurate if it is a rate as of a
specified date, and was in effect within the last 30 days before the
disclosures are provided.
Finally, this proposed provision in Sec. 226.33(c)(6)(i)(A) would
require disclosure of the lowest and highest value of the index and
margin in the past 15 years. The Board's August 2009 HELOC Proposal
would require a disclosure of only the lowest and highest value of the
index, not the index and margin. See 74 FR 43428, 43477, Aug. 26, 2009.
The Board requests comment on whether the proposed reverse mortgage
disclosure should show only the range of the index value.
If the initial rate is an introductory rate, proposed Sec.
226.33(c)(6)(i)(B) would require the creditor to disclose the
introductory rate along with the rate that would otherwise apply to the
plan, and use the term ``introductory'' or ``intro'' in immediate
proximity to the introductory rate. The creditor would also be required
to disclose the time period during which the introductory rate will
remain in effect and the rate that will apply after the introductory
rate expires.
33(c)(6)(ii) Closed-End Annual Percentage Rate
Proposed Sec. 226.33(c)(6)(ii)(A) is modeled after the annual
percentage rate disclosure proposed by the Board in Sec. 226.38(b) in
the August 2009 Closed-End Mortgage Proposal, which would implement
TILA Section 128(a)(4). See 74 FR 43232, 43296-43298, Aug. 26, 2009; 15
U.S.C. 1638(a)(4). It would require disclosure of the annual percentage
rate, using that term, along with the description, ``overall cost of
this loan including interest and fees.'' The Board is not proposing to
include the APR graph under proposed Sec. 226.38(b)(2), the statement
of the average prime offer rate under proposed Sec. 226.38(b)(3) or
the average per-period savings from a 1 percentage point reduction in
the APR under Sec. 226.38(b)(4). Comparisons to the average prime
offer rate are not likely to be meaningful to consumers because reverse
mortgages may have different pricing structures than closed-end
mortgages. In addition, a statement about the per-period savings from a
1 percentage point reduction in the APR would not likely be meaningful
because the consumer does not make regular monthly payments on a
reverse mortgage.
In consumer testing conducted for the Board, a common question that
consumers had was whether reverse mortgage interest rates were fixed or
variable.\121\ For this reason, proposed Sec. 226.33(c)(6)(ii)(B)
would require a disclosure of whether the rate is fixed, adjustable, or
a step-rate. This proposal is based on proposed Sec. 226.38(a)(3)(i)
in the Board's August 2009 Closed-End Mortgage Proposal which would
require a similar disclosure of a closed-end mortgage loan's rate type.
Proposed comment 33(c)(6)(ii)(B)-1 would refer to proposed Sec.
226.38(a)(3) for guidance on determining the rate type of the reverse
mortgage.
---------------------------------------------------------------------------
\121\ See ICF Macro International, Inc., Design and Testing of
Truth in Lending Disclosures for Reverse Mortgages, 9 (July 2010)
available at <http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20100816_Reverse_Mortgage_Report_(7-28)--(FINAL).pdf >.
---------------------------------------------------------------------------
Proposed Sec. 226.33(c)(6)(ii)(C) is modeled after proposed
Sec. Sec. 226.38(e)(1) and (e)(2) in the August 2009 Closed-End
Mortgage Proposal and would require, if the interest rate may increase
after consummation, a description of the method used to calculate the
interest rate and the frequency of interest rate adjustments. If the
interest rate that applies at consummation is not based on the index
and margin that will be used to make later interest rate adjustments,
the description must include the time period when the initial interest
rate expires. For a variable-rate mortgage, any limitations on the
increase in the interest rate would have to be disclosed together with
a statement of the maximum rate that may apply pursuant to such
limitations during the transaction's term to maturity. To maintain
consistency with the disclosures for open-end reverse mortgages, Sec.
226.33(c)(6)(ii)(C) would require disclosure of the lowest and highest
value of the index in the past 15 years. 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.
33(c)(6)(iii) Statement About Interest Accrual
Proposed Sec. 226.33(c)(6)(iii) would require a statement that
interest charges will be added to the loan balance each month (or other
applicable period) and collected when the loan is due. In the consumer
testing conducted for the Board, some consumers were initially unsure
as to whether interest charges must be paid each month or are added to
the loan balance. The proposed disclosure would clarify that interest
charges accrue but are not payable until the reverse mortgage becomes
due and payable. 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.
33(c)(7) Fees and Transactions Costs
The Board's August 2009 HELOC Proposal requires disclosure of a
number of different fees and transaction costs that would apply to
open-end reverse mortgages in the proposed disclosure table. However,
for closed-end mortgages, the current rules do not require an
itemization of fees in the segregated disclosures. In addition, the
Board's August 2009 closed-end mortgage proposal would require only
disclosure of the total settlement charges, but not an itemization, in
the required disclosure table.
For reverse mortgages, however, current Sec. 226.33(b)(3) requires
an itemization of charges to the borrower. For this reason, and to
maintain consistency between the closed-end and open-end reverse
mortgage disclosures, proposed Sec. 226.33(c)(7) would require
disclosure of fees and transactions costs for all types of reverse
mortgages. 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.
33(c)(7)(i) Fees Imposed by the Creditor and Third Parties to
Consummate the Transaction or Open the Plan
Proposed Sec. 226.33(c)(7)(i) is modeled after Sec. Sec.
226.5b(c)(11) and 226.6(a)(2)(vii) and the associated commentary in the
Board's August 2009 HELOC Proposal,
[[Page 58645]]
which would implement TILA Sections 127A(a)(3) and (a)(4). See 74 FR
43428, 43478-43480 and 43502, Aug. 26, 2009; 15 U.S.C. 1637a(a)(3) and
(a)(4). It would apply to open-end and closed-end reverse mortgages.
Proposed Sec. 226.33(c)(7)(i)(A) would require a disclosure of the
total of all one-time fees imposed by the creditor and any third
parties to open the plan, stated as a dollar amount. For the open-end
early disclosures only, if the exact total of one-time fees for account
opening is not known at the time the disclosures are provided, a
creditor would be required to provide the highest total of one-time
account opening fees possible for the plan and that the costs may be
``up to'' that amount.
Proposed Sec. 226.33(c)(7)(i)(B) would require an itemization of
all one-time fees imposed by the creditor and any third parties to open
the plan, stated as a dollar amount, and when such fees are payable.
For the open-end early disclosures only, if the dollar amount of a fee
is not known at the time the disclosures are provided, the creditor
would be required to provide a range for the fee. For the open-end
account-opening disclosures, the creditor would be required to provide
the exact amounts of such fees. See proposed comment 33(c)(7)(i)-1.ii.
(Creditors will know the amount of the fees at the time they make the
open-end account-opening disclosures.) For the closed-end disclosures,
creditors must make good faith estimates of the disclosures as required
by Sec. 226.19(a)(1) and must provide a final disclosure before
consummation. See proposed Sec. 226.33(d)(3).
33(c)(7)(ii) Fees Imposed by the Creditor for Availability of the
Reverse Mortgage
Proposed Sec. 226.33(c)(7)(ii) is modeled after Sec. Sec.
226.5b(c)(12) and 226.6(a)(2)(viii) and the associated commentary in
the Board's August 2009 HELOC Proposal. See 74 FR 43428, 43480-43481,
43499, Aug. 26, 2009. This proposed provision would apply to open-end
and closed-end reverse mortgages. It would require disclosure of all
monthly or other periodic fees that may be imposed by the creditor for
the availability of the reverse mortgage, including any fee based on
activity or inactivity; how frequently the fee will be imposed; and the
annualized amount of the fee. It would also require disclosure of all
costs and charges to the consumer that may be imposed by the creditor
on a regular periodic basis as part of the reverse mortgage, such as a
servicing fee or mortgage insurance premium. The proposed section would
also require a disclosure labeled ``Monthly Interest Charges'' (or
other applicable period) of the interest rate. In consumer testing
conducted for the Board some consumers believed that interest charges
would be payable on a monthly basis.\122\ Therefore, the proposal would
include monthly interest charges with other monthly charges to
emphasize that interest charges, like other monthly fees, are added to
the loan balance along with other charges.
---------------------------------------------------------------------------
\122\ See ICF Macro International, Inc., Design and Testing of
Truth in Lending Disclosures for Reverse Mortgages, 25, 33 (July
2010) available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20100816_Reverse_Mortgage_Report_(7-28)--(FINAL).pdf.
---------------------------------------------------------------------------
33(e)(7)(iii) Fees Imposed by the Creditor for Early Termination of the
Reverse Mortgage
Proposed Sec. 226.33(c)(7)(iii) is modeled after Sec. Sec.
226.5b(c)(13) and 226.6(a)(2)(ix) and the associated commentary in the
Board's August 2009 HELOC Proposal. See 74 FR 43428, 43481, 43499, Aug.
26, 2009. This proposed provision would apply to open-end and closed-
end reverse mortgages. It would require disclosure of any fee that may
be imposed by the creditor if the consumer terminates the reverse
mortgage, or prepays the obligation in full, prior to the scheduled
maturity.
33(c)(7)(iv) Statement About Other Fees
Proposed Sec. 226.33(c)(7)(iv) is modeled after Sec. Sec.
226.5b(c)(14) and 226.6(a)(2)(xv) and the associated commentary in the
Board's August 2009 HELOC Proposal. See 74 FR 43428, 43481-43482 and
43503, Aug. 26, 2009. This proposed provision would apply to open-end
and closed-end reverse mortgages. It would require a statement that
other fees may apply. For the early open-end disclosures, the creditor
would be required to disclose either a statement that the consumer may
receive, upon request, additional information about fees applicable to
the plan, or if the additional information about fees is provided with
the table, reference that the information is enclosed with the table.
For closed-end and account-opening disclosures the creditor would be
required to provide a reference to the reverse mortgage agreement.
33(c)(7)(v) Transaction Requirements
Proposed Sec. 226.33(c)(7)(v) is modeled after Sec. Sec.
226.5b(c)(16) and 226.6(a)(2)(xvii) and the associated commentary in
the Board's August 2009 HELOC Proposal. See 74 FR 43428, 43482 and
43503, Aug. 26, 2009. It would require a disclosure of any limitations
on the number of extensions of credit and the amount of credit that may
be attained during any time period, as well as any minimum draw
requirements. This proposed provision would apply to open-end and
closed-end reverse mortgages. Proposed Sec. 226.33(c)(7)(v) would not
require the disclosure of any minimum outstanding balance because such
a requirement is unlikely to apply to reverse mortgages. The Board
requests comment on whether such requirements may apply to reverse
mortgages and therefore should be disclosed.
33(c)(8) Loan Balance Growth
In place of the table of TALC rates currently required by Sec.
226.33, proposed Sec. 226.33(c)(8) requires a table that demonstrates
how the reverse mortgage balance grows over time. For the reasons
discussed above in this section-by-section analysis, this information
is expressed as dollar amounts rather than as annualized loan cost
rates. The creditor must provide three items of information: (1) The
sum of all advances to and for the benefit of the consumer, including
any payments that the consumer will receive from an annuity that the
consumer purchases along with the reverse mortgage; (2) the sum of all
costs and charges owed by the consumer, including the costs of any
annuity the consumer purchases along with the reverse mortgage; and (3)
the total amount the consumer would be required to repay. See proposed
Sec. 226.33(c)(8)(ii)(A)-(C). This information must be provided for
each of three assumed loan periods of 1 year, 5 years, and 10 years.
The current TALC disclosure requires TALC rates based on three
different property-value appreciation assumptions, but consumers in the
Board's consumer testing found these disclosures confusing and
unhelpful. Thus, the proposed loan balance table would not require
disclosure based on varying appreciation rates (with the exception of
reverse mortgages that include a shared equity or shared appreciation
feature discussed below). The Board tested various alternatives in both
dollar amount and graphical forms to attempt to show the impact that
home price appreciation had on the cost of the reverse mortgage. Many
consumers did not understand those disclosures and those who did found
them not to be useful. In addition, many consumers did not understand
that the time periods used on the TALC form were based on assumptions
about their life expectancy. Consumers expressed a preference for
figures based on standardized time
[[Page 58646]]
periods such as one year, five years and ten years. The Board requests
comment on whether other time periods would be more appropriate.
Annuities. Under TILA Section 138, the projected total cost of a
reverse mortgage used to calculate the TALC rates includes ``the costs
of any associated annuity that the consumer elects or is required to
purchase as part of the reverse mortgage transaction.'' 15 U.S.C. 1648.
In addition, the payments to the consumer include ``the annuity
payments received by the consumer and financed from the proceeds of the
loan, instead of the proceeds used to finance the annuity.'' 15 U.S.C.
1648. Proposed Sec. 226.40(a) prohibits a creditor from requiring a
consumer to purchase any financial or insurance product, including an
annuity, as a condition of obtaining a reverse mortgage. Under the safe
harbor for compliance in proposed Sec. 226.40(a)(2), a creditor is
deemed to comply with the prohibition on required purchases of
financial or insurance products if, among other things, the reverse
mortgage transaction is completed at least 10 calendar days before the
purchase of another product. Accordingly, comment 33(c)(1)-2, which
clarifies that annuity costs are a cost to the consumer, would be
redesignated as comment 33(c)(8)-2 and revised to remove references to
``required'' purchases of an annuity. It would also clarify that the
cost of an annuity purchased after the reverse mortgage transaction is
complete, in accordance with the safe harbor in Sec. 226.40(a)(2),
would not be considered a cost to the consumer.
Similarly, payments from an annuity that the consumer purchases
after the reverse mortgage transaction is complete, in accordance with
the safe harbor, would not be required to be disclosed as the advances
to the consumer. The Board believes that requiring disclosure of the
cost of an annuity that the consumer will not be obligated to purchase
until at least 10 days after the reverse mortgage transaction is
complete would be impractical. A creditor may not know whether the
consumer plans to purchase the annuity, and even if the consumer
indicates intent to purchase an annuity, the consumer may decide not to
do so. In addition, a disclosure that includes the cost of an annuity
that the consumer is not obligated to purchase may confuse the consumer
about whether the purchase is, in fact, optional and about the amount
of the reverse mortgage payments the consumer will receive.
Conversely, if the consumer voluntarily purchases an annuity along
with a reverse mortgage, and the creditor does not follow the safe
harbor in Sec. 226.40(a)(2), the amount paid by the consumer to
purchase the annuity would be included as a cost to the consumer
regardless of whether the annuity is purchased from the creditor or a
third party. The examples used in the current commentary would be
retained to clarify that this includes the cost of an annuity the
creditor offers, arranges, or assists the consumer in purchasing, or
that the creditor is aware that the consumer is purchasing as part of
the transaction. In addition, the advances that the consumer will
receive from the annuity must be disclosed as the advances to the
consumer, rather than the proceeds used to finance the annuity. The
Board requests comment on the circumstances under which the cost of,
and payments from, an annuity should be included in the loan balance
table in Sec. 226.33(c)(8).
All costs and charges. Comment 33(c)(1)-1 would be redesignated as
comment 33(c)(8)-1. This comment clarifies that all costs and charges
to the consumer that are incurred in a reverse mortgage are included in
the loan balance table whether or not the cost or charges are finance
charges under Sec. 226.4. Comment 33(c)(1)-3 would be redesignated as
comment 33(c)(8)-3 and would clarify that costs incurred in connection
with the sale or transfer of the property subject to the reverse
mortgage are not included in the costs to the consumer. Comment
33(c)(2)-1 would be redesignated as comment 33(c)(8)-4 and would
clarify that the disclosure of the amount advanced to the consumer
should not reflect contingent payments in which a credit to the
outstanding loan balance or payment to the consumer's estate is made
upon the occurrence of an event, such as a ``death benefit'' payable if
the consumer's death occurs within a certain period of time.
Limits on liability. Comment 33(c)(4)-1 would be redesignated as
comment 33(c)(8)-7 and would clarify that a creditor would have to
include any limitation on the consumer's liability, such as a
nonrecourse limit or equity conservation agreement, in the disclosure
of the amount owed by the consumer. The Board requests comment on
whether the amount owed by the consumer should reflect such limitations
on the consumer's liability since the proposed disclosures would not be
based on any assumed home-value appreciation and thus may understate
the consumer's eventual liability.
Net proceeds from sale of home. Comment 33(c)(4)-2 would be
redesignated as comment 33(c)(8)-8 and would clarify that if the
contract specifies that the consumer's liability will be limited to the
``net proceeds'' of the sale of the home, but does not specify a
percentage for the ``net proceeds'' liability, for purposes of the
disclosure of the amount the consumer will be required to repay under
Sec. 226.33(c)(8)(ii)(C), a creditor must assume that the costs
associated with selling the property will equal 7 percent of the
projected sale price. The Board requests comment on whether the 7
percent assumption is still appropriate. The Board also requests
comment on whether any assumption for the ``net proceeds'' amount
should be used, or whether, for simplicity, the total amount owed by
the borrower should be shown as limited by the appraised value of the
home.
Set-asides. Comment 33(c)(8)-9 would clarify that if the creditor
sets aside a portion of the loan amount for the benefit of the
consumer, such as for making required repairs to the dwelling, the
creditor must treat the entire amount of the set-aside as advanced to
the consumer. For example, if the creditor estimates of repairs will
cost $1000 but sets aside $1500 (150% of the estimated cost of
repairs), the entire $1500 amount of the repair set-aside is considered
an advance for the benefit of the consumer. The Board requests comment
on whether a different assumption should be used when disclosing the
amount advanced to the consumer under a repair set-aside.
Assumptions used to calculate loan balance growth. Proposed Sec.
226.33(c)(8)(i) requires creditors to base the disclosures of the loan
balance growth on a number of assumptions. First, the creditor would
have to base the loan balance growth table on the initial interest rate
in effect at the time the disclosures are provided and assume that the
consumer does not make any repayments during the term of the reverse
mortgage. The creditor would also have to assume that all closing and
other consumer costs are financed by the creditor unless the creditor
and consumer have agreed otherwise. The Board requests comment on
whether these or other assumptions should be used.
Amount the consumer will owe--shared equity or appreciation. In
reverse mortgages without a shared appreciation or equity feature, the
creditor would have to assume that the dwelling's value does not
change. However, if the creditor is entitled by contract to any shared
appreciation or equity, the creditor must assume the dwelling's value
increases by 4 percent per year and include the shared appreciation in
[[Page 58647]]
the disclosure of the total amount the consumer would be required to
repay. Comment 33(c)(3)-1 would be redesignated as comment 33(c)(8)-5
and revised to clarify that any shared appreciation or equity that the
creditor is entitled to receive pursuant to the legal obligation must
be included in the amount the consumer will owe. Comment 33(c)(8)-6
clarifies that because the cost to the consumer must reflect the shared
appreciation, the creditor must use the 4 percent appreciation
assumption. The 4 percent appreciation assumption is currently used as
the middle appreciation assumption in the TALC disclosure. The Board
requests comment on whether a different appreciation assumption should
be used, whether a uniform appreciation assumption should be used
regardless of whether the reverse mortgage has a shared appreciation
feature, or whether the shared appreciation feature should not be
reflected in the total amount the consumer will owe and disclosed only
under the separate disclosure proposed in Sec. 226.33(c)(8)(iv).
Type of payments selected by consumer. The loan balance growth
table would also be based on the type of payments selected by the
consumer as disclosed in Sec. 226.33(c)(5). In some cases, the
consumer may have a portion of the loan amount available for
discretionary cash advances, such for a line of credit. In these
instances the creditor must make an assumption about how much the
consumer will draw over time. Under the proposal, if the consumer has
elected to receive an initial advance, periodic payments, or some
combination of the two that accounts for 50 percent or more of the
principal loan amount available to the consumer, the creditor must
assume that the consumer takes no further advances. Otherwise, the
creditor must assume that the entire available principal loan amount is
advanced to the consumer at closing, or in the case of an open-end
reverse mortgage when the consumer becomes obligated under the plan.
Comment 33(c)(8)-10.ii provides two examples. The first example
assumes a reverse mortgage with a principal loan amount of $105,000 and
creditor-finance closing costs of $5,000, leaving an available loan
amount of $100,000. The consumer elects to take $25,000 in an initial
advance and have $25,000 paid out in the form of regular monthly
advances, for a total of $50,000. The consumer chooses to leave the
remaining $50,000 in the line of credit. Because the initial advance
and the monthly payments accounts for 50 percent of the available
principal amount the creditor must assume that the consumer takes no
advances from the line of credit. The second example assumes that the
consumer elects to take $24,000 in an initial advance, have $25,000
paid in the form of regular monthly advances, and leave $51,000 in a
line of credit. Because the initial advance and the monthly payments
account for less than 50 percent of the principal loan amount, the
creditor must assume that the consumer draws all $51,000 from the line
of credit at closing.
In the consumer testing conducted for the Board, consumers were
shown reverse mortgage disclosures that included an initial advance,
monthly payments, and a line of credit. Consumers were shown
disclosures that assumed hypothetical periodic advances from the line
of credit and disclosures that assumed no advances from the line of
credit. Consumers initially found a disclosure with a hypothetical line
of credit draw to be confusing. They understood that the costs of the
reverse mortgage would be higher if the consumer drew funds from the
line of credit and did not find the hypothetical amounts to be
meaningful.
In some cases however, the consumer may choose to have most of the
reverse mortgage principal amount remain in a line of credit and take
only a small initial advance or monthly payment. In these instances, a
disclosure of total cost of the reverse mortgage may not provide the
consumer with sufficient information to judge the eventual costs of
future draws from a line of credit. The current disclosure of the table
of TALC rates requires the creditor to assume in all cases that the
consumer draws 50 percent of the line of credit at closing and obtains
no additional extensions of credit. See Appendix K(b)(9). The Board's
August 2009 HELOC Proposal would require the creditor to assume that
the consumer draws the full credit line at account opening and does not
obtain any additional extension of credit. 74 FR 43428, 43534, Aug. 26,
2009. In addition, under some reverse mortgages, including HECMs, the
credit limit on the unused portion of a consumer's line of credit grows
over time. The current disclosures do not take such as feature into
account because they assume that the consumer takes only an initial
line of credit draw. The proposed disclosures also would not reflect a
credit line growth feature because consumers in consumer testing found
a relatively simple hypothetical disclosure that assumed yearly $1500
draws on a line of credit to be confusing. The Board requests comment
on whether a different assumption should be used for reverse mortgages
that allows the consumer to take discretionary cash advances. For
example, the Board requests comment on whether the creditor should
assume that the consumer draws the entire amount at closing or at
account opening in all cases, or whether the creditor should
demonstrate a credit line growth feature.
Additional disclosures for shared equity or shared appreciation.
Proposed Sec. 226.33(c)(8) would also require additional disclosures
for reverse mortgages with shared equity or shared appreciation
features. The creditor would be required to disclose a statement and a
numerical example based on a hypothetical $100,000 increase in the
home's value under the heading, ``Shared Equity'' or ``Shared
Appreciation.'' Comment 33(c)(8)-11 provides an example. For example,
if the creditor is entitled by contract to 25 percent of any
appreciation in the value of the dwelling, the creditor may state,
``This loan includes the Shared Appreciation Agreement, which means
that we will be entitled to 25 percent of any profit made between when
you accept the loan and the sale or refinance your home. For example,
if your home were worth $100,000 more when the loan becomes due than it
is worth today, you would owe us an additional $25,000 on the loan.''
Proposed comment 33(c)(8)-11, emphasis added. In the consumer testing
conducted for the Board, the numerical example based on a $100,000
hypothetical increase in the home's value clearly explained the
potential costs to consumers. The Board requests comment on whether
another hypothetical amount should be used that could better help
consumers to understand the percentage calculation.
33(c)(9) Statements About Repayment Options
The proposed rule requires statements explaining the consumer's
repayment options. Under proposed Sec. 226.33(c)(9)(i), the creditor
would be required to state that once the loan becomes due and payable,
the consumer or consumer's heirs may pay the loan balance in full and
keep the home, or sell the home and use the proceeds to pay off the
loan. For nonrecourse transactions, the creditor would also be required
to state that if the home sells for less than the consumer owes, the
consumer will not be required to pay the difference and that if the
home sells for more than the consumer owes, the difference will be
given to the consumer or the consumer's heirs. See proposed Sec.
226.33(c)(9)(ii)(A) and (B). If the
[[Page 58648]]
reverse mortgage includes a shared equity or shared appreciation
feature, the creditor must state that the creditor will deduct any
shared appreciation or equity before paying the remaining funds to the
consumer or the consumer's heirs. For transactions that allow recourse
against the borrower, the creditor would be required to state that the
consumer or the consumer's estate will be required to repay the entire
amount of the loan, even if the home sells for less than the consumer
owes. See proposed Sec. 226.33(c)(9)(iii).
33(c)(10) Statements About Risks
Proposed Sec. 226.33(c)(10) requires the creditor to provide a
number of disclosures about risks and possible actions by the creditor.
Under this provision, the creditor would have to state that the reverse
mortgage will be secured by the consumer's home, implementing TILA
Sections 127A(a)(5) (for open-end credit) and 128(a)(9) (for closed-end
credit). 15 U.S.C. 1637a(a)(5); 15 U.S.C. 1638(a)(9). The creditor
would also have to state the possible actions it could take, including
foreclosing on the home and requiring the consumer to leave the home;
stop making periodic payments to the consumer, if applicable; prohibit
additional extensions of credit, if applicable; terminate the reverse
mortgage and require payment of the outstanding balance in a single
payment and impose fees on termination; and implement changes in the
reverse mortgage.
The creditor would also be required to describe the conditions
under which it could take these actions including, as applicable, if
the consumer fails to maintain the collateral; if the consumer ceases
to use the dwelling as his principal dwelling (including any residency
time period that will be used to determine whether the dwelling is the
consumer's principal dwelling, such as if the consumer is not in the
home for 12 consecutive months); and the consumer's failure to pay
property taxes or maintain homeowner's insurance. Comment 33(c)(10)-1
would clarify for open-end reverse mortgages that if changes may occur
under Sec. 226.5b(f)(3)(i)-(v) as proposed in the Board's August 2009
HELOC Proposal, a creditor must state that the creditor can make
changes to the plan.\123\
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\123\ See 74 FR 43428, 43487-43489, Aug. 26, 2009.
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33(c)(11) Additional Information and Web Site
Under proposed Sec. 226.33(c)(11), creditors would be required to
state that if the consumer does not understand any disclosure, the
consumer should ask questions and include a statement that the consumer
may obtain additional information at the Web site of the Federal
Reserve Board and a reference to that Web site. The August 2009
Proposals for Closed-End Mortgages and HELOCs contain similar
requirements. The Board proposes this rule pursuant to its authority in
TILA Section 105(a) to effectuate the statute's purposes, which include
facilitating consumers' ability to compare credit terms and helping
consumers avoid the uniformed use of credit.
33(c)(12) Additional Early Disclosures for Open-End Reverse Mortgages
As discussed above, TILA Section 138, implemented by current Sec.
226.31(a), requires HELOC or closed-end mortgage TILA disclosures to be
provided for reverse mortgages, including the early HELOC disclosures
(required by Sec. 226.5b), the account-opening HELOC disclosures
(required by Sec. 226.6), and the closed-end disclosures (required by
Sec. Sec. 226.18 and 19). 15 U.S.C. 1648. While the Board is proposing
to consolidate the disclosure content for reverse mortgages as much as
possible into proposed Sec. 226.33(c)(1) through (11), some of the
content for each of the disclosures differs. Accordingly, proposed
Sec. 226.33(c)(12) through (14) would require specific disclosures for
the open-end early reverse mortgage disclosures, the open-end account-
opening disclosures, and the closed-end disclosures, respectively.
Comparison to the August 2009 HELOC Proposal
A number of disclosures applicable to HELOCs do not apply to, or
are not meaningful for, reverse mortgages. A number of other required
disclosures, however, are applicable to and meaningful for reverse
mortgages and therefore are included in proposed Sec. 226.33(c), which
sets forth the required content for all reverse mortgage disclosures.
Disclosures required in Sec. 226.33(c). First, the identification
information and no-obligation statement in proposed Sec. 226.5b(c)(1),
(2), and (3) would be required by proposed Sec. 226.33(c)(1), (2) and
(4)(i) for reverse mortgages. Second, TILA Section 127A(a)(5) requires
the creditor to disclose 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. Proposed Sec. 226.33(c)(4) and (c)(10)
would implement this provision. 15 U.S.C. 1637a(a)(5).
TILA Section 127A(a)(8) requires a disclosure of HELOC repayment
options and would be implemented by proposed Sec. 226.5b(c)(9) under
the Board's August 2009 HELOC Proposal. 15 U.S.C. 1637a(a)(8). The
HELOC proposal contains a number of disclosures related to minimum
payments during a draw period and repayment period for HELOCs that
would not be applicable or meaningful to reverse mortgage consumers.
For reverse mortgages, proposed Sec. 226.33(c)(4), (c)(8), and (c)(9)
would implement TILA Section 127A(a)(8). These provisions would require
disclosures of reverse mortgage repayment options by describing the
circumstances under which the reverse mortgage may become due and
payable and providing the consumer with a table showing how much the
consumer would be required to repay under different assumed loan terms.
TILA Section 127A(a)(9), implemented by current Sec.
226.5b(d)(5)(iii), requires 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).
Proposed Sec. 226.33(c)(8) would implement this provision with some
modifications. Consumers make only one payment on a reverse mortgage
and the timing of that single payment is generally unknown. Thus, for
reverse mortgages, the disclosure contemplated by TILA Section
127A(a)(9) requires using not only a hypothetical balance of $10,000,
but also an assumed loan period. Consequently, the information provided
to consumers is likely to be less useful because it may not accurately
reflect either the timing or the amounts of their eventual repayment on
a reverse mortgage. Proposed Sec. 226.33(c)(8) would require a
disclosure of the loan balance growth over different assumed periods
using the consumer's actual reverse mortgage rather than a hypothetical
$10,000 balance. 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.
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
[[Page 58649]]
balance in full in a single payment, prohibit additional extensions of
credit and reduce the credit limit. 15 U.S.C. 1637a(a)(7)(A). In
addition, current Sec. 226.5b(d)(4)(i) requires 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 plan as specified in the initial
agreement. Proposed Sec. 226.33(c)(10) would implement these
provisions for reverse mortgages.
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). Negative amortization is a key
feature of a reverse mortgage, and TILA Section 127(A)(a)(11) would be
implemented in proposed Sec. 226.33(c)(4), (c)(8), and (c)(9) which
explain the terms of the reverse mortgage, provide a table of the loan
balance growth, and describe the consumer's repayment options,
including the consequences for the consumer if the loan balance is
greater than the home's value.
Proposed Sec. 226.5b(c)(17) in the Board's August 2009 HELOC
Proposal requires a disclosure of the credit limit. Under an open-end
reverse mortgage, the overall credit limit, which will be based on the
value of the dwelling, is not likely to be meaningful to the consumer
as a standalone disclosure. Instead, proposed Sec. 226.33(c)(5) would
require a disclosure of the amounts and types of payments that the
consumer may receive under the reverse mortgage.
Proposed Sec. 226.5b(c)(20) and 5b(c)(21) in the Board's August
2009 HELOC Proposal requires statements about asking questions and a
reference to the Board's Web site. These disclosures would be required
for reverse mortgages by proposed Sec. 226.33(c)(11).
Disclosures not applicable to reverse mortgages. For open-end
credit secured by the consumer's principal dwelling in which the
extension of credit may exceed the fair market value of the dwelling,
TILA Section 127A(a)(13) requires a disclosure that the interest on the
portion of the credit extension that is greater than the fair market
value of the dwelling is not tax deductible for Federal income tax
purposes; and that the consumer should consult a tax adviser for
further information regarding the deductibility of interest and
charges. 15 U.S.C. 1637a(a)(13). Section 226.5b(c)(8) of the August
2009 HELOC Proposal would implement this section. The disclosure about
the tax deductibility of interest is likely to be confusing to reverse
mortgage consumers and accordingly the Board proposes to use its
authority under TILA Sections 105(a) and 105(f) to exempt reverse
mortgages from the requirements of TILA Section 127A(a)(13). For
reverse mortgages, interest accrues over time but the consumer does not
make regular payments of interest or principal. The consumer generally
would not be able to deduct interest payments until the reverse
mortgage terminates and the consumer makes the single payment. In
addition, in many cases neither the consumer nor the lender can be sure
whether extensions of credit greater than the fair market value of the
dwelling will eventually be made. The Board has considered that reverse
mortgages are secured by the consumer's principal dwelling and are
likely to be made for relatively large amounts, and in most cases the
consumer will have the right of rescission. The Board also considered
that reverse mortgage borrowers may lack financial sophistication
relative to the complexity of the reverse mortgage, the importance of
the credit and supporting property to the borrower, and whether the
goal of consumer protection would be undermined by an exception. In
addition, the Board considered the extent to which the requirement to
provide the tax deductibility disclosure complicates, hinders, or makes
more expensive the credit process for reverse mortgages. The Board
believes that an exemption is warranted because the tax deductibility
disclosure is unlikely to provide a meaningful benefit to reverse
mortgage consumers.
Proposed Sec. 226.5b(c)(18) in the Board's August 2009 HELOC
Proposal requires disclosures regarding fixed-rate and fixed-term
payment plans. Reverse mortgages may have either fixed or variable
rates, and may have fixed-term options for making payments to the
borrower, such as providing a monthly payment for a period of 10 years.
However, the Board is unaware of any reverse mortgage plans that have
fixed-rate or -term repayment plans, which, for example, would allow
the consumer to draw funds that would accrue interest at a fixed rate
for a period of time. Therefore the Board is not proposing to require
such a disclosure for reverse mortgages, but the Board requests comment
on whether reverse mortgages may have fixed-rate and -term payment
plans.
Proposed Sec. 226.5b(c)(19) in the Board's August 2009 HELOC
Proposal requires disclosures about required credit insurance and debt
cancellation and debt suspension coverage. As discussed below in the
section-by-section analysis to Sec. 226.40, the Board is proposing to
prohibit creditors from conditioning a reverse mortgage on the purchase
of any other financial or insurance product. Accordingly, the Board
does not propose to require the disclosures about required credit
insurance and debt cancellation and debt suspension coverage.
33(c)(12)(i) Statement Regarding Refund of Fees Under Sec. 226.5b(e)
Proposed Sec. 226.33(c)(12)(i), modeled on proposed Sec.
226.5b(c)(5), requires a creditor to disclose in the table as part of
the early open-end reverse mortgage 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
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 plan prior to the expiration of the three-day period. See 74 FR
43428, 43461, August 26, 2009.
33(c)(12)(ii) Refund of Fees Under Sec. 226.40(b)
As discussed in the section-by-section analysis to Sec. 226.40(b)
below, the Board is proposing to prohibit creditors from making a
reverse mortgage unless the consumer has received independent
counseling. In addition, the proposal would require creditors to refund
all fees paid (except for the fee for counseling itself) if the
consumer notifies the creditor within three business days of receiving
the counseling that the consumer does not want the reverse mortgage.
Proposed Sec. 226.33(c)(12)(ii) requires a creditor to disclose in the
table as part of the early open-end reverse mortgage disclosures a
statement regarding the consumer's refund right after counseling.
33(c)(12)(iii) Changes to Disclosed Terms
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).
The Board's August 2009 HELOC Proposal implements this provision in
proposed Sec. 226.5b(c)(4). Proposed Sec. 226.5b(c)(4)(i) requires an
[[Page 58650]]
identification of any disclosed term subject to change prior to opening
the plan. This statement would be required to be placed below the
proposed early HELOC disclosure table. Proposed Sec. 226.5b(c)(4)(ii)
requires a statement that the consumer may receive a refund of all fees
paid if a disclosed term changes (other than changes due to
fluctuations in the index in a variable-rate plan) and the consumer
elects not to open the account. This statement would be required to be
inside the proposed early HELOC disclosure table. See 74 FR 43428,
43460-43461, August 26, 2009.
Proposed Sec. 226.33(c)(12)(iii) requires the disclosure required
by proposed Sec. 226.5b(c)(4)(ii)--the statement regarding the
consumer's right to a refund of fees if a disclosed term changes. For
clarity, proposed Sec. 226.33(c)(12)(i) through (c)(12)(iii) require
disclosures that must be placed inside the proposed early open-end
reverse mortgage table. Proposed Sec. 226.33(c)(12)(iv), discussed
below, would require disclosures that must be placed directly beneath
the table.
33(c)(12)(iv) Statement About Refundability of Fees
Proposed Sec. 226.33(c)(12)(iii) is modeled after Sec.
226.5b(c)(4)(i) and (c)(22) and the associated commentary in the
Board's August 2009 HELOC Proposal. See 74 FR 43428, 43460-43461,
43483-43484, August 26, 2009. It would require an identification of any
disclosed term subject to change prior to opening the plan, 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 disclosure statement. Each of these disclosures
would be required to be placed directly beneath the early open-end
reverse mortgage disclosure table. See proposed Sec. 226.33(d)(4)(vi).
33(c)(13) Additional Disclosures Before the First Transaction Under an
Open-End Reverse Mortgage
Proposed Sec. 226.33(c)(13) would require additional disclosures
before the first transaction for open-end reverse mortgages. Its
provisions are modeled after those in proposed Sec. 226.6(a)(2) in the
Board's August 2009 HELOC Proposal.
As discussed above in the section-by-section analysis under Sec.
226.33(c)(12), a number of disclosures applicable to HELOCs are not
applicable to, or are not meaningful for, reverse mortgages. A number
of other required disclosures, however, are applicable to and
meaningful for reverse mortgages and thus are included in proposed
Sec. 226.33(c), which sets forth the required content for all reverse
mortgage disclosures.
Disclosures required in Sec. 226.33(c). As discussed above in the
section-by-section analysis to Sec. 226.33(c)(12), the proposed
disclosures required by Sec. 226.33(c) include the disclosures that
would be required by proposed Sec. 226.6(a)(2)(i) (identification
information); (a)(2)(ii) (security interest and risk to home);
(a)(2)(iii) (possible actions by creditor); (a)(2)(v) (payment terms);
(a)(2)(xvi) (negative amortization); (a)(2)(xviii) (credit limit);
(a)(2)(xxiv) (no obligation statement); (a)(2)(xxv) (statement about
asking questions); and (a)(2)(xxvi) (statement about Board's Web site).
Disclosure required by Sec. 226.6. TILA Section 127(a)(2) provides
that creditors must explain as part of the account-opening disclosures
the method used to determine the balance to which rates are applied. 15
U.S.C. 1637(a)(2). Under the Board's 2009 HELOC Proposal, a creditor
would be required to disclose below the account-opening table the name
of the balance computation method used by the creditor for each feature
of the account, along with a statement that an explanation of the
method(s) is provided in the account agreement or disclosure statement.
See 74 FR 43428, 43539, August 26, 2009 (proposed Sec.
226.6(a)(2)(xxii)). In addition, proposed Sec. 226.6(a)(4)(i)(D) would
require creditors to explain the balance computation method in the
account-opening agreement or other disclosure statement. See 74 FR
43428, 43506, August 26, 2009.
For reverse mortgages, the Board is not proposing to include a
disclosure below the account-opening table of the name of the balance
computation method along with a statement that an explanation of the
method is provided in the account agreement or disclosure statement.
Under the Board's HELOC proposal, however, reverse mortgage creditors
would be required to explain the balance computation method in the
account-opening agreement or other disclosure statement. The Board
believes that because reverse mortgage consumers do not make regular
payments to the lender, a disclosure of the balance computation method
below the account-opening table would be unnecessary and could result
in information overload for consumers. However, creditors would still
be required to provide the information in the account-opening agreement
or other disclosure statement.
Disclosures not applicable to reverse mortgages. Proposed Sec.
226.33(c)(13) does not include the disclosures that would be required
by Sec. 226.6(a)(2)(iv) (tax implications); (a)(2)(xix) (statements
about fixed-rate and -term payment plans); and (a)(2)(xx) (required
insurance, debt cancellation or debt suspension coverage). For the
reasons discussed in the section-by-section analysis to Sec.
226.33(c)(12), these disclosures do not apply to, or are not meaningful
for, reverse mortgages.
In addition, a number of other required account-opening disclosures
for HELOCs are not relevant or meaningful in the reverse mortgage
context. Proposed Sec. 226.6(a)(2)(x), which requires disclosure of
any late-payment fee, and proposed Sec. 226.6(a)(2)(xiii), which
requires disclosure of any returned-payment fee, do not apply to
reverse mortgages because the consumer does not make regular payments.
Also, TILA Section 127(a)(1), implemented by proposed Sec.
226.6(a)(2)(xxi), provides that a creditor must disclose as part of the
account-opening disclosures a statement of when finance charges begin
to accrue, including an explanation of whether any time period exists
within which any credit extended may be repaid without incurring a
finance charge. 15 U.S.C. 1637(a)(1). However, disclosure of a grace
period for reverse mortgages is not relevant or meaningful to consumers
who are not making regular payments. For this reason the Board proposes
to exercise its authority under TILA Sections 105(a) and 105(f) to
exempt reverse mortgages from the requirement to state whether or not
any time period exists within which any credit extended may be repaid
without incurring a finance charge. The Board has considered that
reverse mortgages are secured by the consumer's principal dwelling and
are likely to be made for relatively large amounts, and in most cases
the consumer will have the right of rescission. The Board also
considered that reverse mortgage borrowers may lack financial
sophistication relative to the complexity of the reverse mortgage
transaction, the importance of the credit and supporting property to
the borrower and whether the goal of consumer protection would be
undermined by an exception. The Board also considered the extent to
which the requirement to provide the grace period disclosure
complicates, hinders, or makes more expensive the credit process for
reverse mortgages. The Board believes that an exemption is warranted
because the grace period disclosure may be confusing to reverse
mortgage consumers who are not making regular payments.
[[Page 58651]]
Disclosures required by Sec. 226.33(c)(13). Proposed Sec.
226.33(c)(13)(i) and (ii), modeled on proposed Sec. 226.6(a)(2)(xii)
and (a)(2)(xiv) in the Board's August 2009 HELOC Proposal, requires
disclosure of transaction charges imposed for use of the reverse
mortgage and any fees for failure to comply with transaction
limitations. Proposed Sec. 226.33(c)(13)(iii), modeled on proposed
Sec. 226.6(a)(2)(xxiii), implements TILA Section 127(a)(7) which
requires creditors offering credit subject to Sec. 226.5b to provide
notices of billing rights at account opening. 15 U.S.C. 1637(a)(7).
Proposed Sec. 226.33(c)(13)(iv), modeled on proposed Sec.
226.6(a)(2)(xxiv)(B) in the Board's August 2009 HELOC Proposal,
requires a statement that the consumer should confirm the terms in the
disclosure statement. The Board proposes this rule pursuant to its
authority in TILA Section 105(a) to effectuate the statute's purposes,
which include facilitating consumers' ability to compare credit terms
and helping consumers avoid the uniformed use of credit.
33(c)(14) Additional Disclosures for Closed-End Reverse Mortgages
Proposed Sec. 226.33(c)(14) would require additional disclosures
for closed-end reverse mortgages. The proposed provisions are modeled
on those in the Board's August 2009 Closed-End Mortgage Proposal.
Comparison to the August 2009 Closed-End Mortgage Proposal
The Board's August 2009 Closed-End Mortgage Proposal would create a
new Sec. 226.38 setting forth the content for closed-end mortgage
disclosures, replacing the disclosures currently required by Sec.
226.18. Many of the new and revised disclosures in proposed Sec.
226.38 focus on disclosing possible changes to the consumer's monthly
payment amount and thus would not apply to or be meaningful for reverse
mortgage consumers. Accordingly, proposed Sec. 226.33(c)(14) would not
require some the disclosures required by proposed Sec. 226.38. Other
disclosures required by proposed Sec. 226.38 would be required
elsewhere in Sec. 226.33(c) for reverse mortgages.
Disclosures required in Sec. 226.33. Proposed Sec. 226.38(a)
would require a loan summary disclosure including information about the
loan amount, term, type, and features. Some, but not all, of the items
in the loan summary disclosure would be required (or would have
parallel provisions) elsewhere under proposed Sec. 226.33(c). For
example, the loan amount, term, and type would be disclosed for all
reverse mortgages under proposed Sec. 226.33(c)(4), (c)(5), and
(c)(6)(ii)(B). Proposed Sec. 226.38(a) would also require a disclosure
of total settlement charges. As discussed more fully above, proposed
Sec. 226.33(c)(7) would require a disclosure of costs to the consumer
modeled more closely after the fee disclosure requirements for HELOCs.
Proposed Sec. 226.38(c) would require an interest rate and payment
summary for closed-end mortgages. Proposed Sec. 226.33(c)(14) would
not require the interest rate and payment summary, because for reverse
mortgages there is only a single final payment and the timing of that
payment is unknown and would have to be estimated. Instead, other
provisions in proposed Sec. 226.33(c) would require disclosure of the
types of payments the consumer could receive (Sec. 226.33(c)(5)), a
summary of the loan balance over time (Sec. 226.33(c)(8)), and
descriptions of the consumer's repayment options (Sec. 226.33(c)(9)).
These disclosures would give a reverse mortgage consumer relevant and
meaningful information about the cost of the loan and the options for
repaying the loan. In addition, proposed Sec. 226.33(c)(6)(ii)(C),
discussed above, would require information about the interest rate
calculation.
Proposed Sec. 226.38(d) would require disclosure of a section
labeled, ``Key Questions About Risk.'' This section would include
information about rate increases, payment increases, prepayment
penalties and other potentially risky features, such as disclosures
about shared equity or shared appreciation features. The disclosures in
proposed Sec. 226.38(d) regarding payment increases, interest-only
payments, negative amortization, balloon payments, demand features and
no- or low-documentation loans either do not apply to reverse mortgages
or would be more meaningful if disclosed in a different way. For
example, the proposed disclosures of the loan balance growth in Sec.
226.33(c)(8) and the consumer's repayment options in proposed Sec.
226.33(c)(9) provide information about the negative amortization and
balloon payment features of reverse mortgages that is tailored
specifically for the reverse mortgage context. In addition, proposed
Sec. 226.33(c)(4) and (c)(10) would require disclosures about certain
risks applicable to reverse mortgages. Proposed Sec. 226.33(c)(8)
would require disclosures about features such as shared equity or
shared appreciation.
Proposed Sec. 226.38(e) in the August 2009 Closed-End Mortgage
Proposal would require disclosure of information about payments for
closed-end mortgages. Proposed Sec. 226.33(c) would include some, but
not all of these disclosures. Proposed Sec. 226.33(c) would not
require disclosures of escrows for taxes and insurance or disclosures
about mortgage insurance premiums; instead, Sec. 226.33(c)(4)(iii) and
(c)(10)(iii)(C) would require disclosures that the reverse mortgage
consumer remains responsible for taxes and insurance.
Disclosures not required. Proposed Sec. 226.38(f) and (g) in the
August 2009 Closed-End Mortgage Proposal would require disclosures of
additional information, most of which would be required for reverse
mortgages by Sec. 226.33(c). However, as discussed below, disclosures
about tax deductibility of interest, and a statement that there is no
guarantee the consumer may refinance, would not be required for reverse
mortgages.
For closed-end credit secured by the consumer's principal dwelling
in which the extension of credit may exceed the fair market value of
the dwelling, TILA Section 128(a)(15) requires a disclosure that the
interest on the portion of the credit extension that is greater than
the fair market value of the dwelling is not tax deductible for Federal
income tax purposes; and the consumer should consult a tax adviser for
further information regarding the deductibility of interest and
charges. 15 U.S.C. 1638(a)(15). The disclosure about the tax
deductibility of interest is likely to be confusing to reverse mortgage
consumers and accordingly the Board proposes to use its authority under
TILA Sections 105(a) and 105(f) to exempt reverse mortgages from the
requirements of TILA Section 128(a)(15).
Although reverse mortgages accrue interest over time, because the
consumer does not make regular payments on a reverse mortgage, the
consumer generally would not be able to deduct interest payments until
the reverse mortgage terminates and the consumer makes the single
payment. In addition, in many cases neither the consumer nor the lender
will know whether or not extensions of credit greater than the fair
market value of the dwelling will eventually be made. The Board has
considered that reverse mortgages are secured by the consumer's
principal dwelling and are likely to be made for relatively large
amounts, and in most cases the consumer will have the right of
rescission. The Board also considered that reverse mortgage borrowers
may lack financial sophistication relative to the complexity of the
reverse mortgage transaction, the importance of the credit
[[Page 58652]]
and supporting property to the borrower and whether the goal of
consumer protection would be undermined by an exception. In addition,
the Board considered the extent to which the requirement to provide the
tax deductibility disclosure complicates, hinders, or makes more
expensive the credit process for reverse mortgages. The Board believes
that an exemption is warranted because the potential the tax
deductibility disclosure is unlikely to provide a meaningful benefit to
reverse mortgage consumers.
Proposed Sec. 226.38(h) in the August 2009 Closed-End Proposal
requires disclosures about credit insurance and debt cancellation and
debt suspension coverage. Reverse mortgage consumers do not make
regular payments and the death of the consumer is one of the events
that causes a reverse mortgage to become due and payable. Reverse
mortgage consumers do not appear to be offered credit insurance or debt
cancellation or debt suspension coverage. Accordingly, the disclosures
about credit insurance and debt cancellation and debt suspension
coverage are not applicable and would not be required. The Board
requests comment on whether credit insurance and debt cancellation and
debt suspension coverage may be offered for reverse mortgages.
TILA Section 128(b)(2)(C) requires additional disclosures for loans
secured by a dwelling in which the interest rate or payments may vary.
15 U.S.C. 1638(b)(2)(C). Specifically, creditors must provide
``examples of adjustments to the regular required payment on the
extension of credit based on the change in the interest rates specified
by the contract for such extension of credit. Among the examples
required is an example that reflects the maximum payment amount of the
regular required payments on the extension of credit, based on the
maximum interest rate allowed under the contract.'' TILA Section
128(b)(2)(C), 15 U.S.C. 1638(b)(2)(C). Creditors must provide these
disclosures within three business days of receipt of the consumer's
written application, as provided in TILA Section 128(b)(2)(A),
implemented in Sec. 226.19(a)(1)(i). TILA Section 128(b)(2)(C)
provides that these examples must be in conspicuous type size and
format and that the payment schedule be labeled ``Payment Schedule:
Payments Will Vary Based on Interest Rate Changes.'' Section
128(b)(2)(C) requires the Board to conduct consumer testing to
determine the appropriate format for providing the disclosures to
consumers so that the disclosures can be easily understood, including
the fact that the initial regular payments are for a specific time
period that will end on a certain date, that payments will adjust
afterwards potentially to a higher amount, and that there is no
guarantee that the borrower will be able to refinance to a lower
amount. 15 U.S.C. 1638(b)(2)(C). The Board is implementing these
requirements in an interim rule published elsewhere in today's Federal
Register.
The requirements of TILA Section 128(b)(2)(C) are designed to
ensure that consumers understand the potential for changes in their
regular payment amount under a variable-rate mortgage and are aware
that the borrower may not be able to refinance to a lower amount once
such a change occurs. Armed with this information, consumers can
determine whether payments on a variable-rate mortgage could become
unaffordable. For reverse mortgages, however, these disclosures are
unlikely to be meaningful and may cause confusion because consumers do
not make regular payments to the lender. A disclosure that there is no
guarantee that a consumer can refinance to lower their payment may be
confusing to someone who is not making regular payments. Similarly,
``examples of adjustments to the regular required payment'' based on
changes in the interest rate provides information that is less useful
to reverse mortgage consumers than to consumers with traditional
mortgages. This is because reverse mortgage consumers do not make a
``regular required payment,'' but rather only a single final payment.
In addition, other factors, such as the consumer's longevity and
changes to the home's value, may have significant effects on the total
payment amount. In most cases, the total repayment amount will be
subject to a nonrecourse limit, meaning that the consumer's maximum
possible payment will be limited to the proceeds from the sale of the
home (unless the consumer wishes to retain the home). Thus, even if a
variable interest rate were to climb to its maximum possible amount,
the effect may not be to increase the maximum amount the consumer could
owe, but rather how quickly the consumer's loan balance reached an
amount subject to the nonrecourse limit.
For these reasons, the proposed rule would not require disclosures
of examples of changes to a reverse mortgage's final payment amount
based on changes in the interest rate, or a statement that there is no
guarantee the consumer can refinance to a lower payment. Under the
Board's exception and exemption authorities under TILA Sections 105(a)
and 105(f) the Board is proposing to make an exception to these
requirements in TILA Section 128(b)(2)(C) for reverse mortgages. The
Board believes that there is a potential for confusion or information
overload from these disclosures and that an exception for reverse
mortgages will effectuate the purposes of TILA of providing meaningful
disclosure of credit terms to the consumer and assisting consumers in
avoiding the uninformed use of credit. The Board has considered that
reverse mortgages are secured by the consumer's principal dwelling and
are likely to be made for relatively large amounts. The Board also
considered that reverse mortgage borrowers may lack financial
sophistication relative to the complexity of the reverse mortgage
transaction, the importance of the credit and supporting property to
the borrower, and whether the goal of consumer protection would be
undermined by an exception.
In addition, the Board considered the extent to which the
requirements complicate, hinder, or make more expensive the credit
process for reverse mortgages. Given the importance of the reverse
mortgage to the borrower and the fact that the disclosures would not
provide a meaningful benefit in the form of useful information or
protection, the Board believes that an exemption is warranted. As
discussed below, the Board is proposing new disclosures to explain the
total cost of a reverse mortgage more effectively pursuant to its
authority in TILA Section 105(a) to effectuate the statute's purposes,
which include facilitating consumers' ability to compare credit terms
and helping consumers avoid the uniformed use of credit.
Disclosures required by Sec. 226.33(c)(14). TILA Section 128
requires disclosure of the ``finance charge,'' using that term; the
``amount financed,'' using that term; the sum of the amount financed
and the finance charge, termed the ``total of payments;'' and the
number, amount, and due dates or periods of payments scheduled to repay
the total of payments. 15 U.S.C. 1638(a)(2)(A), (a)(3), (a)(5), (a)(6),
and (a)(8). Proposed Sec. 226.33(c)(4)(v) and (c)(9) would implement
the requirement to disclose the number and due dates of payments by
requiring disclosure of when the reverse mortgage becomes due and
payable and that the consumer must make a single payment to repay the
reverse mortgage.
Proposed Sec. 226.33(c)(14), modeled on proposed Sec.
226.38(e)(5) in the August 2009 Closed-End Mortgage Proposal, would
implement TILA Section 128 by requiring disclosure of the total
payments, the finance charge, and the amount financed for all closed-
end
[[Page 58653]]
reverse mortgages. In the August 2009 Closed-End Mortgage Proposal, the
Board proposed to use its exception authorities to make certain changes
to the disclosures required by TILA Section 128. See 74 FR 43232,
43305-43309, Aug. 26, 2009; 15 U.S.C. 1638(a)(2)(A), (a)(3), (a)(5).
The creditor would be required to disclose the total payments amount
calculated based on the number and amount of scheduled payments in
accordance with the requirements of Sec. 226.18(g), together with a
statement that the total payments is calculated on the assumption that
market rates will not change, if applicable, and a statement of the
estimated loan term. The creditor would be required to disclose the
interest and settlement charges, using that term, calculated as the
finance charge as required by Sec. 226.4, expressed as a dollar
figure, together with a brief statement that the interest and
settlement charges amount represents part of the total payments amount.
The interest and settlement charges would be treated as accurate if the
amount disclosed is understated by no more than $100 or is greater than
the amount required to be disclosed. The creditor would also be
required to disclose the amount financed, using that term and expressed
as a dollar figure, together with a brief statement that the interest
and settlement charges and the amount financed are used to calculate
the APR.
33(c)(15) Disclosures Provided Outside the Table
For closed-end reverse mortgages, proposed Sec. 226.33(c)(15)
would also require the creditor to comply with proposed Sec.
226.38(j), which requires separate disclosures of the itemization of
the amount financed, a statement of whether the consumer is entitled to
a rebate of any finance charge in certain circumstances, late payment
charges, a statement that the consumer may obtain property insurance
from any insurer that is acceptable to the creditor, a statement of the
consumer should refer to the contract for certain other information,
and the statements whether or not a subsequent purchaser may be
permitted to assume the obligation. Creditors would only need to
provide these statements as applicable. As under the August 2009
Closed-End Mortgage Proposal, these disclosures would be required to be
outside the reverse-mortgage disclosure table required by Sec.
226.33(d).
For open-end credit, Sec. 226.6(a)(3) through (a)(5) require
certain disclosures to be provided at account-opening. Under the
Board's August 2009 proposal, these disclosures would be required to be
outside the table containing the disclosures under Sec. 226.6.(a)(2).
For reverse mortgages, proposed Sec. 226.33(c)(15) would require the
disclosures under Sec. 226.6(a)(3) (disclosure of charges imposed as
part of a home-equity plan), (a)(4) (disclosure of rates for home-
equity plans), and (a)(5)(ii) through (iv) (disclosure of security
interests, statement of billing rights, and possible creditor actions)
as applicable. As under the August 2009 HELOC Proposal, these
disclosures would be required to be outside the reverse-mortgage
disclosure table required by Sec. 226.33(d). As discussed above, the
proposed reverse mortgage disclosures would not include disclosures
regarding voluntary credit insurance, debt cancellation, or debt
suspension, or additional information about fixed-rate and -term
payment plans.
33(c)(16) Assumptions for Closed-End Disclosures
For creditors to calculate the total of payments, finance charge,
and annual percentage rate for closed-end credit, they must use an
assumed loan term. Current comment 17(c)(1)-14 provides guidance on
assumptions creditors must use in making these disclosures for closed-
end reverse mortgages. For clarity, the current comment would be moved
into the regulation as proposed Sec. 226.33(c)(16). The proposed
provision and comment 33(c)(16)-1 would also clarify that the use of
these rules does not, by itself, make the disclosures estimates. Thus,
creditors using these rules for the disclosures required by proposed
Sec. 226.19(a)(2) would be able to comply with that section's
limitation on using estimated disclosures.
Under proposed Sec. 226.33(c)(16), if the reverse mortgage has a
specified period for disbursements but repayment is due only upon the
occurrence of a future event such as the death of the consumer, the
creditor must assume that disbursements will be made until they are
scheduled to end. The creditor must assume repayment will occur when
disbursements end (or within a period following the final disbursement
which is not longer than the regular interval between disbursements).
This assumption should be used even though repayment may occur before
or after the disbursements are scheduled to end.
For example, if the reverse mortgage will provide the consumer with
monthly payments for a period of 10 years, the creditor must assume
that payments continue for 10 years and that repayment occurs at the
end of that time. This assumption must be used even though the consumer
may still be living in the home at the end of 10 years and may not
actually repay the reverse mortgage at that time.
If the reverse mortgage has neither a specified period for
disbursements nor a specified repayment date, and these terms will be
determined solely by reference to future events including the
consumer's death, the creditor may assume that the disbursements will
end upon the consumer's death (estimated by using actuarial tables, for
example). The creditor may assume that repayment will be required at
the same time as the consumer's death (or within a period following the
date of the final disbursement which is not longer than the regular
interval for disbursements). Alternatively, the creditor may base the
disclosures upon another future event it estimates will be most likely
to occur first. (If terms will be determined by reference to future
events which do not include the consumer's death, the creditor must
base the disclosures upon the occurrence of the event estimated to be
most likely to occur first.) For example, if the consumer is scheduled
to receive monthly payments for as long as the consumer remains in the
home, the creditor must assume that disbursements end and repayment
occurs either at the consumer's life expectancy, or another future
event the creditor estimates will be most likely to occur first.
In making the disclosures, the creditor must assume that all
disbursements and accrued interest will be paid by the consumer. For
example, if the note has a nonrecourse provision providing that the
consumer is not obligated for an amount greater than the value of the
house, the creditor must nonetheless assume that the full amount to be
disbursed will be repaid. The Board requests comment on whether other
assumptions should be used in making the disclosures required by Sec.
226.33(c)(14), or whether other clarifications about how to make these
disclosures for reverse mortgages would be beneficial. As discussed
below, the Board also requests comment on whether retaining the table
of life expectancies (updated to current figures) in Appendix L would
be useful in determining the total of payments, annual percentage rate,
and finance charge under proposed Sec. 226.33(c)(14). In addition, a
borrower's age may be calculated in different ways. In some cases, the
borrower's age is based on the borrower's nearest birthday (even if
that birthday is in the future) rather than on the borrower's last
birthday. For example, under the first method someone born on January
1, 1930 would be considered to be 81 years old on
[[Page 58654]]
September 1, 2010 because the borrower is nearer to his next birthday
than his last birthday. Under the second method, the borrower would not
be considered to be 81 years old until January 1, 2011. The Board
requests comment on whether to adopt a uniform assumption for
determining the consumer's age and, if so, which method to use.
33(d) Special Disclosure Requirements for Reverse Mortgages
Proposed Sec. 226.33(d) would provide special disclosure
requirements for reverse mortgages in addition to those in Sec.
226.31. Proposed Sec. 226.33(d)(1) would require the open-end early
reverse-mortgage disclosures be provided at the earlier of three
business days after application or three business days before the first
transaction under the plan. The timing requirement for the open-end
early reverse mortgage disclosures would differ slightly from the
timing for the early HELOC disclosures under the Board's August 2009
HELOC Proposal. Under the HELOC Proposal, creditors would be required
to provide the parallel disclosures under Sec. 226.5b not later than
account opening or three business days following receipt of the
consumer's application, whichever is earlier. However, for reverse
mortgages, TILA Section 138 requires that the open-end reverse-
mortgage-specific disclosures be provided at least three business days
before the first transaction under the plan. See current Sec.
226.31(c)(2); 15 U.S.C. 1648.
For the account-opening open-end reverse mortgage disclosures,
proposed Sec. 226.33(d)(2) would require that the disclosures be
provided to the consumer at least three business days before the first
transaction under the plan. As discussed above, TILA Section 127(a) and
current Sec. 226.5(b)(1) require the HELOC account-opening disclosures
be provided before the first transaction under the plan. 15 U.S.C.
1637. For reverse mortgages however, TILA Section 138 requires
disclosures be provided at least three business days before the first
transaction under an open-end reverse mortgage plan. 15 U.S.C. 1648.
Because the proposal combines the HELOC disclosures with the reverse
mortgage specific disclosures, only one timing rule may apply. The
proposal follows the timing requirements that are specific to reverse
mortgages. Reverse mortgages are complex transactions and the Board
believes that consumers would benefit from receiving open-end
disclosures at least three business days before becoming obligated on
the plan so that they have sufficient time to review and contemplate
the 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. 15 U.S.C. 1604(a).
For closed-end reverse mortgages, TILA Section 128(b)(2) requires
creditors to provide good faith estimates of the closed-end TILA
disclosure within three business days after application and at least
seven business days before consummation, and before the consumer has
paid a fee other than a fee for obtaining a credit history. If
subsequent events cause changes to the APR that exceed certain
tolerances, the creditor must provide a corrected disclosure that the
consumer must receive at least three business days before consummation.
15 U.S.C. 1638(b)(2). TILA Section 138 requires that reverse mortgage
disclosures be provided at least three business days before closing. 15
U.S.C. 1648. Proposed Sec. 226.33(d)(3) would require creditors to
provide the disclosures required by Sec. 226.33(c) for closed-end
reverse mortgages in accordance with the rules in Sec. 226.19(a).
Since Sec. 226.19(a), as proposed in the 2009 Closed-End Mortgage
Proposal, requires the TILA good faith estimates to be provided at
least 7 business days before closing, and any required re-disclosures
to be provided at least three business days before closing, the timing
requirements in proposed Sec. 226.19(a) would satisfy the timing
requirements of both TILA Section 128 and Section 138.
In addition, Sec. 226.19(a) permits consumers to waive the seven-
and three-day waiting periods for a bona fide personal financial
emergency, implementing TILA Section 128(b)(2)(F). 15 U.S.C.
1638(b)(2)(F). These waiver provisions would also apply to the closed-
end reverse mortgage disclosures required by proposed Sec.
226.33(d)(3). TILA Section 138 does not explicitly provide for such a
waiver for the reverse-mortgage-specific disclosures. However, the
Board believes that it would be impractical for creditors and consumers
to allow waivers for the waiting periods for some parts of the reverse
mortgages disclosures and not others, or to allow only partial waivers
of the waiting periods. The Board also believes that the benefits to
reverse mortgage consumers of allowing them to waive the disclosure
waiting periods for bona fide personal financial emergencies outweigh
the need to have the extra time to review the disclosures in those
cases. Accordingly, the Board proposes to apply the waiver rules in
Sec. 226.19(a) to the closed-end reverse mortgage disclosures. The
Board proposes this rule pursuant to its authority in TILA Section
105(a) to make adjustments to the statute to carry out its purposes and
facilitate compliance with TILA. 15 U.S.C. 1604(a).
Section 226.19(a), as proposed in the Board's 2009 Closed-End
Mortgage proposal, would also limit creditors' use of estimates in
making final TILA disclosures. As a result of applying the rules in
proposed Sec. 226.19(a) to closed-end reverse mortgage disclosures,
this proposal would also limit the use of estimates in the same manner.
As discussed in the section-by-section analysis to Sec. 226.33(c)(16)
above, while creditors must use certain assumptions in Sec.
226.33(c)(16) in making closed-end reverse mortgage disclosures, use of
those assumptions would not, by themselves, make the disclosures
estimates. See proposed comment 33(c)(16)-1. Thus, creditors would be
able to comply with proposed Sec. 226.19(a). The Board requests
comment, however, on whether there are other disclosures that creditors
would need to estimate in final closed-end reverse mortgage
disclosures.
Proposed Sec. 226.33(d)(4) would require the disclosures in
Sec. Sec. 226.33(c)(3) through (c)(10), (c)(12)(i), (c)(12)(ii),
(c)(12)(iii), (c)(13)(i), (c)(13)(ii), and (c)(14) be provided in the
form of a table with headings, content and format substantially similar
to the model forms in Appendix K. It would also require certain
information to be placed directly above the table, other information to
be placed directly below the table and limit the information that could
be within the table. It would also require that certain information be
disclosed in bold text. For closed-end reverse mortgages it would also
require that the APR be more conspicuous than other required
disclosures, as required by TILA Section 122, and be in at least 16
point font. 15 U.S.C. 1632. Proposed Sec. 226.33(d)(5), modeled after
proposed Sec. Sec. 226.5b(b)(3) and 6(a)(1)(iv), would provide rules
for disclosure of fees based on a percentage of another amount.
33(e) Reverse Mortgage Advertising
Overview
Currently, advertisements for reverse mortgages are subject to
general advertising requirements under Sec. 226.16, for open-end
credit, or Sec. 226.24, for closed-end credit. Board staff extensively
reviewed reverse mortgage advertisements, which
[[Page 58655]]
generally focused on special features of reverse mortgages, such as the
fact that payments of principal and interest are not required. As a
result, the Board proposes additional advertising requirements for
reverse mortgages.
The Board proposes to require that a reverse mortgage advertisement
disclose clarifying information if the advertisement contains one or
more of the seven following types of statements: (1) A reverse mortgage
is a ``government benefit''; (2) a reverse mortgage provides payments
``for life'' or a consumer need not repay a reverse mortgage ``during
your lifetime''; (3) a consumer ``cannot lose'' or there is ``no risk''
to a consumer's home with a reverse mortgage; (4) a consumer or a
consumer's heirs ``cannot owe'' or will ``never repay'' more than the
value of the consumer's home; (5) payments are not required for a
reverse mortgage; (6) government fee limits apply to a reverse
mortgage; or (7) a reverse mortgage does not affect a consumer's
eligibility for or benefits under a government program. The Board also
proposes to require that a reverse mortgage advertisement that refers
to housing or credit counseling state a telephone number and Internet
Web site for housing counseling resources maintained by HUD. The
proposed requirements apply to advertisements for both open-end and
closed-end reverse mortgages.
Authority
TILA Section 105(a) provides the Board with general authority to
prescribe regulations to carry out TILA's purposes, which include
ensuring meaningful disclosure of credit terms so that consumers will
be able to compare available credit terms and avoid the uninformed use
of credit. 15 U.S.C. 1601(a), 1604(a). TILA Section 147(a) authorizes
the Board to require by regulation that an advertisement for open-end
credit secured by a consumer's principal dwelling that sets forth a
specific plan term clearly and conspicuously disclose any information
the Board prescribes, in addition to the credit term information set
forth in TILA Section 147(a)(1)-(3) (as implemented in Sec.
226.16(d)). 15 U.S.C. 1665b(a).
The Board proposes to use its general authority under TILA Section
105(a) and, for open-end reverse mortgage advertisements, its authority
under TILA Section 147 to require that a reverse mortgage advertisement
disclose clarifying information if the advertisement contains any of
seven types of statements.\124\ The Board also proposes to use its
authority under TILA Sections 105(a) and 147 to require that an
advertisement provide a telephone number and Internet Web site for
HUD's housing counseling resources if the advertisement contains a
reference to housing or credit counseling. The foregoing information
would be helpful to consumers considering a reverse mortgage, and
requiring its inclusion would promote the informed use of credit.
---------------------------------------------------------------------------
\124\ Most reverse mortgages are lines of credit, which are
open-end credit transactions. See U.S. Government Accountability
Office, GAO-09-606 at 8.
---------------------------------------------------------------------------
TILA Section 122 authorizes the Board to require that information
be disclosed in a clear and conspicuous manner. 15 U.S.C. 1632.
Pursuant to the Board's authority under TILA Section 122, information
required to accompany a statement that triggers the disclosure
requirement (a triggering statement) must be clearly and conspicuously
disclosed.
Research and Outreach
The Board's staff extensively reviewed reverse mortgage advertising
copy in developing the proposed provisions regarding reverse mortgage
advertising. Board staff also considered a report by the GAO regarding
its review of reverse mortgage marketing materials and related
consultations with Federal and state banking regulators and other
parties.\125\ In addition, Board staff considered the Proposed Reverse
Mortgage Guidance published by the FFIEC, and the comments received on
this proposed guidance, as well as the FFIEC's Final Reverse Mortgage
Guidance.\126\ Board staff also consulted with Federal Trade Commission
staff to identify problems connected with advertisements for reverse
mortgages, as well as areas where reverse mortgage advertising
disclosures could be improved.
---------------------------------------------------------------------------
\125\ Id.
\126\ See Proposed Reverse Mortgage Guidance, 74 FR 66652, Dec.
16, 2009; Final Reverse Mortgage Guidance, 75 FR 50801. Aug. 17,
2010.
---------------------------------------------------------------------------
Through this research and outreach effort, Board staff identified
eight types of statements that warrant a requirement to provide
clarifying information. These statements are discussed in detail below.
The Board solicits comment on the proposed requirements for reverse
mortgage advertisements.
33(e)(1) Scope
Proposed Sec. 226.33(e) applies to all advertisements for reverse
mortgages. The Board's consumer testing has found that consumers find
it difficult to understand reverse mortgages. The reverse mortgage
advertisements Board staff reviewed generally focused on special
features of reverse mortgages, such as the fact that payments of
principal and interest are not required.
The proposed requirements supplement, rather than replace, general
advertising requirements for open-end or closed-end credit transactions
under Subpart B or Subpart C of Regulation Z, respectively. This
approach is consistent with Sec. 226.31(a), which provides that the
requirements and limitations of Subpart E of Regulation Z, including
requirements and limitations for reverse mortgages, are in addition to
requirements contained in other subparts of Part 226.
Proposed Sec. 226.33(e)(1) provides that the requirements of
proposed Sec. 226.33(e) apply to any advertisement for a reverse
mortgage, including promotional materials that accompany applications.
Proposed comment 33(e)(1)-1 states that the requirements of proposed
Sec. 226.33(e) apply to both open-end and closed-end reverse
mortgages. Proposed comment 33(e)(1)-1 also states that the
requirements and limitations of proposed Sec. 226.33(e) are in
addition to those contained in other subparts, including advertising
requirements under Sec. 226.16 in Subpart B or Sec. 226.24 in Subpart
C, as applicable, and contains a cross-reference to Sec. 226.31(a).
33(e)(2) Clear and Conspicuous Standard
Reverse mortgage advertisements currently are subject to the clear
and conspicuous standard for open-end or closed-end advertisements set
forth in Sec. 226.16 in Subpart B or Sec. 226.24 in Subpart C,
respectively. Proposed Sec. 226.33(e)(2) provides that disclosures
required for reverse mortgage advertisements must be made clearly and
conspicuously. Proposed comment 33(e)(2)-1 clarifies that
advertisements for reverse mortgages are subject to the general ``clear
and conspicuous'' standard for Subpart B or Subpart C, as applicable.
Proposed comment 33(e)(2)-1 contains a cross-reference to proposed
comment 33(e)(1)-1, which in turn refers to Sec. 226.31(a), discussed
above.
Proposed comment 33(e)(2)-1 clarifies that proposed Sec. 226.33(e)
prescribes no specific rules for the format of required disclosures,
other than the following requirements: (1) the disclosures required by
proposed Sec. 226.33(e)(3)-(9) must be made with equal prominence and
in close proximity to each triggering statement; and (2) the disclosure
required by proposed Sec. 226.33(e)(10) must be at least as
conspicuous as any
[[Page 58656]]
use of the triggering statement. Proposed comment 33(e)(2)-1 clarifies
further that required statements need not be printed in a certain type
size and need not appear in any particular place in the advertisement,
except as necessary to comply with the foregoing requirements regarding
prominence, proximity, and conspicuousness.
Proposed comment 33(e)(2)-2 states that information required to be
disclosed under proposed Sec. 226.33(e) that is in the same type size
as the triggering statement is deemed to be equally prominent with such
statement. Proposed comment 33(e)(2)-2 states further that if a
disclosure required by proposed Sec. 226.33(e) is made with greater
prominence than the triggering statement, the equal prominence
requirement is satisfied. In addition, proposed comment 33(e)(2)-2
states that information required to be disclosed under proposed Sec.
226.33(e) that is immediately next to or directly above or below a
triggering statement, without any intervening text or graphical
displays and not in a footnote, is deemed to be closely proximate to
such statement. Proposed comments 33(e)(2)-3, -4, and -5 clarify that,
in determining whether required disclosures in an Internet, televised,
or oral advertisement for a reverse mortgage are made clearly and
conspicuously for purposes of proposed Sec. 226.33(e)(2), creditors
may rely on comments 16-3, -4, and -5 for open-end reverse mortgages,
and comments 24(b)-3, -4, and -5 for closed-end reverse mortgages.
33(e)(3) Need To Repay Loan
Some advertisements state that a reverse mortgage is a ``government
benefit'' or other government aid, without indicating that a reverse
mortgage is a loan that must be repaid. Reverse mortgages are complex
transactions, and consumers do not necessarily know how a reverse
mortgage can enable a consumer to receive, rather than make, periodic
payments. For example, some of the consumers who participated in the
Board's consumer testing did not know at the outset that a reverse
mortgage is a loan that must be repaid. A reference to government aid
may compound many consumers' confusion regarding how reverse mortgages
operate.
The Board believes that a statement that a reverse mortgage is a
``government benefit'' or other aid from a government entity may
mislead a consumer to believe that a reverse mortgage is government
assistance that the consumer need not repay. Therefore, the Board
proposes to provide that such a statement in a reverse mortgage
advertisement triggers a requirement to disclose clarifying
information.
Proposed Sec. 226.33(e)(3) provides that if an advertisement
states that a reverse mortgage is a ``government benefit'' or other aid
provided by any Federal, state, or local government entity, each such
statement must be accompanied by an equally prominent and closely
proximate statement of the fact that a reverse mortgage is a loan that
must be repaid. The proposed disclosures would reduce consumers'
confusion regarding the nature of a reverse mortgage likely to result
from a statement that a reverse mortgage is government aid.
Proposed comment 33(e)(3)-1 provides examples illustrating how an
advertisement that states that a reverse mortgage is aid provided by a
government entity may clearly and conspicuously disclose that a reverse
mortgage is a loan that must be repaid. One such example is the
following statement: ``You are eligible for benefits under the
government's Home Equity Conversion Mortgage program. A reverse
mortgage under the program is a loan that you must repay.''
Proposed comment 33(e)(3)-2 clarifies that an advertisement may not
state that a reverse mortgage is a ``government benefit'' unless the
reverse mortgage is associated with a government program, such as HUD's
HECM program. The comment further clarifies that if a reverse mortgage
is associated with a government program, then an advertisement may
contain a statement that a reverse mortgage is a government benefit;
however, the statement must be accompanied by a statement that a
reverse mortgage is a loan that must be repaid, as illustrated in the
examples provided in comment 33(e)(3)-1. Finally, proposed comment
33(e)(3)-2 notes that reverse mortgage advertisements are subject to
the prohibitions in proposed Sec. 226.16(d)(9), for open-end reverse
mortgages, and Sec. 226.24(i)(3), for closed-end reverse mortgages, on
misrepresentations that a mortgage is endorsed or sponsored by the
government. The comment clarifies that an advertisement with this type
of misrepresentation will violate TILA regardless of whether a
statement that the reverse mortgage is a loan that must be repaid
accompanies the misrepresentation.
Proposed comment 33(e)(3)-3 clarifies that a statement that a
reverse mortgage is a ``government-supported loan'' or a ``government
loan program'' or is a loan insured, authorized, developed, created, or
otherwise sponsored or endorsed by a government entity does not trigger
a requirement to disclose clarifying information. Such statements make
clear that a reverse mortgage is a loan. Proposed comment 33(e)(3)-3 is
consistent with Sec. 226.24(i)(3), which allows statements regarding
government endorsement or sponsorship if an advertised loan program in
fact is endorsed or sponsored by a government entity. Proposed comment
33(e)(3)-3 also provides examples of statements that do not trigger a
requirement to disclose clarifying information under proposed Sec.
226.33(e)(3), including the following example: ``A Home Equity
Conversion Mortgage is a loan insured by the U.S. Department of Housing
and Urban Development.''
Proposed comment 33(e)(3)-4 clarifies that a reference to benefits
or other aid through a government program unrelated to reverse
mortgages does not trigger the requirement to disclose clarifying
information. Proposed comment 33(e)(3)-4 clarifies further that using
the term ``benefit'' to mean ``advantage'' does not trigger the
requirement to disclose clarifying information. The proposed comment
also provides examples that illustrate uses of the term ``benefit''
that do not trigger a requirement to disclose clarifying information
under proposed Sec. 226.33(e)(3), including the following: ``A reverse
mortgage does not affect your Social Security benefits.'' (Proposed
comment 33(e)(3)-4 clarifies, however, that the foregoing statement
regarding Social Security benefits triggers a requirement under
proposed Sec. 226.33(e)(9) to disclose that a reverse mortgage may
affect a consumer's benefits under some other government programs, as
discussed below in the section-by-section analysis of Sec.
226.33(e)(9).)
33(e)(4) Events That End Loan Term
Some advertisements state that a reverse mortgage provides payments
or access to a line of credit throughout a consumer's lifetime.
However, a consumer may outlive a credit line if home equity is
exhausted and payments under the term option do not continue beyond a
specified term. A statement that a reverse mortgage provides payments
throughout a consumer's lifetime is partially true where a consumer
chooses a HECM program that provides payments as long as a consumer
lives in the home (tenure option), but relatively few HECM consumers
choose the tenure option.\127\ And even with the tenure option, an
[[Page 58657]]
event other than a consumer's death may cause a reverse mortgage to
become due, including sale of the home and failure by the consumer to
use the home as a principal residence, to maintain the home in good
repair, or to pay property taxes or insurance premiums. Many
participants in the Board's consumer testing were surprised to learn
that such events may cause a reverse mortgage to become due.
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\127\ In 2008, 89% of consumers with a HECM chose the line of
credit option and an additional 6% chose the line of credit option
combined with either the tenure option or the option for a specified
term. See U.S. Government Accountability Office, GAO-09-606 at 8.
---------------------------------------------------------------------------
Other advertisements state that a consumer need not repay a reverse
mortgage during the consumer's lifetime. As discussed above, however,
several events other than a consumer's death may cause a reverse
mortgage to become due.
The Board believes that the foregoing statements in an
advertisement may mislead a consumer to believe that he or she will
receive payments or have access to a line of credit, or need not repay,
a reverse mortgage until death. The Board therefore proposes to require
that such statements be accompanied by a clarifying disclosure of
circumstances that may result in the termination of payments or of
access to a line of credit, or repayment being required, for a reverse
mortgage.
Proposed Sec. 226.33(e)(4) requires that equally prominent and
closely proximate clarifying information accompany each statement in an
advertisement that a reverse mortgage provides payments ``for life'' or
that a consumer need not repay a reverse mortgage ``during your
lifetime'' or another statement that payments or access to a line of
credit for a reverse mortgage or the term of a reverse mortgage will
continue throughout a consumer's lifetime. Specifically, proposed Sec.
226.33(e)(4) provides that the advertisement must disclose that in the
following cases, payments or access to a line of credit may end or
repayment may be required during the consumer's lifetime: If the
consumer (1) sells the home or (2) lives elsewhere for longer than
allowed by the loan agreement. The foregoing disclosure is intended to
address the potentially misleading effects of a statement that payments
or access to a line of credit continue throughout a consumer's lifetime
or that a consumer need not repay a reverse mortgage during the
consumer's lifetime.
A reverse mortgage may become due in other circumstances, such as
if a consumer does not pay property taxes or insurance premiums or does
not maintain the home. The Board is concerned that requiring
advertisements to include many examples of such circumstances could
contribute to information overload, however. For that reason, the Board
proposes to limit the required disclosure of clarifying information to
the two circumstances of selling the home and living elsewhere for
longer than a specified period of time. At the same time, the Board
believes that clearly and conspicuously disclosing more than two events
that cause a reverse mortgage to end may be possible. Therefore,
reverse mortgage advertisements may state more than two such examples
under the Board's proposal, as discussed below.
The examples of selling of the home and living elsewhere for longer
than a specified period of time are particularly relevant to the
consumers to whom reverse mortgages typically are advertised. Generally
aged 62 or older, these consumers may be more likely than younger
consumers to need to live in an assisted living facility, with
relatives, or someplace other than their home for health reasons.
Consequently, proposed Sec. 226.33(e)(4) requires that an
advertisement include these specific examples, if applicable, in the
disclosure triggered by a statement that a reverse mortgage provides
payments ``for life'' or that a consumer need not repay a reverse
mortgage ``during your lifetime'' or by another statement that a
reverse mortgage will continue throughout a consumer's lifetime.
Proposed comment 33(e)(4)-1 provides examples that illustrate how
an advertisement may disclose the clarifying information required by
proposed Sec. 226.33(e)(4), including the following example: ``You get
payments for as long as you live, except that payments may end sooner
in some circumstances. For example, you do not get payments for as long
as you live if you sell your home or live somewhere else for longer
than the loan agreement allows.'' Proposed comment 33(e)(4)-2 states
that the disclosures required by proposed Sec. 226.33(e)(4)(A) and (B)
need be made only if applicable.
Proposed comment 33(e)(4)-3 states that proposed Sec. 226.33(e)(4)
does not require the use of a particular format in providing the
required disclosures, other than requiring that they be equally
prominent with and in close proximity to each triggering statement.
Proposed comment 33(e)(4)-3 also clarifies that an advertisement need
not make the required disclosures in a single sentence and may make the
required disclosures, for example, using a list format. Further,
proposed comment 33(e)(4)-3 states that an advertisement may provide
the required disclosures in any order. Proposed comment 33(e)(4)-4
states that an advertisement for a reverse mortgage may state
additional circumstances in which a reverse mortgage will end during a
consumer's lifetime (for example, where a consumer chooses to receive
payments for a specific time period), but must not obscure the required
disclosures.
33(e)(5) Risk of Foreclosure
Some advertisements state that, with a reverse mortgage, a consumer
cannot lose his or her home or that there is no risk to a consumer's
home. Principal and interest payments are not required with a reverse
mortgage, but foreclosure nevertheless may occur. Some participants in
the Board's consumer testing were surprised that a consumer's home is
at risk with a reverse mortgage. Statements that a reverse mortgage
poses no risk to a consumer's home compounds some consumers' lack of
understanding that a reverse mortgage is a loan secured by a consumer's
home.
The Board believes that a statement that a consumer cannot lose his
or her home or that there is no risk to a consumer's home may mislead a
consumer to believe that foreclosure of a reverse mortgage cannot
occur. The Board therefore proposes to provide that such statement
triggers a requirement to disclose clarifying information. Proposed
Sec. 226.33(e)(5) provides that if an advertisement states that a
consumer ``cannot lose'' or that there is ``no risk'' to the consumer's
home or otherwise states that foreclosure cannot occur if the consumer
(1) lives somewhere other than the dwelling longer than allowed by the
loan agreement or (2) does not pay property taxes or insurance
premiums. The foregoing disclosures clarify a statement that a reverse
mortgage poses no risk to a consumer's home.
Of course, foreclosure may result from other circumstances, such as
not maintaining the home in good repair. However, the Board is
concerned that requiring that advertisements include many examples of
circumstances that may result in foreclosure could contribute to
information overload. For that reason, the Board proposes to limit the
required disclosure of clarifying information to the consumer living
somewhere other than the dwelling longer than allowed by the loan
agreement or not paying property taxes or insurance premiums. At the
same time, the Board believes that clearly and conspicuously disclosing
more than two events that cause a reverse mortgage to end may be
possible. Therefore, reverse mortgage advertisements may state more
than two such examples under the Board's proposal, as discussed below.
Proposed comment 33(e)(5)-1 provides examples that illustrate how
an advertisement may disclose the
[[Page 58658]]
clarifying information required by proposed Sec. 226.33(e)(5). One
such example is the following: ``You cannot lose your home except in
certain circumstances, including if you live somewhere else for longer
than allowed by the loan agreement or you do not pay taxes or
insurance.'' Proposed comment 33(e)(5)-2 clarifies that the disclosures
required by proposed Sec. 226.33(e)(5)(A) and (B) need be made only if
applicable.
Proposed comment 33(e)(5)-3 states that proposed Sec. 226.33(e)(5)
does not require the use of a particular format in providing the
required disclosures, other than requiring that they be equally
prominent with and in close proximity to each triggering statement.
Proposed comment 33(e)(5)-3 also clarifies that an advertisement need
not make the required disclosures in a single sentence and may make the
required disclosures, for example, using a list format. Further,
proposed comment 33(e)(5)-3 states that an advertisement may provide
the required disclosures in any order. Proposed comment 33(e)(5)-4
states that an advertisement for a reverse mortgage may state
additional circumstances in which foreclosure may occur, but must not
obscure the required disclosures.
33(e)(6) Amount Owed
Some advertisements state that a consumer or a consumer's heirs or
estate cannot owe more than the consumer's home is worth with a reverse
mortgage. Although a creditor's recourse in the event of a HECM default
is limited to the value of a consumer's home, the loan balance can
exceed the value of the home. A consumer or the consumer's heirs or
estate must pay the entire loan balance to retain a home when a reverse
mortgage becomes due.
In the past, some HECM creditors themselves mistakenly believed
that a consumer or a consumer's heirs could retain the consumer's home
by paying the home's value rather than the outstanding loan balance,
leading HUD to issue a clarifying statement.\128\ Given evidence of
creditors' confusion in this regard, the Board believes that a
statement in a reverse mortgage advertisement that a consumer or a
consumer's heirs cannot owe more than the consumer's home is worth may
mislead consumers. This type of assertion may give a consumer false
comfort about the consumer's ability, or the ability of the consumer's
heirs, to retain the home when a reverse mortgage's term ends. The
Board therefore proposes to require that clarifying information
accompany a statement that the consumer or a consumer's heirs or estate
cannot owe more than the consumer's home is worth.
---------------------------------------------------------------------------
\128\ See HUD Mortgagee Letter 2008-38 (Dec. 8, 2008).
---------------------------------------------------------------------------
Proposed Sec. 226.33(e)(6) provides that if an advertisement
states that a consumer or a consumer's heirs or estate ``cannot owe''
or will ``never repay'' more than, or otherwise states that repayment
is limited to, the value of the consumer's dwelling, each such
statement must be accompanied by an equally prominent and closely
proximate statement of the fact that (1) to retain the dwelling when
the reverse mortgage becomes due the consumer or the consumer's heirs
or estate must pay the entire loan balance and (2) the balance may be
greater than the value of the consumer's dwelling. The proposed
disclosures would reduce the risk that consumers will underestimate the
likelihood that they or their heirs will lose a home they may want to
keep.
Proposed comment 33(e)(6)-1 provides examples that illustrate how
an advertisement for a reverse mortgage may disclose the clarifying
information required by proposed Sec. 226.33(e)(6). One such example
is the following: ``Your heirs cannot owe more than the value of your
house, unless they want to keep the house when the reverse mortgage is
due. To keep the house, they must pay the entire loan balance, which
may be higher than the house's value.''
33(e)(7) Payments for Taxes and Insurance
Many advertisements state that a reverse mortgage will enable a
consumer to make no payments. A statement that there are no payments
with a reverse mortgage may cause a consumer to overlook the need to
pay property taxes or insurance. Many consumers are used to making a
single payment to a creditor each month that includes payment for
principal, interest, and property taxes and insurance. Such consumers
may misconstrue a statement that a reverse mortgage will eliminate
their payments to mean that the creditor will make taxes and insurance
payments on their behalf out of home equity and that the consumer need
not make those payments directly. To reduce the likelihood of consumer
confusion, the Board proposes to require that a statement regarding the
obligation to make property tax and insurance payments accompany a
statement that a consumer is not required to make payments for a
reverse mortgage.
Specifically, proposed Sec. 226.33(e)(7) provides that, if an
advertisement states that payments are not required for a reverse
mortgage, each such statement must be accompanied by an equally
prominent and closely proximate statement that a consumer must make
payments for property taxes or insurance premiums, if applicable.
Proposed Sec. 226.33(e)(7) is consistent with Sec. 226.24(f)(3),
which provides that in an advertisement for a first-lien, closed-end
mortgage, a statement of the amount of any payment triggers a
requirement to disclose the fact that the stated payments do not
include amounts payable for taxes and insurance premiums. Proposed
comment 33(e)(7)-1 provides examples that illustrate how an
advertisement for a reverse mortgage may disclose the clarifying
information required by Sec. 226.33(e)(7). One such example is the
following: ``There are no loan payments for a reverse mortgage. You
continue to pay for property taxes and insurance.''
33(e)(8) Government Fee Limitation
Some advertisements state that government limits on HECM fees
minimize consumers' costs. This and similar statements may obscure the
fact that HECM fees can be substantial, notwithstanding statutory or
regulatory limits. A statement that the government restricts reverse
mortgage fees may cause a consumer to think that HECMs are less
expensive than ``forward'' mortgages or other financial products. In
fact, reverse mortgages often have higher up-front costs than
``forward'' mortgages.\129\
---------------------------------------------------------------------------
\129\ See, e.g., U.S. Government Accountability Office, GAO-09-
606 at 10-11 (describing typical reverse mortgage costs).
---------------------------------------------------------------------------
Further, consumers may misconstrue a statement that the government
caps HECM fees to mean that the government sets the amount of such
fees. Fees charged may vary, however, because creditors need not charge
the maximum fees permissible for a HECM. Also, pricing discretion
exists despite HECM fee caps, because interest rates for HECMs are not
prescribed. To address concern that consumers will misunderstand the
effect government caps have on reverse mortgage costs, the Board
proposes to provide that a statement regarding government limitations
on fees or other costs triggers a requirement to provide specified
clarifying information.
Proposed Sec. 226.33(e)(8) provides that if an advertisement
states that a Federal, state, or local government limits or regulates
fees or other costs for a reverse mortgage, each such statement must be
accompanied by an equally prominent and closely proximate statement
that costs may vary among creditors and loan types and that less
expensive
[[Page 58659]]
options may be available. Proposed comment 33(e)(8)-1 provides examples
of how an advertisement may disclose the required clarifying
information. One such example is the following: ``The government has
capped fees for HECMs. Costs may vary by lender or loan type, and
cheaper alternatives may be available.''
33(e)(9) Eligibility for Government Programs
Many reverse mortgage advertisements state that a reverse mortgage
will not affect a consumer's Social Security or Medicare benefits.
Although a reverse mortgage generally does not affect a consumer's
benefits from or eligibility for Social Security or Medicare, reverse
mortgage proceeds may affect a consumer's benefits from or eligibility
for means-tested programs such as Supplemental Security Income (SSI)
and Medicaid. Concerns have been raised that consumers may
misunderstand a statement that a reverse mortgage does not affect
certain government benefits to mean that a reverse mortgage does not
affect government benefits generally.\130\ Concerns also have been
raised that some housing counselors do not mention that a reverse
mortgage may affect benefits from and eligibility for government
assistance, even though provision of this information is required.\131\
---------------------------------------------------------------------------
\130\ See, e.g., Proposed Reverse Mortgage Guidance, 74 FR at
66658; Final Reverse Mortgage Guidance, 75 FR at ------------------
--.
\131\ See U.S. Government Accountability Office, GAO-09-606 at
37.
---------------------------------------------------------------------------
With careful planning, some consumers may avoid having a reverse
mortgage adversely affect eligibility for or benefits from a means-
tested government program. Consumers would benefit from clarification
in an advertisement that, although a reverse mortgage may not affect
eligibility for or benefits from a particular government program, a
reverse mortgage may affect eligibility for and benefits from other
government programs. Such clarification would identify an issue about
which many consumers should seek additional information.
Proposed Sec. 226.33(e)(9) provides that if an advertisement
states that a reverse mortgage does not affect a consumer's eligibility
for or benefits from a government program, each such statement must be
accompanied by an equally prominent and closely proximate statement of
the fact that a reverse mortgage may affect a consumer's eligibility
for benefits through some government programs, such as SSI or Medicaid.
Such advertisement must mention SSI and Medicaid specifically, so that
consumers have concrete examples of means-tested programs to discuss
with a housing counselor or other person. Proposed comment 33(e)(9)-1
provides examples that illustrate how an advertisement may disclose the
clarifying information required by proposed Sec. 226.33(e)(9).
33(e)(10) Credit Counseling Information
Some advertisements discuss the availability of housing counseling
in connection with reverse mortgages. Requiring that an advertisement
that refers to housing or credit counseling include a telephone number
and Internet Web site for housing counseling resources maintained by
HUD would help consumers to consult with a housing counselor early in
the lending process. The Board proposes such requirement to promote the
informed use of credit, consistent with TILA's goals.
Proposed Sec. 226.33(e)(10) provides that if an advertisement
contains a reference to housing or credit counseling, the advertisement
must disclose a telephone number and Internet Web site for housing
counseling resources maintained by HUD. Proposed comment 33(e)(10)-1
clarifies that disclosure of HUD's counseling telephone number and Web
site must be at least as conspicuous as any reference to housing or
credit counseling in the advertisement. The comment further clarifies
that the telephone number and Web site information does not have to be
included with every reference to counseling resources. Proposed comment
33(e)(10)-1 also clarifies that language identifying the purpose of the
telephone number and Web site must accompany the disclosure, and
provides the following illustrative statement: ``For information about
housing counseling options, call [telephone number] or go to [Internet
Web site].''
Section 226.34 Prohibited Acts or Practices in Connection With Credit
Subject to Sec. 226.32
34(a) Prohibited Acts or Practices for Loans Subject to Sec. 226.32
34(a)(4) Repayment Ability
The Board is proposing to remove and reserve a comment under Sec.
226.34(a)(4). Section 226.34(a)(4) prohibits creditors from making a
higher-priced mortgage loan without regard to the consumer's repayment
ability as of consummation of the transaction. Comment 34(a)(4)-4
contains an erroneous cross reference to Sec. 226.34(a)(4)(iv).
Accordingly, the Board proposes to remove the comment. No substantive
change is intended.
34(a)(4)(iv) Exclusions From Presumption of Compliance
The Board is proposing to add a new comment 34(a)(4)(iv)-3 to
provide guidance on compliance with the repayment ability requirements
of Sec. 226.34(a)(4) for certain balloon loans with terms of less than
seven years (``short-term balloon loans''). Section 226.34(a)(4)(iii)
provides a presumption of compliance with the repayment ability
requirements if the creditor follows certain procedures, including
verifying the borrower's income. Under Sec. 226.34(a)(4)(iv), however,
the presumption of compliance is not available for certain loan
products, such as short-term balloon loans. Exclusion of short-term
balloon loans from the presumption of compliance has led creditors to
ask the Board whether they can make such loans and how to comply with
the repayment ability rule.
Proposed comment 34(a)(4)(iv)-3 states that the exclusion of short-
term balloon loans from the presumption of compliance does not prohibit
creditors from making short-term balloon loans that are higher-priced
mortgage loans. The proposed comment would clarify, however, that the
creditor must use prudent underwriting standards and determine that the
value of the collateral (the home) is not the basis for repaying the
obligation (including the balloon payment). The proposed comment
clarifies that the creditor need not verify that the consumer has
assets and/or income at the time of consummation that would be
sufficient to pay the balloon payment when it comes due. Proposed
comment 34(a)(4)(iv)-3 states that, in addition to verifying the
consumer's ability to make regular monthly payments, the creditor
should verify that the consumer would likely be able to satisfy the
balloon payment obligation by refinancing the loan or through income or
assets other than the collateral.
Proposed comment 34(a)(4)(iv)-3 contains the same guidance
concerning short-term balloon loans as was previously provided in a
Consumer Affairs Letter issued by Board staff in response to the
inquiries from creditors noted above. See Short-Term Balloon Loans and
Regulation Z Repayment Ability Requirement for Higher-Priced Mortgage
Loans, CA 09-12 (Nov. 9, 2009). The Board is proposing to add new
comment 34(a)(4)(iv)-3 to the staff commentary to make this existing
guidance available to all creditors that are subject to Regulation Z's
requirements. The Board seeks
[[Page 58660]]
comment, however, on whether the guidance can be improved as part of
this rulemaking. For instance, would the addition of examples,
illustrating when a consumer would and would not be considered able to
satisfy the balloon payment by refinancing, provide greater assurance
to creditors that consumers obtaining short-term balloon loans in
similar circumstances would be deemed able to repay the obligation, as
required by Sec. 226.34(a)(4)? Should there be more concrete guidance
regarding the use of assumptions for the terms on which the consumer
might refinance in the future, and should the guidance vary depending
on the current transaction's terms? For example, should guidance
regarding the treatment of a two-year balloon loan with interest-only
payments over the whole term differ from that regarding the treatment
of a six-year balloon loan with amortizing payments?
Section 226.35 Prohibited Acts or Practices in Connection With Higher-
Priced Mortgage Loans
35(a) Higher-Priced Mortgage Loans
The Board is proposing to amend Sec. 226.35(a) to provide that a
creditor determines whether a transaction is a higher-priced mortgage
loan subject to Sec. 226.35 by comparing the ``transaction coverage
rate,'' rather than the annual percentage rate, to the average prime
offer rate. Under the proposal, the transaction coverage rate is a
transaction-specific rate that would be used solely for coverage
determinations; it would not be disclosed to consumers. A creditor
would calculate the transaction coverage rate based on the rules in
Regulation Z for calculation of the annual percentage rate, with one
exception: The creditor would make the calculation using a modified
value for the prepaid finance charge, as discussed below. The Board
also is proposing to add new staff commentary clarifying when Sec.
226.35 would apply to construction loans in which the creditor
permanently finances the acquisition of a dwelling as well as the
initial construction of the dwelling.
Background
In the 2008 HOEPA Final Rule, the Board adopted special consumer
protections for ``higher-priced mortgage loans.'' 73 FR 44522, 44603,
July 30, 2008. These protections include: A requirement that creditors
assess borrowers' ability to repay loans without regard to collateral
and verify the borrower's income and assets; restrictions on a
creditor's imposition of prepayment penalties; and a requirement to
establish an escrow account for taxes and insurance for first-lien
loans (``the 2008 HOEPA protections''). The Board defined a higher-
priced mortgage loan as a transaction secured by a consumer's principal
dwelling for which the annual percentage rate exceeds the ``average
prime offer rate'' by 1.5 percentage points or more, for a first-lien
transaction, or by 3.5 percentage points or more, for a subordinate-
lien transaction.
The Board's objective in adopting these rules was to extend the
2008 HOEPA protections to the entire subprime market and generally to
exclude the prime market from their coverage. The 2008 HOEPA
protections were designed to address unfair and deceptive practices
that were widespread in the subprime market. The prime market, however,
did not show evidence that the same practices were as pervasive or were
as clearly likely to injure consumers as in the subprime market. Thus,
the Board did not apply the 2008 HOEPA protections to the prime market,
stating that the protections should be applied broadly, ``but not so
broadly that the costs, including the always present risk of unintended
consequences, would clearly outweigh the benefits.'' 73 FR 43522,
44532, July 30, 2008. The Board believed that, in the prime market, a
case-by-case approach to determining whether practices are unfair or
deceptive is more appropriate. The Board recognized, at the same time,
that there is uncertainty as to what coverage metric would best achieve
the objectives of covering the subprime market and generally excluding
the prime market. The Board stated that it is appropriate to err on the
side of covering somewhat more than the subprime market. 73 FR 43522,
43533, July 30, 2008.
In the August 2009 Closed-End Proposal, the Board proposed to amend
Sec. 226.4 to provide a simpler, more inclusive definition of the
finance charge. See 74 FR 43232, 43321-23, Aug. 26, 2009. Under the
proposal, most closing costs, including many third-party costs such as
appraisal fees and premiums for lender's title insurance, would be
included in the finance charge and APR. Thus, APRs would be greater
than they are under the current rule. The Board noted that because APRs
generally would increase, more loans would potentially qualify as
higher-priced mortgage loans and HOEPA loans covered by Sec. Sec.
226.32 and 226.34 and trigger state anti-predatory lending laws. 74 FR
43232, 43344-45, Aug. 26, 2009. The Board concluded, based on the
limited data it had, that the proposal to improve the APR would be in
consumers' interests. Comment was solicited on the potential impact of
the proposed rule.
Problems with potential over-inclusive coverage of Sec. 226.35.
There are currently some differences between the APR and the average
prime offer rate. Section 226.35(a)(2) defines ``average prime offer
rate'' as an APR that is derived from average interest rates, points,
and other loan pricing terms currently offered to consumers by a
representative sample of creditors for mortgage transactions that have
low-risk pricing characteristics. These average terms currently are
obtained from the Primary Mortgage Market Survey[reg] (PMMS) published
by Freddie Mac. Freddie Mac surveys mortgage creditors weekly on the
loan pricing, consisting of interest rate and points, that they
currently offer consumers with low-risk transaction terms and credit
profiles. Thus, the average prime offer rate is calculated using data
that includes only contract interest rates and points.
Because average prime offer rates are based on points but not other
origination fees, they are generally comparable to the current APR
under Regulation Z, but not perfectly so. The PMMS does not define
``points,'' and it is likely that survey respondents generally consider
``points'' to include only discount points and, possibly, origination
fees, which often are calculated as points (i.e., as a percentage of
the loan amount). An APR includes not only discount points and
origination fees but also other charges the creditor retains, such as
underwriting and processing fees. Such charges are not commonly thought
of as ``points'' because they are not calculated as percentages of the
loan amount. Thus, survey respondents most likely do not include such
charges in their points when they respond to the PMMS. The Board's
August 2009 Closed-End Proposal would widen the disparity between the
APR and the average prime offer rate. Under that proposal, APRs would
be calculated based on a finance charge that includes most third-party
fees in addition to points, origination fees, and any fees the creditor
retains.
As noted above, the Board solicited comment on the impact of the
August 2009 Closed-End Proposal on higher-priced mortgage loans and
HOEPA loans and triggering of state predatory lending laws. Numerous
mortgage creditors and their trade associations commented on the
proposal to make the finance charge and APR more inclusive. Most
expressed agreement in principle with the proposed finance charge
definition. Nevertheless, most industry
[[Page 58661]]
commenters opposed the proposal, stating that it would cause many prime
loans to be incorrectly classified as higher-priced mortgage loans
under Sec. 226.35. They also stated that the proposal would
inappropriately expand the coverage of HOEPA and State laws. These
commenters noted that HOEPA and most State laws have not only APR tests
but also ``points and fees'' tests and that the more inclusive finance
charge would have a much more significant impact under the applicable
points and fees tests than under the APR tests. One creditor estimated
that 30-50% of its subprime loans, which currently are higher-priced
mortgage loans but not HOEPA loans, would become HOEPA (or state
``high-cost'') loans under the proposal.
Consumer advocates uniformly supported the proposal to make the
finance charge and APR more inclusive. They recognized the resulting
expansion of coverage under Sec. Sec. 226.32 and 226.35 and similar
State laws, but they argued that any such expanded coverage would be
appropriate. Consumer advocates stated that the more inclusive finance
charge and APR would reveal newly covered loans for what they have
always been, namely, HOEPA loans and higher-priced mortgage loans.
Accordingly, they argued, the increased coverage would be warranted.
The Board's Proposal
A new metric for determining coverage. As discussed above, the
Board's definition of a higher-priced mortgage loan was intended to
cover all of the subprime mortgage market and generally to exclude the
prime market. Based on public comment and the Board's own analysis, the
Board believes the test for coverage under Sec. 226.35 should be
revised, especially in light of the Board's proposal to make the APR
more inclusive. That is, the Board adopted the current test in 2008
knowing it would result in some degree of coverage beyond the subprime
market, but the degree of coverage would expand significantly with the
inclusion in the finance charge and APR of title insurance premiums and
other third-party charges that currently are excluded. The Board
therefore proposes to replace the APR with the ``transaction coverage
rate'' as the transaction-specific metric a creditor compares to the
average prime offer rate to determine whether the transaction is
covered. The Board adopted the APR as the metric for coverage under
Sec. 226.35 because the Board believes the best way to identify the
subprime market is by loan price, and the APR is the best available
measure of loan price. See 73 FR 44532, July 30, 2008. The Board
believes that a modified approach is appropriate, however, given the
disparity between the average prime offer rate and the more-inclusive
APR that the Board has proposed.
Under proposed Sec. 226.35(a)(1), the creditor would compare the
``transaction coverage rate,'' instead of the APR, to the average prime
offer rate. As discussed below, the transaction coverage rate would be
a modified version of the transaction's annual percentage rate.
Specifically, under proposed Sec. 226.35(a)(2)(i), the transaction
coverage rate would be calculated in the same manner as the APR, except
that it would be based on a modified prepaid finance charge that would
include only finance charges retained by the creditor, its affiliate,
or a mortgage broker, as discussed below. The transaction coverage rate
would not reflect other closing costs that are treated as finance
charges for purposes of the APR that is disclosed to the consumer.
Thus, the proposed, more inclusive APR would reflect such third-party
charges as title insurance premiums, appraisal fees, and credit report
fees, whereas the transaction coverage rate would not. Proposed comment
35(a)(2)(i)-1 would clarify that the transaction coverage rate is not
the APR that is disclosed to the consumer and that the transaction
coverage rate calculated under Sec. 226.35(a)(2)(i) would be solely
for coverage determination purposes. Existing Sec. 226.35(a)(2), which
defines ``average prime offer rate,'' would be redesignated as Sec.
226.35(a)(2)(ii).
Mandatory use of transaction coverage rate. The Board's goal in
developing the transaction coverage rate is to provide a simple
modification to the metric for Sec. 226.35 coverage that does not
create undue regulatory burden for creditors. The Board recognizes that
any new metric would impose some costs, including training staff and
modifying software and other systems. The Board believes, however, that
these costs should be relatively small because the proposal would
necessitate only a one-time modification to creditors' systems. On
balance, the Board believes the costs of the new metric would be offset
by the benefits of ensuring that the 2008 HOEPA protections apply only
to loans for which they were intended, i.e., subprime mortgages.
The Board considered whether to propose making the use of the
transaction coverage rate optional. An optional approach, however,
would have the anomalous result that identical transactions extended by
two different creditors could have inconsistent coverage under Sec.
226.35. The Board does not believe that whether a consumer receives the
2008 HOEPA protections should depend on which creditor extends the
credit. The Board seeks comment, however, on whether the use of the
transaction coverage rate should be optional.
Finance charges retained by the creditor, its affiliate, or a
mortgage broker. The proposed transaction coverage rate would provide a
measure of a loan's pricing that is more closely aligned with the
average prime offer rate. As discussed above, the average prime offer
rate reflects the contract interest rate and points for a hypothetical,
low-risk transaction. Thus, the transaction coverage rate should
reflect only a transaction's interest rate and points. A transaction's
contract interest rate is well-understood, while ``points'' is not
well-defined, as noted above. The proposal therefore seeks to define as
clearly as possible which charges count toward the ``points'' component
of the transaction coverage rate, i.e., which charges would be included
in the modified prepaid finance charge used to calculate the
transaction coverage rate. The Board proposes to include in the
modified prepaid finance charge only charges that are retained by the
creditor, its affiliates, or a mortgage broker. This rule would avoid
any uncertainty about what is included and would prevent creditors from
evading coverage by shifting points into other charges or to affiliated
third-parties.
The proposal would include in the modified prepaid finance charge
any charges retained by a mortgage broker to ensure that the
transaction coverage rate is comparable to the average prime offer rate
for both retail and wholesale mortgage transactions. The average prime
offer rate reflects creditors' retail pricing, which is higher (either
in rate or in points) than the pricing the same creditors set for
wholesale transactions. Lower wholesale pricing reflects creditors'
reduced overhead and other costs of origination for loans originated
through a mortgage broker. This difference tends to be eliminated once
the mortgage broker's compensation is added into the retail pricing
that the consumer pays. To ensure that Sec. 226.35 coverage
determinations for wholesale transactions account for this difference,
any charges retained by a mortgage broker would be reflected in the
transaction coverage rate.
Proposed comment 35(a)(2)(i)-2 would clarify that the inclusion of
charges retained by a mortgage broker would be limited to compensation
that otherwise constitutes a prepaid finance charge. This limitation
would exclude
[[Page 58662]]
compensation paid by a creditor to a mortgage broker under a separate
arrangement (e.g., compensation that comes from ``yield spread
premium''), although such compensation is included already to the
extent it comes from amounts paid by the consumer that are prepaid
finance charges, such as points. See comment 4(a)(3)-3.\132\ If
mortgage broker compensation comes from amounts paid by the consumer to
the creditor that are finance charges but not prepaid finance charges,
such as interest, those amounts would affect the transaction coverage
rate just as they affect the APR, but the broker compensation itself
would not affect the transaction coverage rate directly. Proposed
comment 35(a)(2)(i)-2 would illustrate these principles with an
example.
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\132\ Comment 4(a)(3)-3 provides that indirect compensation such
as yield spread premiums paid by creditors to mortgage brokers is
not a prepaid finance charge. Creditors and brokers have asked the
Board whether these payments should be treated as prepaid finance
charges because HUD's revised RESPA rules require a yield spread
premium to be disclosed as a credit to the borrower. They believe
that this disclosure results in a direct payment from the consumer
to the mortgage broker, made by drawing on the disclosed credit. The
Board notes that the RESPA disclosure does not affect the correct
treatment of such payments for TILA purposes. Accordingly, indirect
compensation such as yield spread premiums are not included as a
separate component of the finance charge, regardless of how they
must be disclosed on the RESPA disclosures.
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Alternative approach not proposed. Many industry commenters that
expressed concerns about the Board's proposal to make the APR more
inclusive suggested that the Board address the issue by revising the
calculation of the average prime offer rate. These commenters asserted
that the average prime offer rate should reflect average amounts for
other closing costs that are reflected in the APR, in addition to the
points currently included. The Board considered whether to propose such
an approach but determined that it is not feasible. Closing costs vary
significantly by geographical location. They also include costs that
are fixed dollar amounts, which tend to have differing effects on the
annual percentage rate depending on the loan amount. The commenters'
suggested approach, therefore, would need to account for these two
considerations, most likely by providing for separate average prime
offer rates for various loan-size and geographical location categories.
Such an approach would result in significant complexity and compliance
burden for creditors.
In addition, the Board is not proposing to include closing costs in
the average prime offer rate because the Board could not identify a
reliable source for ``average'' closing costs in every location
throughout the country. Because closing costs change over time, the
necessary data source would have to be updated periodically. The Board
is not aware of any source that includes all closing costs for all
relevant geographical and loan-size variations and that is reliably and
regularly updated. The Board considered regularly surveying creditors
for information on closing costs, but determined that the cost and
burden on creditors would be significant. The Board believes the
proposal achieves the same objective as the alternative approach, but
without imposing the burden of ongoing data collection and reporting on
creditors.
HOEPA and State laws. As noted above, the Board considered the
impact of the 2009 Closed-End Proposal's more inclusive APR on the
coverage of HOEPA and certain State laws, in addition to higher-priced
mortgage loans under Sec. 226.35. Industry commenters also raised
concerns regarding additional coverage. The Board's proposal to address
the potential impact of the more inclusive finance charge on HOEPA
coverage under the points and fees test is discussed above in the
section-by-section analysis of Sec. 226.32(b)(1). State predatory
lending coverage thresholds are established under state authorities.
The Board believes that those authorities are best positioned to make
any adjustments to coverage they deem appropriate.
35(a)(3)
Construction-permanent loans. The Board is proposing to add new
comment 35(a)(3)-1 to clarify how Sec. 226.35 applies to cases where a
creditor that extends financing for the initial construction of a
dwelling also may permanently finance the home purchase. The proposed
comment states that the construction phase is not a higher-priced
mortgage loan, as provided in Sec. 226.35(a)(3), regardless of the
creditor's election to disclose such cases as either a single
transaction or as two separate transactions, pursuant to Sec.
226.17(c)(6)(ii).
Loans for the initial construction of a dwelling are excluded from
the definition of a higher-priced mortgage loan by Sec. 226.35(a)(3).
In adopting the 2008 HOEPA Final Rule, the Board found that
construction-only loans do not appear to present the same risk of
consumer abuse as other loans. Applying Sec. 226.35 to construction-
only loans, which generally have higher interest rates than the
permanent financing, could hinder some borrowers' access to
construction financing. The permanent financing of such loans, however,
is not excluded from the definition. The Board has received inquiries
as to how the Sec. 226.35 coverage test and the 2008 HOEPA protections
apply to a construction loan that may be permanently financed by the
same creditor.
Section 226.17(c)(6)(ii) permits creditors, at their option, to
disclose construction-permanent financing as either a single
transaction or two separate transactions. That is, if a creditor
extends credit to finance the initial construction of a dwelling and
may permanently finance the transaction at the end of the construction
phase, the creditor may deliver a single TILA disclosure of both phases
as a single transaction or may deliver a separate TILA disclosure for
each phase as though they were two separate transactions. Creditors
have asked whether and how a creditor's election to disclose such cases
as either a single transaction or as two separate transactions under
Sec. 226.17(c)(6)(ii) affects the coverage and application of Sec.
226.35. In providing that construction lending would not be subject to
Sec. 226.35, the Board did not intend to influence creditors'
elections under Sec. 226.17(c)(6)(ii). Neither did the Board intend
these elections to affect the exclusion of construction financing from
the meaning of higher-priced mortgage loan. In any event, the proposed
transaction coverage rate, discussed above, would eliminate the use of
APRs to determine whether transactions are subject to Sec. 226.35.
Such determinations therefore would be unaffected by how many
disclosures the creditor elects to provide for a construction-permanent
loan, as transaction coverage rates would not be disclosed.
Proposed staff comment 35(a)(3)-1 would clarify that, even if the
creditor discloses construction financing that the creditor may
permanently finance as two separate transactions, a single transaction
coverage rate, reflecting the appropriate charges from both phases,
must be calculated and compared to the average prime offer rate to
determine coverage under Sec. 226.35(a)(1). If the transaction is
determined to be a higher-priced mortgage loan, the proposed comment
would clarify that only the permanent phase is subject to the
requirements of Sec. 226.35. For example, the requirement to establish
an escrow account prior to consummation of a higher-priced mortgage
loan secured by a first lien on a principal dwelling, under Sec.
226.35(b)(3), would apply only
[[Page 58663]]
to the permanent phase and not to the construction phase. The proposed
comment would ensure that a creditor's disclosure election under Sec.
226.17(c)(6)(ii) is not affected by whether the transaction would be
covered under Sec. 226.35. It also would ensure that the construction
loan phase is not subject to Sec. 226.35's requirements, for the
reasons stated.
Effective Date for 2008 HOEPA Final Rule
When the Board adopted the 2008 HOEPA Final Rule, it adopted
comment 1(d)(5)-1, which provides guidance on the effective date for
the rule. The Board is proposing to make two changes to comment
1(d)(5)-1, as discussed in more detail in the section-by-section
analysis for Sec. 226.1 above. One change would provide that a radio
advertisement occurs on the date it is broadcast, and the other would
conform comment 1(d)(5)-1 to changes proposed to Sec. 226.20(a).
Proposed Sec. 226.20(a) provides that a new transaction would occur
when the same creditor and the consumer agree to change certain key
terms of an existing closed-end loan secured by real property or a
dwelling, without reference to State law. A modification that is a new
transaction under proposed Sec. 226.20(a)(1) would also be subject to
the 2008 HOEPA rules in Sec. 226.35, if the new transaction is a
``higher-priced mortgage loan'' under Sec. 226.35(a). The Board is
soliciting comment on the potential burdens and benefits of the
proposed changes to Sec. 226.20(a) and comment 1(d)(5)-1.
35(b) Rules for Higher-Priced Mortgage Loans
Comment 35(b)-1 provides guidance regarding the applicability of
the higher-priced mortgage loan rules to closed-end mortgage
transactions. The Board proposes to amend comment 35(b)-1 to add a
cross-reference to proposed comment 20(a)(1)(i)-2, which clarifies
that, if the same consumer and same creditor agree to increase the
interest rate on a transaction resulting in the new transaction being a
higher-priced mortgage loan under Sec. 226.35(a), then the creditor
must provide new disclosures and also must comply with the requirements
under Sec. 226.35(b).
Section 226.38 Content of Disclosures for Closed-End Mortgages
38(a) Loan Summary
38(a)(5) Prepayment Penalty
The August 2009 Closed-End Proposal would create a new Sec. 226.38
governing disclosure content for mortgage transactions. (Current Sec.
226.18 would provide disclosure content for non-mortgage transactions.)
For the same reasons discussed above under Sec. 226.18(k)(1), this
proposal would revise proposed comment 38(a)(5)-2 to parallel proposed
comment 18(k)(1)-1.
38(h) Required or Voluntary Credit Insurance, Debt Cancellation
Coverage, or Debt Suspension Coverage
In the August 2009 Closed-End Proposal, the disclosures for credit
insurance, debt cancellation coverage, or debt suspension coverage
required under Sec. 226.4(d)(1) and (d)(3) were also listed in
proposed Sec. 226.38(h). The Board proposes to consolidate the list of
these disclosures in Sec. 226.4(d)(1) and (d)(3), and provide a cross-
reference to the required disclosures in Sec. 226.38(h). Associated
commentary would be revised accordingly.
The August 2009 Closed-End Proposal would require creditors to make
a determination at the time of enrollment that the consumer meets any
applicable age or employment eligibility criteria for insurance or debt
cancellation or debt suspension coverage. See proposed Sec. Sec.
226.4(d)(1)(iv) and (d)(3)(v), 226.38(h). To provide creditors with
some flexibility, the Board proposes to revise comment 38(h)-2 to allow
creditors to make the determination prior to or at the time of
enrollment.
38(k) Reverse-mortgage Transactions
Currently reverse-mortgage transactions that are structured as
closed-end credit are subject to Sec. Sec. 226.17 and 18. Under the
Board's August 2009 Closed-End Proposal, disclosures for closed-end
mortgages would move to new Sec. Sec. 226.37 and 226.38. For closed-
end reverse mortgages, the Board is proposing to consolidate the
content of the disclosure requirements in Sec. 226.33. However, under
the August 2009 Closed-End Proposal there would be a number of other
references in Regulation Z to mortgages subject to Sec. 226.38, which
include closed-end reverse mortgages. In order to make clear that
closed-end reverse-mortgage transactions should still be included in
any reference to Sec. 226.38, the Board proposes to mention them
explicitly in Sec. 226.38(k) and provide a cross-reference to the
provisions in Sec. 226.33 and Sec. 226.38 which apply to reverse
mortgages.
Section 226.40 Prohibited Acts or Practices in Connection With Reverse
Mortgages
In addition to the disclosure and advertising rules discussed above
under Sec. 226.33, the Board is proposing additional consumer
protections for reverse mortgages. As discussed below, the proposal
would prohibit requiring the consumer to purchase other financial or
insurance products as a condition of obtaining the reverse mortgage and
would require counseling for reverse mortgage consumers. The Board also
considered other consumer protections, discussed below, that it is not
proposing.
40(a) Requiring the Purchase of Other Financial or Insurance Products
Background
Consumer advocates and policy makers have raised concerns that
reverse mortgage creditors and others may persuade consumers to use the
proceeds of their reverse mortgages to purchase financial or other
products unsuited to their circumstances. Based on discussions with
industry representatives and consumer advocates, the Board understands
that reverse mortgage originators often refer reverse mortgage
consumers to third parties that offer the consumers other products or
services. Some of these creditors or others affirmatively require the
consumer to purchase another financial product to obtain the reverse
mortgage. Some consumer advocates have stated that more unscrupulous
creditors have allegedly ``tied'' other products to the reverse
mortgage by covertly slipping authorization documents for them in with
the reverse mortgage paperwork.\133\
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\133\ See, e.g., Building Sustainable Homeownership: Responsible
Lending and Informed Consumer Choice, Public Hearing on the Home
Equity Lending Market before the Federal Reserve Bank of San
Francisco, 183 (2006) (Statement by Shirley Krohn, Board Chair, Fair
Lending Consortium).
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Providers of other financial and insurance products may receive
commissions, and those who refer consumers to these providers may
receive referral fees, creating strong incentives to encourage reverse
mortgage consumers to purchase additional products regardless of
whether they are appropriate.\134\ When financed by reverse mortgage
proceeds, these commissions and fees can deplete home equity, often
without the consumer's full awareness of these charges and their long-
term consequences.
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\134\ See, e.g., id. (statement by Margaret Burns, Director of
the Federal Housing Administration's Single Family Program
Development, U.S. Department of Housing and Urban Development);
Nat'l Consumer Law Center, Subprime Revisited: How Reverse Mortgage
Lenders Put Older Homeowners' Equity at Risk, 14 (Oct. 2009) (NCLC
Report).
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Products often cited as being required as part of a reverse
mortgage transaction
[[Page 58664]]
include annuities,\135\ certificates of deposit (CDs) and long-term
care insurance, among others. These may be beneficial products for many
consumers and an appropriate way to spend reverse mortgage funds;
however, purchase of these and other products may harm consumers who
are uninformed or misinformed about them.
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\135\ In this Supplementary Information, an ``annuity'' means a
contractual arrangement under which an insurance or financial entity
receives a premium or premiums from a consumer, and in exchange is
obligated to make payments to the consumer at some point in the
future, usually at regular intervals. See 4 Am. Jur. 2d Annuities,
Sec. 1.
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Consumers who purchase an annuity, for example, normally cannot
receive payments until a future date; some reverse mortgage consumers
have reportedly been sold annuities scheduled to mature after their
life expectancy.\136\ Further, an annuity may yield at a lower rate of
interest than the reverse mortgage used to pay for it, causing a
borrower to lose more in home equity than he or she could gain in
annuity profits. Reverse mortgage borrowers who become aware of these
drawbacks face high fees for early withdrawal or cancellation of the
annuity.
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\136\ See, e.g., Reverse Mortgages: Polishing not Tarnishing the
Golden Years, Hearings before the Senate Special Committee on Aging,
110th Cong., 1st Sess. 22 (2007) (statement by Prescott Cole, on
behalf of the Coalition to End Elder Financial Abuse).
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Similarly, a CD may have a lower rate of interest than the reverse
mortgage, tying up the consumer's money without yielding a greater
return than the corresponding loss of home equity. Should the consumer
need the funds before expiration of the CD term, high early withdrawal
penalties may apply.
Long-term care insurance may be unnecessary, such as where the
long-term care insurance coverage is not appreciably better than
Medicaid coverage. Other consumers may not be able to afford the
premiums if they go up, resulting in the loss of all of their reverse
mortgage and other funds used to pay upfront costs and premiums.
Further, a particular plan may not cover what the consumer needs, or
policies may have terms or limitations that make receiving money for a
claim difficult.
Housing and Economic Recovery Act of 2008 (HERA)
To address concerns about inappropriate product tying in reverse
mortgage transactions, in 2008 Congress adopted three rules restricting
the sale of other products and services with an FHA-insured reverse
mortgage, or HECM. Adopted as part of the Housing and Economic Recovery
Act of 2008 (HERA),\137\ these rules apply only to HECMs; they do not
affect proprietary reverse mortgage products.
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\137\ Housing and Economic Recovery Act of 2008 (HERA), Public
Law 110-289 (July 30, 2008), Sec. 2122 (amending Section 255 of the
National Housing Act, 12 U.S.C. 1715z-20).
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Anti-tying Provision: First, Congress prohibited the
lender (or any other party) from requiring a borrower (or any other
party) to purchase ``an insurance, annuity, or other similar product''
as a condition of obtaining a HECM.\138\ Products exempt from this
prohibition include title insurance, hazard, flood, or other peril
insurance, or other products determined by HUD to be ``customary and
normal'' for originating a HECM.
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\138\ HERA, Sec. 2122(a)(9) (codified at 12 U.S.C. 1715z-20(n)
and (o)).
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Provision Restricting Activities: Second, Congress
prohibited the lender and ``any other party that participates in the
origination of a [reverse] mortgage'' from ``participat[ing] in'' any
financial or insurance activity other than reverse mortgage lending.
These parties may do so, however, if they have ``firewalls and other
safeguards'' to ensure the following:
Individuals involved in originating a reverse mortgage are
not involved with any other financial or insurance product and have no
incentive to see that the reverse mortgage consumer obtains one.
The consumer will not be directly or indirectly required
to purchase another financial or insurance product.
Provision Restricting Relationships: Third, Congress
prohibited reverse mortgage lenders and ``any other party that
participates in the origination of a [reverse] mortgage'' from being
``associated with'' or ``employing'' any party that participates in or
is involved with any financial or insurance activity other than reverse
mortgage lending. These relationships are permitted, however, if the
party maintains the firewalls and safeguards described above.
HUD--Implementing the HERA Cross-selling Provisions
As an initial step in implementing the HERA cross-selling
provisions, HUD has issued a Mortgagee Letter instructing HECM lenders
that they must not condition a HECM on the purchase of ``any other
financial or insurance product.'' \139\ Consistent with HERA, the
Mortgagee Letter also advises lenders to establish firewalls and other
safeguards to ensure that there is no undue pressure or appearance of
pressure for a HECM borrower to purchase another product from the
mortgage originator or mortgage originator's company. The Board
understands that HUD plans to issue an Advance Notice of Proposed
Rulemaking (ANPR) to solicit input on how HUD should interpret the HERA
cross-selling provisions.
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\139\ HUD Mortgagee Letter 2008-24 (Sept. 16, 2008).
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Federal Anti-Tying Laws
Banks and other depository institutions are subject to anti-tying
rules under the Bank Holding Company Act \140\ (BHCA) and the Gramm-
Leach Bliley Act \141\ (GLBA).
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\140\ Public Law 91-607, Title I, Sec. 106(b), 84 Stat. 1766
(Dec. 31, 1970) (codified at 12 U.S.C. Sec. Sec. 1972 (banks and
bank holding companies), 1464(q) (savings and loan associations),
and 1467a(n) (savings and loan association holding companies and
their affiliates)).
\141\ Public Law 106-102, Title III, Subtitle A, Sec. 305, 113
Stat. 1338, 1410-15 (Nov. 12, 1999) (codified at 12 U.S.C. 1831x)
(implemented at 12 CFR 14.30 (Office of the Comptroller of the
Currency), 208.83 (Board of Governors of the Federal Reserve
System), 343.30 (Federal Deposit Insurance Corp.), and 536.30
(Office of Thrift Supervision)).
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Bank Holding Company Act amendments. Section 106 of the BHCA
generally prohibits a bank from conditioning the availability or price
of one product, such as a reverse mortgage, on a requirement that the
customer also obtain another product, such as insurance or an annuity,
from the bank or an affiliate of the bank. However, the statute
expressly permits a bank to condition the availability or price of a
product or service on a requirement that the customer also obtain
certain bank products--loan discount, deposit, or trust services--from
the bank or an affiliate of the bank. Savings associations and savings
and loan association holding companies and their affiliates are subject
to similar anti-tying restrictions under the Home Owners' Loan Act
(HOLA).\142\
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\142\ See 12 U.S.C. 1464(1) and 1467a(n).
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Gramm-Leach Bliley Act. Section 305 of the GLBA requires the
Federal banking agencies to prescribe regulations that prohibit
depository institutions from engaging in practices that would cause a
reasonable consumer to believe that an extension of credit (which would
include a reverse mortgage) is conditioned on the purchase of an
insurance product or an annuity from the creditor or its affiliates, or
on the consumer's agreement not to purchase an insurance product or
annuity from an unaffiliated entity.
Interagency Supervisory Guidance on Reverse Mortgages. The Board
and other Federal banking agencies, through the FFIEC, responded to
concerns about unfair and deceptive practices in reverse mortgage
lending by issuing guidance
[[Page 58665]]
for institutions offering reverse mortgages.\143\ To guard against
inappropriate product tying with reverse mortgages, the Final Reverse
Mortgage Guidance advises institutions to adopt policies and internal
controls that do the following:
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\143\ Final Reverse Mortgage Guidance, 75 FR 50801.
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Ensure that the institution does not violate any
applicable anti-tying restrictions. To illustrate, the Guidance states
that an institution risks violations if it requires the borrower to
purchase an annuity, insurance or any product other than a traditional
banking product in order to obtain a reverse mortgage from the
institution or an affiliate.
Ensure that the institution complies with restrictions
designed to avoid conflicts of interest. To illustrate, the Guidance
states that an institution risks violations if it requires the borrower
to purchase an annuity, insurance (other than appropriate title, flood
or hazard insurance), or similar financial product from the institution
or any third party in order to obtain a reverse mortgage from the
institution or broker.\144\
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\144\ Id. at 50811
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The Guidance also advises institutions to adopt compensation
policies to guard generally against ``other inappropriate incentives''
for loan officers and third parties, such as mortgage brokers and
correspondents, to make a loan.\145\
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\145\ Id.
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The Board's Proposal
The anti-tying provisions of the BHCA, GLBA and HERA apply to some
reverse mortgages, but not all. The Board believes that anti-tying
rules specific to reverse mortgages may be appropriate to ensure that
all reverse mortgage originations are covered--including both
government-insured reverse mortgages and proprietary products, as well
as reverse mortgages originated by both depository and nondepository
institutions. For the reasons discussed below, the Board believes that
the practice of requiring a consumer to purchase any other ``financial
or insurance product'' as a condition of obtaining a reverse mortgage
could be unfair to consumers. Based on its authority under TILA Section
129(l)(2)(A) to prohibit acts or practices in mortgage lending that the
Board finds to be unfair or deceptive, the Board proposes new Sec.
226.40(a) to prohibit creditors and loan originators from engaging in
this practice. The Board does not intend to suggest that this practice
is unfair prior to the effective date of any final rule implementing
this proposed prohibition. Prior to the effective date of a final rule,
the Board expects that whether this practice is unfair will be judged
on a case-by-case basis and on the totality of the circumstances under
applicable laws and regulations.
Substantial consumer injury. Consumers who are required to use
reverse mortgage proceeds to purchase ancillary financial or insurance
products stand to lose substantial equity in their most valuable
lifetime asset for little or no benefit. This can take away their
ability to cover daily living expenses, medical costs and other needed
expenses at a time when their income sources are most limited. In
addition, for many seniors, their longtime goal of having assets to
share with their heirs can be significantly undermined, affecting their
heirs' financial circumstances as well. Worse, misuse of reverse
mortgage funds may leave borrowers unable to afford taxes and insurance
or home maintenance required under the reverse mortgage contract,
exposing them to foreclosure at an especially vulnerable time in their
lives.
Injury not reasonably avoidable. For several reasons, reverse
mortgage consumers may not be reasonably able to avoid the injuries
that may result from having to use their reverse mortgage funds for an
ancillary product, or from having to obtain a substantially more
expensive reverse mortgage if they do not purchase an additional
product. First, reverse mortgage borrowers often have limited options
for obtaining additional funds; for some, a reverse mortgage may be the
resource of last resort. Faced with high medical expenses or other
financial challenges, these consumers may be forced to accept a
requirement that they use reverse mortgage funds to purchase another
product, even if they question its necessity or benefits, or to accept
a substantially more expensive loan that will diminish their home
equity much more quickly.
Second, reverse mortgages are complex loan products whose
requirements and characteristics tend to be unfamiliar even to the most
sophisticated consumers. Thus, many consumers may be easily misled or
confused about the costs of other products and services and the
potential downsides to using their home equity to pay for them.
Third, other consumer protections may not, by themselves,
sufficiently protect reverse mortgage consumers from inappropriate
product tying because reverse mortgages are especially complex and the
target consumer population--seniors--is comparatively vulnerable. For
example, the disclosure required in proposed Sec. 226.33(b) that the
consumer is not obligated to use his or her reverse mortgage proceeds
to purchase any other financial or insurance product or service is an
important consumer protection but may not by itself protect all
consumers from persuasive loan officers and brokers, who may pressure
consumers to rush through paperwork. In addition, the proposed anti-
tying rule and the disclosure rule are complementary: the anti-tying
rule is necessary to make the disclosure true.
Similarly, reverse mortgage counseling, required under proposed
Sec. 226.40(b), is critical to a consumer's understanding of a reverse
mortgage but may not sufficiently protect consumers from inappropriate
product tying. Counselors are not trained to advise consumers about the
suitability of a range of financial or insurance products and services,
and recent data indicate that the effectiveness of counseling may not
be consistent from borrower to borrower.\146\
---------------------------------------------------------------------------
\146\ U.S. Government Accountability Office, GAO-09-606 at 32-
40.
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Injury not outweighed by countervailing benefits. On balance,
potential benefits of tying other products to a reverse mortgage do not
appear to outweigh the substantial harm that could be caused, as
described above. The Board recognizes that requiring a consumer to pay
for certain additional financial products to obtain a reverse mortgage
or certain terms may benefit some consumers. For instance, if a
consumer opts to receive reverse mortgage proceeds in a lump sum to
take advantage of a fixed rate, the consumer may benefit from putting
the funds in a CD rather than a savings account. However, consumers
could still enjoy this benefit by voluntarily choosing this option. The
proposed anti-tying prohibition prohibits the consumer from being
required to put the money in a CD, because the consumer would incur
penalties for early withdrawal.
Benefits to competition also do not appear to outweigh injury to
the consumer. Indeed, it has long been recognized that tying
arrangements suppress competition.\147\ The function of a tying
arrangement is generally to market a product that is critical or
desirable to a consumer (the reverse mortgage) and tie access to that
product to the purchase of a less critical or
[[Page 58666]]
desirable product (the ancillary financial or insurance product).\148\
Product tying by definition creates an obstacle to a consumer's ability
to survey the available alternatives and choose the most advantageous
product. In an ideal marketplace, if a consumer wants certain financial
products, the consumer could weigh the costs, benefits, and risks of
several alternatives, such as various insurance products. In a tying
arrangement, however, the creditor chooses a product for the consumer
regardless of the benefits for that consumer. By contrast, if consumers
are permitted to choose ancillary products freely, as the proposed rule
seeks to promote, competition would likely increase and costs would
concomitantly go down.
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\147\ See Standard Oil Co. of Cal. v. United States, 337 U.S.
293, 305-06 (1949) (noting that tying arrangements ``serve hardly
any purpose other than to suppress competition'').
\148\ See Times-Picayune Publishing Co. v. United States, 345
U.S. 594, 614 (1953) (``The common core of * * * unlawful tying
arrangements is the forced purchase of a second distinct commodity
with the desired purchase of a dominant `tying' product.'').
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The Board requests comment on whether the proposed anti-tying rule
addresses the practices of greatest concern and prevalence regarding
product tying in reverse mortgage transactions. In this regard, the
Board invites additional examples of inappropriate product tying in
reverse mortgage transactions, as well as commenters' views on the
potential effectiveness of the proposal in stopping these practices.
Specific aspects of the proposed prohibition are discussed below.
Covered Persons. The proposed anti-tying rule would apply to a
creditor or a loan originator, as defined in Sec. 226.36(a)(1).
Regulation Z defines ``creditor'' to mean, in pertinent part, ``A
person (A) who regularly extends consumer credit that is subject to a
finance charge * * *, and (B) to whom the obligation is initially
payable, either on the face of the note or contract, or by agreement
when there is no note or contract.'' Sec. 226.2(a)(17)(i). Under the
Board's August 2009 Closed-End Proposal, a ``loan originator'' would be
defined as, ``with respect to a particular transaction, a person who
for compensation or other monetary gain, arranges, negotiates, or
otherwise obtains an extension of consumer credit for another person.
The term `loan originator' includes employees of the creditor. The term
includes the creditor if the creditor does not provide the funds for
the transaction at consummation out of the creditor's own resources,
out of deposits held by the creditor, or by drawing on a bona fide
warehouse line of credit.'' Proposed Sec. 226.36(a)(1); 74 FR 43232,
43331-43332, Aug. 29, 2009. This definition was adopted by the Board in
a final rule published elsewhere in today's Federal Register. The Board
requests comment on the proposal to apply this rule to creditors and
loan originators, including whether the proposed anti-tying rule should
apply to any other persons.
40(a)(1) Financial or Insurance Products
Excluded Products and Services
Proposed Sec. 226.40(a)(1) excludes from the meaning of
``financial or insurance product'' two types of products and services:
(1) transaction accounts and savings deposit accounts, as defined in
Regulation D, 12 CFR part 204, that are established to disburse the
reverse mortgage proceeds; and (2) products and services customarily
required to protect the creditor's interest in the collateral or
otherwise mitigate the creditor's risk of loss.
Transaction accounts and savings deposits. With the first
exemption--transaction accounts and savings deposits, as defined in
Regulation D, that are established to disburse reverse mortgage
proceeds--the Board seeks to facilitate the disbursement of reverse
mortgage proceeds to the consumer. The Board understands based on
outreach that a consumer may be able to access their reverse mortgage
funds more readily if they are deposited in an account with the
creditor or loan originator. Under Regulation D, a ``transaction
account'' includes demand deposit accounts such as traditional checking
accounts and NOW accounts.\149\ A ``savings deposit'' includes
traditional interest-bearing savings accounts, passbook savings
accounts and money market accounts.\150\ The Board does not propose to
limit the consumer's use of these accounts only to transactions
involving proceeds of the reverse mortgage. However, the Board proposes
to permit that these accounts be required only if they will serve as a
means of disbursing reverse mortgage proceeds. Neither ``transaction
accounts'' nor ``savings deposits'' under Regulation Z include ``time
deposit'' accounts. As indicated in proposed comment 40(a)(1)-1, the
Board intends to prohibit the tying of time deposit accounts, which
include CDs and other accounts to which penalties for early withdrawal
may apply, to a reverse mortgage.
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\149\ See 12 CFR 204.2(e).
\150\ See id. 204.2(d).
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The Board requests comment on the necessity of the exemption for
transaction and savings deposit accounts from the products that cannot
be tied to a reverse mortgage, and solicits views on whether this
exemption should include a broader or narrower range of accounts.
Products and services customarily required in connection with a
reverse mortgage. The Board also proposes to exempt products and
services that creditors or loan originators ``customarily'' require in
a reverse mortgage transaction to safeguard their interest in the
collateral or otherwise guard against loss. Proposed comment 40(a)(1)-2
explains that these products would include, among others, ``appraisal
or other property evaluation services; title insurance; flood, hazard
or other peril insurance; and mortgage insurance, such as the insurance
required by the U.S. Department of Housing and Urban Development.'' The
Board believes that this exemption is necessary to facilitate the
availability of credit to consumers and to promote the safety and
soundness of lending institutions. Comment is requested on the
appropriateness of this exemption, and the utility of the examples of
exempt products and services in the proposed comment.
Covered Products and Services
Proposed comment 40(a)(1)-1 clarifies that the ``financial or
insurance products,'' namely, products and services that may not be
tied to a reverse mortgage, include both bank and nonbank products. The
comment provides the following examples of covered products and
services: extensions of credit, trust services, certificates of
deposit, annuities, securities and other nondepository investment
products, financial planning services, life insurance, long-term care
insurance, credit insurance, and debt cancellation and debt suspension
coverage.
Unlike the proposal for reverse mortgages, the BHCA anti-tying
provision specifically permits a bank to condition both the
availability and price of credit on the requirement that the customer
obtain a product traditionally provided by a bank, specifically, a
``loan, discount, deposit, or trust service.'' \151\ These ``bank''
products include, but are not limited to, all types of extensions of
credit, including loans, lines of credit, and backup lines of credit,
and all forms of deposit accounts, including demand, negotiable order
of withdrawal (``NOW''), savings and time deposit accounts, as well as
CDs.
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\151\ 12 U.S.C. 1972(1)(A).
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With the exception of certain deposit accounts, discussed below,
the Board proposes to include these types of bank products in the
proposed anti-tying rule for reverse mortgages for three reasons.
[[Page 58667]]
First, any number of traditional bank products could be inappropriate
for a reverse mortgage consumer to purchase in connection with
obtaining the reverse mortgage. As noted, one example would be a CD
that yields at a lower rate than the rate of interest accruing on the
reverse mortgage. Thus, the proposal is intended to enhance consumer
protection by covering a fuller range of potential abuses.
Second, as discussed earlier, the Board believes that reverse
mortgage borrowers are particularly vulnerable to abusive product tying
and need stronger protections than those that apply to other financial
service consumers. The proposal is intended to give reverse mortgage
borrowers added protections without diminishing their access to
appropriate traditional bank products, such as a checking or savings
account to facilitate receipt of funds; reverse mortgage consumers
would retain the freedom to choose any product voluntarily.
Third, an exemption for bank products would unfairly favor
depositories over nondepositories. Unlike the BHCA's anti-tying rule,
which applies only to depository institutions, the Board's proposed
rule would apply to both depositories and nondepositories. The
rationale for the traditional bank product exception under the BHCA
anti-tying rule--namely, to allow banks and their customers to continue
to negotiate their fee arrangements on the basis of the customer's
entire banking relationship with the bank--would not apply to
nondepositories. In effect, depositories would have greater leverage to
reduce rates and fees on reverse mortgages than nondepositories because
they could package a wider range of products with the reverse mortgage.
Proposed comment 40(a)(1)-1 also specifically mentions certain
products that the Board has learned through research and outreach may
be especially problematic in reverse mortgage transactions. These
include annuities, financial planning services, and long-term care
insurance. Credit insurance and debt cancellation and debt suspension
coverage are mentioned to clarify that they would be covered as well,
even though they may not be common in reverse mortgage transactions.
Other Products and Services
As proposed, the reverse mortgage anti-tying rule would not
prohibit conditioning a reverse mortgage on the consumer's obtaining
home improvement services, because home repairs may legitimately be
required before a consumer is eligible for a reverse mortgage.\152\ The
Board received anecdotal evidence, however, that reverse mortgage
originators may require consumers to obtain unnecessary or excessively
costly home repairs. The Board requests additional evidence of abuse in
home improvement contracting associated with reverse mortgages, if any,
and comments on whether and how Board rules should address potential
abuse in this area without interfering with legitimately required
repairs.
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\152\ See, e.g., 24 CFR 206.47 (requiring properties that do not
meet the property standards of the HECM program to be repaired
before FHA will insure reverse mortgages secured by those
properties).
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The Board requests comment on benefits or drawbacks of its proposed
explanations of ``financial or insurance product,'' as well as whether
any additional products should be expressly included in or exempted
from the tying restrictions.
40(a)(2) Safe Harbor
The Board is aware that whether a creditor has required a consumer
to purchase another product to obtain a reverse mortgage in violation
of Sec. 226.40(a) may not always be clear. For this reason, the Board
proposes in Sec. 226.40(a)(2) a ``safe harbor'' for compliance with
the anti-tying rule. The proposed paragraph provides that a creditor or
other person will not be deemed to have required a consumer to purchase
another financial or insurance product if two conditions are met.
First, the consumer received at application the ``Key Questions to
Ask about Your Reverse Mortgage'' document required under proposed
Sec. 226.33(b), or a substantially similar document. As proposed by
the Board, this document includes a statement that the consumer is not
obligated to purchase any other financial or insurance product to
obtain the reverse mortgage, along with explanatory information.
Second, for a reverse mortgage subject to Sec. 226.5b, the account
was opened, or, for any other reverse mortgage, the loan was
consummated, at least 10 calendar days before the consumer becomes
obligated to purchase any financial or insurance product from any of
the following persons:
(1) The creditor;
(2) The loan originator;
(3) An affiliate of either the creditor or loan originator; or
(4) Any other party, if the creditor, loan originator, or an
affiliate of either will receive compensation for the purchase of the
ancillary product or service.
Comment 40(a)(2)-1 safe harbor conditions not met. Proposed comment
40(a)(2)-1 clarifies that where the safe harbor conditions are not met
in a particular reverse mortgage transaction, the creditor or loan
originator will not necessarily have violated the anti-tying rule in
Sec. 226.40(a). Whether a violation has occurred in this case will
depend on an evaluation of all of the facts and circumstances. To
provide additional guidance, however, the Board proposes an example of
an instance in which the safe harbor conditions were not met and the
creditor violated Sec. 226.40(a). In this example, the terms or
features of a reverse mortgage are not available unless the consumer
purchases another financial or insurance product; in this situation,
the Board believes that the consumer has been required to purchase the
product to obtain the reverse mortgage.
The Board solicits comment on the example of an anti-tying
violation where the creditor did not meet the safe harbor conditions.
``Key Questions'' Document
The first condition of the safe harbor--that the consumer has
received the ``Key Questions to Ask about Your Reverse Mortgage''--is
intended to promote the consumer's understanding that he or she is not
obligated to purchase an additional financial or insurance product. As
proposed by the Board, this two-page document includes the following
information for the consumer:
What if my lender wants me to use money from my reverse mortgage to
buy an annuity or make another investment?
Under Federal law, you cannot be required to use your reverse
mortgage money to purchase any other financial or insurance product
(such as an annuity, long-term care insurance, or life insurance). If
another product is offered to you, make sure you understand: (1) how
the product works and what its benefits are, (2) how much it costs, (3)
whether you need it, and (4) how much money the person selling the
product makes if you purchase it. Talk with a HUD-approved reverse
mortgage counselor or financial advisor before you decide.
See Attachment A. To qualify for the safe harbor, the creditor or
loan originator must have provided this disclosure on or with the
application, as required under proposed Sec. 226.33(b).
10-Calendar-Day Waiting Period
The Board believes that the ``Key Questions'' document is an
important
[[Page 58668]]
consumer safeguard but is concerned that by itself the document may not
sufficiently protect all consumers from high-pressure sales tactics.
Therefore, the Board proposes a second element of the safe harbor--
requiring a 10-day waiting period after account-opening or
consummation, as applicable, before the consumer becomes obligated to
purchase another financial or insurance product from one of four
parties: the creditor; the loan originator; an affiliate of either the
creditor or loan originator; and any other person, if the creditor,
loan originator, or an affiliate of either will receive compensation
for the purchase.
This element of the proposed safe harbor is intended to create an
operational barrier to requiring the purchase of an additional product
as a condition of providing a reverse mortgage. In the Board's view, a
purchase several days after reverse mortgage funds are available to a
consumer is more likely to be voluntary than a purchase closer in time
to consummation or account opening of a reverse mortgage. Consumers
will be more adequately prepared to make decisions about purchasing
additional products when they have several days after consummation or
account opening to consider whether to enter into a reverse mortgage
and also to purchase another financial or insurance product. A reverse
mortgage, as any other home mortgage, is a major financial undertaking
requiring the consumer to contemplate considerable details, review
voluminous paperwork, and make numerous decisions at and around the
time of closing. But reverse mortgages are particularly complex loan
products that carry special risks; consumers need ample time before and
after the transaction to understand them.
The proposal may also have the effect of curtailing instances of
consumers believing (or being led to believe) that the purchase of
another product is required to complete the reverse mortgage
transaction when it is not. In rescindable transactions, for example,
proceeds typically may not be disbursed until after the consumer's
right to rescind has expired, which is three business days after
account-opening or consummation. Thus, if a consumer consummates the
reverse mortgage on Monday, June 1, the consumer typically would have
access to the reverse mortgage funds on Friday, June 5 (i.e., the day
after the consumer's right to rescind has expired). The 10-day waiting
period would extend until Thursday, June 11, however. The condition
that the reverse mortgage transaction and the purchase of another
product be separated by 10 days ensures that consumers are less
susceptible to high-pressure sales tactics that might occur at or
immediately after consummation or account opening, but before funds are
available. Finally, the proposal has the added consumer benefit of
giving consumers a ``cooling off'' period of several days after reverse
mortgage funds are available to consider whether using that money to
buy another financial or insurance product is a sound financial choice.
Comment 40(a)(2)(B)-1 obligated to purchase. Proposed comment
40(a)(2)(ii)-1 states that whether a consumer has become obligated to
purchase a financial or insurance product will be a factual inquiry.
This comment provides guidance on when a consumer becomes obligated to
purchase a product through two examples. First, a consumer would become
obligated to purchase a financial or insurance product, for example,
when the consumer signs an agreement to purchase the product, even if
the purchase will occur in the future. Second, a consumer would also
become obligated to purchase a product when the consumer signs an
agreement to purchase a product but has the option to cancel the
purchase for a period of time after the purchase occurs. Finally,
proposed comment 40(a)(2)(ii)-1 provides the following example to
explain the effect of the 10-calendar-day waiting period: If a consumer
consummates a reverse mortgage on Monday, June 1, the creditor will
qualify for the safe harbor only if the consumer does not sign an
agreement to purchase another financial or insurance product from the
parties enumerated in this paragraph until Thursday, June 11, at the
earliest.
The Board requests comment on the utility and appropriateness of
the guidance in the proposed commentary regarding when a reverse
mortgage consumer becomes obligated to purchase another financial or
insurance product. The Board solicits comment on whether and what
additional examples may be warranted.
Persons From Whom the Consumer may not Purchase a Product
Creditor, loan originator, or affiliate of either. The proposed
safe harbor waiting period is intended to eliminate incentives for the
creditor or loan originator to require a consumer to purchase another
product or service to obtain the reverse mortgage. Thus, the persons
from whom a consumer cannot have purchased another product or service
within 10 days of consummation are the creditor, loan originator, and
any affiliate of either. See proposed Sec. 226.40(a)(2)(ii)(A)-(C).
The Board believes that a product purchased from one of these parties
would confer a financial benefit on the creditor or loan originator
that may give the creditor or loan originator an incentive to require
the purchase.
Nonaffiliated third party. The safe harbor would also prohibit,
within the 10-calendar-day waiting period, the consumer's purchase of a
product or service from a nonaffiliated third party if the creditor or
loan originator, or an affiliate of either, would receive compensation
for the purchase. Proposed comment 40(a)(2)(ii)(D)-1 is intended to
clarify that compensation would be considered to be received by a
creditor, loan originator, or an affiliate of either with respect to a
particular purchase, if any of these parties receives a fee because the
consumer purchased the ancillary product.
For further guidance, this comment also gives an example of a
situation in which a creditor would not be deemed to have received
compensation for a consumer's purchase of an ancillary product.
Specifically, the comment states that a creditor does not receive
compensation for a consumer's purchase of an ancillary product if the
creditor sells a customer list to a nonaffiliated third party, which,
in turn, sells a financial or insurance product to a reverse mortgage
consumer on the list within the 10-day waiting period, as long as the
creditor receives no compensation directly or indirectly related to
whether the consumer purchases the product. The Board intends with this
example to clarify that the safe harbor does not prohibit practices
that may result in compensation to the creditor, loan originator, or
affiliate, when the compensation received would be too attenuated from
the purchase of the ancillary product to create a realistic incentive
for the creditor or loan originator to engage in prohibited product
tying.
The Board requests comment on the appropriateness and efficacy of
the proposed safe harbor and accompanying commentary for addressing the
problem of inappropriate product tying in reverse mortgage
transactions.
Disbursements Directly to the Consumer
The HECM rules require that reverse mortgage proceeds must be
disbursed directly to the consumer ``at the initial disbursement or
after closing (upon expiration of the 3-day rescission period under 12
CFR part 226, if applicable),'' except for certain payments related to
[[Page 58669]]
the mortgage transaction. The following disbursements are excepted from
the requirement to disburse HECM proceeds directly to the consumer: (1)
Disbursements to a relative or legal representative of the mortgagor,
or a trustee for the benefit of the mortgagor; (2) disbursements for
the initial mortgage insurance premium required for the HECM; (3) fees
that the mortgagee is authorized to collect under the HECM rules; (4)
amounts required to discharge any existing liens on the property; (5)
annuity premiums if disclosed as part of the TALC disclosure required
in current Sec. 226.33; and (6) funds required to pay contractors who
performed repairs as a condition of closing, in accordance with
standard FHA requirements for repairs required by appraisers.\153\
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\153\ See 24 CFR 206.29.
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The Board believes that the proposed disclosure requirement and 10-
day waiting period to qualify for the ``safe harbor'' will sufficiently
protect consumers from harmful product tying in reverse mortgage
transactions; thus, the Board does propose to require that reverse
mortgage proceeds be disbursed only to the consumer. The Board is also
concerned that the term ``initial'' disbursement may be difficult to
define clearly, especially in open-end reverse mortgage transactions
where the consumer might not draw on the line until well after account
opening. A rule covering disbursements beyond those occurring at or
immediately after account opening, however, may be overly broad. For
example, requiring that proceeds be disbursed directly to the consumer
one year after account opening would be unnecessary to stop the
creditor from requiring the consumer to purchase another product as a
condition of obtaining the reverse mortgage; the consumer would already
have the reverse mortgage.
The Board requests comment on whether the Board should adopt
disbursement restrictions similar to those that apply to HECMs for
proprietary reverse mortgages, including specific reasons why
commenters believe that the Board should or should not do so.
40(b) Counseling
The Board is concerned that consumers seeking reverse mortgages may
not be sufficiently aware of the risks, obligations, and financial
implications of reverse mortgages solely through disclosures provided
during the origination process. The Board's consumer testing of reverse
mortgage disclosures revealed that even more sophisticated consumers do
not readily understand how reverse mortgages work and their impact on a
consumer's financial future. As discussed above in the section-by-
section analysis to proposed Sec. 226.33(a)-(d), the Board proposes
comprehensive revisions to TILA's reverse mortgage disclosures, which
the Board anticipates will significantly improve consumer understanding
of these complex transactions. As discussed further below, however, the
Board believes that the complexity of and risks associated with reverse
mortgages warrant added consumer protections, including a requirement
that counseling occur before the consumer obtains a reverse mortgage
and at least three business days before a consumer has to pay a
nonrefundable fee in connection with a reverse mortgage transaction
(except a fee for the counseling).
Background
Prospective borrowers must receive counseling before obtaining a
HECM.\154\ In addition, several states have enacted reverse mortgage
counseling rules.\155\ Federal law does not require prospective
borrowers of proprietary reverse mortgages to obtain counseling.
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\154\ See 12 U.S.C. 1715z-20(d)(2)(B) and (f); HECM Handbook
4235.1 REV-1, ch. 2-1.
\155\ See Ariz. Rev. Stat. Sec. Sec. 6-1602, 1603A; Ark. Code
Ann. Sec. 23-54-106(a); Cal. Civ. Code Sec. Sec. 1923.2(j) and
(k), 1923.5(a); Colo. Rev. Stat. Sec. 11-38-111; Del. Code Ann.
Tit. 5 Sec. Sec. 2118 and Sec. 2244; 205 Ill. Comp. Stat. Ann.
Sec. 5/6-1; Md. Fin. Inst. Code Ann. Sec. Sec. 12-1219, 12-1221;
Mass. Gen. Laws Ann. Ch. 167E, Sec. 7(e); Mo. Rev. Stat. Sec. 53-
270(6); N.Y. Real Property Law Sec. Sec. 280(2)(g) and 280-a(2)(j);
N.C. Gen. Stat. Sec. Sec. 53-257(4), 53-264(b), 53-269, 53-270(6);
S.C. Code Ann. Sec. 29-4-60; Tenn. Code Ann. Sec. Sec. 47-30-
102(4), 47-30-104(c), 47-30-115(6), 47-30-109(b); Tex Const. Art. 16
Sec. 50(k)(8); Utah Code Ann. Sec. 61-2d-112; Vt. Stat. Ann. Tit.
8 Sec. 10702; W.Va. Code Sec. 47-24-7(b).
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Counseling Requirements for HECMs
Referrals. When a potential HECM borrower first contacts or
communicates with an FHA-approved HECM mortgagee, the mortgagee must
provide the borrower with contact information for ten HUD-approved
counseling agencies.\156\
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\156\ HUD Mortgagee Letter 2009-10 (March 27, 2009).
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Timing. A HECM mortgagee may not begin ``processing'' a HECM loan
application before receiving a certificate confirming that the borrower
has received reverse mortgage counseling.\157\ According to HUD
guidance, this means that a mortgagee may accept a borrower's
application before receiving the counseling certificate, but ``may not
order an appraisal, title search, or FHA case number or in any other
way begin the process of originating a HECM loan.'' \158\ The mortgagee
also may not charge an application fee or any other HECM-related fees
before the mortgagee receives a required HECM counseling certificate
indicating that counseling has been completed.
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\157\ HECM Handbook 4235.1 REV-1, ch. 2-1, 2-3; HUD Mortgagee
Letter 2004-25 (June 23, 2004).
\158\ HUD Mortgagee Letter 2004-25 (June 23, 2004).
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Content. HECM counselors must provide information on, among other
topics: (1) The financial implications of entering into a HECM; (2) the
consequences of a HECM on the borrower's taxes, estate, and eligibility
for assistance under Federal and state programs; (3) other home equity
conversion options, such as sale-leaseback financing; (4) additional
financial options such as other housing, social service, health, and
financial options (provided through the government or non-profit
organizations, for example); and (5) the circumstances under which the
HECM becomes due.\159\
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\159\ HECM Handbook 4235.1 REV-1, ch. 2-5; HUD Mortgagee Letter
2004-25 (June 23, 2004).
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Counselor independence. HECM mortgagees are prohibited from
steering, directing, recommending, or otherwise encouraging a consumer
to choose a particular counseling agency.\160\ They also may not
contact a counselor or counseling agency to refer a consumer or discuss
a consumer's personal information.
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\160\ HUD Mortgagee Letter 2004-25 (June 23, 2004).
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In 2008, Congress expanded these general restrictions by
prohibiting certain parties from directly or indirectly compensating or
being associated with a counselor or counseling agency; specifically,
any party ``involved in'': (1) ``originating or servicing the
mortgage''; (2) ``funding the loan underlying the mortgage''; or (3)
``the sale of annuities, investments, long-term care insurance, or any
other type of financial or insurance product.'' \161\ To implement
these measures, HUD issued a Mortgagee Letter prohibiting lenders from
paying counseling agencies, directly or indirectly, for HECM counseling
services through either a lump-sum payment or on a case-by-case
basis.\162\ The Mortgagee Letter indicates that a lender would
``indirectly'' pay for HECM counseling by ``funneling payment for HECM
counseling through a nonprofit, foundation, association or any other
entity or organization that is a branch of,
[[Page 58670]]
affiliated with or associated with a lending institution.'' Neither the
statute nor HUD's Mortgagee Letter indicates whether a creditor or
other person is prohibited from, for example, making charitable
donations designated for general purposes to a non-profit organization
that offers multiple services that include reverse mortgage counseling,
or whether this rule prohibits arranging for the consumer to finance
the counseling fee as part of the reverse mortgage transaction.
---------------------------------------------------------------------------
\161\ HERA Sec. 2122(a)(3) (codified at 12 U.S.C. 1715z-
20(d)(2)(B)).
\162\ HUD Mortgagee Letter 2008-28 (Sept. 29, 2008).
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Counseling protocol. HUD has previously issued a ``Counseling
Protocol,'' which includes additional counseling requirements.\163\ HUD
issued an updated and expanded Counseling Protocol that will go into
effect on September 11, 2010.\164\
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\163\ HUD, HECM Counseling Protocol (December 2006).
\164\ See HUD Handbook 7610.1 (05/2010) http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/7610.1/76101HSGH.pdf (visited
July 15, 2010).
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Interagency Supervisory Guidance on Reverse Mortgages
Through the FFIEC, the Board and other Federal banking agencies
recently stated in the Final Reverse Mortgage Guidance that reverse
mortgage borrowers ``do not consistently understand the terms,
features, and risks of their loans.'' \165\ Thus, despite concerns
about whether counseling is uniformly effective, the agencies stated
further that counseling for borrowers of proprietary reverse mortgages
is necessary to ``promote consumer understanding and manage compliance
risks.''Sec. \166\
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\165\ Final Reverse Mortgage Guidance, 75 FR at 50809.
\166\ Id. at 50811.
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Timing. The Guidance advises institutions to require consumers to
have received counseling before the consumer submits a reverse mortgage
application or pays an application fee.
Content. The Final Reverse Mortgage Guidance states that counseling
sessions should cover a range of information, largely consistent with
information required for HECM counseling. This information includes,
for example, ``[t]he availability of other housing, social service,
health, and financial options'' and ``[t]he financial implications and
tax consequences of entering into a reverse mortgage.'' In addition,
the Guidance advises that counseling sessions should cover, among other
topics, ``[t]he differences between HECM loans and proprietary reverse
mortgages.''
Counselor independence. Under the Guidance, institutions offering
proprietary reverse mortgages should ensure the independence of
counselors by adopting policies that prohibit the following:
Steering a consumer to any one particular counseling
agency.
Contacting a counselor to discuss a particular consumer, a
particular transaction, or the timing or content of a counseling
session ``unless the consumer is involved.''
Outreach
During Board outreach for this proposal and in comments on the
Proposed Reverse Mortgage Guidance, representatives of the reverse
mortgage industry uniformly affirmed the importance and value of
counseling for reverse mortgage borrowers and generally agreed that
creditors should ensure that prospective borrowers of proprietary
reverse mortgages receive counseling. The National Reverse Mortgage
Lenders Association (NRMLA) commented that the Federal banking agencies
should deem the HECM counseling rules ``best and prudent practices''
for institutions offering proprietary products. Several industry
representatives, however, expressed concerns that the counseling
network is underfunded and understaffed, resulting in long wait times
for prospective borrowers and lower quality counseling.
Consumer advocates have expressed support for requiring consumer
counseling in all reverse mortgage transactions. They caution, however,
that counseling alone may insufficiently protect consumers against
abusive practices.\167\ Like industry representatives, consumer
advocates question the effectiveness of counseling due to inadequate
funding and the limited availability of trained counselors. Some
consumer advocates therefore favor not only strengthening counseling,
but also requiring lenders and brokers to assess the suitability of a
reverse mortgage for each borrower before making a loan.\168\ See
``Suitability,'' below.
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\167\ NCLC Report at 18.
\168\ Id. at 19.
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Reverse mortgage counselors consulted by the Board expressed
differing views on a range of counseling issues. They differed on when
counseling should occur; some suggested that counseling was best after
the consumer had transaction-specific documents to review with the
counselor, while others thought that counseling was optimal earlier in
the process as an aid to informed consumer shopping. On counseling
content, counselors generally expressed concerns that requirements such
as having to complete a full budget for the consumer to determine the
appropriateness and affordability of a reverse mortgage would be too
difficult and time-consuming. Some advocated requiring additional
content, such as information about the general differences between
proprietary reverse mortgages and HECMs.
On counselor independence, some counselors shared anecdotally that
creditors have compromised counselor independence by providing the
required list of HECM counselors, while orally ``recommending''
particular counselors. At least one expressed support for Congress's
ban on creditors directly or indirectly paying HECM counselors
(discussed above), stating that this has stopped significant abuses.
All, however, shared the view that lack of funding for counseling is a
significant and growing problem.
The Board's Proposal
Based on its research and outreach, the Board believes that
originating a reverse mortgage before the consumer has obtained
counseling should be considered an unfair practice under Regulation Z.
The Board also believes that imposing a nonrefundable fee on a
prospective reverse mortgage consumer within three days after a
consumer has obtained counseling should be considered unfair. The Board
therefore proposes to prohibit these practices under its authority in
TILA Section 129(l)(2)(A) to prohibit practices in connection with
mortgage lending that the Board finds unfair or deceptive. 12 U.S.C.
1639(l)(2)(A). The Board does not intend to suggest that these
practices are unfair prior to the effective date of any final rule
implementing these proposed prohibitions. Prior to the effective date
of a final rule, the Board expects that whether these practices are
unfair will be judged on a case-by-case basis and on the totality of
the circumstances under applicable laws and regulations.
The proposed counseling requirement would apply to HECMs as well as
to proprietary reverse mortgages. While counseling is already required
for HECMs, a private action may not be brought against a mortgagee for
failure to comply with the counseling requirements; TILA Section 130,
however, gives consumers a private right of action. 15 U.S.C. 1640.
Consequently, the Board's proposal is intended in part to level the
playing field between HECM and proprietary reverse mortgage
originators. As discussed below, the Board is also proposing to provide
that compliance
[[Page 58671]]
with the HECM counseling rules satisfies the Board's rule.
Substantial consumer injury. Uninformed reverse mortgage consumers
stand to lose substantial equity in their most valuable asset--their
home--at a time when they may be least able to recover financially.
This loss could jeopardize a consumer's health and fundamental well-
being. Home equity is a critical financial resource for reverse
mortgage borrowers, who generally must be 62 years of age or older.
Borrowers in this age group are more likely to be retired than younger
borrowers, and thus tend to have more limited income sources. Should
emergency expenses arise or the cost of living increase higher than
expected, home equity may be the only resource for these consumers.
Reverse mortgage borrowers also risk foreclosure if they do not
clearly understand important facts about reverse mortgages. These
include the consequences of failing to pay property taxes and insurance
directly (rather than relying on the lender to do so, as is common with
some traditional ``forward'' mortgages), moving out of the home for an
extended period, or failing to maintain the property. Borrowers aged 62
or older may be more likely to face physical constraints on their
mobility than younger borrowers, and so as a practical matter may be
less able to find affordable alternative housing should they lose their
home.
In addition, uninformed or misinformed reverse mortgage borrowers
may unknowingly compromise their goals to leave assets for their heirs,
undermining not only their personal financial objectives that may have
taken years to achieve, but also their heirs' financial prospects.
Finally, Board research and outreach has indicated that many consumers
choose reverse mortgages if they have few or no other options; at age
62 or older, they may be on a fixed income or otherwise have limited
financial resources. Consequently, reverse mortgage consumers may be
especially vulnerable to pressure to go through with a reverse mortgage
transaction if they have to pay nonrefundable fees before they have
received adequate information to make an informed decision about
whether the transaction is appropriate for them.
Injury not reasonably avoidable. Without counseling, prospective
reverse mortgage borrowers may not reasonably be able to avoid these
injuries. If counseling is not required, creditors and financial
advisors may not be aware of or inform consumers of counseling
resources. Consumers could receive information about reverse mortgages
from other sources, such as the Internet, but these sources may provide
conflicting and confusing information, and be too voluminous for
consumers to categorize coherently for review. Creditors or financial
planners themselves may be willing to provide counseling to consumers,
but their guidance and information may be biased by an economic
interest in steering the consumer to a reverse mortgage.
As noted above, consumer testing conducted by the Board has shown
that consumers need considerable guidance to understand the
complexities of reverse mortgages, and that for some prospective
reverse mortgage borrowers, disclosures about reverse mortgage costs,
features, and risks, while valuable, are not by themselves sufficient.
For the same reason, merely informing consumers orally or in a written
disclosure that counseling is advisable and available may not ensure
that consumers in fact receive sufficient information and guidance.
Finally consumers who have to pay nonrefundable fees after applying
for a reverse mortgage, but before they receive counseling, may feel
locked into a reverse mortgage transaction--even if subsequent
counseling creates doubt about whether a reverse mortgage is right for
them. Consumers on a fixed income or with otherwise limited resources,
as many reverse mortgage borrowers are, may be especially vulnerable to
this pressure. A primary purpose of counseling is to ensure that the
consumer freely chooses a reverse mortgage, based on an informed
conclusion that the reverse mortgage is truly suitable for that
consumer. The imposition of nonrefundable fees on consumers before they
have had a chance to consider the information received through
counseling may render counseling ineffective in accomplishing this
purpose.
Injury not outweighed by countervailing benefits. The potential
injury to consumers described above may not be outweighed by the
potential benefits of not requiring counseling. Benefits of not
requiring counseling might include that consumers would save the
counseling fee and potentially be able to obtain reverse mortgages more
quickly to receive needed cash sooner. Creditors might also benefit by
being able to make more reverse mortgages in a shorter timeframe.
Creditors might be more likely to enter the reverse mortgage
marketplace if counseling is not required, increasing competition.
In the Board's view, however, these potential benefits may not
outweigh the possibility of severe negative consequences to reverse
mortgage consumers' financial well-being. Moreover, any increased
competition due to higher reverse mortgage volume would be offset by
the detriment to competition resulting from uninformed consumers.
Informed consumers are able to shop more effectively than uninformed
consumers, driving the market to produce more affordable loan products
with features better tailored to consumers' needs and preferences.
40(b)(1) Counseling Required
Under proposed Sec. 226.40(b)(1), a creditor or other person may
not originate a reverse mortgage before the consumer has obtained
counseling from a counselor or counseling agency that meets the
counselor qualification standards established by HUD pursuant to its
authority under the National Housing Act, as amended (NHA),\169\ or
``substantially similar'' standards. See 12 U.S.C. 1715z-20(f).
---------------------------------------------------------------------------
\169\ 12 U.S.C. 1701 et seq.
---------------------------------------------------------------------------
Counselor Qualifications
For several reasons, the Board proposes to require that counselors
meet HUD's qualification standards for HECM counselors, or standards
that would require a similar level of training and knowledge to those
required for HUD-approved counselors. First, the Board recognizes that
HUD has developed and continues to improve a comprehensive system of
certifying counselors to provide required counseling on reverse
mortgages under the HECM program. Second, the Board learned through
outreach with creditors and reverse mortgage counselors that
proprietary reverse mortgage creditors have routinely required
borrowers to obtain counseling from HUD-approved counselors, indicating
that the Board's proposal would not be unduly burdensome. Finally, the
Board believes that consumer protection can be served through a
counseling requirement only if counselors are properly trained to
provide germane, consistent, and detailed information about reverse
mortgages to consumers.
The Board requests comment on the potential benefits and drawbacks
of this aspect of the proposal. In particular, the Board acknowledges
concerns expressed during outreach that the quantity of counselors may
be insufficient to meet the demand for counseling and requests comment
on the potential effects of the proposed qualification standards on the
reverse mortgage market for both HECMs and proprietary products. The
Board also requests comment on the appropriateness of allowing
counselors
[[Page 58672]]
to meet qualification standards that are ``substantially similar'' to
those established by HUD, such as standards that might be developed by
a state.
Originating a Reverse Mortgage
The Board proposes to prohibit originating a reverse mortgage
before the consumer has obtained counseling from a HUD-approved or
similarly qualified counselor. As noted above, the HECM program
requires counseling before a HECM mortgagee may ``process'' an
application, meaning that the mortgagee may accept an application, but
``may not order an appraisal, title search, or an FHA case number or in
any other way begin the process of originating a HECM loan'' before the
consumer has received counseling.\170\ The Board proposes to take a
different position in proposed comment 40(b)(1)-1, which states that a
creditor or other person may not ``open a reverse mortgage account (for
an open-end reverse mortgage) or consummate a reverse mortgage loan
(for a closed-end reverse mortgage) before the consumer has obtained
the counseling required under Sec. 226.40(b)(1).'' The proposed
comment explains that a creditor or other person may accept an
application for a reverse mortgage and may also begin processing the
application (by, for example, ordering an appraisal or title search)
before the consumer has obtained counseling. As discussed below,
however, the Board is also proposing that the creditor not be permitted
to impose a nonrefundable fee before the consumer has obtained
counseling.
---------------------------------------------------------------------------
\170\ HUD Mortgagee Letter 2004-25 (June 23, 2004).
---------------------------------------------------------------------------
The proposed rule is intended to establish a bright line basis for
determining the time by which counseling must have occurred--
origination. The Board believes that this approach will provide greater
clarity to proprietary reverse mortgage creditors subject to the
proposed counseling rule. The proposal will facilitate compliance,
because creditors and others would not have to question whether a
particular activity related to a consumer's application is considered
part of ``processing'' the application and therefore prohibited. A more
precise rule is especially important where, as here, creditors are
subject to a private right of action for violations. At the same time,
consumers would be protected because, as discussed below, the proposal
would also require a creditor to refund any fees that the consumer paid
if the consumer decides, within three business days after receiving
counseling, not to proceed with the transaction. See proposed Sec.
226.40(b)(2) and comment 40(b)(2)(i)-1.
Allowing creditors and others to engage in the full range of
application processing activities before receiving confirmation of
counseling may in some cases allow them to produce transaction-specific
documents that the consumer could then review with the counselor. In
outreach, some reverse mortgage counselors expressed the view that
counseling can be particularly effective when transaction-specific
documents are available. The proposed rule, however, would also permit
counseling to be obtained earlier in the process, such as before
application, equipping the consumer to engage in more informed
shopping.
Proposed comment 40(b)(1)-2 provides that a creditor may rely on a
certificate of counseling in a form approved by HUD pursuant to 12
U.S.C. 1715z-20(f), or a substantially similar form, to confirm that
the consumer received the required counseling. HUD's current
Certificate of HECM Counseling requires the names, addresses and
signatures of the homeowners receiving counseling (namely, all persons
shown as homeowners on the deed); a list of seven topics required to be
covered in HECM counseling sessions; and spaces for the name, contact
information, employer information, and signature of the counselor.\171\
The Certificate of HECM Counseling also requires an indication of how
the interview was held (face-to-face or by telephone), how long the
session lasted, how much was charged for the session, and whether the
fee was paid up front, financed or waived. Finally, the Certificate
requires the date of counseling and the ``certificate expiration
date,'' which is 180 days from the date of the counseling session.
---------------------------------------------------------------------------
\171\ See HUD Form 92902 (6/2008).
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The Board's proposed counseling rule applies not only to HECMs, but
also to proprietary reverse mortgages. Hence the Board proposes to give
creditors the flexibility of relying on a ``substantially similar''
form, which the Board believes should include information sufficient to
confirm, at a minimum, that the consumer received counseling in
accordance with the requirements in the proposed rule for counselor
qualifications and the date of the counseling session. The Board
understands that many proprietary reverse mortgage creditors have
required that counseling be verified with the Certificate of HECM
Counseling and requests comment on whether the proposed safe harbor
allowing creditors to rely on a form ``substantially similar'' to the
Certificate of HECM Counseling is appropriate.
40(b)(2) Nonrefundable Fees Prohibited
Paragraph 40(b)(2)(i)
Under the proposal, neither a creditor nor any other person may
impose a nonrefundable fee in connection with a reverse mortgage
subject to Sec. 226.33 until after the third business day following
the consumer's completion of counseling. See proposed Sec.
226.40(b)(2)(i) and accompanying commentary. With this proposal, the
Board seeks to address concerns that consumers who have to pay a
nonrefundable fee after applying for a reverse mortgage, but before
they receive counseling, may feel locked into a reverse mortgage even
if they later receive counseling and have doubts about whether a
reverse mortgage is a sound choice. As noted above, Board research and
outreach have indicated that many consumers choose reverse mortgages if
they have few or no other options; at age 62 or older, they may be on a
fixed income or otherwise have limited financial resources. The Board
therefore is concerned that a reverse mortgage consumer may be
especially vulnerable to pressure to go through with a transaction once
the consumer has invested money in it that cannot be recouped. A
restriction on imposing nonrefundable fees would help ensure that
counseling effectively assists consumers in making informed financial
choices, because consumers would not be financially committed to a
reverse mortgage transaction before receiving comprehensive guidance
and information.
For consistency in Regulation Z, this rule is similar to the rule
on imposing nonrefundable fees under current Sec. 226.5b(h) and
accompanying commentary (redesignated and revised in the August 2009
HELOC Proposal as Sec. 226.5b(e) and comments 5b(e)-1 and -2), which
prohibits imposing nonrefundable fees until three business days after a
consumer receives the disclosures required by Sec. 226.5b. 74 FR
43428, 43536, 43594, Aug. 26, 2009. As discussed in the section-by-
section analysis to Sec. 226.19 above, the Board is proposing a
parallel rule for closed-end real property- or dwelling-secured
mortgages. See proposed Sec. 226.19(a)(1)(iv) and accompanying
commentary.
Proposed comment 40(b)(2)(i)-1 clarifies that a creditor or other
person may collect a fee, including an application fee, earlier than
the expiration of three business days after
[[Page 58673]]
the consumer obtains counseling. Similarly to comment 5b(h)-1, which
explains the implications of the analogous HELOC nonrefundable fee
rule, proposed comment 40(b)(2)(i)-1 explains that the creditor or
other person must refund the fee if, within three business days of
obtaining counseling, the consumer decides not to enter into the
reverse mortgage transaction. Unlike current comment 5b(h)-1, however,
proposed comment 40(b)(2)(i)-1 does not state that the consumer must be
notified that the fee is refundable. The Board proposes to require
reverse mortgage creditors to notify the consumer of this refund right
as part of the early reverse mortgage disclosures under proposed Sec.
226.33(c), (d)(1) and (d)(3). However, unlike the proposed
nonrefundable fee rule, the disclosure requirement is not proposed
based on the Board's authority under TILA Section 129 to prohibit
unfair or deceptive practices. See 15 U.S.C. 1639(l)(2)(A). Violations
for rules proposed under the Board's Section 129 authority carry
enhanced damages. See TILA Section 130(a)(4); 15 U.S.C. 1640(a)(4).
Therefore, the Board does not propose to refer to this disclosure
requirement in comment 40(b)(2)(i)-1, which interprets Sec.
226.40(b)(2), a provision proposed pursuant to the Board's authority
under TILA Section 129.
In new comment 40(b)(2)(i)-2, the Board proposes guidance regarding
how a creditor or other person may determine when the consumer obtained
counseling for purposes of imposing a nonrefundable fee. Specifically,
the comment states that a creditor or other person may rely on the date
of the counseling session indicated on a certificate of counseling in a
form approved by the Secretary of HUD pursuant to 12 U.S.C. 1715z-
20(f), or a substantially similar form. A creditor would be free to
rely on a consumer's oral representation of the date on which
counseling occurred but would incur the risk of this representation
later being more difficult to substantiate.
Proposed comment 40(b)(2)(i)-3 explains how the proposed
restriction on imposing nonrefundable fees for reverse mortgages
interacts with the longstanding restriction on imposing nonrefundable
fees for HELOCs subject to Sec. 226.5b. Historically, most reverse
mortgages have been open-end mortgages subject to Sec. 226.5b.\172\
Consequently, these reverse mortgages have been subject to the
restriction on imposing nonrefundable fees before the consumer has
received the disclosures required under Sec. 226.5b (also discussed in
the section-by-section analysis of Sec. 226.5b, above). Under this
proposal, reverse mortgages subject to Sec. 226.5b would still be
subject to this restriction, but would also be subject to the
restriction under proposed Sec. 226.40(b)(2)(i), which prohibits
imposing a nonrefundable fee (other than a counseling fee (see proposed
Sec. 226.40(b)(2)(ii))) until three business days after the consumer
has obtained counseling. As explained in the section-by-section
analysis to proposed 226.33(a) through (d), the Board proposes to move
the relevant early disclosure requirements applicable to open-end
reverse mortgages from Sec. 226.5b to Sec. 226.33(c) and (d)(1).
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\172\ In fiscal year 2008, for example, most HECM borrowers
chose to receive at least part of their payments as a line of
credit. Of these borrowers, 89 percent chose to receive their
payments exclusively as a line of credit; another 6 percent chose to
receive a line of credit in combination with term or tenure
payments. See U.S. Government Accountability Office, GAO-09-606 at 8
(referencing HUD data).
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Proposed comment 40(b)(2)(i)-3 notes that, for open-end reverse
mortgages, a nonrefundable fee generally may not be imposed until both
waiting periods have ended and provides two illustrations of the
relationship between these restrictions. First, if three business days
have elapsed since the consumer received the early disclosures required
under proposed Sec. 226.33(d)(1), but fewer than three business days
have elapsed since the consumer obtained counseling, the creditor or
other person could not impose a nonrefundable fee (other than a fee for
required counseling (see proposed Sec. 226.40(b)(2)(ii))) until after
the third business day following the consumer's completion of
counseling. Similarly, if three business days have elapsed since the
consumer obtained counseling, but fewer than three business days have
elapsed since the consumer received the early disclosures, the creditor
or other person may not impose a nonrefundable fee until after the
third business day following the consumer's receipt of the required
disclosures.
Comment 40(b)(2)(i)-4.i. Proposed comment 40(b)(2)(i)-4.i explains
how the proposed restriction on imposing nonrefundable fees for reverse
mortgages interacts with the restriction in Sec. 226.19(a)(1)(ii) on
imposing any fees for a closed-end real property- or dwelling-secured
mortgage until the consumer has received the early disclosures required
under Sec. 226.19(a)(1)(i). Exceptions to this restriction on imposing
fees are fees for obtaining a consumer's credit history (Sec.
226.19(a)(1)(iii)) and, as discussed in the section-by-section analysis
to proposed Sec. 226.19(a)(1)(v), fees for required counseling
(proposed Sec. 226.19(a)(1)(v)). As discussed in the section-by-
section analysis to proposed Sec. 226.33(a) through (d), the Board
proposes to move the early disclosure requirements for closed-end
reverse mortgages from Sec. Sec. 226.19 and 226.38 to Sec. 226.33(c)
and (d)(3).
Proposed comment 40(b)(2)(i)-4.i provides two illustrations of the
relationship between the fee restrictions in Sec. 226.19(a)(1)(ii) and
proposed Sec. 226.40(b)(2)(i). First, if the consumer has received the
early disclosures, but fewer than three business days have elapsed
since the consumer obtained counseling, the creditor or other person
could not impose a nonrefundable fee on the consumer (other than a fee
for required counseling) until after the third business day following
the consumer's completion of counseling. Second, if three business days
have elapsed since the consumer obtained counseling, but the consumer
has not received the early disclosures, the creditor or other person
may not impose any fees--refundable or nonrefundable (except for a fee
for obtaining a consumer's credit history or required counseling)--
until the consumer has received the early disclosures.
Comment 40(b)(2)(i)-4.ii. Under this proposal, closed-end reverse
mortgages would be subject to two restrictions on imposing
nonrefundable fees. The first restriction would be under proposed Sec.
226.19(a)(1)(iv), which prohibits imposing a nonrefundable fee (other
than a fee for obtaining a consumer's credit history (see Sec.
226.19(a)(1)(iii)) and a fee for required counseling (see Sec.
226.19(a)(1)(v)) until after the third business day following the
consumer's receipt of the early disclosures required under Sec. Sec.
226.19(a)(1)(i) and 226.33(d)(3). (Again, as discussed in the section-
by-section analysis to proposed Sec. 226.33(a) through (d), the Board
proposes to move the early disclosure requirements for closed-end
reverse mortgages from Sec. Sec. 226.19 and 226.38 to Sec. 226.33(c)
and (d)(3).) The second restriction would be under proposed Sec.
226.40(b)(2), which prohibits imposing a nonrefundable fee (other than
a fee for required counseling (see Sec. 226.40(b)(2)(ii))) until after
the third business day following the consumer's completion of
counseling.
Proposed comment 40(b)(2)(i)-4.ii explains that, for closed-end
reverse mortgages, a nonrefundable fee generally may not be imposed
until both waiting periods have ended and provides two illustrations of
the relationship between these restrictions
[[Page 58674]]
on imposing nonrefundable fees. First, if three business days have
elapsed since the consumer received the early disclosures required
under Sec. Sec. 226.19(a)(1)(i) and 226.33(d)(3), but fewer than three
business days have elapsed since the consumer obtained counseling, the
creditor or other person may not impose a nonrefundable fee (except for
a counseling fee) until after the third business day following the
consumer's completion of counseling. Second, if three business days
have elapsed since the consumer obtained counseling, but fewer than
three business days have elapsed since the consumer received the early
disclosures, the creditor or other person may not impose a
nonrefundable fee (except a fee for obtaining a consumer's credit
history or counseling) until after the third business day following the
consumer's receipt of the early disclosures.
Proposed comment 40(b)(2)(i)-5 provides that, for purposes of
proposed Sec. 226.40(b)(2)(i), which prohibits imposing a
nonrefundable fee until three business days after the consumer has
obtained counseling, the term ``business day'' has the more precise
definition used for rescission and certain disclosure purposes: All
calendar days except Sundays and the Federal holidays referred to in
Sec. 226.2(a)(6). For example, if a consumer were to obtain counseling
on Monday, June 1, a creditor could not impose a nonrefundable fee on
the consumer until Friday, June 5. If the consumer decided on June 4
not to proceed with the transaction, the creditor would have to refund
to the consumer any fees that had been charged before that time for the
reverse mortgage transaction.
The Board proposes to use the more precise definition of ``business
day'' for this provision to conform to the Board's proposal to use the
more precise definition in the nonrefundable fee rule for open-end
mortgage transactions subject to Sec. 226.5b. See 74 FR 43428, 43593,
Aug. 26, 2009. Under that rule, as discussed above, a creditor or other
person may not impose a nonrefundable fee on the consumer until three
business days after the consumer has received the disclosures required
under Sec. 226.5b. The more precise definition of ``business day''
also applies to the restriction on imposing fees for closed-end reverse
mortgages under Sec. 226.19(a)(1)(ii) and the restriction on imposing
nonrefundable fees under proposed Sec. 226.19(a)(1)(iv). See comment
19(a)(1)(ii)-1 and proposed comment 19(a)(1)(iv)-1. As noted, the
closed-end mortgage fee restriction under Sec. 226.19(a)(1)(ii)
prohibits imposing any fees until the consumer has received the early
disclosures required under Sec. 226.19(a)(1)(i) (also see proposed
Sec. 226.33(d)(3)). Proposed Sec. 226.19(a)(1)(iv) would prohibit
imposing a nonrefundable fee in connection with a closed-end mortgage
before the consumer has received the early disclosures required under
Sec. 226.19(a)(1)(i) (also see proposed Sec. 226.33(d)(3)). In both
cases, the consumer is deemed to have received the disclosures three
business days after the creditor has mailed the disclosures. See
comment 19(a)(1)(ii)-2 and proposed comment 19(a)(1)(iv)-2. By using
the same definition of ``business day'' for all of these fee
restrictions, the Board seeks to alleviate confusion among creditors
and others regarding when fees may be imposed, and when obligations to
refund fees arise.
Paragraph 40(b)(2)(ii)
To facilitate compliance with the proposed rule on imposing
nonrefundable fees, the Board proposes in Sec. 226.40(b)(2)(ii) to
exempt from the restriction on imposing nonrefundable fees a bona fide
and reasonable fee for required reverse mortgage counseling imposed by
a qualified counselor or counseling agency. This proposed provision
specifies that the counselor or counseling agency must meet the
counselor qualification standards established by the Secretary of HUD
pursuant to 12 U.S.C. 1715z-20(f), or substantially similar
qualification standards, as proposed in Sec. 226.40(b)(1). Comment
40(b)(2)(ii)-1 clarifies that a fee for required counseling may be
collected earlier than the expiration of three business days after the
consumer obtains counseling, and does not have to be refunded if the
consumer decides not to proceed with the transaction within three
business days, as described in proposed comment 40(b)(2)(i)-1.
The Board proposes this exemption because counseling fees are often
collected at the point of service by the counselor or counseling
agency. These fees are not always connected to a specific reverse
mortgage transaction because, under HECM rules and the proposal, a
consumer need obtain counseling only once with respect to multiple
reverse mortgage applications (as long as fewer than 180 days have
elapsed between the time of counseling and the application, as required
under proposed Sec. 226.40(b)(4)). In addition, the Board is cognizant
of funding concerns for reverse mortgage counseling, and therefore does
not believe that counselors and counseling agencies should have to
refund fees charged for counseling as prescribed in the proposed rule.
Comparison to HECM Rules
The Board believes that determining how to comply with the proposed
restriction on imposing nonrefundable fees until after the third
business day following counseling will not pose serious challenges to
reverse mortgage providers, because, as noted above in the
``Introduction'' to Sec. 226.33, historically, most reverse mortgages
have been open-end mortgage loans subject to Sec. 226.5b.
Consequently, most reverse mortgage providers will be familiar with
this general approach to imposing nonrefundable fees. The Board
recognizes, however, that HUD's rule on imposing fees for HECMs differs
from this proposal. As discussed earlier, HUD guidance indicates that a
HUD mortgagee may not charge the borrower an application fee, an
appraisal fee, or fees for any other HECM-related services before the
mortgagee receives HUD's required Certificate of HECM Counseling.\173\
The Board's proposal would cover not only fees imposed by HUD
mortgagees, but also fees imposed by any third party that might perform
a transaction-related service. The Board believes that this broader
coverage is important to protect consumers from being committed to a
particular reverse mortgage transaction before having had an
opportunity to consider information received during counseling.
---------------------------------------------------------------------------
\173\ See HUD Mortgagee Letter 2004-25 (June 23, 2004).
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Another difference from the HECM rules is that the Board's proposal
would permit creditors and others to charge (and collect) fees earlier
than three business days after the consumer has obtained counseling.
However, these fees would have to be refunded should the consumer
decide not to go forward with the transaction within that time period.
The Board believes that this approach will facilitate reverse mortgage
transactions in a manner that will help consumers make more informed
credit decisions. For example, allowing appraisal or other property
valuation fees to be charged would enable consumers to know how much
money would be available to them before being committed to a particular
transaction. Also, consumers would be more likely to have accurate
transaction-specific documents to review with a counselor if they may
pay a fee for a creditor to process their application. If, after
counseling, the consumer decides that the transaction is not the best
choice, the consumer would be entitled to a refund of any fees paid. At
the same
[[Page 58675]]
time, the proposed restriction on nonrefundable fees would not delay
moving forward with transactions as much as a restriction on imposing
any fees prior to counseling might. This could benefit consumers who
have immediate financial needs.
Finally, the proposal is intended to ensure that consumers have
time after counseling to consider whether to proceed with the
transaction. Under the HECM rules, once a creditor receives a HECM
counseling certificate, the creditor may immediately impose fees on the
consumer. Under the proposal, if a creditor receives a HECM counseling
certificate one business day after the consumer obtained counseling,
the creditor would still have to give the consumer two additional
business days to cancel the transaction and receive a refund of fees.
Regarding the new restriction on imposing nonrefundable fees for
both open-end and closed-end reverse mortgages, the Board requests
comment on the usefulness of illustrations and other guidance in the
comments, as well as potential disadvantages and benefits of the
proposed restriction.
40(b)(3) Content of Counseling
To ensure that the reverse mortgage counseling provides relevant
and useful information to the consumer, the Board proposes to define
minimum content requirements for counseling. Specifically, under
proposed Sec. 226.40(b)(3), the required counseling must include
``information regarding reverse mortgages and their suitability to the
consumer's financial needs and circumstances.'' Proposed comment
40(b)(3)-1 provides a safe harbor for this content requirement:
Counseling that conveys the information required by HUD for the HECM
program, or substantially similar information. Information required by
HUD includes the following, among other topics: (1) The financial
implications of entering into a HECM; (2) the consequences of a HECM on
the borrower's taxes, estate, and eligibility for assistance under
Federal and state programs; (3) other home equity conversion options,
such as sale-leaseback financing; (4) additional financial options such
as other housing, social service, health, and financial options
(provided through government entities or non-profit organizations, for
example); and (5) the circumstances under which the HECM becomes
due.\174\ The Board believes that counseling that conveys this
information would satisfy the general requirement that counseling must
include ``information regarding reverse mortgages and their suitability
to a consumer's financial needs and circumstances.'' See proposed Sec.
226.40(b)(3).
---------------------------------------------------------------------------
\174\ HECM Handbook 4235.1 REV-1, ch. 2-5; HUD Mortgagee Letter
2004-25 (June 23, 2004).
---------------------------------------------------------------------------
To provide flexibility for complying with the content requirement
for counseling, the Board also proposes that counseling covering topics
that are ``substantially similar'' to those required for HECMs also
would satisfy the requirements of Sec. 226.40(b)(3). The Board
recognizes that consumers have varying levels of financial
sophistication and diverse financial needs and goals, and that
counseling covering additional or alternative topics may therefore be
appropriate. These topics might include information about the
differences between proprietary reverse mortgages and HECMs or an
explanation of the disclosures required for reverse mortgage
transactions under proposed Sec. 226.33(b) (``Key Questions to Ask
about Reverse Mortgages'') and Sec. 226.33(c) (regarding reverse
mortgage costs and related information). See proposed Sec. 226.33(b)
and (c) and accompanying commentary.
The Board requests comment on the proposed requirements and safe
harbor for the content of counseling required under Sec. 226.40(b)(3).
40(b)(4) Timing of Counseling
Proposed Sec. 226.40(b)(4) requires counseling for each reverse
mortgage transaction to have occurred no earlier than 180 calendar days
(six months) prior to the creditor's receipt of the consumer's
application. The Board proposes this restriction on the time for which
counseling remains valid for two reasons. First, this time limitation
is necessary to ensure that the counseling session addresses the
consumer's current financial circumstances, assuming that significant
changes generally would not have occurred within only six months.
Second, the 180-day expiration date for the validity of counseling is
generally consistent with the rule applicable to HECM counseling, and
thus should require no adjustments on the part of HECM lenders that
choose to offer proprietary products.\175\ The Board requests comment
on whether 180 days prior to application or some other timeframe is an
appropriate limit on the period for which counseling is valid.
---------------------------------------------------------------------------
\175\ See HUD Form 92902, ``Certificate of HECM Counseling,''
(6/2008) (specifying that the counseling session is valid for 180
days after the date of the session). See also HUD Mortgagee Letter
2004-25 (June 23, 2004) (providing that the mortgagee must take the
application before the counseling expiration date, but need not
close the loan before the expiration date).
---------------------------------------------------------------------------
40(b)(5) Type of Counseling
Proposed Sec. 226.40(b)(5) requires that reverse mortgage
counseling occur face-to-face or by telephone. Proposed comment
40(b)(5)-1 is intended to accommodate additional forms of communication
that may be characterized as telephone, face-to-face, or both, such as
connections over the Internet allowing persons to see one another and
communicate in real time. This comment also clarifies that
communications via the Internet or similar connection designed to
accommodate persons with disabilities, such as those who are visually
or hearing impaired, would also meet the requirement that counseling be
face-to-face or by telephone.
During discussions with the Board for this proposal and in comments
on the Proposed Reverse Mortgage Guidance, industry representatives,
consumer advocates, and reverse mortgage counselors did not agree on
whether face-to-face counseling should be preferred (or required) over
telephone counseling. Consumer advocates generally commented that in-
person counseling was better for consumers. At least one consumer
advocacy organization, however, opposed requiring in-person counseling
because many reverse mortgage consumers lack the mobility required to
travel to a counseling session; in addition, conference calls often
allow family members across the country or other named owners on the
deed of the securing property (see proposed Sec. 226.40(b)(7)) to
participate in the session.
The Board is not persuaded that either form of counseling is
superior in all cases. The Board solicits comment on the proposed rule
and guidance regarding the types of counseling permitted, including the
absence of a requirement that counseling occur in only one particular
form.
40(b)(6) Independence of Counselor
During outreach for this proposal, the Board heard from consumer
advocates and reverse mortgage counselors that counselors may not in
all cases be impartial advisors. Given certain incentives, counselors
may provide guidance that favors a particular reverse mortgage product,
regardless of its appropriateness for the consumer. In addition,
Congress recently enacted restrictions on how counselors may be
compensated to address concerns that counselors may not be independent
of creditors and may consequently steer
[[Page 58676]]
consumers to particular reverse mortgage products.\176\
---------------------------------------------------------------------------
\176\ HERA Sec. 2122(a)(3) (codified at 12 U.S.C. 1715z-
20(d)(2)(B)) (prohibiting parties involved in originating or
servicing a HECM, or in selling any financial or insurance product,
from directly or indirectly paying a counselor or being associated
in any way with the counselor).
---------------------------------------------------------------------------
The Board believes that counselor impartiality is essential to
ensuring that counseling affords meaningful consumer protection.
Without counselor impartiality, the prohibitions on originating a
reverse mortgage or imposing a nonrefundable fee on a reverse mortgage
applicant before the consumer obtains counseling would be of limited
value. The Board has identified two primary incentives that undermine
counselor impartiality:
Receiving compensation from a particular originator. A
counselor or counseling agency compensated by a creditor or mortgage
broker may present biased information about reverse mortgages intended
to steer the consumer to the creditor's or mortgage broker's product.
Receiving consumers for counseling through referrals by a
particular originator. If a counselor or counseling agency counsels
only prospective borrowers referred by a single originator, that
counselor may be motivated to steer consumers to that originator's
products.
This proposal therefore incorporates two provisions designed to
promote counselor independence: one restricting compensation for
counseling services and another prohibiting creditors or others from
steering consumers to particular counselors or counseling agencies.
40(b)(6)(i) Counselor Compensation
Proposed Sec. 226.40(b)(6)(i) prohibits a creditor or any other
person involved in originating a reverse mortgage from compensating a
counselor or counseling agency for providing reverse mortgage
counseling with respect to a particular transaction. As noted earlier,
in 2008 Congress broadly prohibited parties involved in originating or
servicing a HECM, or in selling any financial or insurance product,
from directly or indirectly paying a counselor or being associated in
any way with the counselor.\177\ To implement these measures, HUD
issued a Mortgagee Letter prohibiting lenders from paying counseling
agencies, directly or indirectly, for HECM counseling services.\178\
---------------------------------------------------------------------------
\177\ Id.
\178\ HUD Mortgagee Letter 2008-28 (Sept. 29, 2008).
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The Board proposes a similar rule that would prohibit creditors and
other persons involved in originating a reverse mortgage, such as
mortgage brokers, from compensating a counselor or counseling agency
for providing the counseling required under proposed Sec. 226.40(b)(1)
for a particular transaction. See proposed Sec. 226.40(b)(6)(i).
Proposed comment 40(b)(6)(i)-1, however, clarifies that a creditor or
other person would not violate this provision by arranging for the
counseling fee to be financed as part of a reverse mortgage
transaction. Even though financing counseling fees may involve the
creditor or other person remitting funds from the financed transaction
to the counselor, this provision is intended to retain consumers'
options for paying for counseling without creating unnecessary
compliance risk.
The Board believes that the proposed compensation rule will curtail
the practice of counselors promoting a particular reverse mortgage
product or provider. In the Board's view, a more precise rule
prohibiting compensation for counseling with respect to a particular
transaction, rather than a rule prohibiting any financial assistance
for counseling services generally, is appropriate where, as under TILA,
violations trigger a private right of action. By contrast, the recent
amendments to the NHA's HECM provisions under the HERA are not
enforceable through private action.\179\ In addition, the Board has
frequently heard concerns that counseling resources are limited, and
that funding for counseling is inadequate. As a result, the Board has
reservations about expressly prohibiting reverse mortgage providers
from providing any financial assistance to non-profit counseling
agencies. Donations that are not related to a particular transaction
could help ensure that needed counseling is available for more
consumers.
---------------------------------------------------------------------------
\179\ See, e.g., 12 U.S.C. 1735f-14(b)(1)(H) (granting the
Secretary of HUD authority to impose civil money penalties against a
mortgagee who knowingly and materially violates any provision of
Title II of the National Housing Act, as amended (``NHA''), 12
U.S.C. 1707 et seq., or any implementing regulation or handbook
issued under the NHA, including provisions under the HECM program
pursuant to Section 255(d) of the National Housing Act, 12 U.S.C.
1715z-20).
---------------------------------------------------------------------------
At the same time, the Board is concerned that these donations may
in some cases compromise counselor independence. For example, donations
by a creditor to a counseling agency could compromise counselor
independence if the donations occur on a regular basis, and are tied in
amount to the number or value of transactions made by the donating
creditor to consumers counseled by the recipient counseling agency. The
Board also notes, however, that RESPA's prohibition on referral fees
for settlement services (which include originating a mortgage loan)
\180\ may already deter donations designed to secure more business for
the donating reverse mortgage provider.
---------------------------------------------------------------------------
\180\ 12 U.S.C. 2607; 24 CFR 3500.14.
---------------------------------------------------------------------------
With these considerations in mind, the Board requests comment on
whether to adopt additional or alternative restrictions on compensation
of counselors or counseling agencies by persons involved in originating
reverse mortgages.
40(b)(6)(ii) Steering
The second provision designed to promote counselor independence is
proposed Sec. 226.40(b)(6)(ii), which prohibits steering a consumer to
a particular counselor or counseling agency. In the Board's view,
without this prohibition, the rule requiring counseling would be
ineffective. Absent a steering prohibition, a creditor could send the
consumer to a counselor who is a family member or personal friend, for
example, and with whom the creditor has a tacit or express agreement to
refer clients in exchange for preferable treatment of the creditor's
products in the counseling session.
Whether steering of this type has occurred is a case-by-case
determination and may be difficult to discern. Accordingly, the Board
has proposed in Sec. 226.40(b)(6)(ii) a ``safe harbor'' for compliance
with this anti-steering rule. The safe harbor would permit a creditor
or other person involved in originating a reverse mortgage to ensure
compliance with the rule by providing to the consumer a list of at
least five HUD-approved counselors or counseling agencies. Comment
40(b)(6)(ii)-1 clarifies that a creditor or other person that does not
provide a list of five counselors or counseling agencies has not in all
cases violated this provision. The comment points out, for example,
that when the consumer has received qualifying counseling prior to
contacting (or being contacted by) a creditor, broker, or other person
offering or promoting reverse mortgages, the consumer would not need a
list of counselors or counseling agencies from that creditor or other
person. Here, the concern about the creditor steering the consumer to a
particular counselor would be irrelevant.
The list proposed to constitute a safe harbor must include at least
five counselors or counseling agencies, although the Board is aware
that HECM rules require mortgagees to provide to
[[Page 58677]]
the consumer a list of at least ten counseling agencies.\181\ The Board
is concerned that it may be unreasonable to require a list of at least
ten counselors or agencies for proprietary reverse mortgage
transactions. In particular, the Board is concerned that fewer
counselors and agencies may have the expertise to provide information
about proprietary reverse mortgages than HECMs.
---------------------------------------------------------------------------
\181\ HUD Mortgagee Letter 2009-10 (March 7, 2009).
---------------------------------------------------------------------------
The Board requests comment on the proposed approach to curtailing
steering of consumers to particular counselors or counseling agencies.
The Board solicits comment on whether there are other situations in
which a list may not be necessary, or in which the creditor or other
person would not be able to meet the safe harbor but should still be
deemed to comply with proposed Sec. 226.40(b)(6)(ii). The Board also
requests comment on whether a list of fewer or more than five
counselors or agencies should be required to qualify for the proposed
safe harbor.
Communications With Counselors
The Board is not proposing limitations on a creditor or other
person's communications with counselors. Parties consulted during the
Board's outreach for this proposal disagreed on whether restrictions on
originators' contacting counselors compromised counselor independence.
Consumer advocates generally support prohibitions on communications
between counselors and creditors or other key participants in reverse
mortgage originations. Industry representatives have raised concerns
that restrictions on communication could prevent counselors with
questions about an institution's proprietary reverse mortgage product
from obtaining information critical to the consumer. Reverse mortgage
counselors consulted by the Board indicated that freedom to communicate
with a creditor to clear up questions about a particular transaction
can enhance the quality of counseling and consumer understanding.
The anti-steering proposal is intended to address harmful
practices, not to stop communications that may be beneficial to
consumers. The Board invites comment on whether and what specific
restrictions on communications between counselors and key participants
in reverse mortgage originations (such as creditors, brokers, and
correspondents) would be appropriate.
40(b)(7) Definition of ``Consumer''
Proposed Sec. 226.40(b)(7) provides that, for purposes of the
proposed counseling requirements under Sec. 226.40(b)(1), the meaning
of ``consumer'' includes all persons who, at the time of origination of
a reverse mortgage subject to Sec. 226.33, will be shown as owners on
the property deed of the dwelling that will secure the applicable
reverse mortgage. Under this proposed definition, however, for purposes
of Sec. 226.40(b)(2), which prohibits a creditor or other person from
imposing a nonrefundable fee in connection with a reverse mortgage
until after the third business day following the consumer's completion
of counseling, the term ``consumer'' includes only persons who will be
obligors on the applicable reverse mortgage. The Board proposes this
clarification based on its authority under TILA Section 105(a) to
prescribe regulations containing classifications, differentiations, or
other provision as in the judgment of the Board are necessary or proper
to effectuate the purposes of TILA. 12 U.S.C. 1604(a). This
clarification is necessary in reverse mortgage transactions because all
owners may have to pay off the mortgage themselves to retain
homeownership if the party obligated on the note dies or moves out. In
addition, the Board's proposal conforms to the HECM rule requiring
counseling for all named owners listed on the property deed.\182\ Thus,
the proposed rule is especially appropriate for HECMs, for which all
parties on the property deed must meet HUD's mortgagor qualification
standards and all are obligated on the mortgage.\183\
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\182\ HUD Mortgagee Letter 2004-25 (June 23, 2004).
\183\ See, e.g., 24 CFR 206.35.
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The Board believes that creditors should not have to wait for all
owners shown on the deed to obtain counseling before beginning to
process the reverse mortgage application. A creditor would have to
order a title search to obtain that information, which gives rise to a
title search fee. Moreover, in some cases, certain parties on the deed
may not use the securing property as their principal dwelling and may
be difficult to locate. For these reasons, the Board proposes to
require that only parties who will be obligors on the reverse
mortgage--in most instances, those who have applied for the reverse
mortgage--be required to have obtained counseling before a
nonrefundable fee may be imposed under proposed Sec. 226.40(b)(2).
The Board requests comment on whether requiring counseling for all
persons who, at the time of origination of a reverse mortgage subject
to Sec. 226.33, will be shown as owners on the property deed of the
dwelling that will secure the applicable reverse mortgage is
appropriate for proprietary reverse mortgages, which may have different
requirements and features than HECMs.
Suitability
Background
For this proposal, the Board examined whether reverse mortgages are
a product for which suitability standards are warranted because reverse
mortgages are complex and the population for which reverse mortgages
are intended--typically consumers 62 years of age or older--may be more
vulnerable than younger consumers to the potential adverse consequences
of obtaining inappropriate financial products. In this regard, the
Board considered whether the practice of making a reverse mortgage
without evaluating whether the product is suitable for the consumer is
unfair or deceptive, and thus should be banned under the Board's
authority to prohibit practices that are unfair or deceptive in
mortgage transactions. TILA Sec. 129(l)(2)(A), 15 U.S.C.
1639(l)(2)(A).
Some consumer advocates have recommended imposing a fiduciary
``duty of good faith and fair dealing'' on reverse mortgage
originators, which would include a duty to assess whether a reverse
mortgage is suitable for the consumer.\184\ In addition, the Code of
Ethics of the National Association of Reverse Mortgage Lenders (NRMLA)
includes a number of provisions requiring members to act in the best
interests of their customers.\185\ The Board is also aware that the
Securities and Exchange Commission (SEC) has approved, and most states
have adopted, suitability standards for the sale of annuities; the
Board recognizes that annuities function similarly to many reverse
mortgage transactions in that the consumer exchanges something of value
for the right to receive regular payments.\186\
---------------------------------------------------------------------------
\184\ NCLC Report at 18-19 (Oct. 2009).
\185\ Nat'l Ass'n of Reverse Mortgage Lenders, Code of Ethics &
Professional Responsibility: Ethics Standards Complaint Procedures,
Values 1, 3, and 5; Rules 107, 108, 501, 502 (revised June 16,
2009).
\186\ See, e.g., NASD Rule 2821, ``Responsibilities Regarding
Deferred Variable Annuities''; National Ass'n of Ins. Commissioners,
``Suitability in Annuity Transactions Model Regulation,'' Model 275.
---------------------------------------------------------------------------
Determination
At this time, the Board is not proposing a finding that originating
a reverse mortgage without assessing the transaction's suitability for
the
[[Page 58678]]
consumer is unfair. Enhanced reverse mortgage disclosures (proposed
Sec. 226.33(a)-(d)), new advertising rules (proposed Sec. 226.33(e)),
and a requirement that consumers receive counseling before taking out a
reverse mortgage or incurring nonrefundable fees (proposed Sec.
226.40(b)) provide protections for consumers that the Board believes
should render a suitability assessment by the originator unnecessary.
Other factors that the Board considered include those discussed below.
First, the Board is concerned that any suitability standard would
reduce the availability and increase the cost of reverse mortgage
credit for many consumers who could benefit from this product. A
reverse mortgage suitability rule would be adopted under the Board's
authority in TILA Sec. 129(l)(2)(A) to deem certain practices in
mortgage transactions unfair or deceptive, hence violations of the rule
would give rise to a private right of action, potentially exposing
creditors to significant litigation risk. 15 U.S.C. 1639(l)(2)(A); 15
U.S.C. 1640(a), (e). By contrast, SEC and most state suitability rules
for annuities do not carry a private right of action. The Board also
notes that the National Association of Insurance Commissioners' model
suitability rule for annuities, adopted by many states, requires that
an annuity provider have ``reasonable grounds'' for determining that an
annuity is a suitable recommendation for a consumer; \187\ the Board is
concerned that the concept of ``reasonableness'' could be subject to
substantial and possibly frivolous litigation when incorporated into a
rule conveying a private right of action. In sum, the attendant risks
of a suitability rule imposed under the Board's Section 129 authority
may deter many reputable originators from offering reverse mortgages,
especially to those who may be most in need of this type of credit.
---------------------------------------------------------------------------
\187\ National Ass'n of Ins. Commissioners, ``Suitability in
Annuity Transactions Model Regulation,'' Model 275.
---------------------------------------------------------------------------
Second, any suitability rule would require the creditor to collect
significant information from the consumer about the consumer's
financial status, tax status, and investment goals.\188\ The amount and
type of information required to make a suitability determination would
be difficult to define clearly, because each consumer's situation is
different. Yet a more flexible rule could expose creditors to excessive
litigation risk--again, increasing the cost of reverse mortgage credit
and reducing its availability. In addition, the challenge of producing
substantial financial information may discourage many elders from
pursuing a financial option that they may need. In effect, reverse
mortgages may be rendered less accessible to the consumers for which
they were designed, those with substantial home equity but few or no
other assets. Finally, on a practical level, some consumers may simply
find that navigating the reverse mortgage application process with
these additional requirements is too difficult to undertake.
---------------------------------------------------------------------------
\188\ See, e.g., id. Sec. 6(B).
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Third, as a result of market innovation, reverse mortgages may
eventually be designed for borrowers under 62 years of age, and these
products would presumably be subject to any suitability rule adopted
under Regulation Z. The Board believes that arguments for suitability
standards in reverse mortgage transactions may be weaker where the
consumers are younger, as these borrowers are not a segment of the
population generally distinguished in other Federal laws for special
protections.\189\
---------------------------------------------------------------------------
\189\ See Equal Credit Opportunity Act, 15 U.S.C. 1691(a)
(implemented by the Board's Regulation B, 12 CFR Part 202).
---------------------------------------------------------------------------
Fourth, the Board's proposed counseling rule, discussed above, and
enhanced disclosure rules, discussed in the section-by-section analysis
to Sec. 226.33(a) through (d), are designed to equip consumers to make
their own informed decisions about whether a reverse mortgage is
suitable for them. The proposed counseling rule, for instance,
incorporates requirements for the timing and content of counseling, as
well as provisions to ensure the independence of counselors, all of
which are intended to ensure that consumers receive information about
the appropriateness of a reverse mortgage from an independent
counselor. See proposed Sec. 226.40(b) and accompanying commentary. In
the Board's view, reverse mortgage originators who comply with the
proposed counseling requirements and enhanced disclosure rules should
be able to presume that prospective borrowers have adequate information
to make informed financial judgments for themselves.
The Board invites comment on its decision not to propose a
suitability standard for reverse mortgages at this time, and solicits
specific recommendations for an appropriate and workable standard.
Set Asides for Property Taxes and Insurance
Background
Both industry representatives and consumer advocates have expressed
concerns about reverse mortgages becoming prematurely due if the
borrower fails to pay required taxes, insurance, and assessments on the
property securing the mortgage. The Board understands that some reverse
mortgage borrowers may not make required payments because they are
unaware of or forget to fulfill this obligation; others may simply not
have the funds to do so. Borrowers that default on their reverse
mortgage obligations in this way risk losing their homes.
Reverse mortgage borrowers may be at risk for not making these
payments because they may be accustomed to traditional ``forward''
mortgages, in which property taxes and insurance are often escrowed and
remitted by the loan servicer. In addition, as discussed in the
section-by-section analysis to Sec. 226.33(e), some reverse mortgage
advertisements have stated that the borrower need not make any payments
for a reverse mortgage. The initial impression given by these
advertisements may lead consumers to overlook that they still must pay
taxes and insurance on a regular basis.
When presented with this issue at their meeting on March 24, 2010,
members of the Board's Consumer Advisory Council supported the Board's
consideration of rules to protect reverse mortgage consumers who, for
any number of reasons, fail to stay current on their tax and insurance
payments. Consumer advocate members emphasized the benefits to
consumers of requiring a set aside for taxes and insurance to ensure
that funds are available to avoid default. Creditor and servicer
members expressed concerns about the business implications of
eventually having to foreclose on a senior homeowner, and therefore
supported efforts to prevent consumers from defaulting in this way.
Safety and soundness is another industry concern. For example, even if
a HECM mortgagee covers these costs for a defaulting borrower, the loan
is in technical default and cannot be assigned to FHA (FHA otherwise
allows a HECM lender to assign a HECM to FHA if the loan amount reaches
98 percent of the maximum claim amount).\190\ The mortgagee must then
hold the loan even if it ultimately will not be able to collect from
FHA the entire amount owed,
[[Page 58679]]
because that amount would exceed the maximum claim amount.
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\190\ 24 CFR 206.107(a)(1).
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HECM Rules on Set Asides and Escrow Accounts
In general, HECM borrowers are responsible for directly paying all
``property charges'' (consisting of taxes, ground rents, flood and
hazard insurance premiums, and special assessments).\191\ The borrower
may elect, however, to have the mortgagee pay property charges by
withholding funds from monthly payments due to the borrower or by
charging the borrower's line of credit.\192\
---------------------------------------------------------------------------
\191\ 24 CFR 206.205(a).
\192\ 24 CFR 206.205(b).
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Currently, FHA regulations permit a mortgagee to advance funds to
cover property charges that a borrower fails to pay.\193\ When the loan
ends (such as when the borrower dies or moves out), the mortgagee can
seek reimbursement from FHA for these advanced funds through the claims
process.\194\
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\193\ 24 CFR 206.205(c).
\194\ 24 CFR 206.123, 206.129.
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Set asides. HECM rules require set asides in a few
instances. First, if the borrower chooses to have the mortgagee pay
property charges by withholding funds from monthly payments, the
mortgagee must set aside a portion of the principal limit at the outset
of the transaction to cover any initial property charges.\195\ Set
asides of the principal limit are also required to cover post-closing
repairs, if needed, and for monthly servicing charges.\196\
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\195\ 24 CFR 206.19(d)(3), 206.205(f).
\196\ 24 CFR 206.19(d)(2), (4).
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Escrow accounts. The HECM rules prohibit escrow accounts,
which could be harmful to the borrower for two reasons. First, funds
for escrow accounts are added to the loan balance even before the
property charges to which they are allocated are due. Thus the borrower
is forced to pay more interest and a higher monthly mortgage insurance
premium (which is based on the loan amount) for a longer period of time
than if the funds were added to the loan balance only when paid out to
cover each tax and insurance payment. Second, escrow accounts are
typically interest-bearing accounts that may have tax implications for
the borrower.
HUD property charges proposal. HUD has stated that it
plans to propose a rule that would permit, under certain circumstances,
a HECM mortgagee to set aside a portion of the borrower's principal
limit (the maximum amount that a consumer may borrow) to cover property
charges that the servicer would pay on the borrower's behalf.
The Board's Proposal
One way in which the Board is addressing concerns about consumer
defaults for failure to pay property charges is through its proposed
reverse mortgage disclosure and advertising rules. See proposed Sec.
226.33(c) and (e) and accompanying commentary. In particular, as
discussed above in the section-by-section analysis to proposed Sec.
226.33(c)(4), the Board is proposing to require that open- and closed-
end reverse mortgage TILA disclosures must notify the consumer that he
or she will retain title to the home and must pay property taxes and
insurance. See proposed Sec. 226.33(c)(4)(iii). In addition, the Board
is proposing an advertising rule that would highlight consumers'
obligation to pay property taxes and insurance. See proposed Sec.
226.33(e)(7).
Largely due to HUD's pending initiative on property charges,
however, the Board is not at this time proposing regulations expressly
addressing set asides for property charges in reverse mortgage
transactions. The Board solicits comment on specific concerns and
problems related to reverse mortgage borrower defaults due to failure
to pay property charges. The Board also requests comment on and
suggestions for alternatives to address these problems, particularly
for proprietary reverse mortgages.
Section 226.41 Servicer's Response to Borrower's Request for
Information
Background
After consummation or account-opening, a consumer may need to
contact the current assignee of their loan for a number of reasons,
including to request changes to or to assert their rights in connection
with the mortgage or HELOC. For example, TILA Section 131(c) provides
that a consumer may assert a right to rescind against an assignee of
the obligation. 15 U.S.C. 1641(c). Consumers may also have a cause of
action against an assignee, although generally assignees are only
liable for TILA violations apparent on the face of the disclosure
statement. TILA Section 131(e); 15 U.S.C. 1641(e). Consumers may also
need to contact an assignee to seek forbearance or modification of loan
terms.
Consumers may have difficulty determining the identity of an
assignee. A consumer typically knows who the original creditor was, but
may not know who the subsequent assignee of the loan is. If a loan is
sold after consummation, the consumer's point of contact is usually a
loan servicer who is under contract with the owner of the debt
obligation or the owner's representative. Servicers are not assignees
or owners for purposes of TILA Section 131's liability provisions. See
TILA Section 131(f); 15 U.S.C. 1641(f).
TILA Section 131(f)(2) provides a means for consumers to identify
and obtain contact information for the current owner or assignee of
their loans. 15 U.S.C. 1641(f)(2). Specifically, upon receipt of a
consumer's written request, the loan servicer must provide to the
consumer, to the servicer's best knowledge, the name, address, and
telephone number of the owner or master servicer of the obligation.
Currently, Regulation Z does not provide any rules to implement TILA
Section 131(f)(2).
Consumer advocates have expressed concerns that servicers often
ignore information requests under TILA Section 131(f)(2). They point
out that, if a servicer does not promptly and properly respond to a
consumer's written request, the consumer could be prevented from
asserting important legal rights. In one case, for example, a court
found that a consumer's right of rescission was time-barred, after the
servicer delayed responding to the consumer's written request for at
least five months.\197\ One reason servicers may ignore written
requests is that TILA provides no deadline for the servicer's action.
Moreover, until recently, TILA provided no private cause of action for
failure to respond to a consumer's request under Section 131(f)(2).
---------------------------------------------------------------------------
\197\ See Meyer v. Argent Mortgage Co., 379 B.R. 529 (Bankr.
E.D. Pa. 2007).
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To address these and related concerns, in 2009 Congress amended
TILA in two ways. First, Congress added TILA Section 131(g) to require
a new owner or assignee of a debt obligation to provide written notice
to the consumer of the transfer no later than 30 days after the
transfer.\198\ 15 U.S.C. 1641(g). Among other information, the notice
must include the identity, address, and telephone number of the new
owner or assignee of the note and information on how to reach an agent
or party having authority to act on behalf of the new owner or
assignee. Second, Congress amended TILA Section 130(a) to give
consumers a private right of action for violations of TILA Sections
131(f) and 131(g).\199\ 15 U.S.C. 1640(a), 1641(f) and (g).
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\198\ Helping Families Save Their Homes Act of 2009, Public Law
111-22, tit. IV, Sec. 404(a), 123 Stat. 1632, 1638 (2009).
\199\ Id. at Sec. 404(b).
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In November 2009, the Board published new Sec. 226.39 as an
interim final rule to implement TILA Section 131(g). 74 FR 60143, Nov.
20, 2009. In comments on Sec. 226.39, consumer
[[Page 58680]]
advocates argued that regulations implementing TILA Section 131(f)(2)
are necessary, even though TILA Section 131(g) and Sec. 226.39 require
assignees to identify themselves to consumers. Consumer advocates note
that a consumer may still need to use TILA Section 131(f)(2) to request
information regarding the current owner if, for example, transfer of
the obligation occurred before the effective date of TILA Section
131(g), the consumer misplaced or never received the TILA Section
131(g) notice from the new owner, or if the consumer wishes to exercise
the right to rescind or otherwise contact the new owner before
receiving the notice under TILA Section 131(g). In addition, Sec.
226.39 does not require notice to the consumer if a transferee assigns
the obligation within 30 days of acquisition. Although RESPA provides
consumers with the right to obtain information from a servicer by
making a ``qualified written request,'' \200\ such a request would not
be helpful in time-sensitive situations, because the servicer has 60
days to provide the requested information.\201\
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\200\ 12 U.S.C. 2600 et seq.(implemented by Regulation X, 12 CFR
Part 3500).
\201\ 12 U.S.C. 2605(e)(2); 24 CFR 3500.21(e).
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The Board's Proposal
To address these concerns, the Board proposes new Sec. 226.41 to
implement TILA Section 131(f)(2). 15 U.S.C. 1641(f)(2). Under the
proposal, upon receipt of a written request from the consumer, the
servicer would be required to provide the consumer, within a reasonable
time and to the best of its knowledge, the name, address, and telephone
number of the owner or the master servicer of the debt obligation. The
term ``servicer'' as used in the proposal has the same meaning as in
Sec. 226.36(c)(3). Proposed comment 41-1 clarifies that it would be
reasonable under most circumstances to provide the required information
within ten business days of receipt of the consumer's written request.
Proposed Sec. 226.41 is intended to ensure that information
critical for the consumer's exercise of legal rights against the
current owner or assignee is provided within a reasonable time. The
Board does not expect that the rule would impose a significant burden
on servicers, because they should already possess or may easily obtain
the requested information. The Board requests comment on the
appropriateness of the ten business day safe harbor in proposed comment
41-1, as well as any benefits or burdens that the proposed rule may
create.
Appendices G and H--Open-End and Closed-End Model Forms and Clauses
Appendices G and H set forth model forms, model clauses and sample
forms that creditors may use to comply with the requirements of
Regulation Z. Appendix G contains model forms, model clauses and sample
forms applicable to open-end plans. Appendix H contains model forms,
model clauses and sample forms applicable to closed-end loans. Although
use of the model forms and clauses is not required, creditors using
them properly will be deemed to be in compliance with the regulation
with regard to those disclosures. As discussed above, the Board
proposes to revise or add several model and sample forms to Appendices
G and H for the requirements applicable to rescission and credit
insurance, debt cancellation coverage, and debt suspension coverage
(``credit protection products''). The revised or new model or sample
forms are discussed above in the section-by-section analysis applicable
to the regulatory provisions to which the forms relate. See discussion
under Sec. Sec. 226.4(d) (credit protection products), 226.15(b)
(rescission of a HELOC), and 226.23(b) (rescission of a closed-end
mortgage).
Permissible Changes
The staff commentary to Appendices G and H contain comment app. G
and H-1, which discusses changes creditors may make to the model forms
and clauses. Comment app. G and H-1 also lists the models to which
formatting changes may not be made because the disclosures must be made
in a form substantially similar to that in the models to retain the
safe harbor from liability. In the August 2009 HELOC Proposal and the
August 2009 Closed-End Proposal, the Board proposed to revise comment
app. G and H-1 by adding a number of proposed new open-end and closed-
end model forms and clauses to the list of model forms and clauses to
which formatting changes may not be made. In addition, in the August
2009 Closed-End Proposal, the Board proposed to require creditors to
provide disclosures for transactions secured by real property or a
dwelling only as applicable. See proposed Sec. 226.38. As a result,
the Board proposed to amend comment app. G and H-1.vi to clarify that
the use of multipurpose standard forms is not permitted for
transactions secured by real property or a dwelling. See discussion
under proposed Sec. 226.37(a)(2) in the August 2009 Closed-End
Proposal. In addition, current comment app. G and H-1.vii provides that
acceptable changes to model forms includes using a vertical, rather
than a horizontal, format for the boxes in the closed-end disclosures.
Consistent with the proposed restrictions on format changes to the
proposed closed-end model forms, the Board proposed in the August 2009
Closed-End Proposal to delete comment app. G and H-1.vii as obsolete.
In this proposal, the Board proposes to revise comment app. G and
H-1 further by adding proposed Forms G-5(A)-(C) (for rescission in
connection with a HELOC) to the list of forms to which formatting
changes may not be made. As discussed in more detail in the section-by-
section analysis to proposed Sec. 226.15(b), proposed Sec.
226.15(b)(6) provides that a creditor satisfies Sec. 226.15(b)(3) if
it provides Model Form G-5(A), or a substantially similar notice, which
is properly completed with the disclosures required by Sec.
226.15(b)(3). In addition, proposed Samples G-5(B) and G-5(C) provide
sample forms for how a creditor may satisfy the content and format
requirements set forth in Sec. 226.15(b) and Model Form G-5(A) for
certain rescission notices.
For similar reasons, the Board also proposes to revise comment app.
G and H-1 by adding proposed Model Forms H-8(A) and H-9 and Sample H-
8(B) (for rescission in connection with a closed-end mortgage) to the
list of forms to which formatting changes may not be made. As discussed
in more detail in the section-by-section analysis to proposed Sec.
226.23(b), proposed Sec. 226.23(b)(6) provides that a creditor
satisfies Sec. 226.23(b)(3) if it provides the appropriate model form
(H-8(A) or H-9), or a substantially similar notice, which is properly
completed with the disclosures required by Sec. 226.23(b)(3). Proposed
Sample H-8(B) provides a sample form for how a creditor may satisfy the
content and format requirements set forth in Sec. 226.23(b) and Model
Form H-8(A).
Finally, the Board proposes to revise comment app. G and H-1 by
adding proposed Model Forms G-16(A) and H-17(A), and Sample Forms G-
16(B)-(D) and H-17(B)-(D) (for credit protection products) to the list
of forms to which formatting changes may not be made. As discussed in
more detail in the section-by-section analysis to proposed Sec.
226.4(d), proposed Sec. 226.4(d) provides that a creditor satisfies
Sec. 226.4(d) if it provides the required disclosures grouped together
and substantially similar in headings, content, and format to Model
Forms G-16(A) or H-17(A). Proposed Samples G-16(B)-(D) and H-17(B)-(D)
provide examples of how a
[[Page 58681]]
creditor may satisfy the content and format requirements set forth in
Sec. 226.4(d) and Model Forms G-16(A) or H-17(A).
Appendix G--Open-End Model Forms and Clauses
Appendix G to part 226 sets forth model forms, model clauses and
sample forms that creditors may use to comply with requirements of
Regulation Z for open-end credit. Although use of the model forms and
clauses generally is not required, creditors using them properly will
be deemed to be in compliance with the regulation with regard to those
disclosures.
Credit Protection Products
As noted above, the Board proposes a new model form and three new
sample forms for the requirements applicable to credit protection
products under Sec. 226.4(d). Accordingly, the Board proposes to
delete the current G-16(A) Debt Suspension Model Clause and G-16(B)
Debt Suspension Sample, and add G-16(A) Credit Insurance, Debt
Cancellation Coverage, or Debt Suspension Coverage Model Form; G-16(B)
Credit Life Insurance Sample; G-16(C) Disability Debt Cancellation
Coverage Sample; and G-16(D) Unemployment Debt Suspension Coverage
Sample to illustrate the disclosures required under proposed Sec.
226.4(d)(1) and (d)(3).
Model and Sample Forms Applicable to the Right of Rescission Notice
In this proposal, the Board would require new disclosures in
proposed Sec. 226.15(b) for open-end consumer credit transactions
subject to the right of rescission. As discussed in the section-by-
section analysis to proposed Sec. 226.15(b) and as discussed in detail
below, the Board proposes to replace the current model forms for the
rescission notices in Model Forms G-5 through G-9 with proposed Model
Form G-5(A), and two proposed Sample Forms G-5(B) and G-5(C).
Currently, Appendix G provides the following five model rescission
notices, one that corresponds to each of the five transactions that
might give right to a right of rescission: (1) Form G-5 for account
opening; (2) Form G-6 for each advance that is greater than the
previously-established credit limit; (3) Form G-7 for increases in the
credit limit; (4) Form G-8 for addition of a security interest; and (5)
Form G-9 for increases in a security interest when there is not a
credit limit increase.
As discussed in the section-by-section analysis to proposed Sec.
226.15(b), the Board proposes to require new disclosures for the notice
of the right to rescind for HELOC accounts. Consistent with the
proposed content and format requirements for the rescission notices in
proposed Sec. 226.15(b), the Board proposes to replace current Model
Forms G-5 through G-9 with proposed Model Form G-5(A), and two proposed
Samples G-5(B) and G-5(C). The Board also proposes to revise comment
app. G-4 consistent with the new model and sample forms. Under the
proposal, most of the guidance in current comment app. G-4 regarding
existing Model Forms G-5 through G-9 would be deleted. Guidance
regarding the parenthetical information following the blank for the
deadline for rescission would be deleted as unnecessary. The cross
reference to Sec. 226.2(a)(25) regarding the specificity with which
the security interest should be disclosed in current Model Form G-7 is
no longer necessary.
The Board proposes to replace the material removed from comment
app. G-4 with guidance regarding the content and format requirements in
proposed Sec. 226.15(b)(2) and corresponding proposed comments.
Specifically, proposed comment app. G-4.i provides that a creditor
satisfies Sec. 226.15(b)(3) if it provides the Model Form G-5(A), or a
substantially similar notice, which is properly completed with the
disclosures required by Sec. 226.15(b)(3).
Sample G-5(B) provides guidance where a creditor is providing the
rescission notice for opening of a HELOC account where the credit line
is being secured by the consumer's home and the full credit line is
rescindable. Proposed comment app. G-4.ii clarifies that in this
situation, a creditor may use Sample G-5(B) to meet the content and
format requirements for the rescission notice set forth in Sec.
226.15(b) and Model Forms G-5(A).
Sample G-5(C) provides guidance where a creditor is providing the
rescission notice for a credit limit increase on the HELOC account.
Proposed comment app. G-4.iii clarifies that in this situation, a
creditor may use proposed Sample G-5(C) to meet the content and format
requirements for the rescission notice set forth in Sec. 226.15(b) and
Model Form G-5(A).
Proposed comment app. G-4.iv notes that Samples G-5(B) and G-5(C)
contain the following optional disclosures set forth in Sec.
226.15(b): (1) A disclosure about joint owners; (2) an acknowledgment
of receipt of the notice; (3) the consumer's name and property address
pre-printed on the form; (4) an account number on the form; and (5) a
fax number that may be used by the consumer to exercise his or her
rescission right. This proposed comment clarifies that a creditor may
delete these optional disclosures from Samples G-5(B) and G-5(C) and
still retain the safe harbor from liability by using these forms.
Proposed comment app. G-4.v provides that although creditors are
not required to use a certain paper size in disclosing the rescission
notice required under Sec. 226.15(b), Samples G-5(B) and G-5(C) are
each designed to be printed on an 8\1/2\ x 11 inch sheet of paper. In
addition, proposed comment app. G-4.v specifies that the following
formatting techniques were used in presenting the information in the
sample notices to ensure that the information is readable:
A. A readable font style and font size (10-point Arial font style).
B. Sufficient spacing between lines of the text.
C. Adequate spacing between paragraphs when several pieces of
information were included in the same row of the table, as appropriate.
D. Standard spacing between words and characters. In other words,
the text was not compressed to appear smaller than 10-point type.
E. Sufficient white space around the text of the information in
each row, by providing sufficient margins above, below and to the sides
of the text.
F. Sufficient contrast between the text and the background.
Generally, black text was used on white paper.
Proposed comment app. G-4.vi specifies that while the regulation
does not require creditors to use the above formatting techniques in
presenting information in the rescission notice (except for the 10-
point font requirement), creditors are encouraged to consider these
techniques when deciding how to disclose information in the notice, to
ensure that the information is presented in a readable format.
Proposed comment app. G-4.vi clarifies that creditors may use
color, shading and similar graphic techniques with respect to the
rescission notices, so long as the notice remains substantially similar
to the model and sample forms in G-5(A)-(C).
The Board is not proposing to provide sample forms for each
transaction that might give rise to a right to rescind for HELOC
accounts. For example, the Board is not proposing to provide samples
forms for the following situations where a right to rescind arises
under Sec. 226.15: (1) Each advance that falls outside of a
previously-established credit limit; (2) an addition of a security
interest; and (3) an increase in the security interest when there is
not a
[[Page 58682]]
credit limit increase. Based on Board research, the Board understands
that these situations rarely occur. The Board believes that sample
forms for these transactions would not necessarily be helpful to
creditors. Because these events are rare, when they do occur, creditors
may need to craft a specialized notice to deal with facts that pertain
to that particular transaction. Nonetheless, the Board solicits comment
on whether the Board should issue sample forms for these transactions,
and if so, in what context they generally arise.
Appendix H--Closed-End Model Forms and Clauses
Appendix H to part 226 sets forth model forms, model clauses and
sample forms that creditors may use to comply with requirements of
Regulation Z for closed-end credit. Although use of the model forms and
clauses generally is not required, creditors using them properly will
be deemed to be in compliance with the regulation with regard to those
disclosures.
Credit Protection Products
As noted above, the Board proposes a new model form and three new
sample forms for the requirements applicable to credit protection
products under Sec. 226.4(d). Accordingly, the Board proposes to
delete the current H-17(A) Debt Suspension Model Clause and H-17(B)
Debt Suspension Sample, and add H-17(A) Credit Insurance, Debt
Cancellation Coverage, or Debt Suspension Coverage Model Form; H-17(B)
Credit Life Insurance Sample; H-17(C) Disability Debt Cancellation
Coverage Sample; and H-17(D) Unemployment Debt Suspension Coverage
Sample to illustrate the disclosures required under proposed Sec.
226.4(d). In a technical revision, the Board also proposes to revise
comments app. H-1, H-3 and H-12 to clarify that the guidance applies to
new Model Form H-17(A) and Samples H-17(B), (C) and (D).
Model Forms and Sample Form for Notice of the Right of Rescission
In this proposal, the Board would require new disclosures in
proposed Sec. 226.23(b) for closed-end consumer credit transactions
subject to the right of rescission. Current Model Form H-9 illustrates
the format and content of disclosures currently required under Sec.
226.23(b) for a refinancing with the original creditor involving the
extension of new money. Current Model Form H-8 illustrates the format
and content of disclosures currently required under Sec. 226.23(b) for
all other closed-end consumer credit transactions subject to the right
of rescission. As discussed in the section-by-section analysis to
proposed Sec. 226.23(b) and as discussed in detail below, the Board
proposes to revise the current model forms for the rescission notices
in Model Forms H-8 (redesignated as H-8(A)) and H-9 (renamed as
``Rescission Model Form (New Advance of Money with the Same
Creditor)'', and to add Sample H-8(B).
The Board proposes to revise existing commentary that provides
guidance to creditors on how to use current Model Forms H-8 and H-9.
Under the proposal, most of the guidance contained in current comment
app. H-11 regarding current Model Forms H-8 and H-9 would be deleted.
Guidance regarding the parenthetical information following the blank
for the deadline for rescission would be deleted as unnecessary. The
cross reference to Sec. 226.2(a)(25) regarding the specificity with
which the security interest should be disclosed in current Model Form
H-9 is no longer necessary, nor is the guidance regarding the use of
the current model forms over the previous forms.
The Board proposes to replace the material removed from comment
app. H-11 with guidance regarding the content and format requirements
introduced by proposed Sec. 226.23(b)(2) and the corresponding
proposed comments. Specifically, proposed comment app. H-11 clarifies
that Model Forms H-8(A) and H-9 contain the rescission notices for a
typical closed-end transaction and a new advance of money with the same
creditor, respectively. These proposed model forms illustrate, in the
tabular format, the disclosures required generally by proposed Sec.
226.23(b). Proposed comment app. H-11.ii specifies that a creditor
satisfies Sec. 226.23(b)(3) if it provides the appropriate model form
(H-8(A) or H-9), or a substantially similar notice, which is properly
completed with the disclosures required by Sec. 226.23(b)(3).
Proposed comment app. H-11.iii notes that Sample H-8(B) contains
the following optional disclosures set forth in Sec. 226.23(b): (1) a
disclosure about joint owners; (2) an acknowledgment of receipt of the
notice; (3) the consumer's name and property address pre-printed on the
form; and (4) the loan number on the form; and (5) a fax number that
may be used by the consumer to exercise his or her rescission right.
This proposed comment clarifies that a creditor may delete these
optional disclosures from Sample H-8(B) and still retain the safe
harbor from liability by using this form.
Proposed comment app. H-11.iv provides that although creditors are
not required to use a certain paper size in disclosing the rescission
notice required under Sec. 226.23(b), proposed Model Forms H-8(A) and
H-9 and Sample H-8(B) are designed to be printed on an 8\1/2\ x 11 inch
sheet of paper. In addition, proposed comment app. H-11.iv states that
the following formatting techniques were used in presenting the
information in the model and sample notices to ensure that the
information was readable:
A. A readable font style and font size (10-point Arial font style).
B. Sufficient spacing between lines of the text.
C. Adequate spacing between paragraphs when several pieces of
information were included in the same row of the table, as appropriate.
D. Standard spacing between words and characters. That is, words
were not compressed to appear smaller than 10-point type.
E. Sufficient white space around the text of the information in
each row, by providing sufficient margins above, below and to the sides
of the text.
F. Sufficient contrast between the text and the background. Black
text was used on white paper.
Proposed comment app. H-11.v states that while the regulation does
not require creditors to use the above formatting techniques in
presenting information in the table (except for the 10-point font
size), creditors are encouraged to consider these techniques when
deciding how to disclose the notice, to ensure that the information is
presented in a readable format.
Proposed comment app. H-11.vi clarifies that creditors may use
color, shading and similar graphic techniques with respect to the
rescission notices, so long as the notice remains substantially similar
to the model and sample forms in Appendix H.
Appendix K--Model and Sample Reverse Mortgage Forms
Current Appendix K to Regulation Z provides instructions on how to
calculate the TALC rates required to be disclosed, based on the
calculation method used for closed-end APRs in Appendix J, and provides
a model and sample disclosure form. Because the Board is proposing to
remove the disclosure of the TALC rate table, Appendix K would be
revised to contain only the model and sample disclosure forms that
creditors may use to comply with the requirements of Regulation Z for
reverse mortgages. Although use of the model forms and clauses is not
required, creditors using them properly will be deemed to be in
compliance
[[Page 58683]]
with the regulation with regard to those disclosures.
As discussed in the section-by-section analysis to proposed Sec.
226.33(c) and (d), the Board proposes to add new model and sample forms
for open-end reverse mortgage early disclosures, open-end reverse
mortgage account-opening disclosures, and closed-end reverse mortgage
disclosures. Accordingly, the Board proposes to add new Model Forms,
Sample Forms, and Model Clause K-1 through K-7 that creditors may use
to comply with the requirements in proposed Sec. 226.38(c) and (d).
The Board proposes to add Models K-1 through K-3 to illustrate the
format and content of disclosures required under proposed Sec. 226.33
for early open-end reverse mortgage disclosures, account-opening
reverse mortgage disclosures, and closed-end reverse mortgage
disclosures, respectively. In addition, the Board would add Model
Clause K-7 to provide guidance to creditors on how to disclose a shared
equity or shared appreciation feature.
In addition, the Board proposes to add several sample forms to
provide examples of how creditors can provide certain disclosures
required under proposed Sec. 226.33 in the tabular format for each of
the types of reverse mortgage disclosures. Specifically, proposed
Samples K-4 through K-6 illustrate disclosures required under proposed
Sec. 226.33 for early open-end reverse mortgage disclosures, account-
opening reverse mortgage disclosures, and closed-end reverse mortgage
disclosures, respectively.
The Board also proposes to add commentary to provide guidance to
creditors on the purpose of the sample forms, and how to use Model
Forms, Sample Forms and Model Clause K-1 through K-7 for reverse
mortgages. Comment app. K-1 and app. K-2 discuss permissible changes
that creditors may make to the model forms and clauses without losing
protection from liability for failure to comply with the regulation's
disclosure requirements. For example, the commentary indicates that
Samples K-4 through K-6 are designed to be printed on 8\1/2\ x 11 inch
sheets of paper. In addition, the following formatting techniques were
used in presenting the information in the table to ensure that the
information was readable:
1. A readable font style and font size (10-point Ariel font style,
except for the APR which is shown in 16-point type).
2. Sufficient spacing between lines of the text.
3. Standard spacing between words and characters. That is, words
were not compressed to appear smaller than 10-point type.
4. Sufficient white space around the text of the information in
each row, by providing sufficient margins above, below and to the sides
of the text.
5. Sufficient contrast between the text and the background. Black
text was used on white paper.
Although the Board is not requiring creditors to use the above
formatting techniques in presenting information in the table (except
for the 10-point and 16-point font size), the Board encourages
creditors to consider these techniques when disclosing information in
the tabular format to ensure that the information is presented in a
readable format. However, comment app. K-2 clarifies that, except as
otherwise permitted, disclosures must be substantially similar in
sequence and format to model forms K-1 through K-3, as applicable.
Comment app. K-3 provides guidance to creditors regarding the
purpose of sample forms generally. In addition, the Board proposes to
add comments to indicate the terms illustrated in the sample forms.
Comment app. K-4 would indicate the terms of the early open-end reverse
mortgage disclosure illustrated in Sample K-4. Comment app. K-5 would
indicate the terms of the account-opening open-end reverse mortgage
disclosure illustrated in Sample K-5. Comment app. K-6 would indicate
the terms of the closed-end reverse mortgage disclosure illustrated in
Sample K-6.
Appendix L--Reserved
Appendix L to Regulation Z contains the loan periods creditors must
use in disclosing the TALC rates and a table of life expectancies that
must be used to determine loan periods based on the consumer's life
expectancy. The proposal would remove and reserve Appendix L because
the Board is proposing to eliminate the table of TALC rates. The Board
requests comment on whether the life expectancies (updated to current
figures) in Appendix L would be useful in determining the total of
payments, annual percentage rate, and finance charge under proposed
Sec. 226.33(c)(14).
VII. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act (PRA) of 1995 (44
U.S.C. 3506; 5 CFR part 1320 appendix A.1), the Board reviewed the
proposed rule under the authority delegated to the Board by the Office
of Management and Budget (OMB). The collection of information that is
required by this proposed rule is found in 12 CFR part 226. The Board
may not conduct or sponsor, and an organization is not required to
respond to, this information collection unless the information
collection displays a currently valid OMB control number. The OMB
control number is 7100-0199.
This information collection is required to provide benefits for
consumers and is mandatory (15 U.S.C. 1601 et seq.). Since the Board
does not collect any information, no issue of confidentiality arises.
The respondents/recordkeepers are creditors and other entities subject
to Regulation Z.
TILA and Regulation Z are intended to ensure effective disclosure
of the costs and terms of credit to consumers. For open-end credit,
creditors are required to, among other things, disclose information
about the initial costs and terms and to provide periodic statements of
account activity, notice of changes in terms, and statements of rights
concerning billing error procedures. Regulation Z requires specific
types of disclosures for credit and charge card accounts and home
equity plans. For closed-end loans, such as mortgage and installment
loans, cost disclosures are required to be provided prior to
consummation. Special disclosures are required in connection with
certain products, such as reverse mortgages, certain variable-rate
loans, and certain mortgages with rates and fees above specified
thresholds. TILA and Regulation Z also contain rules concerning credit
advertising. Creditors are required to retain evidence of compliance
for twenty-four months, Sec. 226.25, but Regulation Z identifies only
a few specific types of records that must be retained.\202\
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\202\ See comments 25(a)-3 and -4.
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Under the PRA, the Board accounts for the paperwork burden
associated with Regulation Z for the state member banks and other
creditors supervised by the Federal Reserve that engage in consumer
credit activities covered by Regulation Z and, therefore, are
respondents under the PRA. Appendix I of Regulation Z defines the
Federal Reserve-regulated institutions as: State member banks, branches
and agencies of foreign banks (other than Federal branches, Federal
agencies, and insured state branches of foreign banks), commercial
lending companies owned or controlled by foreign banks, and
organizations operating under section 25 or 25A of the Federal Reserve
Act. Other Federal agencies account for the paperwork burden imposed on
the entities for which they have administrative enforcement authority.
The current total annual burden to
[[Page 58684]]
comply with the provisions of Regulation Z is estimated to be 1,497,362
hours for the 1,138 Federal Reserve-regulated institutions that are
deemed to be respondents for the purposes of the PRA. To ease the
burden and cost of complying with Regulation Z (particularly for small
entities), the Board provides model forms, which are appended to the
regulation.
As discussed in the preamble, the Board proposes changes to format,
timing, and content requirements for the following notices and
disclosures governed by Regulation Z: (1) Right of rescission--notice
of right to rescind certain open- and closed-end loans secured by the
consumer's principal dwelling; (2) subsequent disclosure requirements--
loan modifications that require new TILA disclosures; (3)
advertisements for open-end home-secured credit plans; (4) requirements
for reverse mortgages; and (5) notices given by loan servicers
containing information about the current owner or master servicer of a
consumer's loan.\203\
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\203\ This proposal also contains changes to format and content
requirements for disclosures related to credit insurance or debt
cancellation or debt suspension coverage (``credit protection
products''). These proposed changes amend provisions that were
originally proposed as part of an earlier Board proposal on closed-
end mortgages (Docket No. R-1366) (74 FR 43232). The burden estimate
for changes to disclosures for credit protection products are not
included in burden estimates for this rulemaking because they were
included in the burden estimate for the earlier closed-end mortgage
proposal.
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The proposed rule would impose a one-time increase in the total
annual burden under Regulation Z for all respondents regulated by the
Federal Reserve by 190,168 hours, from 1,497,362 to 1,687,530 hours. In
addition, the Board estimates that, on a continuing basis, the proposed
revisions to the rules would increase the total annual burden by
610,464 hours from 1,497,362 to 2,107,826 hours.
The total estimated burden increase, as well as the estimates of
the burden increase associated with each major section of the proposed
rule as set forth below, represents averages for all respondents
regulated by the Federal Reserve. The Board expects that the amount of
time required to implement each of the proposed changes for a given
institution may vary based on the size and complexity of the
respondent.\204\
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\204\ The burden estimate for this rulemaking does not include
the burden addressing changes to implement the following provisions
announced in separate rulemakings:
Closed-End Mortgages (Docket No. R-1366) (74 FR 43232),
or
Home-Equity Lines of Credit (Docket No. R-1367) (74 FR
43428).
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The Board proposes to revise the content and format requirements
for the notice of the right to rescind under sections 226.15 and
226.23. In an effort to reduce burden the Board is amending Appendix G,
as it pertains to section 226.15, and Appendix H, as it pertains to
section 226.23, to replace the current model forms for the rescission
notices. The Board estimates that 1,138 respondents regulated by the
Federal Reserve would take, on average, 160 hours (four business weeks)
to update their systems, internal procedure manuals, and provide
training for relevant staff to comply with the proposed notice and
disclosure requirements in sections 226.15 and 226.23. This one-time
revision would increase the burden by 182,080 hours.
The Board proposes to revise section 226.16 to address certain
misleading or deceptive practices used in open-end home-secured credit
plan advertisements and promote consistency in the current advertising
rules applicable to open-end and closed-end home-secured credit. The
Board estimates that the 651 respondents regulated by the Federal
Reserve would take, on average, 8 hours (one business day) to update
their systems for advertising to comply with the proposed disclosure
requirements in section 226.16. This one-time revision would increase
the burden by 5,208 hours.
The Board proposes to revise section 226.20(a) for closed-end
mortgages requiring new disclosures for mortgage transactions when
existing parties agree to modify certain key terms, such as the
interest rate or loan amount, and to remove reliance on whether the
existing legal obligation is satisfied and replaced under applicable
State law. The Board estimates that the 1,138 respondents regulated by
the Federal Reserve would take, on average, 40 hours a month to comply
with the proposed disclosure requirements in section 226.20(a). This
revision would increase the burden by 546,240 hours.
The Board proposes to revise section 226.33 to ensure consumers
receive meaningful information in an understandable format using forms
that are designed, and have been consumer tested, for reverse mortgage
consumers. The Board is proposing three consolidated reverse mortgage
disclosure forms: An early disclosure for open-end reverse mortgages,
an account-opening disclosure for open-end reverse mortgages, and a
closed-end reverse mortgage disclosure. Rather than receive two or more
disclosures under TILA that come at different times and have different
formats, consumers would receive all the disclosures in a single format
that is largely similar regardless of whether the reverse mortgage is
structured as open-end or closed-end. The Board's proposal would also
facilitate compliance with TILA by providing creditors with a single
set of forms that are specific to and designed for reverse mortgages,
rather than requiring creditors to modify and adapt disclosures
designed for forward mortgages. In an effort to reduce burden Appendix
K would be amended by removing the disclosure of the TALC rate table
and adding model and sample disclosure forms that creditors may use to
comply with the requirements of Regulation Z for reverse mortgages. The
Board estimates that 18 respondents regulated by the Federal Reserve
would take, on average, 160 hours (four business weeks) to update their
systems, internal procedure manuals, and provide training for relevant
staff to comply with the proposed notice and disclosure requirements in
sections 226.33. This one-time revision would increase the burden by
2,080 hours. On a continuing basis the Board estimates that 18
respondents regulated by the Federal Reserve would take, on average, 8
hours a month to comply with the proposed notice and disclosure
requirements in sections 226.33 and would increase the ongoing burden
by 1,728 hours.
Board proposes new Sec. 226.41 to implement TILA Section
131(f)(2). 15 U.S.C. 1641(f)(2). Under the proposal, upon receipt of a
written request from the consumer, the servicer would be required to
provide the consumer, within a reasonable time and to the best of its
knowledge, the name, address, and telephone number of the owner or the
master servicer of the debt obligation. The Board estimates that 651
respondents regulated by the Federal Reserve would take, on average, 8
hours a month to comply with the proposed notice and disclosure
requirements in section 226.41 and would increase the ongoing burden by
62,496 hours.
The other Federal financial agencies: Office of the Comptroller of
the Currency (OCC), Office of Thrift Supervision (OTS), the Federal
Deposit Insurance Corporation (FDIC), and the National Credit Union
Administration (NCUA) are responsible for estimating and reporting to
OMB the total paperwork burden for the domestically chartered
commercial banks, thrifts, and Federal credit unions and U.S. branches
and agencies of foreign banks for which they have primary
administrative enforcement jurisdiction under TILA Section 108(a), 15.
U.S.C. 1607(a). These agencies are permitted, but are not required, to
use the Board's burden estimation methodology. Using the Board's
method, the total current
[[Page 58685]]
estimated annual burden for the approximately 16,200 domestically
chartered commercial banks, thrifts, and Federal credit unions and U.S.
branches and agencies of foreign banks supervised by the Federal
Reserve, OCC, OTS, FDIC, and NCUA under TILA would be approximately
19,610,245 hours. The proposed rule would impose a one-time increase in
the estimated annual burden for such institutions by 5,313,600 hours to
24,923,845 hours. On a continuing basis the proposed rule would impose
an increase in the estimated annual burden by 3,110,400 to 22,720,645
hours. The above estimates represent an average across all respondents;
the Board expects variations between institutions based on their size,
complexity, and practices.
Comments are invited on: (1) Whether the proposed collection of
information is necessary for the proper performance of the Board's
functions; including whether the information has practical utility; (2)
the accuracy of the Board's estimate of the burden of the proposed
information collection, including the cost of compliance; (3) ways to
enhance the quality, utility, and clarity of the information to be
collected; and (4) ways to minimize the burden of information
collection on respondents, including through the use of automated
collection techniques or other forms of information technology.
Comments on the collection of information should be sent to Michelle
Shore, Federal Reserve Board Clearance Officer, Division of Research
and Statistics, Mail Stop 95-A, Board of Governors of the Federal
Reserve System, Washington, DC 20551, with copies of such comments sent
to the Office of Management and Budget, Paperwork Reduction Project
(7100-0199), Washington, DC 20503.
VIII. Initial Regulatory Flexibility Analysis
In accordance with section 3(a) of the Regulatory Flexibility Act
(RFA), 5 U.S.C. 601-612, the Board is publishing an initial regulatory
flexibility analysis for the proposed amendments to Regulation Z. The
RFA requires an agency either to provide an initial regulatory
flexibility analysis with a proposed rule or to certify that the
proposed rule will not have a significant economic impact on a
substantial number of small entities. Under regulations issued by the
Small Business Administration (SBA), an entity is considered ``small''
if it has $175 million or less in assets for banks and other depository
institutions, and $7 million or less in revenues for non-bank mortgage
lenders and loan servicers.\205\
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\205\ 13 CFR 121.201; see also SBA, Table of Small Business Size
Standards Matched to North American Industry Classification System
Codes, available at http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf.
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Based on its analysis and for the reasons stated below, the Board
believes that this proposed rule will have a significant economic
impact on a substantial number of small entities. A final regulatory
flexibility analysis will be conducted after consideration of comments
received during the public comment period. The Board requests public
comment in the following areas.
A. Reasons for the Proposed Rule
Congress enacted TILA based on findings that economic stability
would be enhanced and competition among consumer credit providers would
be strengthened by the informed use of credit resulting from consumers'
awareness of the cost of credit. One of the stated purposes of TILA is
providing a 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. TILA's disclosures differ depending
on whether 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.
In this regard, the proposed amendments to Regulation Z partly aim
to improve the effectiveness of the disclosures that creditors provide
to consumers. Accordingly, the Board is proposing changes to format,
timing and content requirements for disclosures related to rescission
rights, and to credit insurance or debt cancellation or debt suspension
coverage (``credit protection products''). The proposal revises the
rules regarding when a modification to an existing closed-end mortgage
loan results in a new transaction, to ensure that consumers receive
TILA disclosures for modifications to key loan terms. The Board also is
proposing to provide consumers with a right to a refund of fees for
three days after the consumer receives early disclosures required under
Sec. 226.19(a). The proposal includes changes to format, timing, and
content requirements for reverse mortgage disclosures, and rules to
govern reverse mortgage and open-end mortgage advertising. The proposal
also would require loan servicers, upon request, to provide a consumer
with information about the owner or master servicer of the consumer's
loan within a reasonable time after the request, such as 10 business
days.
Congress enacted HOEPA in 1994 as an amendment to TILA. TILA is
implemented by the Board's Regulation Z. HOEPA imposed additional
substantive protections on certain high-cost mortgage transactions.
HOEPA also charged the Board with prohibiting acts or practices in
connection with mortgage loans that are unfair, deceptive, or designed
to evade the purposes of HOEPA, and acts or practices in connection
with refinancing of mortgage loans that are associated with abusive
lending or are otherwise not in the interest of borrowers.
The proposed regulations would revise and enhance disclosure
requirements of Regulation Z for transactions secured by a consumer's
principal dwelling, as noted above. These amendments are proposed in
furtherance of the Board's responsibility to prescribe regulations to
carry out the purposes of TILA, including promoting consumers'
awareness of the cost of credit and their informed use thereof. The
proposal also would revise the rules for determining whether a closed-
end mortgage is a higher-priced mortgage loan subject to special
consumer protections, to ensure that prime loans are not incorrectly
classified as higher-priced loans. Finally, the Board is proposing
rules to mandate reverse mortgage counseling and prohibit reverse
mortgage cross-selling. These restrictions are proposed pursuant to the
Board's statutory responsibility to prohibit unfair and deceptive acts
and practices in connection with mortgage loans.
B. Statement of Objectives and Legal Basis
The SUPPLEMENTARY INFORMATION contains the statement of objectives
and legal basis. In summary, the proposed amendments to Regulation Z
are designed to: (1) Revise the rules regarding the consumer's right to
rescind certain open- and closed-end loans secured by the consumer's
principal dwelling in Sec. Sec. 226.15 and 226.23; (2) revise the
rules regarding when a modification of an existing closed-end loan
requires new disclosures in Sec. 226.20(a); (3) revise the rules
regarding when a closed-end loan is a ``higher-priced'' mortgage
subject to special consumer protections in Sec. 226.35; (4) provide
consumers with the right to a refund of fees for three days after the
consumer receives the early disclosures required under Sec. 226.19(a);
(5) for reverse mortgages, revise the cost disclosures, prohibit
certain unfair lending acts or practices,
[[Page 58686]]
and ensure that advertising is balanced and accurate in Sec. Sec.
226.33 and 226.40; (6) revise the rules regarding disclosure
requirements for credit protection products written in connection with
a credit transaction in Sec. 226.4(d); (7) revise the rules regarding
advertisements for HELOC plans in Sec. 226.16(d); and (8) add new
Sec. 226.41 to require loan servicers, upon request, to provide
information to a consumer about the owner or master servicer of the
consumer's loan within a reasonable time after the request, such as 10
business days.
The legal basis for the proposed rule is in Sections 105(a),
105(f), 129(l)(2), 131(f)(2) and 147 of TILA. 15 U.S.C. 1604(a),
1604(f), 1639(l)(2), 1641(f)(2) and 1665b. A more detailed discussion
of the Board's rulemaking authority is set forth in part IV of the
SUPPLEMENTARY INFORMATION.
C. Description of Small Entities to Which the Proposed Rule Would Apply
The proposed regulations would apply to all institutions and
entities that engage in originating or extending home-secured credit,
as well as servicers of these loans. The Board is not aware of a
reliable source for the total number of small entities likely to be
affected by the proposal, and the credit provisions of TILA and
Regulation Z have broad applicability to individuals and businesses
that originate, extend, and service even small numbers of home-secured
credit. See Sec. 226.1(c)(1).\206\ All small entities that originate,
extend, or service open-end loans secured by a consumer's principal
dwelling or closed-end loans secured by a real property or a dwelling;
or offer credit protection products in connection with any credit
transaction covered by Regulation Z potentially could be subject to at
least some aspects of the proposed rules.
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\206\ Regulation Z generally applies to ``each individual or
business that offers or extends credit when four conditions are met:
(i) the credit is offered or extended to consumers; (ii) the
offering or extension of credit is done regularly, (iii) the credit
is subject to a finance charge or is payable by a written agreement
in more than four installments, and (iv) the credit is primarily for
personal, family, or household purposes.'' Sec. 226.1(c)(1).
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The Board can, however, identify through data from Reports of
Condition and Income (``call reports'') approximate numbers of small
depository institutions that would be subject to the proposed rules.
Based on March 2010 call report data, approximately 8,845 small
institutions would be subject to the proposed rules. Approximately
15,658 depository institutions in the United States filed call report
data, approximately 11,148 of which had total domestic assets of $175
million or less and thus were considered small entities for purposes of
the RFA. Of 3,898 banks, 523 thrifts and 6,727 credit unions that filed
call report data and were considered small entities, 3,776 banks, 496
thrifts, and 4,573 credit unions, totaling 8,845 institutions, extended
mortgage credit. For purposes of this analysis, thrifts include savings
banks, savings and loan entities, co-operative banks, and industrial
banks.
The Board cannot identify with certainty the number of small non-
depository institutions that would be subject to the proposed rules.
Home Mortgage Disclosure Act (HMDA) \207\ data indicate that 1,507 non-
depository institutions filed HMDA reports in 2008.\208\ Based on the
small volume of lending activity reported by these institutions, most
are likely to be small.
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\207\ The 8,388 lenders (both depository institutions and
mortgage companies) covered by HMDA in 2008 accounted for the
majority of home lending in the United States. Under HMDA, lenders
use a ``loan/application register'' (HMDA/LAR) to report information
annually to their Federal supervisory agencies for each application
and loan acted on during the calendar year. Only lenders that have
offices (or, for non-depository institutions, lenders that are
deemed to have offices) in metropolitan areas are required to report
under HMDA. However, if a lender is required to report, it must
report information on all of its home loan applications and loans in
all locations, including non-metropolitan areas.
\208\ The 2008 HMDA Data, http://www.federalreserve.gov/pubs/bulletin/2010/pdf/hmda08final.pdf.
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Certain parts of the proposed rule would also apply to mortgage
servicers. The Board is not aware, however, of a source of data for the
number of small mortgage servicers. The available data are not
sufficient for the Board realistically to estimate the number of
mortgage servicers that would be subject to the proposed rules, and
that are small as defined by SBA.
D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
The compliance requirements of the proposed rules are described in
part VI of the SUPPLEMENTARY INFORMATION. The effect of the proposed
revisions to Regulation Z on small entities is unknown. Some small
entities would be required, among other things, to modify their notices
of the right to rescind and the processes for delivery thereof to
comply with the revised rules. The precise costs to small entities of
updating their systems and disclosures are difficult to predict. These
costs will depend on a number of unknown factors, including, among
other things, the specifications of the current systems used by such
entities to prepare and provide disclosures and to administer and
maintain accounts, the complexity of the terms of credit products that
they offer, and the range of such product offerings.
Small entities would be required to provide only one copy of the
notice of the right to rescind to consumers at closing, thus enjoying a
cost savings. The proposed rules would also clarify the parties'
obligations when the right to rescind is asserted after the initial
three days, and clarify that the consumer's death and certain
refinancings terminate an extended right to rescind, thus reducing
litigation risks and costs for small entities. The proposed rules would
revise the list of ``material disclosures'' that can trigger the
extended right to rescind to focus on disclosures that testing shows
are most important to consumers, and establish accuracy tolerances for
certain disclosures, accordingly lowering costs for small entities.
Under the proposed rules, a new transaction for purposes of TILA
occurs when the creditor and consumer modify certain key terms,
regardless of State law or the parties' intent. The proposed rules
would thus increase the number of transactions that require new
disclosures and potential compliance with HOEPA rules, raising costs
for small entities. The precise costs to small entities of providing
more disclosures are difficult to predict. These costs would be
mitigated somewhat by the proposed exemption of loan workouts reached
in a court proceeding, loan workouts for borrowers in delinquency or
default, and certain beneficial modifications unless fees are charged
and new money is advanced.
The proposed rules would require creditors to determine whether a
loan is a higher-priced mortgage loan by comparing the loan's rate
without third-party fees (the ``coverage rate'') to the APOR. The
coverage rate would be calculated using the loan's interest rate and
the points and any other origination charges the creditor keeps for
itself, and so would be closely comparable to the APOR. The precise
costs to small entities of updating their systems are difficult to
predict. The proposal would reduce potential compliance burden for all
entities, including small entities, by ensuring that prime loans are
not erroneously classified as higher-priced loans subject to the
special protections in Sec. 226.35(a).
The proposed rules would provide consumers with a right to a refund
of fees during the three business days following the consumer's receipt
of the early disclosures required under Sec. 226.19(a). The right to a
refund would
[[Page 58687]]
likely delay processing the consumer's application until the three days
expire, as creditors may not order an appraisal or issue a rate lock
without charging a nonrefundable fee. These delays may inconvenience
consumers, but it is not clear that the delays would impose costs on
small entities. Small entities would, however, incur costs to revise
their systems and train personnel to comply with the right to a refund.
The precise costs to small entities of updating their systems and
training personnel are difficult to predict. In addition, the proposal
would require a short disclosure of the right to a refund on the ``Key
Questions'' disclosure proposed in the Board's August 2009 Closed-End
Proposal. This disclosure would impose no additional burden, as it
would be included in the Key Questions document published by the Board
and would not require institutions to tailor the disclosure to
individual transactions.
The proposed rules would require creditors to provide a new ``Key
Questions'' disclosure before a consumer applies for a reverse mortgage
that would explain the product and identify potential risks. The
current TALC rates required under Sec. 226.33 would be replaced with
dollar figures for the consumer's costs and how much they will owe,
based on three life expectancies. The precise costs to small entities
of updating their systems and disclosures are difficult to predict.
These costs will depend on a number of unknown factors, including,
among other things, the specifications of the current systems used by
such entities to prepare and provide disclosures and to administer and
maintain accounts, the complexity of the terms of credit products that
they offer, and the range of such product offerings. Very few small
entities likely offer reverse mortgages, however, so only a very small
number would be affected by the proposed rules on reverse mortgages.
The proposed prohibition on conditioning a reverse mortgage on the
purchase of an annuity or other insurance or financial product may lead
to a loss of revenue, but the precise costs are difficult to ascertain.
A safe harbor would be available if, among other things, a reverse
mortgage is closed at least ten days before the sale of another
product, thus reducing litigation risks and compliance costs. The
proposed requirement that prospective borrowers receive independent
counseling before a reverse mortgage is made may slow down the process,
but should not otherwise impose costs on small entities. The Board is
proposing rules that would apply to advertisements for HECMs and
proprietary reverse mortgages, and to open-end mortgages. The Board
believes that these proposed rules will require the same types of
professional skills and recordkeeping procedures that are needed to
comply with existing TILA and Regulation Z advertising rules. The cost
to small entities will accordingly be mitigated.
To implement TILA Section 131(f)(2), the proposed rules also would
provide that when a consumer requests information from his or her loan
servicer about the owner of the loan, the servicer must provide certain
information about the owner or master servicer of the loan within a
reasonable time, which generally would be 10 business days. Although
the precise costs to small servicers of providing these notices are
difficult to predict, the Board does not anticipate substantial burden
on small servicers in providing these notices. RESPA already provides
consumers with the right to obtain information from a servicer by
making a ``qualified written request,'' \209\ but a servicer in that
case has 60 days to provide the requested information.\210\ The Board
does not expect, however, that requiring loan servicers to provide
information about the current owner or master servicer of the loan in a
shorter time frame, such as 10 business days, would impose a
significant burden on servicers because they should already possess or
may easily obtain that information.
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\209\ 12 U.S.C. 2600 et seq. (implemented by Regulation X, 12
CFR part 3500).
\210\ 12 U.S.C. 2605(e)(2); 24 CFR 3500.21(e).
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Finally, the proposed rules would require creditors to provide
revised disclosures when offering or requiring a credit protection
product in connection with a credit transaction. The revised disclosure
would explain the product and identify potential risks. The precise
costs to small entities of updating their systems and disclosures are
difficult to predict.
The Board believes that costs of the proposed rules as a whole will
have a significant economic effect on small entities, including small
mortgage creditors and servicers. The Board seeks information and
comment on any costs, compliance requirements, or changes in operating
procedures arising from the application of the proposed rules to small
businesses.
E. Identification of Duplicative, Overlapping, or Conflicting Federal
Rules
Other Federal Rules
The Board has not identified any Federal rules that conflict with
the proposed revisions to Regulation Z.
Overlap With RESPA
HUD issued Frequently Asked Questions suggesting that a creditor
may impose a nonrefundable fee under the Real Estate Settlement
Procedures Act (RESPA) if the consumer receives a Good Faith Estimate
(GFE) and expresses an intent to proceed with the loan covered by the
GFE.\211\ Under the proposed rule, however, the consumer would have a
right to a refund of all fees during the three business days following
receipt of the early disclosures required under Sec. 226.19(a).
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\211\ New RESPA Rule Facts 7, available at http://www.hud.gov/offices/hsg/ramh/res/resparulefaqs422010.pdf.
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The proposed rules governing early disclosures for closed-end
reverse mortgages may overlap with RESPA requirements that closed-end
reverse mortgage consumers receive a GFE.
RESPA provides consumers with the right to obtain information from
a servicer by making as ``qualified written request,'' \212\ and the
servicer has 60 days to provide the requested information.\213\ Under
the proposed rule, however, when a consumer requests information from
his or her loan servicer about the owner of the loan, the servicer must
provide certain information about the owner or master servicer of the
loan within a reasonable time after the request, which generally would
be 10 business days.
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\212\ 12 U.S.C. 2600 et seq. (implemented by Regulation X, 12
CFR part 3500).
\213\ 12 U.S.C. 2605(e)(2); 24 CFR 3500.21(e).
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Overlap With HUD's Guidance
The Board recognizes that HUD issued guidance on HECMs. The Board
intends that its proposal be consistent with HUD's guidance for HECMs,
and complement HUD's guidance by extending certain protections to
proprietary reverse mortgages.
The Board seeks comment regarding any Federal rules that would
duplicate, overlap, or conflict with the proposed rules.
F. Identification of Duplicative, Overlapping, or Conflicting State
Laws
State Equivalents to TILA and HOEPA
Many states regulate consumer credit through statutory disclosure
schemes similar to TILA. Under TILA Section
[[Page 58688]]
111, the proposed rules would not preempt such State laws except to the
extent they are inconsistent with the proposal's requirements. 15
U.S.C. 1610.
Currently, whether there is a refinancing depends on the parties'
intent and State law. State court decisions are the predominant type of
State law, and focus on whether the original obligation has been
satisfied and replaced, or merely modified, in order to determine lien-
holder priority. Reliance on State law leads to inconsistent
application of Regulation Z and, in some cases, to loopholes. The
proposed rules would not preempt such State laws except to the extent
they are inconsistent with the proposal's requirements. Id.
The Board also is aware that many states regulate ``high-cost'' or
``high-priced'' mortgage loans under laws that resemble HOEPA. Many of
these State laws involve coverage tests that partly depend on the APR
of the transaction. The proposed rules would overlap with these laws by
requiring lenders to determine whether a loan is a higher-priced
mortgage loan by comparing the loan's coverage rate to the APOR.
Some State laws deal with reverse mortgage counseling, cross-
selling, and suitability standards, and with credit insurance. The
proposed rules would not preempt such State laws except to the extent
they are inconsistent with the proposal's requirements. Id.
The Board seeks comment regarding any state or local statutes or
regulations that would duplicate, overlap, or conflict with the
proposed rules.
G. Discussion of Significant Alternatives
The steps the Board has taken to minimize the economic impact and
compliance burden on small entities, including the factual, policy, and
legal reasons for selecting the alternatives adopted and why each one
of the other significant alternatives was not accepted, are described
above in the SUPPLEMENTARY INFORMATION. The Board has provided a
different standard for defining higher-priced mortgage loans to
correspond more accurately to mortgage market conditions, and exclude
from the definition some prime loans that might otherwise have been
classified as higher-priced. The Board believes that this standard will
decrease the economic impact of the proposed rules on small entities by
limiting their compliance costs for prime loans that the Board does not
intend to cover under the higher-priced mortgage loan rules.
The Board welcomes comments on any significant alternatives,
consistent with the requirements of TILA, that would minimize the
impact of the proposed rules on small entities.
List of Subjects in 12 CFR Part 226
Advertising, Consumer protection, Federal Reserve System,
Mortgages, Reporting and recordkeeping requirements, Truth in Lending.
Text of Proposed Revisions
Certain conventions have been used to highlight the proposed
revisions. New language is shown inside bold arrows, and language that
would be deleted is shown inside bold brackets.
Authority and Issuance
For the reasons set forth in the preamble, the Board proposes to
amend Regulation Z, 12 CFR part 226, as follows:
PART 226--TRUTH IN LENDING (REGULATION Z)
1. The authority citation for part 226 continues to read as
follows:
Authority: 12 U.S.C. 3806; 15 U.S.C. 1604, 1637(c)(5), and
1639(l); Pub. L. 111-24 Sec. 2, 123 Stat. 1734.
Subpart A--General
2. Section 226.1 is amended by revising paragraphs (d)(5) and
(d)(8) to read as follows:
Sec. 226.1 Authority, purpose, coverage, organization, enforcement,
and liability.
* * * * *
(d) * * *
(5) Subpart E contains special rules for certain mortgage
transactions. Section 226.32 requires certain disclosures and provides
limitations for loans that have rates and fees above specified amounts.
Section 226.33 [lsqbb]requires[rsqbb] [rtrif]contains rules on[ltrif]
disclosures[lsqbb], including the total annual loan cost rate,[rsqbb]
[rtrif]and advertising[ltrif] for reverse mortgages. Section 226.34
prohibits specific acts and practices in connection with mortgage
transactions that are subject to Sec. 226.32. Section 226.35 prohibits
specific acts and practices in connection with higher-priced mortgage
loans, as defined in Sec. 226.35(a). Section 226.36 prohibits specific
acts and practices in connection with credit secured by a consumer's
principal dwelling. [rtrif]Section 226.40 prohibits specific acts and
practices in connection with reverse mortgages.[ltrif]
* * * * *
(8) Several appendices contain information such as the procedures
for determinations about State laws, state exemptions and issuance of
staff interpretations, special rules for certain kinds of credit plans,
a list of enforcement agencies, and the rules for computing annual
percentage rates in closed-end credit transactions [lsqbb]and total-
annual-loan-cost rates for reverse mortgage transactions[rsqbb].
* * * * *
3. Section 226.2 is amended by revising paragraphs (a)(6) and
(a)(11) to read as follows:
Sec. 226.2 Definitions and rules of construction.
(a) * * *
(6) Business day means a day on which the creditor's offices are
open to the public for carrying on substantially all of its business
functions. However, for purposes of rescission under Sec. Sec. 226.15
and 226.23, and for purposes of [rtrif]Sec. 226.5b(e), Sec.
226.9(j)(2),[ltrif] Sec. 226.19(a)(1)(ii), [rtrif]Sec.
226.19(a)(1)(iv),[ltrif] Sec. 226.19(a)(2), Sec. 226.31, [rtrif]Sec.
226.33(d)(1)(ii), Sec. 226.33(d)(2), Sec. 226.40(b)(2)[ltrif] and
Sec. 226.46(d)(4), the term means all calendar days except Sundays and
the legal public holidays specified in 5 U.S.C. 6103(a), such as New
Year's Day, the Birthday of Martin Luther King, Jr., Washington's
Birthday, Memorial Day, Independence Day, Labor Day, Columbus Day,
Veterans Day, Thanksgiving Day, and Christmas Day.
* * * * *
(11) Consumer means a cardholder or a natural person to whom
consumer credit is offered or extended. However, for purposes of
rescission under Sec. Sec. 226.15 and 226.23, the term also includes a
natural person in whose principal dwelling a security interest is or
will be retained or acquired, if that person's ownership interest in
the dwelling is or will be subject to the security interest. [rtrif]For
purposes of the counseling requirements under Sec. 226.40(b) for
reverse mortgages subject to Sec. 226.33, the term is defined in Sec.
226.40(b)(7).[ltrif]
* * * * *
4. Section 226.4 is amended by revising paragraphs (d)(1), (d)(3),
and (d)(4) to read as follows:
Sec. 226.4 Finance charge.
* * * * *
(d) Insurance and debt cancellation and debt suspension coverage.
(1) Voluntary credit insurance premiums. [rtrif]Except as provided in
Sec. 226.4(g), premiums[ltrif][lsqbb]Premiums[rsqbb] for credit life,
accident, health, or loss-of-income insurance may be excluded from the
finance charge if the following conditions are met [rtrif]before the
consumer enrolls in the credit insurance policy written in connection
with the credit transaction[ltrif]:
[[Page 58689]]
(i) [lsqbb]The insurance coverage is not required by the creditor,
and this fact is disclosed in writing.[rsqbb][rtrif]The creditor
clearly and conspicuously in a minimum 10-point font provides the
following disclosures, which shall be grouped together and
substantially similar in headings, content, and format to Model Form G-
16(A) or H-17(A) in Appendix G or H of this part, as applicable:
(A) A heading disclosing the optional nature of the product,
together with the name of the product;
(B) A statement that the consumer should stop to review the
disclosure, together with a statement that the consumer does not have
to buy the product to get or keep the loan or line of credit, as
applicable;
(C) A statement that the consumer may visit the Web site of the
Federal Reserve Board to learn more about the product, and a reference
to that Web site;
(D) The following information in a tabular and question-and-answer
format:
(1) A statement that if the consumer already has enough insurance
or savings to pay off or make payments on the debt if a covered event
occurs, the consumer may not need the product;
(2) A statement that other types of insurance can give the consumer
similar benefits and are often less expensive;
(3) A statement of the maximum premium or charge per period,
together with a statement that the cost depends on the consumer's
balance or interest rate, as applicable;
(4) A statement of the maximum benefit amount, together with a
statement that the consumer will be responsible for any balance due
above the maximum benefit amount, as applicable;
(5) A statement that the consumer meets the age and employment
eligibility requirements, as required under paragraph (d)(1)(ii) of
this section;
(6) If there are other eligibility requirements in addition to age
and employment, a statement in bold, underlined text that the consumer
may not receive any benefits even if the consumer purchases the
product, together with a statement that there are other requirements
that the consumer may not meet and that, if the consumer does not meet
these requirements, the consumer will not receive any benefits even if
the consumer purchases the product and pays the periodic premium or
charge; and
(7) A statement of the time period and age limit for coverage;
(E) A checkbox and a statement that the consumer wants to purchase
the optional product, together with a statement of the maximum premium
or charge per period; and
(F) A designation for the consumer's signature or initials.[ltrif]
(ii) [lsqbb]The premium for the initial term of insurance coverage
is disclosed in writing. If the term of insurance is less than the term
of the transaction, the term of insurance also shall be disclosed. The
premium may be disclosed on a unit-cost basis only in open-end credit
transactions, closed-end credit transactions by mail or telephone under
Sec. 226.17(g), and certain closed-end credit transactions involving
an insurance plan that limits the total amount of indebtedness subject
to coverage.[rsqbb][rtrif]The creditor determines prior to or at the
time of enrollment that the consumer meets any applicable age or
employment eligibility criteria for insurance coverage; and[ltrif]
(iii) The consumer signs or initials an affirmative written request
for the insurance after receiving the disclosures specified in
paragraph (d)(1)(i) of this section, except as provided in paragraph
(d)(4) of this section. Any consumer in the transaction may sign or
initial the request.
* * * * *
(3) Voluntary debt cancellation or debt suspension fees.
[rtrif]Except as provided in Sec. 226.4(g), charges[ltrif]
[lsqbb]Charges[rsqbb] or premiums paid for debt cancellation coverage
for amounts exceeding the value of the collateral securing the
obligation or for debt cancellation or debt suspension coverage in the
event of the loss of life, health, or income or in case of accident may
be excluded from the finance charge, whether or not the coverage is
insurance, if the following conditions are met [rtrif]before the
consumer enrolls in the coverage written in connection with the credit
transaction[ltrif]:
(i) [lsqbb]The debt cancellation or debt suspension agreement or
coverage is not required by the creditor, and this fact is disclosed in
writing;
(ii) The fee or premium for the initial term of coverage is
disclosed in writing. If the term of coverage is less than the term of
the credit transaction, the term of coverage also shall be disclosed.
The fee or premium may be disclosed on a unit-cost basis only in open-
end credit transactions, closed-end credit transactions by mail or
telephone under Sec. 226.17(g), and certain closed-end credit
transactions involving a debt cancellation agreement that limits the
total amount of indebtedness subject to coverage;
(iii) The following are disclosed[rsqbb][rtrif] The creditor
clearly and conspicuously provides in a minimum 10-point font the
disclosures specified in paragraph (d)(1)(i) of this section, which
shall be grouped together and substantially similar in headings,
content, and format to Model Form G-16(A) or H-17(A) in Appendix G or H
of this part, as applicable, including a disclosure[ltrif], as
applicable, for debt suspension coverage[lsqbb]:
That[rsqbb][rtrif]that[ltrif] the obligation to pay loan principal and
interest is only suspended, [lsqbb]and[rsqbb] that interest will
continue to accrue during the period of suspension [rtrif], and that
the balance will increase during the suspension period[ltrif];
[rtrif](ii) The creditor determines prior to or at the time of
enrollment that the consumer meets any applicable age or employment
eligibility criteria for the debt cancellation or debt suspension
coverage; and[ltrif]
[lsqbb](iv)[rsqbb][rtrif](iii)[ltrif] The consumer signs or
initials an affirmative written request for coverage after receiving
the disclosures specified in paragraph (d)(3)(i) of this section,
except as provided in paragraph (d)(4) of this section. Any consumer in
the transaction may sign or initial the request.
(4) Telephone purchases. If a consumer purchases credit insurance
or debt cancellation or debt suspension coverage for an open-end
[lsqbb](not home-secured)[rsqbb] plan by telephone, the creditor must
make the disclosures under paragraphs (d)(1)(i) [lsqbb]and (ii)[rsqbb]
or (d)(3)(i) [lsqbb]through (iii)[rsqbb] of this section, as
applicable, orally. In such a case, the creditor shall:
(i) Maintain evidence that the consumer, after being provided the
disclosures orally, affirmatively elected to purchase the insurance or
coverage; and
(ii) Mail the disclosures under paragraphs (d)(1)(i) [lsqbb]and
(ii)[rsqbb] or (d)(3)(i) [lsqbb]through (iii)[rsqbb] of this section,
as applicable, within three business days after the telephone purchase.
* * * * *
Subpart B--Open-End Credit
5. Section 226.5 is amended by revising paragraph (a)(1)(ii) to
read as follows:
Sec. 226.5 General disclosure requirements.
(a) * * *
(1) * * *
(ii) The creditor shall make the disclosures required by this
subpart in writing,\7\ in a form that the consumer may keep,\8\ except
that:
---------------------------------------------------------------------------
\7\ [lsqbb]Reserved[rsqbb].
\8\ [lsqbb]Reserved[rsqbb].
---------------------------------------------------------------------------
(A) The following disclosures need not be written:
[[Page 58690]]
[rtrif](1) Disclosures under Sec. 226.6(a)(3) of charges that are
imposed as part of a home-equity plan that are not required to be
disclosed under Sec. 226.6(a)(2) or Sec. 226.33(c) and related
disclosures under Sec. 226.9(c)(1)(ii)(B) of charges;
(2)[ltrif] Disclosures under Sec. 226.6(b)(3) of charges that are
imposed as part of an open-end (not home-secured) plan that are not
required to be disclosed under Sec. 226.6(b)(2) and related
disclosures under Sec. 226.9(c)(2)(ii)(B) of charges;
[rtrif](3) Disclosures[ltrif] [lsqbb]disclosures[rsqbb] under Sec.
226.9(c)(2)(v); and
[rtrif](4) Disclosures[ltrif] [lsqbb]disclosures[rsqbb] under Sec.
226.9(d) when a finance charge is imposed at the time of the
transaction.
(B) The following disclosures need not be in a retainable form:
[rtrif](1)[ltrif] Disclosures that need not be written under
paragraph (a)(1)(ii)(A) of this section;
[rtrif](2) Disclosures[ltrif] [lsqbb]disclosures[rsqbb] for credit
and charge card applications and solicitations under Sec. 226.5a;
[lsqbb]home-equity disclosures under Sec. 226.5b(d);[rsqbb]
[rtrif](3) The[ltrif] [lsqbb]the[rsqbb] alternative summary
billing-rights statement under Sec. 226.9(a)(2);
[rtrif](4) The[ltrif] [lsqbb]the[rsqbb] credit and charge card
renewal disclosures required under Sec. 226.9(e); and
[rtrif](5) The[ltrif] [lsqbb]the[rsqbb] payment requirements under
Sec. 226.10(b), except as provided in Sec. 226.7(b)(13).
* * * * *
6. Section 226.5b, as proposed to be amended on Aug. 26, 2009 (74
FR 43428), is further amended by revising the introductory text and
paragraphs (d), (e), (f)(2) introductory text, and (f)(4), and adding
new paragraph (h) to read as follows:
Sec. 226.5b Requirements for home equity plans.
The requirements of this section apply to open-end credit plans
secured by the consumer's dwelling[rtrif], except as provided in
paragraph (i) of this section[ltrif].
* * * * *
(d) Refund of fees. A creditor shall refund all fees paid by the
consumer if any term required to be disclosed under paragraph (b) of
this section changes (other than a change due to fluctuations in the
index in a variable-rate plan[rtrif], or changes to the disclosures
required by Sec. 226.33(c)(3), (c)(5) or (c)(8) due to changes in the
type of payment the consumer receives, or verification of the appraised
property value or the consumer's age [ltrif]) before the plan is opened
and the consumer elects not to open the plan.
(e) Imposition of nonrefundable fees. Neither a creditor nor any
other person may impose a nonrefundable fee until three business days
after the consumer receives the disclosures required under paragraph
(b) of this section [rtrif]or Sec. 226.33(d)(1)[ltrif].\10d\ If the
disclosures required under this section are mailed to the consumer, the
consumer is considered to have received them three business days after
they are mailed.
---------------------------------------------------------------------------
\10d\ Reserved.
---------------------------------------------------------------------------
(f) * * *
(2) Terminate a plan and demand repayment of the entire outstanding
balance in advance of the original term (except for reverse
mortgage[rtrif]s[ltrif] [lsqbb]transactions[rsqbb] that are subject to
paragraph (f)(4) of this section) unless:
* * * * *
(4) For reverse mortgage[rtrif]s[ltrif] [lsqbb]transactions[rsqbb]
that are subject to Sec. 226.33, terminate a plan and demand repayment
of the entire outstanding balance in advance of the original term
except:
(i) In the case of default;
(ii) If the consumer transfers title to the property securing the
note;
(iii) If the consumer ceases using the property securing the note
as the primary dwelling; or
(iv) Upon the consumer's death.
* * * * *
[rtrif](h) Reverse mortgages. For reverse mortgages that are
subject to Sec. 226.33, the creditor must comply with the requirements
for open-end reverse mortgages in Sec. 226.33 and not with paragraphs
(a) through (c) of this section.[ltrif]
* * * * *
7. Section 226.6, as proposed to be amended on August 26, 2009 (74
FR 43428), is further amended by revising paragraphs (a) introductory
text, (a)(5) introductory text, and (a)(5)(i), and Sec. 226.6 is also
amended by revising paragraphs (b)(5) introductory text and (b)(5)(i)
to read as follows:
Sec. 226.6 Account-opening disclosures.
(a) Rules affecting home-equity plans. The requirements of
paragraph (a) of this section apply only to home equity plans subject
to Sec. 226.5b. [rtrif]The requirements of paragraphs (a)(1), (a)(2),
(a)(5)(i), and (a)(5)(v) do not apply to reverse-mortgage
transactions.[ltrif]
* * * * *
(5) Additional disclosures for home-equity plans. A creditor shall
disclose [lsqbb]to the extent applicable[rsqbb] [rtrif]or comply with,
as applicable[ltrif]:
(i) [lsqbb]Voluntary[rsqbb][rtrif]Required or voluntary[ltrif]
credit insurance, debt cancellation [rtrif]coverage,[ltrif] or debt
suspension [rtrif]coverage[ltrif]. The disclosures [rtrif]and
requirements[ltrif] in Sec. 226.4(d)(1)(i) [lsqbb]and
(d)(1)(ii)[rsqbb] [rtrif]through (d)(1)(iii)[ltrif] and (d)(3)(i)
through (d)(3)(iii)[rtrif], as applicable,[ltrif] if the creditor
offers optional credit insurance,[lsqbb]or[rsqbb] debt cancellation
[rtrif]coverage[ltrif] or debt suspension coverage that is identified
in Sec. 226.4(b)(7) or (b)(10). [rtrif]For required credit insurance,
debt cancellation coverage, or debt suspension coverage that is
identified in Sec. 226.4(b)(7) or (b)(10), the creditor shall provide
the disclosures required in Sec. 226.4(d)(1)(i) and (d)(3)(i), as
applicable, except for Sec. 226.4(d)(1)(i)(A), (B), (D)(5), (E) and
(F).[ltrif]
* * * * *
(b) * * *
(5) Additional disclosures for open-end (not home-secured) plans. A
creditor shall disclose [rtrif]or comply with, as[ltrif][lsqbb]to the
extent[rsqbb] applicable:
(i) [lsqbb]Voluntary[rsqbb][rtrif]Required or voluntary[ltrif]
credit insurance, debt cancellation [rtrif]coverage[ltrif], or debt
suspension [rtrif]coverage[ltrif]. The disclosures [rtrif]and
requirements[ltrif] in Sec. 226.4(d)(1)(i) [lsqbb]and
(d)(1)(ii)[rsqbb][rtrif]through (d)(1)(iii)[ltrif] and (d)(3)(i)
through (d)(3)(iii) [rtrif],as applicable,[ltrif] if the creditor
offers optional credit insurance, [lsqbb]or[rsqbb] debt cancellation
[rtrif]coverage,[ltrif] or debt suspension coverage that is identified
in Sec. 226.4(b)(7) or (b)(10). [rtrif]For required credit insurance,
debt cancellation coverage, or debt suspension coverage that is
identified in Sec. 226.4(b)(7) or (b)(10), the creditor shall provide
the disclosures required in Sec. 226.4(d)(1)(i) and (d)(3)(i), as
applicable, except for Sec. 226.4(d)(1)(i)(A), (B), (D)(5), (E) and
(F).[ltrif]
* * * * *
8. Section 226.7 is amended by revising paragraph (a)(8) to read as
follows:
Sec. 226.7 Periodic statement.
* * * * *
(a) . * * *
(8) Grace period. [rtrif]Except for reverse mortgages that are
subject to Sec. 226.33, t[ltrif][lsqbb]T[rsqbb]he date by which or the
time period within which the new balance or any portion of the new
balance must be paid to avoid additional finance charges. If such a
time period is provided, a creditor may, at its option and without
disclosure, impose no finance charge if payment is received after the
time period's expiration.
* * * * *
9. Section 226.9 is amended by revising paragraphs (b)(1) and (2),
redesignating paragraph (c)(1)(ii) as paragraph (c)(1)(iv) and revising
it, revising paragraph (c)(1)(iii), and adding
[[Page 58691]]
new paragraph (c)(1)(ii) to read as follows:
Sec. 226.9 Subsequent disclosure requirements.
* * * * *
(b) Disclosures for supplemental credit access devices and
additional features. (1) If a creditor, within 30 days after mailing or
delivering the account-opening disclosures under [rtrif]Sec.
[ltrif]Sec. 226.6(a)(1)[rtrif],[ltrif] [lsqbb]or[rsqbb]
[rtrif]6[ltrif](b)(3)(ii)(A), [rtrif]or 226.33(d)(2) and
(d)(4)(i),[ltrif] as applicable, adds a credit feature to the
consumer's account or mails or delivers to the consumer a credit access
device, including but not limited to checks that access a credit card
account, for which the finance charge terms are the same as those
previously disclosed, no additional disclosures are necessary. Except
as provided in paragraph (b)(3) of this section, after 30 days, if the
creditor adds a credit feature or furnishes a credit access device
(other than as a renewal, resupply, or the original issuance of a
credit card) on the same finance charge terms, the creditor shall
disclose, before the consumer uses the feature or device for the first
time, that it is for use in obtaining credit under the terms previously
disclosed.
(2) Except as provided in paragraph (b)(3) of this section,
whenever a credit feature is added or a credit access device is mailed
or delivered to the consumer, and the finance charge terms for the
feature or device differ from disclosures previously given, the
disclosures required by [rtrif]Sec. [ltrif]Sec.
226.6(a)(1)[rtrif],[ltrif] [lsqbb]or[rsqbb]
[rtrif]6[ltrif](b)(3)(ii)(A), [rtrif]or 226.33(d)(2) and
(d)(4)(i),[ltrif] as applicable, that are applicable to the added
feature or device shall be given before the consumer uses the feature
or device for the first time.
* * * * *
(c) Change in terms. (1) Rules affecting home-equity plans.--(i)
Written notice required. * * *
[rtrif](ii) Charges not covered by Sec. 226.6(a)(1) and (a)(2) or
Sec. 226.33. Except as provided in paragraph (c)(1)(iv) of this
section, if a creditor increases any component of a charge or provides
for a new charge required to be disclosed under Sec. 226.6(a)(3) that
is not required to be disclosed in a tabular format under Sec. Sec.
226.6(a)(2) or 226.33(d)(4), a creditor may either, at its option:
(A) Comply with the requirements of paragraph (c)(1)(i) of this
section; or
(B) Provide notice of the amount of the charge before the consumer
agrees to or becomes obligated to pay the charge, at a time and in a
manner that a consumer would be likely to notice the disclosure of the
charge. The notice may be provided orally or in writing.
(iii) Disclosure requirements.--(A) Changes to terms described in
account-opening table. If a creditor changes a term required to be
disclosed in a tabular format pursuant to Sec. Sec. 226.6(a)(1) and
(a)(2), or 226.33(d)(4)(i), the creditor must provide the following
information on the notice provided pursuant to paragraph (c)(1)(i) of
this section:
(1) A summary of the changes made to terms required by Sec. Sec.
226.6(a)(1) and (2) or 226.33(d)(4)(i);
(2) A statement that changes are being made to the account;
(3) A statement indicating the consumer has the right to opt out of
these changes, if applicable, and a reference to additional information
describing the opt-out right provided in the notice, if applicable;
(4) The date the changes will become effective; and
(5) If applicable, a statement that the consumer may find
additional information about the summarized changes, and other changes
to the account, in the notice.
(B) Format requirements.--(1) Tabular format. The summary of
changes described in paragraph (c)(1)(iii)(A)(1) of this section must
be in a tabular format, with headings and format substantially similar
to any of the account-opening tables found in G-15 in Appendix G to
this part, or for reverse mortgages, in K-2 and K-5 in Appendix K to
this part. The table must disclose the changed term(s) and information
relevant to the change(s), if that relevant information is required by
Sec. Sec. 226.6(a)(1) and (a)(2), or 226.33(c) and (d)(4). The new
terms must be described with the same level of detail as required when
disclosing the terms under Sec. 226.6(a)(2) or Sec. 226.33(c).
(2) Notice included with periodic statement. If a notice required
by paragraph (c)(1)(i) of this section is included on or with a
periodic statement, the information described in paragraph
(c)(1)(iii)(A)(1) of this section must be disclosed on the front of any
page of the statement. The summary of changes described in paragraph
(c)(1)(iii)(A)(1) of this section must immediately follow the
information described in paragraph (c)(1)(iii)(A)(2) through
(c)(1)(iii)(A)(5) of this section, and be substantially similar to the
format shown in Sample G-25 in Appendix G to this part.
(3) Notice provided separately from periodic statement. If a notice
required by paragraph (c)(1)(i) of this section is not included on or
with a periodic statement, the information described in paragraph
(c)(1)(iii)(A)(1) of this section must, at the creditor's option, be
disclosed on the front of the first page of the notice or segregated on
a separate page from other information given with the notice. The
summary of changes required to be in a table pursuant to paragraph
(c)(1)(iii)(A)(1) of this section may be on more than one page, and may
use both the front and reverse sides, so long as the table begins on
the front of the first page of the notice and there is a reference on
the first page indicating that the table continues on the following
page. The summary of changes described in paragraph (c)(1)(iii)(A)(1)
of this section must immediately follow the information described in
paragraph (c)(1)(iii)(A)(2) through (c)(1)(iii)(A)(5) of this section,
substantially similar to the format shown in Sample G-25 in Appendix G
to this part.[ltrif]
[rtrif](iv)[ltrif][lsqbb](ii)[rsqbb] Notice not required. For home-
equity plans subject to the requirements of Sec. 226.5b, a creditor is
not required to provide notice under this section when the change
involves a reduction of any component of a finance or other charge or
when the change results from an agreement involving a court proceeding.
[rtrif]Suspension of credit privileges, reduction of a credit limit, or
termination of an account do not require notice under paragraph
(c)(1)(i) of this section, but must be disclosed pursuant to paragraph
(j) of this section.[ltrif]
[lsqbb](iii) Notice to restrict credit. For home-equity plans
subject to the requirements of Sec. 226.5b, if the creditor prohibits
additional extensions of credit or reduces the credit limit pursuant to
Sec. 226.5b(f)(3)(i) or (f)(3)(vi), the creditor shall mail or deliver
written notice of the action to each consumer who will be affected. The
notice must be provided not later than three business days after the
action is taken and shall contain specific reasons for the action. If
the creditor requires the consumer to request reinstatement of credit
privileges, the notice also shall state that fact.[rsqbb]
* * * * *
10. Section 226.15 is revised to read as follows:
Sec. 226.15 Right of rescission.
(a) Consumer's right to rescind. (1) [rtrif]Coverage.[ltrif]--
(1)(i) Except as provided in paragraph[rtrif]s[ltrif] (a)(1)(ii)
[rtrif]and (f)[ltrif] of this section, in a credit plan in which a
security interest is or will be retained or acquired in a consumer's
principal dwelling, each consumer whose ownership interest is or will
be subject to the security interest shall have the right to rescind
[rtrif]the following transactions[ltrif]: each credit
[[Page 58692]]
extension made under the plan; the plan when the plan is opened; a
security interest when added or increased to secure an existing plan;
and the increase when a credit limit on the plan is increased.
(ii) As provided in section 125(e) of the Act, the consumer does
not have the right to rescind each credit extension made under the plan
if such extension is made in accordance with a previously established
credit limit for the plan.
(2) [rtrif]Exercise of the right. (i) Provision of written
notification.[ltrif] To exercise the right to rescind, the consumer
shall notify the creditor of the rescission by mail [lsqbb],
telegram,[rsqbb] or other means of written communication. Notice is
considered given when mailed, [lsqbb]or when filed for telegraphic
transmission,[rsqbb] or, if sent by other means, when delivered to the
[lsqbb]creditor's designated place of business.[rsqbb][rtrif]
appropriate party identified in paragraph (a)(2)(ii) of this section
within the applicable time period.
(ii) Party the consumer shall notify. (A) During the three-
business-day period following the transaction. To exercise the right to
rescind during the three-business-day period following the transaction
that gave rise to the right of rescission, the consumer shall mail or
deliver written notice of the rescission to the creditor or the
creditor's agent for receiving such notice, as designated on the notice
provided by the creditor pursuant to paragraph (b) of this section.
Where no designation is provided, mailing or delivering notice to the
servicer, as defined in Sec. 226.36(c)(3), constitutes delivery to the
creditor.
(B) After the three-business-day period following the transaction.
To exercise an extended right to rescind after the three-business-day
period following the transaction that gave rise to the right of
rescission, the consumer shall mail or deliver written notice of the
rescission to the current owner of the debt obligation. A notice of
rescission mailed or delivered to the servicer, as defined in Sec.
226.36(c)(3), shall constitute delivery to the current owner.[ltrif]
(3) [rtrif]Rescission period. (i) Three business days.[ltrif] The
consumer [may exercise][rtrif]has[ltrif] the right to rescind until
midnight [lsqbb]of[rsqbb] [rtrif]after[ltrif] the third business day
following the [rtrif]transaction[ltrif][lsqbb]occurrence[rsqbb]
described in paragraph (a)(1) of this section that gave rise to the
right of rescission, delivery of the notice required by paragraph (b)
of this section, or delivery of all material disclosures
[rtrif]required by paragraph (a)(5) of this section[ltrif],\36\
whichever occurs last.
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\36\ [rtrif][Reserved.][ltrif] [The term material disclosures
means the information that must be provided to satisfy the
requirements in Sec. 226.6 with regard to the method of determining
the finance charge and the balance upon which a finance charge will
be imposed, the annual percentage rate, the amount or method of
determining the amount of any membership or participation fee that
may be imposed as part of the plan, and the payment information
described in Sec. 226.5b(d)(5)(i) and (ii) that is required under
Sec. 226.6(e)(2).]
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[rtrif](ii) Unexpired right of rescission. (A) Up to three
years.[ltrif] If the [lsqbb]required[rsqbb] notice [rtrif]required by
paragraph (b) of this section or[ltrif] [lsqbb]and[rsqbb] material
disclosures [rtrif]required by paragraph (a)(5) of this section[ltrif]
are not delivered, the right to rescind shall expire three years after
the [rtrif]transaction[ltrif] [lsqbb]occurrence[rsqbb] giving rise to
the right of rescission, [lsqbb]or[rsqbb] upon transfer of all of the
consumer's interest in the property, [lsqbb]or upon[rsqbb] sale of the
property[rtrif], refinancing with a creditor other than the current
holder, or paying off of the obligation[ltrif], whichever occurs first.
[rtrif](B) Extension in connection with certain administrative
proceedings.[ltrif] In the case of certain administrative proceedings,
the rescission period shall be extended in accordance with section
125(f) of the Act.
(4) [rtrif]Joint owners.[ltrif] When more than one consumer has the
right to rescind, the exercise of the right by one consumer shall be
effective as to all consumers.
[rtrif](5)(i) Definition of material disclosures. For purposes of
this section, the term material disclosures means the following
disclosures required under Sec. 226.6(a)(2) or Sec. 226.33(c):
(A) Any annual percentage rate, information related to introductory
rates, and information related to variable rate plans disclosed under
Sec. 226.6(a)(2)(vi) or Sec. 226.33(c)(6)(i) except for the lowest
and highest value of the index in the past 15 years disclosed under
Sec. 226.6(a)(2)(vi)(A)(1)(vi) or Sec. 226.33(c)(6)(i)(A)(1)(vi);
(B) The total of all one-time fees imposed by the creditor and any
third parties to open the plan disclosed under Sec. 226.6(a)(2)(vii)
or Sec. 226.33(c)(7)(i)(A);
(C) 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 disclosed under Sec.
226.6(a)(2)(viii) or Sec. 226.33(c)(7)(ii);
(D) Any fee that may be imposed by the creditor if a consumer
terminates the plan prior to its scheduled maturity disclosed under
Sec. 226.6(a)(2)(ix) or Sec. 226.33(c)(7)(iii);
(E) The length of the plan, the length of the draw period and the
length of any repayment period disclosed under Sec. 226.6(a)(2)(v)(A);
(F) An explanation of how the minimum periodic payment will be
determined and the timing of the payments. If 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 statement of
this fact, as well as a statement that a balloon payment may result or
will result, as applicable, disclosed under Sec. 226.6(a)(2)(v)(B);
(G) If applicable, a statement that negative amortization may occur
and that negative amortization increases the principal balance and
reduces the consumer's equity in the dwelling disclosed under Sec.
226.6(a)(2)(xvi);
(H) 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
disclosed under Sec. 226.6(a)(2)(xvii) or Sec. 226.33(c)(7)(v);
(I) The credit limit applicable to the plan disclosed under Sec.
226.6(a)(2)(xviii); and
(J) A fee for insurance described in Sec. 226.4(b)(7) or debt
cancellation or suspension coverage described in Sec. 226.4(b)(10), if
the insurance or debt cancellation or suspension coverage is required
as part of the plan as disclosed under Sec. 226.6(a)(2)(xx).
(ii) Tolerances for accuracy of total of all one-time fees imposed
by the creditor and any third parties to open the plan. The total of
all one-time fees imposed by the creditor and any third parties to open
the plan and other disclosures affected by the total shall be
considered accurate for purposes of this section if the disclosed total
of all one-time fees imposed by the creditor and any third parties to
open the plan:
(A) Is understated by no more than $100; or
(B) Is greater than the amount required to be disclosed under Sec.
226.6(a)(2)(vii) or Sec. 226.33(c)(7)(i)(A).
(iii) Tolerances for accuracy of the credit limit applicable to the
plan. The credit limit applicable to the plan shall be considered
accurate for purposes of this section if the disclosed credit limit
applicable to the plan:
(A) Is overstated by no more than \1/2\ of 1 percent of the credit
limit applicable to the plan required to be disclosed under Sec.
226.6(a)(2)(xviii) or $100, whichever is greater; or
[[Page 58693]]
(B) Is less than the amount required to be disclosed under Sec.
226.6(a)(2)(xviii).[ltrif]
(b) Notice of right to rescind. [rtrif](1) Who receives
notice.[ltrif] In any transaction [lsqbb]or occurrence[rsqbb] subject
to rescission, a creditor shall deliver [lsqbb]two copies of [rsqbb]
the notice of the right to rescind to each consumer entitled to
rescind. [lsqbb](one copy to each if the notice is delivered in
electronic form in accordance with the consumer consent and other
applicable provisions of the E-Sign Act). The notice shall identify the
transaction or occurrence and clearly and conspicuously disclose the
following:
(1) The retention or acquisition of a security interest in the
consumer's principal dwelling.
(2) The consumer's right to rescind, as described in paragraph
(a)(1) of this section.
(3) How to exercise the right to rescind, with a form for that
purpose, designating the address of the creditor's place of business.
(4) The effects of rescission, as described in paragraph (d) of
this section.
(5) The date the rescission period expires.[rsqbb]
[rtrif](2) Format of notice. (i) Grouped and segregated. The
disclosures required under paragraph (b)(3) of this section and the
optional disclosures permitted under paragraph (b)(4) of this section
shall appear on the front side of a one-page document, separate from
all other unrelated material. The disclosures required by paragraph
(b)(3)(i)-(vii) of this section shall appear grouped together in the
notice. The disclosures required by paragraph (b)(3)(viii) of this
section shall appear grouped together and shall be segregated from all
other information in the notice. The notice shall not contain any other
information not directly related to the disclosures required under
paragraph (b)(3) of this section.
(ii) Specific format. The title of the notice shall appear at the
top of the notice. The disclosures required by paragraph (b)(3)(i)-
(vii) of this section shall appear beneath the title and be in the form
of a table. If the creditor chooses to place in the notice one or both
of the optional disclosures described in paragraph (b)(4) of this
section, the text shall follow the disclosures required by paragraph
(b)(3)(i)-(vii) of this section, but appear before the segregated
disclosures required by paragraph (b)(3)(viii) of this section. If both
statements described in paragraph (b)(4) of this section are inserted,
the statement described in paragraph (b)(4)(i) of this section shall
appear before the statement described in paragraph (b)(4)(ii) of this
section. The disclosures required by paragraph (b)(3) of this section
and any optional disclosures permitted under paragraph (b)(4) of this
section must be given in a minimum 10-point font. If the creditor
chooses to insert an acknowledgement as described in paragraph
(b)(4)(ii) of this section, the acknowledgement must be disclosed in a
format substantially similar to the format used in Model Form G-5(A) in
Appendix G to this part.
(3) Required content of notice. The creditor shall clearly and
conspicuously disclose the following information in the notice:
(i) Identification of the transaction. An identification of the
type of transaction giving rise to the right of rescission.
(ii) Security interest. A statement that the consumer could lose
his or her home if the consumer does not repay the money owed under the
obligation that is secured by the home.
(iii) Right to cancel. A statement that the consumer has the right
under Federal law to cancel the transaction on or before the stated
date. If paragraph (c) of this section applies, a statement that
Federal law prohibits the creditor from making any funds (or certain
funds, as applicable) available to the consumer until after the stated
date.
(iv) Fees. A statement that, if the consumer cancels, the creditor
will not charge the consumer a cancellation fee and will refund any
fees the consumer paid in connection with the transaction giving rise
to the right of rescission.
(v) Effect of cancellation on existing line of credit. As
applicable, the following statements:
(A) A statement that if the consumer cancels the transaction giving
rise to the right of rescission, all of the terms of the consumer's
current line of credit with the creditor will still apply;
(B) A statement that the consumer will still owe the creditor the
current balance; and
(C) Except for a reverse mortgage, if some or all of that money is
secured by the home, a statement that the consumer could lose his or
her home if the consumer does not repay the money that is secured by
the home.
(vi) How to cancel. The name and postal address for regular mail of
the creditor or its agent and a statement that the consumer may cancel
by submitting the form located at the bottom of the notice to the
address provided.
(vii) Deadline to cancel. The calendar date on which the three-
business-day rescission period expires, together with a statement that
the right to cancel the transaction may extend beyond this date and in
that case the consumer must submit the form located at the bottom of
the notice to either the current owner of the line of credit or the
person to whom the consumer sends his or her payments. If the creditor
cannot provide an accurate calendar date on which the three-business-
day rescission period expires, the creditor must provide the calendar
date on which it reasonably and in good faith expects the three-
business-day period for rescission to expire. If the creditor provides
a date in the notice that gives the consumer a longer period within
which to rescind than the actual period for rescission, the notice
shall be deemed to comply with this paragraph, as long as the creditor
permits the consumer to rescind through the end of the date in the
notice. If the creditor provides a date in the notice that gives the
consumer a shorter period within which to rescind than the actual
period for rescission, the creditor shall be deemed to comply with the
requirement in this paragraph if the creditor notifies the consumer
that the deadline in the first notice of the right of rescission has
changed and provides a second notice to the consumer stating that the
consumer's right to rescind expires on a calendar date which is three
business days from the date the consumer receives the second notice.
(viii) Form for consumer's exercise of right. A form that the
consumer may use to exercise the right of rescission, which includes
spaces for entry of the consumer's name and property address. At a
creditor's option, the creditor may pre-print on the form the
consumer's name, property address and account number, but may not
request that or require the consumer to provide the account number.
(4) Optional content of notice. (i) Exercise of right by joint
owners. At a creditor's option, a statement that joint owners may have
the right to rescind and that a rescission by one owner is effective
for all owners.
(ii) Acknowledgement of receipt. At a creditor's option, a
statement the consumer may use to acknowledge receipt of the notice.
(5) Time of providing notice. The notice required by paragraph (b)
of this section shall be provided before the transaction that gives
rise to the right of rescission.
(6) Proper form of notice. A creditor satisfies the disclosure
requirements of paragraph (b)(3) of this section if it provides the
model form in Appendix G of this part, or a substantially similar
notice, which is properly completed with the disclosures required by
paragraph (b)(3) of this section.[ltrif]
[[Page 58694]]
(c) Delay of creditor's performance. Unless a consumer waives the
right to rescind under paragraph (e) of this section, no money shall be
disbursed other than in escrow, no services shall be performed, and no
materials delivered until after the rescission period has expired and
the creditor is reasonably satisfied that the consumer has not
rescinded. A creditor does not violate this section if a third party
with no knowledge of the event activating the rescission right does not
delay in providing materials or services, as long as the debt incurred
for those materials or services is not secured by the property subject
to rescission.
(d)[rtrif](1)[ltrif] Effects of rescission [rtrif]prior to the
creditor disbursing funds. This paragraph applies if the creditor has
not, directly or indirectly through a third party, disbursed money or
delivered property, and the consumer's right to rescind has not
expired.[ltrif]
[lsqbb](1)[rsqbb][rtrif](i) Effect of consumer's notice of
rescission.[ltrif] When a consumer [lsqbb]rescinds a
transaction[rsqbb][rtrif]provides a notice of rescission to a creditor
[ltrif], the security interest giving rise to the right of rescission
becomes void and the consumer shall not be liable for any amount,
including any finance charge.
[lsqbb](2)[rsqbb][rtrif](ii) Creditor's obligations.[ltrif] Within
20 calendar days after receipt of a [lsqbb]notice of rescission, the
creditor shall return any money or property that has been given to
anyone[rsqbb][rtrif]consumer's notice of rescission, the creditor shall
return to the consumer any money that the consumer has given to the
creditor or a third party[ltrif] in connection with the transaction and
shall take [lsqbb]any action[rsqbb] [rtrif]whatever steps are[ltrif]
necessary to [lsqbb]reflect the termination of
the[rsqbb][rtrif]terminate its[ltrif] security interest.
[lsqbb](3) If the creditor has delivered any money or property, the
consumer may retain possession until the creditor has met its
obligation under paragraph (d)(2) of this section. When the creditor
has complied with that paragraph, the consumer shall tender the money
or property to the creditor or, where the latter would be impracticable
or inequitable, tender its reasonable value. At the consumer's option,
tender of property may be made at the location of the property or at
the consumer's residence. Tender of money must be made at the
creditor's designated place of business. If the creditor does not take
possession of the money or property within 20 calendar days after the
consumer's tender, the consumer may keep it without further obligation.
(4) The procedures outlined in paragraphs (d)(2) and (3) of this
section may be modified by court order.[rsqbb]
[rtrif](2) Effects of rescission after the creditor disburses
funds. This paragraph applies if the creditor has, directly or
indirectly through a third party, disbursed money or delivered
property, and the consumer's right to rescind has not expired under
Sec. 226.15(a)(3)(ii).
(i) Effects of rescission if the parties are not in a court
proceeding. This paragraph applies if the creditor and consumer are not
in a court proceeding.
(A) Creditor's acknowledgment of receipt. Within 20 calendar days
after receipt of a consumer's notice of rescission, the creditor shall
mail or deliver to the consumer a written acknowledgment of receipt of
the consumer's notice, which shall include a written statement of
whether the creditor will agree to cancel the transaction.
(B) Creditor's written statement. If the creditor agrees to cancel
the transaction, the creditor's acknowledgment of receipt shall contain
a written statement, which provides:
(1) As applicable, the amount of money or a description of the
property that the creditor will accept as the consumer's tender;
(2) A reasonable date by which the consumer may tender the money or
property described in paragraph (d)(2)(i)(B)(1); and
(3) That within 20 calendar days after receipt of the consumer's
tender, the creditor will take whatever steps are necessary to
terminate its security interest.
(C) Consumer's response. (1) Tender of money. This paragraph
applies if the creditor disbursed money to the consumer. A consumer may
respond by tendering to the creditor the money described in the written
statement by the date stated in the written statement. Tender of money
may be made at the creditor's designated place of business, or any
reasonable location specified in the creditor's written statement.
(2) Tender of property. This paragraph applies if the creditor
delivered property to the consumer. A consumer may respond by tendering
to the creditor the property described in the written statement by the
date stated in the written statement. Where this tender would be
impracticable or inequitable, the consumer may tender the property's
reasonable value. At the consumer's option, tender of property may be
made at the location of the property or at the consumer's residence.
(D) Creditor's security interest. Within 20 calendar days after
receipt of the consumer's tender, the creditor shall take whatever
steps are necessary to terminate its security interest.
(ii) Effects of rescission in a court proceeding. This paragraph
applies if the creditor and consumer are in a court proceeding, and the
consumer's right to rescind has not expired as provided in paragraph
15(a)(3)(ii) of this section.
(A) Consumer's obligation. (1) Tender of money. This paragraph
applies if the creditor disbursed money to the consumer. After the
creditor receives the consumer's notice of rescission, the consumer
shall tender to the creditor the principal balance then owed less any
amounts the consumer has given to the creditor or a third party in
connection with the transaction. Tender of money may be made at the
creditor's designated place of business, or other reasonable location.
(2) Tender of property. This paragraph applies if the creditor
delivered property to the consumer. After the creditor receives the
consumer's notice of rescission, the consumer shall tender the property
to the creditor, or where this tender would be impracticable or
inequitable, tender its reasonable value. At the consumer's option,
tender of property may be made at the location of the property or at
the consumer's residence.
(3) Effect of non-possession. If the creditor does not take
possession of the money or property within 20 calendar days after the
consumer's tender, the consumer may keep it without further obligation.
(B) Creditor's obligation. Within 20 calendar days after receipt of
the consumer's tender, the creditor shall take whatever steps are
necessary to terminate its security interest. If the consumer tendered
property, the creditor shall return to the consumer any amounts the
consumer has given to the creditor or a third party in connection with
the transaction.
(C) Judicial modification. The procedures outlined in paragraphs
(d)(2)(ii)(A) and (B) of this section may be modified by a
court.[ltrif]
(e) Consumer's waiver of right to rescind. [lsqbb](1)[rsqbb] The
consumer may modify or waive the right to rescind[rtrif], after
delivery of the notice required by paragraph (b) of this section and
the disclosures required by Sec. 226.6,[ltrif] if the consumer
determines that the [lsqbb]extension of credit is needed[rsqbb][rtrif]
loan proceeds are needed during the rescission period[ltrif] to meet a
bona fide personal financial emergency. To modify or waive the right,
[lsqbb]the consumer[rsqbb][rtrif] each consumer entitled to
rescind[ltrif] shall give the creditor a dated written statement that
describes the emergency, specifically modifies or waives the right to
rescind, and bears the [rtrif]consumer's[ltrif] signature[lsqbb] of all
the
[[Page 58695]]
consumers entitled to rescind[rsqbb]. Printed forms for this purpose
are prohibited[lsqbb], except as provided in paragraph (e)(2) of this
section[rsqbb].
[lsqbb](2) The need of the consumer to obtain funds immediately
shall be regarded as a bona fide personal financial emergency provided
that the dwelling securing the extension of credit is located in an
area declared during June through September 1993, pursuant to 42 U.S.C.
5170, to be a major disaster area because of severe storms and flooding
in the Midwest.\36a\ In this instance, creditors may use printed forms
for the consumer to waive the right to rescind. This exemption to
paragraph (e)(1) of this section shall expire one year from the date an
area was declared a major disaster.
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[lsqbb]\36a\ A list of the affected areas will be maintained by
the Board.[rsqbb]
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(3) The consumer's need to obtain funds immediately shall be
regarded as a bona fide personal financial emergency provided that the
dwelling securing the extension of credit is located in an area
declared during June through September 1994 to be a major disaster
area, pursuant to 42 U.S.C. 5170, because of severe storms and flooding
in the South.\36b\ In this instance, creditors may use printed forms
for the consumer to waive the right to rescind. This exemption to
paragraph (e)(1) of this section shall expire one year from the date an
area was declared a major disaster.
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[lsqbb]\36b\ A list of the affected areas will be maintained and
published by the Board. Such areas now include parts of Alabama,
Florida, and Georgia.[rsqbb]
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(4) The consumer's need to obtain funds immediately shall be
regarded as a bona fide personal financial emergency provided that the
dwelling securing the extension of credit is located in an area
declared during October 1994 to be a major disaster area, pursuant to
42 U.S.C. 5170, because of severe storms and flooding in Texas.\36c\ In
this instance, creditors may use printed forms for the consumer to
waive the right to rescind. This exemption to paragraph (e)(1) of this
section shall expire one year from the date an area was declared a
major disaster.[rsqbb]
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[lsqbb]\36c\ A list of the affected areas will be maintained and
published by the Board. Such areas now include the following
counties in Texas: Angelina, Austin, Bastrop, Brazos, Brazoria,
Burleson, Chambers, Fayette, Fort Bend, Galveston, Grimes, Hardin,
Harris, Houston, Jackson, Jasper, Jefferson, Lee, Liberty, Madison,
Matagorda, Montgomery, Nacagdoches, Orange, Polk, San Augustine, San
Jacinto, Shelby, Trinity, Victoria, Washington, Waller, Walker, and
Wharton.[rsqbb]
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(f) Exempt transactions. The right to rescind does not apply to the
following:
(1) A residential mortgage transaction.
(2) A credit plan in which a state agency is a creditor.
11. Section 226.16 is amended by revising paragraph (d)(6), and
adding paragraphs (d)(7) through (13) to read as follows:
Sec. 226.16 Advertising.
* * * * *
(d) * * *
(6) Promotional rates and payments. (i) Definitions. The following
definitions apply for purposes of paragraph (d)(6) of this section:
(A) Promotional rate. The term ``promotional rate'' means, in a
variable-rate plan, any annual percentage rate that is not based on the
index and margin that will be used to make rate adjustments under the
plan, if that rate is less than a reasonably current annual percentage
rate that would be in effect under the index and margin that will be
used to make rate adjustments under the plan.
(B) Promotional payment. The term ``promotional payment'' means:
(1) For a variable-rate plan, any minimum payment applicable for a
promotional period that [lsqbb]:
(i) Is not derived by applying the index and margin to the
outstanding balance when such index and margin will be used to
determine other minimum payments under the plan; and
(ii) Is[rsqbb] [rtrif]is[ltrif] less than other minimum payments
under the plan derived by applying a reasonably current index and
margin that will be used to determine the amount of such payments,
given an assumed balance.
(2) For a plan other than a variable-rate plan, any minimum payment
applicable for a promotional period if that payment is less than other
payments required under the plan given an assumed balance.
(C) Promotional period. A ``promotional period'' means a period of
time, less than the full term of the loan, that the promotional rate or
promotional payment may be applicable.
(ii) Stating the promotional period and post-promotional rate or
payments. If any annual percentage rate that may be applied to a plan
is a promotional rate, or if any payment applicable to a plan is a
promotional payment, the following must be disclosed in any
advertisement, other than television or radio advertisements, in a
clear and conspicuous manner with equal prominence and in close
proximity to each listing of the promotional rate or payment:
(A) The period of time during which the promotional rate or
promotional payment will apply;
(B) In the case of a promotional rate, any annual percentage rate
that will apply under the plan. If such rate is variable, the annual
percentage rate must be disclosed in accordance with the accuracy
standards in Sec. Sec. 226.5b or 226.16(b)(1)(ii) as applicable; and
(C) In the case of a promotional payment, the amounts and time
periods of any payments that will apply under the plan [rtrif]given the
same assumed balance[ltrif]. In variable-rate transactions, payments
that will be determined based on application of an index and margin
shall be disclosed based on a reasonably current index and margin.
(iii) Envelope excluded. The requirements in paragraph (d)(6)(ii)
of this section do not apply to an envelope in which an application or
solicitation is mailed, or to a banner advertisement or pop-up
advertisement linked to an application or solicitation provided
electronically.
[rtrif](7) Misleading advertising of ``fixed'' rates and payments.
An advertisement may not use the word ``fixed'' to refer to rates,
payments, or the plan in an advertisement for a variable-rate plan or
other plan where the payment may increase, unless:
(i) In the case of an advertisement solely for one or more
variable-rate plans:
(A) The phrase ``variable rate'' appears in the advertisement
before the first use of the word ``fixed'' and is at least as
conspicuous as any use of the word ``fixed'' in the advertisement; and
(B) Each use of the word ``fixed'' to refer to a rate or payment is
accompanied by an equally prominent and closely proximate statement of
the time period for which the rate or payment is fixed, and the fact
that the rate may vary or the payment may increase after that period;
(ii) In the case of an advertisement solely for non-variable-rate
plans where the payment may increase, each use of the word ``fixed'' to
refer to the payment is accompanied by an equally prominent and closely
proximate statement of the time period for which the payment is fixed,
and the fact that the payment may increase after that period; or
(iii) In the case of an advertisement for both variable-rate plans
and non-variable-rate plans:
(A) The phrase ``variable rate'' appears in the advertisement with
equal prominence to any use of the word ``fixed;'' and
(B) Each use of the word ``fixed'' to refer to a rate, payment, or
the plan either refers solely to the plans for which the rate is fixed
for the term of the plan and complies with paragraph (d)(7)(ii) of this
section, if applicable, or, if it refers to the variable-rate plans, is
accompanied by an equally prominent
[[Page 58696]]
and closely proximate statement of the time period for which the rate
or payment is fixed, and the fact that the rate may vary or the payment
may increase after that period.
(8) Misleading comparisons in advertisements. An advertisement may
not make any comparison between actual or hypothetical credit payments
or rates and any payment or rate that will be available under the
advertised plan for a period less than the full term of the plan,
unless:
(i) In general. The advertisement includes a clear and conspicuous
comparison of the actual or hypothetical payments or rates to any
payments and rates that will apply under the advertised plan, in
accordance with paragraph (d)(6)(ii) of this section; and
(ii) Application to variable-rate transactions. If the
advertisement is for a variable-rate transaction, and the advertised
payment or rate is based on the index and margin that will be used to
make subsequent rate or payment adjustments over the term of the plan,
the advertisement includes an equally prominent statement in close
proximity to the payment or rate that the payment or rate is subject to
adjustment and the time period when the first adjustment will occur.
(9) Misrepresentations about government endorsement. An
advertisement may not make any statement in an advertisement that the
plan offered is a ``government loan program,'' ``government-supported
loan,'' or is otherwise endorsed or sponsored by any Federal, state, or
local government entity, unless the advertisement is for a credit
program that is, in fact, endorsed or sponsored by a Federal, state, or
local government entity.
(10) Misleading use of the current creditor's name. An
advertisement may not use the name of the consumer's current creditor
in an advertisement that is not sent by or on behalf of the consumer's
current creditor, unless the advertisement:
(i) Discloses with equal prominence the name of the creditor or
other person making the advertisement; and
(ii) Includes a clear and conspicuous statement that the creditor
or other person making the advertisement is not associated with, or
acting on behalf of, the consumer's current creditor.
(11) Misleading claims of debt elimination. An advertisement may
not make any misleading claim in an advertisement that the plan offered
will eliminate debt or result in a waiver or forgiveness of a
consumer's existing loan terms with, or obligations to, another
creditor.
(12) Misleading use of the term ``counselor.'' An advertisement may
not use the term ``counselor'' in an advertisement to refer to a for-
profit broker or creditor, its employees, or persons working for the
broker or creditor that are involved in offering, originating or
selling home-equity plans.
(13) Misleading foreign-language advertisements. An advertisement
may not provide information about some trigger terms or required
disclosures, such as a promotional rate or payment, only in a foreign
language in an advertisement, but provide information about other
trigger terms or required disclosures, such as information about the
fully-indexed rate or fully amortizing payment, only in English in the
same advertisement.[ltrif]
* * * * *
Subpart C--Closed-End Credit
12. Section 226.18 is amended by revising the introductory text and
paragraph (n) to read as follows:
Sec. 226.18 Content of disclosures.
For each transaction, the creditor shall disclose the following
information or comply with the following requirements, as applicable
[rtrif], except that for each transaction secured by real property or a
dwelling, the creditor shall make the disclosures required by Sec.
226.38[ltrif]:
* * * * *
(n) Insurance [rtrif],[ltrif] [lsqbb]and[rsqbb] debt
cancellation[rtrif], and debt suspension.[ltrif] [lsqbb]The items
required by Sec. 226.4(d) in order to exclude certain insurance
premiums and debt cancellation fees from the finance charge.[rsqbb]
[rtrif]The disclosures and requirements of Sec. Sec. 226.4(d)(1)(i)
through (d)(1)(iii) and (d)(3)(i) through (d)(3)(iii), as applicable,
if the creditors offers optional credit insurance, debt cancellation
coverage, or debt suspension coverage that is identified in Sec.
226.4(b)(7) or (b)(10). For required credit insurance, debt
cancellation coverage, or debt suspension coverage that is identified
in Sec. 226.4(b)(7) or (b)(10), the creditor shall provide the
disclosures required in Sec. Sec. 226.4(d)(1)(i) and (d)(3)(i), as
applicable, except for Sec. Sec. 226.4(d)(1)(i)(A), (B), (D)(5), (E)
and (F).[ltrif]
* * * * *
13. Section 226.19 is amended by revising the section heading and
paragraph (a), adding introductory text, reserving paragraph (d), and
adding paragraph (e) to read as follows:
Sec. 226.19 [lsqbb]Certain mortgage and variable-rate
transactions.[rsqbb][rtrif]Early disclosures and adjustable-rate
disclosures for transactions secured by real property or a dwelling.
In connection with a closed-end transaction secured by real
property or a dwelling, subject to paragraph (a)(4) of this section,
the following requirements shall apply:[ltrif]
(a) Mortgage transactions [lsqbb]subject to RESPA[rsqbb]--(1)(i)
Time of [rtrif]good faith estimates of[ltrif] disclosures. [lsqbb]In a
mortgage transaction subject to the Real Estate Settlement Procedures
Act (12 U.S.C. 2601 et seq.) that is secured by the consumer's
dwelling, other than a home equity line of credit subject to Sec.
226.5b or mortgage transaction subject to paragraph (a)(5) of this
section, t[rsqbb][rtrif]T[ltrif]he creditor shall make good faith
estimates of the disclosures required by [lsqbb]Sec.
226.18[rsqbb][rtrif]Sec. 226.38[ltrif] and shall deliver or place them
in the mail not later than the third business day after the creditor
receives the consumer's written application.
(ii) Imposition of fees. Except as provided in paragraph
(a)(1)(iii) of this section, neither a creditor nor any other person
may impose a fee on a consumer in connection with the consumer's
application for a mortgage transaction subject to paragraph (a)(1)(i)
of this section before the consumer has received the disclosures
required by paragraph (a)(1)(i) of this section. If the disclosures are
mailed to the consumer [rtrif]or delivered to the consumer by means
other than delivery in person[ltrif], the consumer is considered to
have received them three business days after they are mailed [rtrif]or
delivered[ltrif].
(iii) Exception to fee restriction. A creditor or other person may
impose a fee for obtaining the consumer's credit history before the
consumer has received the disclosures required by paragraph (a)(1)(i)
of this section, provided the fee is bona fide and reasonable in
amount. [rtrif]Notwithstanding paragraph (a)(1)(iv) of this section, a
bona fide and reasonable fee paid for obtaining a consumer's creditor
history need not be refundable.[ltrif]
[rtrif](iv) Imposition of nonrefundable fees. Neither a creditor
nor any other person may impose a nonrefundable fee for three business
days after a consumer receives the disclosures required by paragraph
(a)(1)(i) of this section. A creditor or other person shall refund any
fee paid by a consumer within three business days after receiving those
disclosures, upon the consumer's request. This paragraph (a)(1)(iv)
applies only to a refund request made by the consumer within three
business days after receiving the early disclosures and
[[Page 58697]]
only if the consumer decides not to enter into the transaction.
(v) Counseling fee. If housing or credit counseling is required by
applicable law, a bona fide and reasonable charge imposed by a
counselor or counseling agency for such counseling is not a ``fee'' for
purposes of paragraph (a)(1)(ii) of this section and need not be
refundable under paragraph (a)(1)(iv) of this section.[ltrif]
[lsqbb](2) Waiting periods for early disclosures and corrected
disclosures. (i)[rsqbb][rtrif](2)(i) Seven-business-day waiting
period.[ltrif] The creditor shall deliver or place in the mail the good
faith estimates required by paragraph (a)(1)(i) of this section not
later than the seventh business day before consummation of the
transaction.
[rtrif](ii) Three-business-day waiting period. After providing the
disclosures required by paragraph (a)(1)(i) of this section, the
creditor shall provide the disclosures required by Sec. 226.38 before
consummation. The consumer must receive the new disclosures no later
than three business days before consummation. Only the disclosures
required by Sec. Sec. 226.38(c)(3)(i)(C), 226.38(c)(3)(ii)(C),
226.38(c)(6)(i) and 226.38(e)(5)(i) may be estimated
disclosures.[ltrif]
ALTERNATIVE 1--PARAGRAPH (a)(2)(iii)
[lsqbb](ii) If the annual percentage rate disclosed under paragraph
(a)(1)(i) of this section becomes inaccurate, as defined in Sec.
226.22, the creditor shall provide corrected disclosures with all
changed terms.[rsqbb][rtrif](iii) Additional three-business-day waiting
period. If a subsequent event makes the disclosures required by
paragraph (a)(2)(ii) inaccurate, as defined in Sec. 226.22, the
creditor shall provide corrected disclosures, subject to paragraph
(a)(2)(iv) of this section.[ltrif] The consumer must receive the
corrected disclosures no later than three business days before
consummation. [rtrif]Only the disclosures required by Sec. Sec.
226.38(c)(3)(i)(C), 226.38(c)(3)(ii)(C), 226.38(c)(6)(i) and
226.38(e)(5)(i) may be estimated disclosures.[ltrif] [lsqbb]If the
corrected disclosures are mailed to the consumer or delivered to the
consumer by means other than delivery in person, the consumer is deemed
to have received the corrected disclosures three business days after
they are mailed or delivered.[rsqbb]
Alternative 2--paragraph (a)(2)(iii)
[lsqbb](ii)[rsqbb][rtrif](iii) Additional three-business-day
waiting period.[ltrif] If the annual percentage rate disclosed under
paragraph [lsqbb](a)(1)(i)[rsqbb][rtrif](a)(2)(ii)[ltrif] of this
section becomes inaccurate, as defined in Sec. 226.22, [rtrif]or a
transaction that was disclosed as a fixed-rate transaction becomes an
adjustable-rate transaction,[ltrif] the creditor shall provide
corrected disclosures with all changed terms[rtrif], subject to
paragraph (a)(2)(iv) of this section[ltrif]. The consumer must receive
the corrected disclosures no later than three business days before
consummation. [rtrif] Only the disclosures required by Sec. Sec.
226.38(c)(3)(i)(C), 226.38(c)(3)(ii)(C), 226.38(c)(6)(i) and
226.38(e)(5)(i) may be estimated disclosures.[ltrif] [lsqbb]If the
corrected disclosures are mailed to the consumer or delivered to the
consumer by means other than delivery in person, the consumer is deemed
to have received the corrected disclosures three business days after
they are mailed or delivered.[rsqbb]
[rtrif](iv) Annual percentage rate accuracy. An annual percentage
rate disclosed under paragraph (a)(2)(ii) or (a)(2)(iii) shall be
considered accurate as provided by Sec. 226.22, except that even if
one of the following subsequent events makes the disclosed annual
percentage rate inaccurate under Sec. 226.22, the APR shall be
considered accurate for purposes of paragraph (a)(2)(ii) and
(a)(2)(iii) of this section:
(A) A decrease in the loan's annual percentage rate due to a
discount the creditor gives the consumer to induce periodic payments by
automated debit from a consumer's deposit or other account.
(B) A decrease in the loan's annual percentage rate due to a
discount a title insurer gives the consumer on voluntary owners' title
insurance.
(v) Timing of receipt. If the disclosures required by paragraph
(a)(2)(ii) or paragraph (a)(2)(iii) of this section are mailed to the
consumer or delivered by means other than delivery in person, the
consumer is considered to have received the disclosures three business
days after they are mailed or delivered.[ltrif]
(3) Consumer's waiver of waiting period before consummation.
[lsqbb]If the consumer determines that the extension of credit is
needed to meet a bona fide personal financial emergency,
the[rsqbb][rtrif]The[ltrif] consumer may modify or waive the seven-
business-day waiting period or [lsqbb]the[rsqbb][rtrif]a[ltrif] three-
business-day waiting period required by paragraph (a)(2) of this
section, after receiving the disclosures required by [lsqbb]Sec.
226.18[rsqbb][rtrif]Sec. 226.38, if the consumer determines that the
loan proceeds are needed before the waiting period ends to meet a bona
fide personal financial emergency[ltrif]. To modify or waive a waiting
period, [lsqbb]the consumer[rsqbb][rtrif]each consumer primarily liable
on the obligation[ltrif] shall give the creditor a dated written
statement that describes the emergency, specifically modifies or waives
the waiting period, and bears the [rtrif]consumer's[ltrif]
signature[lsqbb] of all the consumers who are primarily liable on the
legal obligation[rsqbb]. Printed forms for this purpose are prohibited.
[lsqbb](4) Notice. Disclosures made pursuant to paragraph (a)(1) or
paragraph (a)(2) of this section shall contain the following statement:
``You are not required to complete this agreement merely because you
have received these disclosures or signed a loan application.'' The
disclosure required by this paragraph shall be grouped together with
the disclosures required by paragraph (a)(1) or (a)(2) of this
section.[rsqbb]
[lsqbb](5)[rsqbb][rtrif](4)[ltrif] Timeshare plans. In a mortgage
transaction [lsqbb]subject to the Real Estate Settlement Procedures Act
(12 U.S.C. 2601 et seq.)[rsqbb] that is secured by a consumer's
interest in a timeshare plan described in 11 U.S.C. 101(53(D)):
(i) [rtrif]Exemption.[ltrif] The requirements of paragraphs (a)(1)
through [lsqbb](a)(4)[rsqbb][rtrif](a)(3)[ltrif] of this section do not
apply;
(ii) [rtrif]Time of disclosures for timeshare plans.[ltrif] The
creditor shall make good faith estimates of the disclosures required by
[lsqbb]Sec. 226.18[rsqbb] [rtrif]Sec. 226.38[ltrif] before
consummation, or shall deliver or place them in the mail not later than
three business days after the creditor receives the consumer's written
application, whichever is earlier; and
(iii) [rtrif]Redisclosure for timeshare plans.[ltrif] If the annual
percentage rate at the time of consummation varies from the annual
percentage rate disclosed under paragraph
(a)[lsqbb](5)[rsqbb][rtrif](4)[ltrif](ii) of this section by more than
\1/8\ of 1 percentage point in a regular transaction or \1/4\ of 1
percentage point in an irregular transaction, the creditor shall
disclose all the changed terms no later than consummation or
settlement.
* * * * *
[rtrif](d) [Reserved]
(e) Exception for reverse mortgages. The requirements of paragraphs
(b) through (d) of this section do not apply to reverse mortgages, as
defined in Sec. 226.33(a).[ltrif]
14. Section 226.20 is amended by revising paragraphs (a) and (c) to
read as follows:
Sec. 226.20 Subsequent disclosure requirements.
(a) [rtrif]Modifications to terms by the same creditor. (1)
Mortgages. (i) A new transaction results and the creditor must provide
new disclosures to the consumer if the same creditor and consumer
modify an existing legal
[[Page 58698]]
obligation secured by real property or a dwelling that was subject to
this part by:
(A) Increasing the loan amount;
(B) Imposing a fee on the consumer in connection with the
modification, whether or not the fee is reflected in any agreement
between the parties;
(C) Changing the loan term;
(D) Changing the interest rate;
(E) Increasing the amount of the periodic payment;
(F) Adding an adjustable-rate feature or a feature listed in Sec.
226.38(d)(1)(iii) or (d)(2); or
(G) Adding new collateral that is real property or a dwelling.
(ii) Exceptions. New disclosures shall not be required if the same
creditor and consumer modify an existing legal obligation secured by
real property or a dwelling that was subject to this part:
(A) As part of a court proceeding;
(B) In connection with the consumer's default or delinquency,
unless there is an increase in the loan amount or interest rate, or a
fee is imposed on the consumer in connection with the modification; or
(C) By decreasing the interest rate with no other modifications,
except a decrease in the periodic payment amount, an extension of the
loan term, or both, and no fee is imposed on the consumer in connection
with the modification.
(iii) For purposes of paragraph (a)(1) of this section, the term
``same creditor'' means the current holder, or servicer acting on
behalf of the current holder, of an existing legal obligation.[ltrif]
[lsqbb](a)[rsqbb][rtrif](2)[ltrif] Refinancings [rtrif]by the same
creditor--Non-mortgage credit[ltrif]. A refinancing occurs when an
existing obligation that was subject to this subpart [rtrif]and that is
not secured by real property or a dwelling[ltrif] is satisfied and
replaced by a new obligation undertaken by the same consumer. A
refinancing is a new transaction requiring new disclosures to the
consumer.[lsqbb] The new finance charge shall include any unearned
portion of the old finance charge that is not credited to the existing
obligation.[rsqbb] The following shall not be treated as a refinancing:
[lsqbb](1)[rsqbb][rtrif](i)[ltrif] A renewal of a single payment
obligation with no change in the original terms.
[lsqbb](2)[rsqbb][rtrif](ii)[ltrif] A reduction in the annual
percentage rate with a corresponding change in the payment schedule.
[lsqbb](3)[rsqbb][rtrif](iii)[ltrif] An agreement involving a court
proceeding.
[lsqbb](4)[rsqbb][rtrif](iv)[ltrif] A change in the payment
schedule or a change in collateral requirements as a result of the
consumer's default or delinquency, unless the rate is increased, or the
new amount financed exceeds the unpaid balance plus earned finance
charge and premiums for continuation of insurance of the types
described in Sec. 226.4(d).
[lsqbb](5)[rsqbb][rtrif](v)[ltrif] The renewal of optional
insurance purchased by the consumer and added to an existing
transaction, if disclosures relating to the initial purchase were
provided as required by this subpart.
[rtrif](3) Unearned finance charge. In connection with any new
transaction under this subsection 226.20(a), the new finance charge
must include any unearned portion of the old finance charge that is not
credited to the existing obligation.[ltrif]
* * * * *
[lsqbb](c) Variable-rate adjustments.\45c\ An adjustment to the
interest rate with or without a corresponding adjustment to the payment
in a variable-rate mortgage subject to Sec. 226.19(b) is an event
requiring new disclosures to the consumer. At least once each year
during which an interest rate adjustment is implemented without an
accompanying payment change, and at least 25, but no more than 120,
calendar days before a payment at a new level is due, the following
disclosures, as applicable, must be delivered or placed in the mail:
---------------------------------------------------------------------------
[lsqbb]\45c\ Information provided in accordance with variable-
rate subsequent disclosure regulations of other Federal agencies may
be subsituted for the disclosure required by paragraph (c) of this
section.[rsqbb]
---------------------------------------------------------------------------
(1) The current and prior interest rates.
(2) The index values upon which the current and prior interest
rates are based.
(3) The extent to which the creditor has foregone any increase in
the interest rate.
(4) The contractual effects of the adjustment, including the
payment due after the adjustment is made, and a statement of the loan
balance.
(5) The payment, if different from that referred to in paragraph
(c)(4) of this section, that would be required to fully amortize the
loan at the new interest rate over the remainder of the loan
term.[rsqbb]
[rtrif](c) Rate adjustments. If an adjustment to the interest rate
of an adjustable rate mortgage is made, with or without a corresponding
adjustment to the payment, disclosures required by this paragraph must
be provided to the consumer. This paragraph applies only to adjustable
rate mortgages subject to Sec. 226.19(b), and to adjustments made
based on the terms of the legal obligation between the parties,
including adjustments made upon conversion to a fixed-rate transaction.
(1) Timing of disclosures. (i) Payment change. If an interest rate
adjustment is accompanied by a payment change, the creditor shall
deliver or place in the mail the disclosures required by paragraph
(c)(2) of this section at least 60, but no more than 120, calendar days
before a payment at a new level is due.
(ii) No payment change. At least once each year during which an
interest rate adjustment is implemented without an accompanying payment
change, the creditor shall deliver or place in the mail the disclosures
required by paragraph (c)(3) of this section.
(2) Content of payment change disclosures. The creditor must
provide the following information on the notice provided pursuant to
paragraph (c)(1)(i) of this section, as applicable:
(i) A statement that changes are being made to the interest rate,
the date such changes are effective, and a statement that more detailed
information is available in the loan agreement(s).
(ii) A table containing the following disclosures--
(A) The current and new interest rates.
(B) If payments on the loan may be interest-only or negatively
amortizing, the amount of the current and new payment allocated to pay
principal, interest, and taxes and insurance in escrow, as applicable.
The current payment allocation disclosed shall be based on the payment
allocation in the last payment period during which the current interest
rate applies. The new payment allocation disclosed shall be based on
the payment allocation in the first payment period during which the new
interest rate applies.
(C) The current and new payment and the due date for the new
payment.
(iii) A description of the change in the index or formula and any
application of previously foregone interest.
(iv) The extent to which the creditor has foregone any increase in
the interest rate and the earliest date the creditor may apply foregone
interest to future adjustments, subject to rate caps.
(v) Limits on interest rate or payment increases at each
adjustment, if any, and the maximum interest rate or payment over the
life of the loan.
(vi) A statement of whether or not part of the new payment will be
allocated to pay the loan principal and a statement of the payment
required to fully amortize the loan at the new interest rate over the
remainder of the loan term or to fully amortize the loan without
extending the loan term, if different from the new payment disclosed
[[Page 58699]]
pursuant to paragraph (c)(2)(ii)(C) of this section.
(vii) A statement of the loan balance as of the date the interest
rate change will become effective.
(3) Content of annual interest rate notice. The creditor shall
provide the following information on the annual notice provided
pursuant to paragraph (c)(1)(ii) of this section, as applicable:
(i) The specific time period covered by the disclosure, and a
statement that the interest rate on the loan has changed during the
past year without changing required payments.
(ii) The highest and lowest interest rates that applied during the
period specified under paragraph (c)(3)(i) of this section.
(iii) Any foregone increase in the interest rate or application of
previously foregone interest.
(iv) The maximum interest rate that may apply over the life of the
loan.
(v) A statement of the loan balance as of the last day of the time
period required to be disclosed by paragraph (c)(3)(i) of this section.
(4) Additional information. In addition to the disclosures provided
under paragraph (c)(2) or (c)(3) of this section, the creditor shall
provide the following information:
(i) If the creditor may impose a penalty if the obligation is
prepaid in full, a statement of the circumstances under which and
period in which the creditor may impose the penalty and the amount of
the maximum penalty possible during the period between the date the
creditor delivers or mails the disclosures required by this paragraph
(c) and the last day the creditor may impose the penalty.
(ii) A telephone number the consumer may call to obtain additional
information about the consumer's loan.
(iii) A telephone number and Internet Web site for housing
counseling resources maintained by the Department of Housing and Urban
Development.
(5) Format of disclosures. (i) The disclosures required by this
paragraph (c) shall be provided in the form of tables with headings,
content and format substantially similar to Form H-4(G) in Appendix H
to this part, where an interest rate adjustment is accompanied by a
payment change, or Form H-4(K) in Appendix H to this part, where a
creditor provides an annual notice of interest rate adjustments without
an accompanying payment change. The disclosures required by paragraph
(c)(2) or (c)(3) of this section shall be grouped together with the
disclosures required by paragraph (c)(4) of this section, and shall be
in a prominent location.
(ii) The disclosures required by paragraph (c)(2)(i) or paragraph
(c)(3)(i) of this section shall precede the other disclosures required
by paragraph (c)(2) or (c)(3). The disclosures required by paragraph
(c)(4) shall be located directly beneath the disclosures required by
paragraph (c)(2) or (c)(3).
(iii) The disclosures required by paragraph (c)(2)(ii) shall be in
the form of a table with headings, content, and format substantially
similar to Form H-4(G) in Appendix H to this part. The disclosures
required by paragraphs (c)(2)(iii) through (c)(2)(vii) of this section
shall be located directly below the table required by paragraph
(c)(2)(ii).[ltrif]
15. Section 226.22 is amended by revising paragraph (a) to read as
follows:
Sec. 226.22 Determination of annual percentage rate.
(a) Accuracy of annual percentage rate. (1) [rtrif]Actual annual
percentage rate. (i)[ltrif] The annual percentage rate is a measure of
the cost of credit, expressed as a yearly rate, that relates the amount
and timing of value received by the consumer to the amount and timing
of payments made. The annual percentage rate shall be determined in
accordance with either the actuarial method or the United States Rule
method. Explanations, equations and instructions for determining the
annual percentage rate in accordance with the actuarial method are set
forth in appendix J to this regulation.\45d\
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[lsqbb]\45d\ An error in disclosure of the annual percentage
rate or finance charge shall not, in itself, be considered a
violation of this regulation if: (1) The error resulted from a
corresponding error in a calculation tool used in good faith by the
creditor; and (2) upon discovery of the error, the creditor promptly
discontinues use of that calculation tool for disclosure purposes
and notifies the Board in writing of the error in the calculation
tool.[rsqbb]
---------------------------------------------------------------------------
[rtrif](ii) An error in disclosure of the finance charge, for non-
mortgage loans, or the interest and settlement charges, for mortgage
loans, or in disclosure of the annual percentage rate is not a
violation of this part if:
(A) The error resulted from a corresponding error in a calculation
tool used in good faith by the creditor; and
(B) Upon discovery of the error, the creditor promptly discontinues
use of that calculation tool for disclosure purposes.[ltrif]
(2) [rtrif]Regular transaction.[ltrif] As a general rule,
[lsqbb]the[rsqbb][rtrif]a disclosed[ltrif] annual percentage rate shall
be considered accurate if it is not more than \1/8\ of 1 percentage
point above or below the annual percentage rate determined in
accordance with paragraph (a)(1) of this section.
(3) [rtrif]Irregular transaction.[ltrif] In an irregular
transaction, [lsqbb]the[rsqbb][rtrif]a disclosed[ltrif] annual
percentage rate shall be considered accurate if it is not more than \1/
4\ of 1 percentage point above or below the annual percentage rate
determined in accordance with paragraph (a)(1) of this section.\46\
[rtrif]For purposes of this paragraph (a)(3), ``irregular transaction''
means a transaction that includes any of the following features:
multiple advances, irregular payment periods, or irregular payment
amounts, other than an irregular first period or an irregular first or
final payment.
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\46\ [rtrif][lsqbb]Reserved.[rsqbb][ltrif][lsqbb]For purposes of
paragraph (a)(3) of this section, an irregular transaction is one
that includes one or more of the following features: multiple
advances, irregular payment periods, or irregular payment amounts
(other than an irregular first period or an irregular first or final
payment).[rsqbb]
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(i) The term ``irregular transaction'' includes the following:
(A) A construction loan for which advances are made as construction
progresses;
(B) A transaction where payments vary to reflect the consumer's
seasonal income;
(C) A transaction where payments vary due to changes in a premium
for or termination of mortgage insurance; and
(D) A transaction with a graduated payment schedule where the
contract commits the consumer to several series of payments in
different amounts.
(ii) The term ``irregular transaction'' does not include a loan
with a variable-rate feature that has regular payment periods.[ltrif]
(4) Mortgage loans. If the annual percentage rate disclosed in a
transaction secured by real property or a dwelling varies from the
actual rate determined in accordance with paragraph (a)(1) of this
section, in addition to the tolerances applicable under paragraphs
(a)(2) and (3) of this section, the disclosed annual percentage rate
shall also be considered accurate if:
(i) The rate results from the disclosed [lsqbb]finance
charge[rsqbb][rtrif]interest and settlement charges[ltrif]; and
(ii)(A) The disclosed [lsqbb]finance charge[rsqbb][rtrif]interest
and settlement charges[ltrif] would be considered accurate under
[lsqbb]Sec. 226.18(d)(1)[rsqbb] [rtrif]Sec. 226.38(e)(5)(ii)[ltrif];
or
(B) For purposes of rescission, if the disclosed [lsqbb]finance
charge[rsqbb][rtrif]interest and settlement charges[ltrif] would be
considered accurate under Sec.
226.23[rtrif](a)(5)(ii)[ltrif][lsqbb](g) or (h), whichever
applies[rsqbb].
(5) Additional tolerance for mortgage loans. In a transaction
secured by real property or a dwelling, in addition to
[[Page 58700]]
the tolerances applicable under paragraphs (a)(2) and (3) of this
section, if the disclosed [lsqbb]finance charge
is[rsqbb][rtrif]interest and settlement charges are[ltrif] calculated
incorrectly but [lsqbb]is[rsqbb][rtrif]are[ltrif] considered accurate
under Sec. 226.[rtrif]38(e)(5)(ii)[ltrif][18(d)(1)[rsqbb] or Sec.
226.23[rtrif](a)(5)(ii)[ltrif][lsqbb](g) or (h)[rsqbb], the disclosed
annual percentage rate shall be considered accurate:
(i) If the disclosed [lsqbb]finance charge is[rsqbb][rtrif]interest
and settlement charges are[ltrif] understated, and the disclosed annual
percentage rate is also understated but it is closer to the actual
annual percentage rate than the rate that would be considered accurate
under paragraph (a)(4) of this section;
(ii) If the disclosed [lsqbb]finance charge
is[rsqbb][rtrif]interest and settlement charges are[ltrif] overstated,
and the disclosed annual percentage rate is also overstated but it is
closer to the actual annual percentage rate than the rate that would be
considered accurate under paragraph (a)(4) of this section.
* * * * *
16. Section 226.23 is revised to read as follows:
Sec. 226.23 Right of rescission.
(a) Consumer's right to rescind. (1) [rtrif]Coverage.[ltrif] In a
credit transaction in which a security interest is or will be retained
or acquired in a consumer's principal dwelling, each consumer whose
ownership interest is or will be subject to the security interest shall
have the right to rescind the transaction, except for transactions
described in paragraph (f) of this section.\47\ [rtrif]For purposes of
this section, the addition to an existing obligation of a security
interest in a consumer's principal dwelling is a transaction. The right
of rescission applies only to the addition of the security interest and
not the existing obligation.[ltrif]
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\47\ [rtrif][Reserved.][ltrif][lsqbb]For purposes of this
section, the addition to an existing obligation of a security
interest in a consumer's principal dwelling is a transaction. The
right of rescission applies only to the addition of the security
interest and not the existing obligation. The creditor shall deliver
the notice required by paragraph (b) of this section but need not
deliver new material disclosures. Delivery of the required notice
shall begin the rescission period.[rsqbb]
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(2) [rtrif]Exercise of the right. (i) Provision of written
notification.[ltrif] To exercise the right to rescind, the consumer
shall notify the creditor of the rescission by mail[lsqbb],
telegram[rsqbb] or other means of written communication. Notice is
considered given when mailed, [lsqbb]when filed for telegraphic
transmission[rsqbb] or, if sent by other means, when delivered to the
[lsqbb]creditor's designated place of business[rsqbb] [rtrif]
appropriate party identified in paragraph (a)(2)(ii) of this section
within the applicable time period.
(ii) Party the consumer shall notify. (A) During the three-
business-day period following consummation. To exercise the right to
rescind during the three-business-day period following consummation of
the transaction, the consumer shall mail or deliver written notice of
the rescission to the creditor or the creditor's agent for receiving
such notice, as designated on the notice provided by the creditor
pursuant to paragraph (b) of this section. Where no designation is
provided, mailing or delivering notice to the servicer, as defined in
Sec. 226.36(c)(3), constitutes delivery to the creditor.
(B) After the three-business-day period following consummation. To
exercise an extended right to rescind after the three-business-day
period following consummation, the consumer shall mail or deliver
written notice of the rescission to the current owner of the debt
obligation. A notice of rescission mailed or delivered to the servicer,
as defined in Sec. 226.36(c)(3), shall constitute delivery to the
current owner.[ltrif]
(3) [rtrif]Rescission period. (i) Three business days.[ltrif] The
consumer [lsqbb]may exercise[rsqbb] [rtrif]has[ltrif] the right to
rescind until midnight [lsqbb]of[rsqbb] [rtrif]after[ltrif] the third
business day following consummation, delivery of the notice required by
paragraph (b) of this section, or delivery of all material disclosures
[rtrif]required by paragraph (a)(5) of this section[ltrif],\48\
whichever occurs last.
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\48\ [rtrif][Reserved.][ltrif][lsqbb]The term ``material
disclosures'' means the required disclosures of the annual
percentage rate, the finance charge, the amount financed, the total
payments, the payment schedule, and the disclosures and limitations
referred to in Sec. 226.32 (c) and (d) and 226.35(b)(2).[rsqbb]
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[rtrif](ii) Unexpired right of rescission. (A) Up to three
years.[ltrif] If the [lsqbb]required[rsqbb] notice [rtrif]required by
paragraph (b) of this section[ltrif] or material disclosures
[rtrif]required by paragraph (a)(5) of this section[ltrif] are not
delivered, the right to rescind shall expire three years after
consummation, upon transfer of all of the consumer's interest in the
property, [lsqbb]or upon[rsqbb] sale of the property[rtrif],
refinancing with a creditor other than the current holder, or paying
off of the obligation[ltrif], whichever occurs first.
[rtrif](B) Extension in connection with certain administrative
proceedings.[ltrif] In the case of certain administrative proceedings,
the rescission period shall be extended in accordance with section
125(f) of the Act.
(4) [rtrif]Joint Owners.[ltrif] When more than one consumer in a
transaction has the right to rescind, the exercise of the right by one
consumer shall be effective as to all consumers.
[rtrif](5)(i) Definition of material disclosures. For purposes of
this section, the term material disclosures means the disclosures and
limitations referred to in Sec. Sec. 226.32(c) and (d) and
226.35(b)(2), and the following disclosures required under Sec. Sec.
226.33 and 226.38:
(A) The loan amount disclosed under Sec. 226.38(a)(1);
(B) The loan term disclosed under Sec. 226.38(a)(2);
(C) The loan type disclosed under Sec. 226.38(a)(3)(i) or the rate
type under Sec. 226.3(c)(6)(ii)(B);
(D) The loan features disclosed under Sec. 226.38(a)(3)(ii);
(E) The total settlement charges disclosed under Sec. 226.38(a)(4)
or the total fees under Sec. 226.33(c)(7)(i)(A);
(F) The prepayment penalty disclosed under Sec. 226.38(a)(5) or
Sec. 226.33(c)(7)(iii);
(G) The annual percentage rate disclosed under Sec. 226.38(b)(1)
or Sec. 226.33(c)(6)(ii)(A);
(H) The interest rate and payment summary disclosed under Sec.
226.38(c) or the interest rate under Sec. 226.33(c)(7)(ii)(C)(1); and
(I) The interest and settlement charges disclosed under Sec.
226.38(e)(5)(ii) or Sec. 226.33(c)(14)(ii).
(ii) Tolerances for accuracy of the interest and settlement
charges. (A) In general. Except as provided in paragraphs (a)(5)(ii)(B)
and (a)(5)(ii)(C) of this section, the interest and settlement charges
and the annual percentage rate shall be considered accurate for
purposes of this section if the disclosed interest and settlement
charges:
(1) Are understated by no more than \1/2\ of 1 percent of the face
amount of the note or $100, whichever is greater; or
(2) Are greater than the amount required to be disclosed.
(B) Special tolerance for a refinancing with no new advance. In a
refinancing of a residential mortgage transaction with a creditor other
than the current holder of the debt obligation (other than a
transaction covered by Sec. 226.32), if there is no new advance and no
consolidation of existing loans, the interest and settlement charges
and the annual percentage rate shall be considered accurate for
purposes of this section if the disclosed interest and settlement
charges:
(1) Are understated by no more than 1 percent of the face amount of
the note or $100, whichever is greater; or
(2) Are greater than the amount required to be disclosed.
(C) Special tolerance for foreclosures. After the initiation of
foreclosure on the
[[Page 58701]]
consumer's principal dwelling that secures the credit obligation, the
interest and settlement charges and the annual percentage rate shall be
considered accurate for purposes of this section if the disclosed
interest and settlement charges:
(1) Are understated by no more than $35; or
(2) Are greater than the amount required to be disclosed.
(iii) Tolerances for accuracy of the loan amount. (A) In general.
Except as provided in paragraph (a)(5)(B) of this section and Sec.
226.32(c)(5), the loan amount shall be considered accurate if the
disclosed loan amount:
(1) Is understated by no more than \1/2\ of 1 percent of the face
amount of the note or $100, whichever is greater; or
(2) Is greater than the amount required to be disclosed.
(B) Special tolerance for a refinancing with no new advance. Except
as provided in Sec. 226.32(c)(5), in a refinancing of a residential
mortgage transaction with a creditor other than the current holder of
the debt obligation, if there is no new advance and no consolidation of
existing loans, the loan amount shall be considered accurate for
purposes of this section if the disclosed loan amount:
(1) Is understated by no more than 1 percent of the face amount of
the note or $100, whichever is greater; or
(2) Is greater than the amount required to be disclosed.
(iv) Tolerances for accuracy of the total settlement charges, the
prepayment penalty, and the payment summary. The total settlement
charges, the prepayment penalty, and the payment summary shall be
considered accurate for purposes of this section if each of the
disclosed amounts:
(A) Is understated by no more than $100; or
(B) Is greater than the amount required to be disclosed.
(b)[lsqbb](1)[rsqbb] Notice of right to rescind. [rtrif](1) Who
receives notice.[ltrif] In a transaction subject to rescission, a
creditor shall deliver [lsqbb]two copies of[rsqbb] the notice of the
right to rescind to each consumer entitled to rescind[rtrif].[ltrif]
[lsqbb](one copy to each if the notice is delivered in electronic form
in accordance with the consumer consent and other applicable provisions
of the E-Sign Act). The notice shall be on a separate document that
identifies the transaction and shall clearly and conspicuously disclose
the following:
(i) The retention or acquisition of a security interest in the
consumer's principal dwelling.
(ii) The consumer's right to rescind the transaction.
(iii) How to exercise the right to rescind, with a form for that
purpose, designating the address of the creditor's place of business.
(iv) The effects of rescission, as described in paragraph (d) of
this section.
(v) The date the rescission period expires.[rsqbb]
(2) [lsqbb]Proper form[rsqbb][rtrif]Format[ltrif] of notice.
[lsqbb]To satisfy the disclosure requirements of paragraph (b)(1) of
this section, the creditor shall provide the appropriate model form in
Appendix H of this part or a substantially similar notice.[rsqbb]
[rtrif](i) Grouped and segregated. The disclosures required under
paragraph (b)(3) of this section and the optional disclosures permitted
under paragraph (b)(4) of this section shall appear on the front side
of a one-page document, separate from all other unrelated material. The
disclosures required by paragraph (b)(3)(i)-(vi) of this section shall
appear grouped together in the notice. The disclosures required by
paragraph (b)(3)(vii) of this section shall appear grouped together and
shall be segregated from all other information in the notice. The
notice shall not contain any other information not directly related to
the disclosures required under paragraph (b)(3) of this section.
(ii) Specific format. The title of the notice shall appear at the
top of the notice. The disclosures required by paragraph (b)(3)(i)-(vi)
of this section shall appear beneath the title and be in the form of a
table. If the creditor chooses to place in the notice one or both of
the optional disclosures described in paragraph (b)(4) of this section,
the text shall follow the disclosures required by paragraph (b)(3)(i)-
(vi) of this section, but appear before the segregated disclosures
required by paragraph (b)(3)(vii) of this section. If both statements
described in paragraph (b)(4) of this section are inserted, the
statement described in paragraph (b)(4)(i) of this section shall appear
before the statement described in paragraph (b)(4)(ii) of this section.
The disclosures required by paragraph (b)(3) of this section and any
optional disclosures permitted under paragraph (b)(4) of this section
must be given in a minimum 10-point font. If the creditor chooses to
insert an acknowledgement as described in paragraph (b)(4)(ii) of this
section, the acknowledgement must be disclosed in a format
substantially similar to the format used in Model Form H-8(A) or H-9 in
Appendix H to this part.
(3) Required content of notice. The creditor shall clearly and
conspicuously disclose the following information in the notice:
(i) Security interest. A statement that the consumer could lose his
or her home if the consumer does not repay the money owed under the
loan that is secured by the home.
(ii) Right to cancel. A statement that the consumer has the right
under Federal law to cancel the loan on or before the stated date,
together with a statement that Federal law prohibits the creditor from
making any funds available to the consumer until after the stated date.
(iii) Fees. A statement that, if the consumer cancels, the creditor
will not charge the consumer a cancellation fee and will refund any
fees the consumer paid to obtain the loan.
(iv) New advance of money with the same creditor under paragraph
(f)(2) of this section. If there is a new transaction with the same
creditor and a new advance of money as described in paragraph (f)(2) of
this section, a statement that if the consumer cancels the new
transaction, all of the terms of the previous loan will still apply,
the consumer will still owe the creditor the previous balance, and the
consumer could lose his or her home if the consumer does not repay the
previous loan.
(v) How to cancel. The name and postal address for regular mail of
the creditor or its agent and a statement that the consumer may cancel
by submitting the form located at the bottom of the notice to the
address provided.
(vi) Deadline to cancel. The calendar date on which the three-
business-day rescission period expires, together with a statement that
the right to cancel the loan may extend beyond this date and in that
case the consumer must submit the form located at the bottom of the
notice to either the current owner of the loan or the person to whom
the consumer sends his or her payments. If the creditor cannot provide
an accurate calendar date on which the three-business-day rescission
period expires, the creditor must provide the calendar date on which it
reasonably and in good faith expects the three-business-day period for
rescission to expire. If the creditor provides a date in the notice
that gives the consumer a longer period within which to rescind than
the actual period for rescission, the notice shall be deemed to comply
with this paragraph, as long as the creditor permits the consumer to
rescind through the end of the date in the notice. If the creditor
provides a date in the notice that gives the consumer a shorter period
within which to rescind than the actual period for rescission, the
creditor shall be
[[Page 58702]]
deemed to comply with the requirement in this paragraph if the creditor
notifies the consumer that the deadline in the first notice of the
right of rescission has changed and provides a second notice to the
consumer stating that the consumer's right to rescind expires on a
calendar date which is three business days from the date the consumer
receives the second notice.
(vii) Form for consumer's exercise of right. A form that the
consumer may use to exercise the right of rescission, which includes
spaces for entry of the consumer's name and property address. At a
creditor's option, the creditor may pre-print on the form the
consumer's name, property address and loan number, but may not request
or require the consumer to provide the loan number.
(4) Optional content of notice. (i) Exercise of right by joint
owners. At a creditor's option, a statement that joint owners may have
the right to rescind and that a rescission by one owner is effective
for all owners.
(ii) Acknowledgement of receipt. At a creditor's option, a
statement the consumer may use to acknowledge receipt of the notice.
(5) Time of providing notice. (i) In general. Except as provided in
paragraph (b)(5)(ii) of this section, the notice required by paragraph
(b) of this section shall be provided before consummation of the
transaction.
(ii) Addition of a security interest to an existing obligation. In
the case of the addition to an existing obligation of a security
interest as described in paragraph (a)(1) of this section, the notice
required by paragraph (b) of this section shall be provided before the
addition of the security interest to the existing obligation.
(6) Proper form of notice. A creditor satisfies the disclosure
requirements of paragraph (b)(3) of this section if it provides the
appropriate model form in Appendix H of this part, or a substantially
similar notice, which is properly completed with the disclosures
required by paragraph (b)(3) of this section.[ltrif]
(c) Delay of creditor's performance. Unless a consumer waives the
right of rescission under paragraph (e) of this section, no money shall
be disbursed other than in escrow, no services shall be performed and
no materials delivered until the rescission period has expired and the
creditor is reasonably satisfied that the consumer has not rescinded.
(d)[rtrif](1)[ltrif] Effects of rescission [rtrif]prior to the
creditor disbursing funds. This paragraph applies if the creditor has
not, directly or indirectly through a third party, disbursed money or
delivered property, and the consumer's right to rescind has not
expired.[ltrif]
[lsqbb](1)[rsqbb][rtrif](i) Effect of consumer's notice of
rescission.[ltrif] When a consumer [lsqbb]rescinds a
transaction[rsqbb][rtrif]provides a notice of rescission to a creditor
[ltrif], the security interest giving rise to the right of rescission
becomes void and the consumer shall not be liable for any amount,
including any finance charge.
[lsqbb](2)[rsqbb][rtrif](ii) Creditor's obligations.[ltrif] Within
20 calendar days after receipt of a[lsqbb]notice of rescission, the
creditor shall return any money or property that has been given to
anyone[rsqbb][rtrif]consumer's notice of rescission, the creditor shall
return to the consumer any money that the consumer has given to the
creditor or a third party[ltrif] in connection with the transaction and
shall take [lsqbb]any action[rsqbb][rtrif]whatever steps are[ltrif]
necessary to [lsqbb]reflect the termination of
the[rsqbb][rtrif]terminate its[ltrif] security interest.
[lsqbb](3) If the creditor has delivered any money or property, the
consumer may retain possession until the creditor has met its
obligation under paragraph (d)(2) of this section. When the creditor
has complied with that paragraph, the consumer shall tender the money
or property to the creditor or, where the latter would be impracticable
or inequitable, tender its reasonable value. At the consumer's option,
tender of property may be made at the location of the property or at
the consumer's residence. Tender of money must be made at the
creditor's designated place of business. If the creditor does not take
possession of the money or property within 20 calendar days after the
consumer's tender, the consumer may keep it without further obligation.
(4) The procedures outlined in paragraphs (d)(2) and (3) of this
section may be modified by court order.[rsqbb]
[rtrif](2) Effects of rescission after the creditor disburses
funds. This paragraph applies if the creditor has, directly or
indirectly through a third party, disbursed money or delivered
property, and the consumer's right to rescind has not expired under
Sec. 226.23(a)(3)(ii).
(i) Effects of rescission if the parties are not in a court
proceeding. This paragraph applies if the creditor and consumer are not
in a court proceeding.
(A) Creditor's acknowledgment of receipt. Within 20 calendar days
after receipt of a consumer's notice of rescission, the creditor shall
mail or deliver to the consumer a written acknowledgment of receipt of
the consumer's notice, which shall include a written statement of
whether the creditor will agree to cancel the transaction.
(B) Creditor's written statement. If the creditor agrees to cancel
the transaction, the creditor's acknowledgment of receipt shall contain
a written statement, which provides:
(1) As applicable, the amount of money or a description of the
property that the creditor will accept as the consumer's tender;
(2) A reasonable date by which the consumer may tender the money or
property described in paragraph (d)(2)(i)(B)(1); and
(3) That within 20 calendar days after receipt of the consumer's
tender, the creditor will take whatever steps are necessary to
terminate its security interest.
(C) Consumer's response. (1) Tender of money. This paragraph
applies if the creditor disbursed money to the consumer. A consumer may
respond by tendering to the creditor the money described in the written
statement by the date stated in the written statement. Tender of money
may be made at the creditor's designated place of business, or any
reasonable location specified in the creditor's written statement.
(2) Tender of property. This paragraph applies if the creditor
delivered property to the consumer. A consumer may respond by tendering
to the creditor the property described in the written statement by the
date stated in the written statement. Where this tender would be
impracticable or inequitable, the consumer may tender the property's
reasonable value. At the consumer's option, tender of property may be
made at the location of the property or at the consumer's residence.
(D) Creditor's security interest. Within 20 calendar days after
receipt of the consumer's tender, the creditor shall take whatever
steps are necessary to terminate its security interest.
(ii) Effects of rescission in a court proceeding. This paragraph
applies if the creditor and consumer are in a court proceeding, and the
consumer's right to rescind has not expired as provided in paragraph
23(a)(3)(ii) of this section.
(A) Consumer's obligation. (1) Tender of money. This paragraph
applies if the creditor disbursed money to the consumer. After the
creditor receives the consumer's notice of rescission, the consumer
shall tender to the creditor the principal balance then owed less any
amounts the consumer has given to the creditor or a third party in
connection with the transaction. Tender of money may be made at the
creditor's designated place of business, or other reasonable location.
(2) Tender of property. This paragraph applies if the creditor
delivered property to the consumer. After the creditor receives the
consumer's notice of rescission, the consumer shall tender
[[Page 58703]]
the property to the creditor, or where this tender would be
impracticable or inequitable, tender its reasonable value. At the
consumer's option, tender of property may be made at the location of
the property or at the consumer's residence.
(3) Effect of non-possession. If the creditor does not take
possession of the money or property within 20 calendar days after the
consumer's tender, the consumer may keep it without further obligation.
(B) Creditor's obligation. Within 20 calendar days after receipt of
the consumer's tender, the creditor shall take whatever steps are
necessary to terminate its security interest. If the consumer tendered
property, the creditor shall return to the consumer any amounts the
consumer has given to the creditor or a third party in connection with
the transaction.
(C) Judicial modification. The procedures outlined in paragraphs
(d)(2)(ii)(A) and (B) of this section may be modified by a
court.[ltrif]
(e) Consumer's waiver of right to rescind. [lsqbb](1)[rsqbb] The
consumer may modify or waive the right to rescind[rtrif], after
delivery of the notice required by paragraph (b) of this section and
the disclosures required by Sec. Sec. 226.32(c) and 226.38, as
applicable,[ltrif] if the consumer determines that the [lsqbb]extension
of credit is needed[rsqbb][rtrif]loan proceeds are needed during the
rescission period[ltrif] to meet a bona fide personal financial
emergency. To modify or waive the right, [lsqbb]the
consumer[rsqbb][rtrif]each consumer entitled to rescind[ltrif] shall
give the creditor a dated written statement that describes the
emergency, specifically modifies or waives the right to rescind, and
bears the [rtrif]consumer's[ltrif] signature[lsqbb]of all the consumers
entitled to rescind[rsqbb]. Printed forms for this purpose are
prohibited[lsqbb], except as provided in paragraph (e)(2) of this
section[rsqbb].
[lsqbb](2) The need of the consumer to obtain funds immediately
shall be regarded as a bona fide personal financial emergency provided
that the dwelling securing the extension of credit is located in an
area declared during June through September 1993, pursuant to 42 U.S.C.
5170, to be a major disaster area because of severe storms and flooding
in the Midwest.\48a\ In this instance, creditors may use printed forms
for the consumer to waive the right to rescind. This exemption to
paragraph (e)(1) of this section shall expire one year from the date an
area was declared a major disaster.
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[lsqbb]\48a\ A list of the affected areas will be maintained by
the Board.[rsqbb]
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(3) The consumer's need to obtain funds immediately shall be
regarded as a bona fide personal financial emergency provided that the
dwelling securing the extension of credit is located in an area
declared during June through September 1994 to be a major disaster
area, pursuant to 42 U.S.C. 5170, because of severe storms and flooding
in the South.\48b\ In this instance, creditors may use printed forms
for the consumer to waive the right to rescind. This exemption to
paragraph (e)(1) of this section shall expire one year from the date an
area was declared a major disaster.
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[lsqbb]\48b\ A list of the affected areas will be maintained and
published by the Board. Such areas now include parts of Alabama,
Florida, and Georgia.[rsqbb]
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(4) The consumer's need to obtain funds immediately shall be
regarded as a bona fide personal financial emergency provided that the
dwelling securing the extension of credit is located in an area
declared during October 1994 to be a major disaster area, pursuant to
42 U.S.C. 5170, because of severe storms and flooding in Texas.\48c\ In
this instance, creditors may use printed forms for the consumer to
waive the right to rescind. This exemption to paragraph (e)(1) of this
section shall expire one year from the date an area was declared a
major disaster.[rsqbb]
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[lsqbb]\48c\ A list of the affected areas will be maintained and
published by the Board. Such areas now include the following
counties in Texas: Angelina, Austin, Bastrop, Brazos, Brazoria,
Burleson, Chambers, Fayette, Fort Bend, Galveston, Grimes, Hardin,
Harris, Houston, Jackson, Jasper, Jefferson, Lee, Liberty, Madison,
Matagorda, Montgomery, Nacagdoches, Orange, Polk, San Augustine, San
Jacinto, Shelby, Trinity, Victoria, Washington, Waller, Walker, and
Wharton.[rsqbb]
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(f) Exempt transactions. The right to rescind does not apply to the
following:
(1) A residential mortgage transaction.
(2) A [lsqbb]refinancing or consolidation[rsqbb] [rtrif] new
transaction under Sec. 226.20(a)(1)[ltrif] by the same creditor of an
extension of credit already secured by the consumer's principal
dwelling [rtrif], except to the extent of any new advance of money.
(i) For purposes of this paragraph, the term same creditor means
the original creditor that is also the current holder of the debt
obligation. The original creditor is the creditor to whom the written
agreement was initially made payable. In a merger, consolidation or
acquisition, the successor institution is considered the original
creditor.
(ii) For purposes of this paragraph, the term new advance means the
amount by which the new loan amount exceeds the unpaid principal
balance, any earned unpaid finance charge on the existing debt, and
amounts attributed solely to the costs of the new transaction. If the
new transaction with the same creditor involves a new advance of money,
the new transaction is rescindable only to the extent of the new
advance.[ltrif] [lsqbb]The right of rescission shall apply, however, to
the extent the new amount financed exceeds the unpaid principal
balance, any earned unpaid finance charge on the existing debt, and
amounts attributed solely to the costs of the refinancing or
consolidation.[rsqbb]
(3) A transaction in which a state agency is a creditor.
(4) An advance, other than an initial advance, in a series of
advances or in a series of single-payment obligations that is treated
as a single transaction under Sec. 226.17(c)(6), if the notice
required by paragraph (b) of this section and all material disclosures
have been given to the consumer.
(5) A renewal of optional [rtrif]credit[ltrif] insurance
premiums[rtrif], debt cancellation coverage or debt suspension
coverage, provided that the disclosures relating to the initial
purchase were provided as required under Sec. 226.38(h)[ltrif]
[lsqbb]that is not considered a refinancing under Sec.
226.20(a)(5)[rsqbb].
[lsqbb](g) Tolerances for accuracy--(1) One-half of 1 percent
tolerance. Except as provided in paragraphs (g)(2) and (h)(2) of this
section, the finance charge and other disclosures affected by the
finance charge (such as the amount financed and the annual percentage
rate) shall be considered accurate for purposes of this section if the
disclosed finance charge:
(i) is understated by no more than \1/2\ of 1 percent of the face
amount of the note or $100, whichever is greater; or
(ii) is greater than the amount required to be disclosed.
(2) One percent tolerance. In a refinancing of a residential
mortgage transaction with a new creditor (other than a transaction
covered by Sec. 226.32), if there is no new advance and no
consolidation of existing loans, the finance charge and other
disclosures affected by the finance charge (such as the amount financed
and the annual percentage rate) shall be considered accurate for
purposes of this section if the disclosed finance charge:
(i) is understated by no more than 1 percent of the face amount of
the note or $100, whichever is greater; or
(ii) is greater than the amount required to be disclosed.[rsqbb]
[lsqbb](h)[rsqbb][rtrif](g)[ltrif] Special rules for foreclosures.
[lsqbb](1) Right to rescind.[rsqbb] After the initiation of foreclosure
on the consumer's principal dwelling that secures the credit
obligation, the
[[Page 58704]]
consumer shall have the right to rescind the transaction if:
[lsqbb](i)[rsqbb][rtrif](1)[ltrif] A mortgage broker fee that
should have been included in the [finance charge][rtrif] interest and
settlement charges[ltrif] was not included; or
[lsqbb](ii)[rsqbb][rtrif](2)[ltrif] The creditor did not provide
the properly completed appropriate model form in appendix H of this
part, or a substantially similar notice of rescission.
[lsqbb](2) Tolerances for disclosures. After the initiation of
foreclosure on the consumer's principal dwelling that secures the
credit obligation, the finance charge and other disclosures affected by
the finance charge (such as the amount financed and the annual
percentage rate) shall be considered accurate for purposes of this
section if the disclosed finance charge:
(i) Is understated by no more than $35; or
(ii) Is greater than the amount required to be disclosed.[rsqbb]
17. Section 226.24 is amended by revising paragraph (f)(3)(i) to
read as follows:
Sec. 226.24 Advertising.
* * * * *
(f) * * *
(3) Disclosure of payments--(i) In general. [lsqbb]In addition to
the requirements of paragraph (c) of this section, if[rsqbb]
[rtrif]If[ltrif] an advertisement for credit secured by a dwelling
states the amount of any payment, the advertisement shall disclose in a
clear and conspicuous manner:
* * * * *
Subpart E--Special Rules for Certain Home Mortgage Transactions
18. Section 226.31 is amended by revising paragraphs (b),
(c)(1)(iii), (c)(2), and (d)(2) to read as follows:
Sec. 226.31 General rules.
* * * * *
(b) Form of disclosures. The creditor shall make the disclosures
required by this subpart clearly and conspicuously in writing, in a
form that the consumer may keep. The disclosures required by this
subpart may be provided to the consumer in electronic form, subject to
compliance with the consumer consent and other applicable provisions of
the Electronic Signatures in Global and National Commerce Act (E-Sign
Act) (15 U.S.C. 7001 et seq.). [rtrif]The disclosures required by Sec.
226.33(b) may be provided to the consumer in electronic form without
regard to the consumer consent or other provisions of the E-Sign Act in
the circumstances set forth in that section.[ltrif]
(c) * * *
(1) * * *
(iii) Consumer's waiver of waiting period before consummation.
[lsqbb]The consumer may, after receiving the disclosures required by
paragraph (c)(1) of this section, modify or waive the three-day waiting
period between delivery of those disclosures and consummation, if the
consumer determines that the extension of credit is
needed[rsqbb][rtrif]The consumer may modify or waive the three-day
waiting period between when the consumer receives the disclosures
required by paragraph (c)(1) of this section and consummation, after
receiving those disclosures, if the consumer determines that the loan
proceeds are needed before the waiting period ends[ltrif] to meet a
bona fide personal financial emergency. To modify or waive the right,
[lsqbb]the consumer[rsqbb][rtrif]each consumer primarily liable on the
legal obligation[ltrif] shall give the creditor a dated written
statement that describes the emergency, specifically modifies or waives
the waiting period, and bears the [rtrif]consumer's[ltrif]
signature[lsqbb]of all the consumers entitled to the waiting
period[rsqbb]. Printed forms for this purpose are prohibited[lsqbb],
except when creditors are permitted to use printed forms pursuant to
Sec. 226.23(e)(2)[rsqbb].
(2) Disclosures for reverse mortgages. The creditor shall furnish
the disclosures required by Sec. 226.33 [rtrif]as specified in
paragraph (d) of that section[ltrif][lsqbb]at least three business days
prior to:
(i) Consummation of a closed-end credit transaction; or
(ii) The first transaction under an open-end credit plan[rsqbb].
* * * * *
(d) * * *
(2) Estimates. [rtrif]Except as otherwise required by Sec.
226.19(a)(2), i[ltrif] [lsqbb]I[rsqbb]f any information necessary for
an accurate disclosure is unknown to the creditor, the creditor shall
make the disclosure based on the best information reasonably available
at the time the disclosure is provided, and shall state clearly that
the disclosure is an estimate.
* * * * *
19. Section 226.32 is amended by revising paragraphs (a)(2)(ii) and
(b)(1)(i) to read as follows:
Sec. 226.32 Requirements for certain closed-end home mortgages.
(a) * * *
(2) * * *
(ii) A [rtrif]nonrecourse[ltrif] reverse mortgage
[lsqbb]transaction[rsqbb] subject to Sec. 226.33.
* * * * *
(b) * * *
(1) * * *
(i) All items [lsqbb]required to be disclosed under[rsqbb]
[rtrif]included in the finance charge pursuant to[ltrif] Sec.
226.4[lsqbb](a) and 226.4(b)[rsqbb], except[rtrif]--
(A)[ltrif] Interest or the time-price differential; [rtrif]and
(B) For purposes of this paragraph (b)(1)(i), Sec. 226.4(g) does
not apply;[ltrif]
* * * * *
20. Section 226.33 is revised to read as follows:
Sec. 226.33 Requirements for reverse mortgages.
(a) Definition. For purposes of this subpart, reverse mortgage
[lsqbb]transaction[rsqbb] means a [lsqbb]nonrecourse[rsqbb] consumer
credit obligation in which:
(1) A mortgage, deed of trust, or equivalent consensual security
interest securing one or more advances is created in the consumer's
principal dwelling; and
(2) Any principal, interest, or shared appreciation or equity is
due and payable (other than in the case of default) only after:
(i) The consumer dies;
(ii) The dwelling is transferred; or
(iii) The consumer ceases to occupy the dwelling as a principal
dwelling.
[rtrif](b) Reverse mortgage document provided on or with the
application. (1) In general. Except as provided in paragraph (b)(2) of
this section, the reverse mortgage document ``Key Questions to Ask
about Reverse Mortgage Loans'' published by the Board, or a
substantially similar document, shall be provided prominently on or
with an application form at the time the application form is provided
to the consumer or before the consumer pays a nonrefundable fee (except
a bona fide and reasonable fee imposed by a counselor or a counseling
agency for reverse mortgage counseling required by applicable law),
whichever is earlier.
(2) Application made by telephone or through an intermediary. If
the creditor receives the consumer's application through an
intermediary agent or broker or by telephone, the creditor satisfies
the requirements of paragraph (b)(1) of this section if the creditor
delivers the document or places it in the mail not later than three
business days after the creditor receives the consumer's application;
or before consummation or account opening, whichever is earlier.
(3) Electronic disclosure. For an application that is accessed by
the consumer in electronic form, the document required by paragraph
(b)(1) of this section must be provided in a timely manner and may be
provided to
[[Page 58705]]
the consumer in electronic form on or with the application.
(4) Duties of third parties. Persons other than the creditor who
provide applications to consumers for open-end reverse mortgages must
comply with paragraphs (b)(1) and (b)(3) of this section, except that
these third parties are not required to deliver or mail the document
required by paragraph (b)(1) of this section for telephone applications
as discussed in paragraph (b)(2) of this section.[ltrif]
[lsqbb](b)[rsqbb][rtrif](c)[ltrif] Content of disclosures
[rtrif]for reverse mortgages[ltrif]. In addition to other disclosures
required by this part, in a reverse mortgage [lsqbb]transaction[rsqbb]
the creditor shall provide the following disclosures in a form
substantially similar to [lsqbb]the model form[rsqbb] [rtrif]Forms K-1,
K-2, or K-3[ltrif] found in [lsqbb]paragraph (d) of[rsqbb] appendix K
of this part:
(1) Notice. A statement that the consumer is not obligated to
complete the reverse mortgage [lsqbb]transaction[rsqbb] merely because
the consumer has received the disclosures required by this section or
has signed an application for a reverse mortgage loan. [rtrif]If the
creditor provides space for the consumer's signature, a statement that
a signature by the consumer only confirms receipt of the disclosure
statement.[ltrif]
(2) [rtrif]Identification information. (i) The identity of the
creditor.
(ii) The date the disclosure was prepared.
(iii) The loan originator's unique identifier, as defined by
Sections 1503(3) and (12) of the Secure and Fair Enforcement for
Mortgage Licensing Act of 2008, 12 U.S.C. 5102(3) and
(12).[ltrif][lsqbb]Total annual loan cost rates. A good-faith
projection of the total cost of the credit, determined in accordance
with paragraph (c) of this section and expressed as a table of ``total
annual loan cost rates,'' using that term, in accordance with appendix
K of this part.[rsqbb]
(3) Itemization of pertinent information. [lsqbb]An itemization of
loan terms, charges, the age of the youngest borrower[rsqbb] [rtrif]The
name, address, account number, and age of each borrower[ltrif], and the
appraised property value.
(4) [rtrif]Information about the reverse mortgage. (i) A statement
that the consumer has applied for a reverse mortgage secured by his
dwelling that does not have to be repaid while the consumer remains in
the home.
(ii) A description of the types of payments which the consumer may
receive, such as an initial advance, a monthly or other periodic
advance, or through discretionary cash advances in which the consumer
controls the timing of advances, if more than one type of payment is
available.
(iii) A statement that the consumer will retain title to the home
and must pay any property charges such as taxes and insurance and must
maintain the property.
(iv) As applicable, a statement that the consumer will have access
to the loan funds and will continue to receive payments even if the
loan's principal balance exceeds the value of the home, provided that
the consumer remains in the home.
(v) A description of the events that may cause the reverse mortgage
to become due and payable, and a statement that the consumer must repay
the loan, including interest and fees, once such an event
occurs.[ltrif][lsqbb]Explanation of table. An explanation of the table
of total annual loan cost rates as provided in the model form found in
paragraph (d) of appendix K of this part.[rsqbb]
[rtrif](5) Payment of loan funds. (i) An itemization of the types
of payments the creditor will make to the consumer including, as
applicable:
(A) The amount of any initial advance at consummation or for a
HELOC, after the consumer becomes obligated on the plan, and a
statement that the funds will be paid to the consumer after the
consumer accepts the reverse mortgage, labeled ``Initial Advance''.
(B) The amount of any monthly or other regular periodic payment of
funds to the consumer and a statement that the funds will be paid each
month (or other applicable period) while the consumer remains in the
home, labeled ``Monthly Advance'' (or other applicable period).
(C) Any amount made available to the consumer as discretionary cash
advances, the timing of which the consumer controls, and a statement
that the funds will be available to the consumer at any time while the
consumer remains in the home, labeled ``Line of Credit.''
(ii) If the consumer may choose the types of payments by which to
receive loan funds, and the consumer has not selected a payment option
at the time the disclosures are provided, the creditor shall disclose
the amount the consumer may receive in the following manner:
(A) As the maximum amount the consumer could receive under
paragraph (c)(5)(i)(C) of this section along with a statement that the
consumer may also choose to take some or all of the funds in an initial
advance or periodic payment as described in paragraphs (c)(5)(i)(A) or
(c)(5)(i)(B) of this section, if applicable.
(B) If the creditor does not provide the consumer with the option
to receive funds in the manner described in paragraph (c)(5)(i)(C) of
this section, as the maximum amount the consumer may receive as an
initial advance under paragraph (c)(5)(i)(A) of this section along with
a statement that the consumer may choose to take some or all of the
funds in the form of a periodic payment as described in paragraph
(c)(5)(i)(B) of this section, if applicable.
(iii) A statement that the consumer may change the types of
payments received, if applicable.
(6) Annual percentage rate. (i) Open-end annual percentage rate.
For an open-end reverse mortgage, each periodic interest rate
applicable to the transaction that may be used to compute the finance
charge on an outstanding balance, expressed as an annual percentage
rate (as determined by Sec. 226.14(b)). The annual percentage rates
disclosed pursuant to this paragraph shall be in at least 16-point
type, except for the following: Any minimum or maximum annual
percentage rates that may apply; and any rate changes set forth in the
initial agreement that would not generally apply after the expiration
of an introductory rate, such as the loss of an employee preferred rate
when an employee ceases employment.
(A) Disclosures for variable-rate plans. (1) If a rate disclosed
under paragraph (c)(6)(i) of this section is a variable rate, the
following disclosures, as applicable:
(i) The fact that the annual percentage rate may change due to the
variable-rate feature, using the term ``variable rate'' in underlined
text as shown in the applicable tables found in Samples K-4, or K-5 in
Appendix K of this part.
(ii) An explanation of how the annual percentage rate will be
determined. Except as provided in paragraph (c)(6)(i)(A)(1)(vi) of this
section, in providing this disclosure, a creditor must only identify
the type of index used and the amount of any margin.
(iii) The frequency of changes in the annual percentage rate.
(iv) Any rules relating to changes in the index value and the
annual percentage rate.
(v) A statement of any limitations on changes in the annual
percentage rate, including the minimum and maximum annual percentage
rate that may be imposed. If no annual or other periodic limitations
apply to changes in the annual percentage rate, a statement that no
annual limitation exists.
(vi) The lowest and highest value of the index and margin in the
past 15 years.
[[Page 58706]]
(2) A variable rate is accurate if it is a rate as of a specified
date and the rate was in effect within the last 30 days before the
disclosures are provided.
(B) Introductory initial rate. If the initial rate is an
introductory rate, the creditor must disclose the rate that would
otherwise apply pursuant to paragraph (c)(6)(i) of this section. Where
the rate is fixed, the creditor must disclose the rate that will apply
after the introductory rate expires. Where the rate is variable, the
creditor must disclose the rate based on the applicable index or
formula. A creditor must disclose in the table described in paragraph
(d)(4) of this section the introductory rate along with the rate that
would otherwise apply to the plan, and use the term ``introductory'' or
``intro'' in immediate proximity to the introductory rate. The creditor
must also disclose the time period during which the introductory rate
will remain in effect.
(ii) Closed-end annual percentage rate. (A) The ``annual percentage
rate,'' using that term (as determined by Sec. 226.22), and the
following description: ``overall cost of this loan including interest
and settlement charges.''
(B) Rate type. (1) If the annual percentage rate may increase after
consummation, a statement that the rate is an ``adjustable rate'' using
that term.
(2) If the interest rate will change after consummation, and the
rates and periods in which they will apply are known, a statement that
the rate is a ``step rate'' using that term.
(3) If the rate is not an adjustable rate or a step rate, a
statement that the rate is a ``fixed rate'' using that term.
(C) Rate calculation and rate change limits. If the annual
percentage rate may increase after consummation:
(1) A statement labeled ``Rate Calculation'' that described the
method used to calculate the interest rate and the frequency of
interest rate adjustments. If the interest rate that applies at
consummation is not based on the index and margin that will be used to
make later interest rate adjustments, the statement must include the
time period when the initial interest rate expires.
(2) Any limitations on the increase in the interest rate together
with a statement of the maximum rate that may apply, labeled ``Rate
Change Limits.''
(3) The lowest and highest value of the index and margin in the
past 15 years.
(iii) Statement about interest accrual. A statement that interest
charges will be added to the loan balance each month (or other
applicable period) and collected when the loan is due.
(7) Fees and transaction requirements. (i) Fees imposed by the
creditor and third parties to consummate the transaction or open the
plan. (A) The total of all one-time fees imposed by the creditor and
any third parties to open the plan or consummate the transaction,
stated as a dollar amount. If the exact total of one-time fees for
account opening is not known at the time the open-end early disclosures
required by paragraph (d)(1) of this section are delivered or mailed, a
creditor must provide the highest total of one-time account opening
fees possible for the plan terms with a indication that the one-time
account opening costs may be ``up to'' that amount.
(B) An itemization of all one-time fees imposed by the creditor and
any third parties to open the plan or consummate the transaction,
stated as a dollar amount, and when such fees are payable. If the
dollar amount of an itemized fee is not known at the time the
disclosures under paragraph (d)(1) of this section are delivered or
mailed, a creditor must provide a range for such fee.
(C) A creditor shall not disclose the amount of any property
insurance premiums under this paragraph, even if the creditor requires
property insurance.
(ii) Fees imposed by the creditor for availability of the reverse
mortgage. (A) Any monthly or other periodic fees that may be imposed by
the creditor for the availability of the reverse mortgage, including
any fee based on account activity or inactivity; how frequently the fee
will be imposed; and the annualized amount of the fee. A creditor must
not disclose the amount of any property insurance premiums under this
paragraph, even if the creditor requires property insurance.
(B) All costs and charges to the consumer that may be imposed by
the creditor on a regular periodic basis as part of the reverse
mortgage, such as a servicing fee or mortgage-insurance premium.
(C) The label ``Monthly Interest Charges'' along with:
(1) For a closed-end reverse mortgage, the interest rate applicable
to the loan and, if the rate is variable, a statement that the rate can
change.
(2) For an open-end reverse mortgage, the annual percentage rate
applicable to the plan and, if the rate is variable, a statement that
the rate can change.
(iii) Fees imposed by the creditor for early termination of the
reverse mortgage. Any fee that may be imposed by the creditor if a
consumer terminates the reverse mortgage, or prepays the obligation in
full, prior to its scheduled maturity.
(iv) Statement about other fees. (A) For the early open-end
disclosure required by paragraph (d)(1) of this section, a statement
that other fees may apply, if applicable. As applicable, 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 described in paragraph (d)(4)(i) of this section, a reference to
the location of the information.
(B) For the open-end account-opening disclosures required by
paragraph (d)(2) of this section and the closed-end disclosures
required by paragraph (d)(3) of this section, a statement that other
fees may apply and that information about other fees is included in the
disclosures or agreement, as applicable.
(v) Transaction requirements. 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 draw requirements.
(8) Loan balance growth. (i) Itemization. An itemization of the
loan balance expressed as a dollar amount. The creditor shall base the
itemization on:
(A) The initial interest rate in effect at the time the disclosures
are provided.
(B) The assumption that the consumer does not make any repayments
during the term of the reverse mortgage.
(C) The payment type(s) selected by the consumer as disclosed in
paragraph (c)(5) of this section. If the consumer has elected to
receive an initial advance, a periodic payment, or some combination of
the two which accounts for fifty percent or more of the principal loan
amount available to the consumer, the creditor shall assume that the
consumer takes no further advances. In all other cases, including where
the consumer has not selected a payment type, the creditor shall assume
that the entire principal loan amount is advanced at closing or, in the
case of an open-end credit transaction, at the time the consumer
becomes obligated on the plan.
(D) If the creditor is entitled by contract to any shared
appreciation or shared equity, the assumption that the dwelling's value
increases by 4 percent per year. In all other cases, the assumption
that the dwelling's value does not change.
(E) If the creditor and consumer have not agreed on whether any
closing or account-opening and other transaction costs will be financed
by the creditor or paid by the consumer, the assumption
[[Page 58707]]
that all such costs will be financed by the creditor.
(ii) Content. The itemization shall contain only the following
information for each of the assumed loan periods of one year, five
years, and ten years:
(A) The sum of all advances to and for the benefit of the consumer,
including payments that the consumer will receive from an annuity that
the consumer purchases along with the reverse mortgage;
(B) The sum of all costs and charges owed by the consumer,
including the costs of any annuity the consumer purchases along with
the reverse mortgage; and
(C) The total amount the consumer would be required to repay,
including any shared appreciation or equity in the dwelling that the
creditor is entitled by contract to receive and any limitations on the
consumer's liability (such as nonrecourse limits and equity-
conservation agreements).
(iii) Explanation. An explanation of the table required by
paragraph (c)(8)(v) of this section including:
(A) A statement that the table is based on payment type(s) selected
by the consumer as disclosed in paragraph (c)(5) of this section and,
if applicable, a statement that the disclosure assumes no further
advances are taken.
(B) For a reverse mortgage under an open-end credit plan, the
annual percentage rate in effect at the time the disclosures are
provided and a statement that the table is based on the assumption that
the annual percentage rate does not change.
(C) For a closed-end reverse mortgage, the interest rate in effect
at the time the disclosures are provided and a statement that the table
is based on the assumption that the interest rate does not change.
(iv) Shared appreciation disclosure. If the creditor is entitled by
contract to any shared appreciation or equity, a statement under the
heading, ``Shared Appreciation'' or ``Shared Equity,'' that the reverse
mortgage includes such an agreement and a description that this means
the lender will be entitled to a specified percent of any gain the
consumer makes when the consumer sells or refinances the home. The
creditor must also disclose a numeric example of the amount of shared
appreciation or equity the creditor would be entitled to based on a
hypothetical $100,000 appreciation in the home's value.
(v) Format. The information in paragraph (c)(8)(ii) shall be in the
form of a table with headings, content and format substantially similar
to Forms K-1, K-2, or K-3 in Appendix K to this part. That table shall
contain only the information required in paragraph (c)(8)(iii). The
information in paragraph (c)(8)(iv) shall be in the form of a table
with headings, content and format substantially similar to Model Clause
K-7 in Appendix K to this part.
(9) Statements about repayment options. (i) A statement that once
the loan becomes due and payable the consumer or the consumer's heirs
may pay the loan balance in full and keep the home, or sell the home
and use the proceeds to pay off the loan.
(ii) For a nonrecourse transaction a statement that:
(A) If the home sells for less than the consumer owes, the consumer
will not be required to pay the difference.
(B) If the home sells for more than the consumer owes, the
difference will be provided to the consumer or the consumer's heirs. If
the reverse mortgage includes a shared equity or shared appreciation
feature, a statement that the creditor will deduct any shared
appreciation or equity before paying the remaining funds to the
consumer or consumer's heirs.
(iii) For a transaction that allows recourse against the borrower,
a statement that the consumer or the consumer's estate will be required
to repay the entire amount of the loan, even if the home sells for less
than the consumer owes.
(10) Statements about risks. (i) A statement that the reverse
mortgage will be secured by the consumer's home.
(ii) As applicable, a statement that the creditor may:
(A) Foreclose on the home and require that the consumer leave the
home;
(B) Stop making periodic payments to the consumer;
(C) Prohibit additional extensions of credit or reduce the credit
limit, if applicable;
(D) Terminate the reverse mortgage and require payment of the
outstanding balance in full in a single payment and impose fees upon
termination; and
(E) Implement changes in the reverse mortgage.
(iii) A statement of the following conditions under which the
creditor may take the actions in paragraph (c)(10)(ii) of this section,
including as applicable:
(A) The consumer's failure to maintain the collateral.
(B) The consumer's ceasing to use the dwelling as the consumer's
principal residence and a statement of any residency time period that
will be used to determine whether the dwelling is the consumer's
principal residence (such as if the consumer does not reside in the
dwelling for 12 consecutive months).
(C) The consumer's failure to pay property taxes or maintain
homeowner's insurance.
(D) The consumer's failure to meet any other obligations.
(11) Additional information and Web site. A statement that if the
consumer does not understand any disclosure required by this section
the consumer should ask questions; a statement that the consumer may
obtain additional information at the Web site of the Federal Reserve
Board; and a reference to that Web site.
(12) Additional early disclosures for open-end reverse mortgages.
The following disclosures must be provided with the disclosures
required by paragraph (d)(1) of this section:
(i) Refund of fees under Sec. 226.5b(e). 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
disclosures given pursuant to this paragraph (d) of this section that
he does not want to open the plan.
(ii) Refund of fees under Sec. 226.40(b). 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
counseling required by Sec. 226.40(b) that he does not want to open
the plan.
(iii) Changes to disclosed terms. 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.
(iv) Statement about refundability of fees. (A) Identification of
any disclosed term that is subject to change prior to opening the plan.
(B) 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
(C) A cross reference to the ``Fees'' section in the table
described in paragraph (d)(4)(i) of this section.
(13) Additional disclosures before the first transaction under an
open-end reverse mortgage. The following disclosures must be provided
with the disclosures required by paragraph (d)(2) of this section:
(i) Transaction charges. Any transaction charge imposed by the
creditor for use of the reverse mortgage.
(ii) Fees for failure to comply with transaction limitations. Any
fee imposed by the creditor for a consumer's failure to comply with:
[[Page 58708]]
(A) Any limitations on the number of extensions of credit or the
amount of credit that may be obtained during any time period.
(B) Any minimum draw requirements.
(iii) Billing error rights reference. A statement that information
about consumers' right to dispute transactions is included in the
account-opening disclosures.
(iv) Statement about confirming terms. A statement that the
consumer should confirm that the terms in the disclosure statement are
the same terms for which the consumer applied.
(14) Additional disclosures for closed-end reverse mortgages. The
following disclosures must be provided with the disclosures required by
paragraph (d)(3) of this section, grouped together under the subheading
``Total Payments,'' using that term:
(i) Total payments. The total payments amount, calculated based on
the number and amount of scheduled payments in accordance with the
requirements of Sec. 226.18(g), together with a statement that the
total payments is calculated on the assumption that market rates do not
change, if applicable, and a statement of the estimated loan term.
(ii) Interest and settlement charges. The interest and settlement
charges, using that term, calculated as the finance charge in
accordance with the requirements of Sec. 226.4 and expressed as a
dollar figure, together with a brief statement that the interest and
settlement charges amount represents part of the total payments amount.
The disclosed interest and settlement charges, and other disclosures
affected by the disclosed interest and settlement charges (including
the amount financed and annual percentage rate), shall be treated as
accurate if the amount disclosed as the interest and settlement
charges--
(A) Is understated by no more than $100;
(B) Is greater than the amount required to be disclosed.
(iii) Amount financed. The amount financed, using that term and
expressed as a dollar figure, together with a brief statement that the
interest and settlement charges and the amount financed are used to
calculate the annual percentage rate.
(15) Disclosures provided outside the table. The following
disclosures must be provided outside the table required by paragraph
(d)(4) of this section:
(i) For closed-end reverse mortgages, the disclosures required by
Sec. 226.38(j), as applicable.
(ii) For open-end reverse mortgages, the information required by
Sec. 226.6(a)(3), (a)(4), and (a)(5), as applicable.
(16) Assumptions for closed-End disclosures. In a closed-end
reverse mortgage, the creditor must apply the following rules, as
applicable, in making the disclosures required by paragraph (c)(14) of
this section. The creditor's use of these rules does not, by itself,
make the disclosures estimates:
(i) If the reverse mortgage has a specified period for
disbursements but repayment is due only upon the occurrence of a future
event such as the death of the consumer, the creditor must assume that
disbursements will be made until they are scheduled to end. The
creditor must assume repayment will occur when disbursements end or
within a period following the final disbursement which is not longer
than the regular interval between disbursements.
This assumption should be used even though repayment may occur
before or after the disbursements are scheduled to end.
(ii) If the reverse mortgage has neither a specified period for
disbursements nor a specified repayment date and these terms will be
determined solely by reference to future events including the
consumer's death, the creditor may assume that the disbursements will
end upon the consumer's death (which may be estimated by using
actuarial tables, for example) and that repayment will be required at
the same time (or within a period following the date of the final
disbursement which is not longer than the regular interval for
disbursements). Alternatively, the creditor may base the disclosures
upon another future event it estimates will be most likely to occur
first. If terms will be determined by reference to future events which
do not include the consumer's death, the creditor must base the
disclosures upon the occurrence of the event estimated to be most
likely to occur first.
(iii) In making the disclosures, the creditor must assume that all
disbursements and accrued interest will be paid by the consumer. For
example, if the note has a nonrecourse provision providing that the
consumer is not obligated for an amount greater than the value of the
house, the creditor must nonetheless assume that the full amount to be
disbursed will be repaid.[ltrif]
[lsqbb](c) Projected total cost of credit. The projected total cost
of credit shall reflect the following factors, as applicable:
(1) Costs to consumer. All costs and charges to the consumer,
including the costs of any annuity the consumer purchases as part of
the reverse mortgage transaction.
(2) Payments to consumer. All advances to and for the benefit of
the consumer, including annuity payments that the consumer will receive
from an annuity that the consumer purchases as part of the reverse
mortgage transaction.
(3) Additional creditor compensation. Any shared appreciation or
equity in the dwelling that the creditor is entitled by contract to
receive.
(4) Limitations on consumer liability. Any limitation on the
consumer's liability (such as nonrecourse limits and equity
conservation agreements).
(5) Assumed annual appreciation rates. Each of the following
assumed annual appreciation rates for the dwelling:
(i) 0 percent.
(ii) 4 percent.
(iii) 8 percent.
(6) Assumed loan period. (i) Each of the following assumed loan
periods, as provided in appendix L of this part:
(A) Two years.
(B) The actuarial life expectancy of the consumer to become
obligated on the reverse mortgage transaction (as of that consumer's
most recent birthday). In the case of multiple consumers, the period
shall be the actuarial life expectancy of the youngest consumer (as of
that consumer's most recent birthday).
(C) The actuarial life expectancy specified by paragraph
(c)(6)(i)(B) of this section, multiplied by a factor of 1.4 and rounded
to the nearest full year.
(ii) At the creditor's option, the actuarial life expectancy
specified by paragraph (c)(6)(i)(B) of this section, multiplied by a
factor of .5 and rounded to the nearest full year.[rsqbb]
[rtrif](d) Special disclosure requirements for reverse mortgages.
(1) Timing of early open-end reverse mortgage disclosures. In a reverse
mortgage structured as an open-end credit plan, the creditor shall
deliver or mail the disclosures required under paragraph (c) of this
section, as applicable, not later than--
(i) Three business days following receipt of a consumer's
application by the creditor; or
(ii) Three business days before the first transaction under the
plan, if earlier.
(2) Timing of open-end reverse mortgage account-opening
disclosures. In a reverse mortgage structured as an open-end credit
plan, at least three business days before the first transaction under
the plan a creditor must provide the disclosures specified in paragraph
(c) of this section, as applicable.
(3) Timing of closed-end reverse mortgage disclosures. In a closed-
end reverse mortgage, the creditor shall
[[Page 58709]]
make the disclosures required by paragraph (c) of this section, as
applicable, in accordance with the rules in Sec. 226.19(a).
(4) Form of disclosures; tabular format. (i) The disclosures
required by paragraphs (c)(3) through (c)(10), (c)(12)(i), (c)(12)(ii),
(c)(12)(iii), (c)(13)(i), (c)(13)(ii), and (c)(14) of this section
generally shall be in the form of a table with headings, content, and
format substantially similar to any of the applicable tables found in
K-1, K-2, or K-3 in Appendix K to this part.
(ii) The table described in paragraph (d)(4)(i) of this section
shall contain only the information required or permitted by paragraphs
(c)(3) through (c)(10), (c)(12)(i), (c)(12)(ii), (c)(12)(iii),
(c)(13)(i), (c)(13)(ii), and (c)(14).
(iii) Disclosures required by paragraph (c)(2) of this section must
be placed directly above the table described in paragraph (d)(4)(i) of
this section, in a format substantially similar to any of the
applicable tables found in K-1, K-2, or K-3 in Appendix K to this part.
(iv) The disclosures required by paragraphs (c)(1), (c)(11),
(c)(12), (c)(12)(iv), (c)(13)(iii), and (c)(13)(iv) of this section
must be disclosed directly below the table described in paragraph
(d)(4)(i) of this section, in a format substantially similar to any of
the applicable tables found in K-1, K-2, or K-3 in Appendix K to this
part.
(v) Other information may be presented with the table described in
paragraph (d)(4)(i) of this section, provided that such information
appears outside of the required table.
(vi) The following disclosures must be disclosed in bold text:
(A) Disclosures required by paragraphs (c)(1), (c)(6)(iii),
(c)(8)(ii)(C), (c)(11), (c)(12)(iv)(A), and (c)(12)(iv)(B) of this
section.
(B) Any dollar amount required to be disclosed under paragraph
(c)(5)(i) of this section.
(C) Any annual percentage rates required to be disclosed under
paragraph (c)(6) of this section. For closed-end reverse mortgages, the
annual percentage rate must be more conspicuous than the other required
disclosures and in at least 16 point font.
(D) Total account opening fees required to be disclosed under
paragraph (c)(7)(i) of this section.
(E) Any percentage or dollar amount required to be disclosed under
paragraphs (c)(7)(ii), (c)(7)(iii), (c)(7)(v), (c)(13)(i), and
(c)(13)(ii) of this section except the annualized amount of any
periodic fee disclosed pursuant to paragraph (c)(7)(ii) of this
section.
(5) Disclosures based on a percentage. Except for disclosing fees
under paragraph (c)(7)(i) of this section, if the amount of any fee
required to be disclosed under paragraph (c) of this section or the
amount of any transaction requirement required to be disclosed under
paragraph (c)(7)(v) of this section is determined on the basis of a
percentage of another amount, the percentage used and the amount
against which the percentage is applied may be disclosed instead of the
amount of the fee or transaction amount, as applicable.
(e) Reverse mortgage advertising.
(1) Scope. The requirements of paragraph (e) of this section apply
to any advertisement for a reverse mortgage, including promotional
materials accompanying applications.
(2) Clear and conspicuous standard. Disclosures required by
paragraph (e) of this section shall be made clearly and conspicuously.
(3) Need to repay loan. If an advertisement states that a reverse
mortgage is a ``government benefit'' or otherwise is aid provided by
any Federal, state, or local government entity, each such statement
shall be accompanied by an equally prominent and closely proximate
statement of the fact that a reverse mortgage is a loan that must be
repaid.
(4) Events that end loan term. If an advertisement states that a
reverse mortgage provides payments ``for life'' or that a consumer need
not repay a reverse mortgage ``during your lifetime'' or otherwise
states that a reverse mortgage will continue throughout a consumer's
lifetime, each such statement shall be accompanied by an equally
prominent and closely proximate statement that a reverse mortgage will
end sooner in certain circumstances, including, as applicable, if the
consumer--
(A) Sells the dwelling; or
(B) Lives somewhere other than the dwelling for a longer period
than allowed by the loan agreement.
(5) Risk of foreclosure. If an advertisement states that a consumer
``cannot lose'', or that there is ``no risk'' to, a consumer's dwelling
with a reverse mortgage or otherwise states that foreclosure cannot
occur with a reverse mortgage, each such statement shall be accompanied
by an equally prominent and closely proximate statement that
foreclosure may occur in some circumstances, including, as applicable,
if the consumer--
(A) Lives somewhere other than the dwelling longer than allowed by
the loan agreement; or
(B) Does not pay property taxes or insurance premiums.
(6) Amount owed. If an advertisement states that with a reverse
mortgage a consumer or a consumer's heirs or estate ``cannot owe'' or
will ``never repay'' an amount greater than, or otherwise states that
repayment is limited to, the value of the consumer's dwelling, each
such statement shall be accompanied by an equally prominent and closely
proximate statement of the fact that--
(A) To retain the dwelling when the reverse mortgage becomes due,
the consumer or the consumer's heirs or estate must pay the entire loan
balance; and
(B) The balance may be greater than the value of the consumer's
dwelling.
(7) Payments for taxes and insurance. If an advertisement states
that payments are not required for a reverse mortgage, each such
statement shall be accompanied by an equally prominent and closely
proximate statement of the fact that a consumer must pay taxes and
insurance premiums, if applicable.
(8) Government fee limitation. If an advertisement states that a
Federal, state, or local government limits or regulates fees or other
costs for a reverse mortgage, each such statement shall be accompanied
by an equally prominent and closely proximate statement of the fact
that costs may vary among creditors and loan types and that less
expensive options may be available.
(9) Eligibility for government programs. If an advertisement states
that a reverse mortgage does not affect a consumer's benefits from or
eligibility for a Federal, state, or local government program, each
such statement shall be accompanied by an equally prominent and closely
proximate statement of the fact that a reverse mortgage may affect
benefits from or eligibility for some government programs such as
Supplemental Security Income and Medicaid.
(10) Credit counseling information. If an advertisement for a
reverse mortgage contains a reference to housing or credit counseling,
the advertisement shall disclose a telephone number and Internet Web
site for housing counseling resources maintained by the U.S. Department
of Housing and Urban Development that is at least as conspicuous as any
such reference in the advertisement.[ltrif]
* * * * *
21. Section 226.35 is amended by revising paragraphs (a)(1) and
(a)(2) to read as follows:
Sec. 226.35 Prohibited acts or practices in connection with higher-
priced mortgage loans.
(a) Higher-priced mortgage loans--(1) For purposes of this section,
a higher-priced mortgage loan is a consumer credit transaction secured
by the
[[Page 58710]]
consumer's principal dwelling with [rtrif]a transaction coverage
rate[ltrif] [lsqbb]an annual percentage rate[rsqbb] that exceeds the
average prime offer rate for a comparable transaction as of the date
the interest rate is set by 1.5 or more percentage points for loans
secured by a first lien on a dwelling, or by 3.5 or more percentage
points for loans secured by a subordinate lien on a dwelling.
(2) [rtrif]Definitions. (i) ``Transaction coverage rate'' means the
rate used to determine whether a transaction is a higher-priced
mortgage loan subject to this section. The transaction coverage rate is
determined in accordance with the applicable rules of this part for the
calculation of the annual percentage rate for a closed-end transaction,
except that the prepaid finance charge for purposes of calculating the
transaction coverage rate includes only prepaid finance charges that
will be retained by the creditor, its affiliate, or a mortgage broker.
(ii)[ltrif] ``Average prime offer rate'' means an annual percentage
rate that is derived from average interest rates, points, and other
loan pricing terms currently offered to consumers by a representative
sample of creditors for mortgage transactions that have low-risk
pricing characteristics. The Board publishes average prime offer rates
for a broad range of types of transactions in a table updated at least
weekly as well as the methodology the Board uses to derive these rates.
* * * * *
22. Section 226.38, as proposed to be added on August 26, 2009 (74
FR 43232), is further amended by revising the introductory text and
paragraph (h), and by adding paragraph (k) to read as follows:
[rtrif]Sec. 226.38 Content of disclosures for closed-end mortgages.
In connection with a closed-end transaction secured by real
property or a dwelling, the creditor shall disclose the following
information, [rtrif]or comply with the following requirements, as
applicable[ltrif]:
* * * * *
(h) [lsqbb]Credit[rsqbb] [rtrif]Required or voluntary credit[ltrif]
insurance, [lsqbb]and[rsqbb] debt cancellation [rtrif]coverage, or
[ltrif] [lsqbb]and[rsqbb] debt suspension coverage. [rtrif]The
disclosures and requirements of Sec. 226.4(d)(1)(i) through
(d)(1)(iii) and (d)(3)(i) through (d)(3)(iii), as applicable if the
creditor offers optional or required credit insurance, debt
cancellation coverage, or debt suspension coverage that is identified
in Sec. 226.4(b)(7) or (b)(10). For required credit insurance, debt
cancellation coverage, or debt suspension coverage that is identified
in Sec. 226.4(b)(7) or (b)(10), the creditor shall provide the
disclosures required in Sec. 226.4(d)(1)(i) and (d)(3)(i), as
applicable, except for Sec. 226.4(d)(1)(i)(A) and (B).[ltrif]
[lsqbb]The disclosures specified in paragraphs (h)(1)-(10) of this
section, which shall be grouped together and substantially similar in
headings, content and format to Model Clauses H-17(A) and H-17(C) in
Appendix H to this part.
(1)(i) If the product is optional, the term ``OPTIONAL COSTS,'' in
capitalized and bold letters, along with the name of the program, in
bold letters; or
(ii) If the product is required, the name of the program, in bold
letters.
(2) If the product is optional, the term ``STOP,'' in capitalized
and bold letters, along with a statement that the consumer does not
have to buy the product to get the loan. The term ``not'' shall be in
bold text and underlined.
(3) A statement that if the consumer already has insurance, then
the policy or coverage may not provide the consumer with additional
benefits.
(4) A statement that other types of insurance may give the consumer
similar benefits and are often less expensive.
(5) (i) If the eligibility restrictions are limited to age and/or
employment, a statement that based on the creditor's review of the
consumer's age and/or employment status at this time, the consumer
would be eligible to receive benefits.
(ii) If there are other eligibility restrictions in addition to age
and/or employment, a statement that based on the creditor's review of
the consumer's age and/or employment status at this time, the consumer
may be eligible to receive benefits.
(6) If there are other eligibility restrictions in addition to age
and/or employment, such as pre-existing health conditions, a statement
that the consumer may not qualify to receive any benefits because of
other eligibility restrictions.
(7) If the product is a debt suspension agreement, a statement that
the obligation to pay loan principal and interest is only suspended,
and that interest will continue to accrue during the period of
suspension.
(8) A statement that the consumer may obtain additional information
about the product at the Web site of the Federal Reserve Board, and
reference to that Web site.
(9)(i) If the product is optional, a statement of the consumer's
request to purchase or enroll in the optional product and a statement
of the cost of the product expressed as a dollar amount per month or
per year, as applicable, together with the loan amount and the term of
the product in years; or
(ii) If the product is required, a statement that the product is
required, along with a statement of the cost of the product expressed
as a dollar amount per month or per year, as applicable, together with
the loan amount and the term of the product in years.
(iii) The cost, month or year, loan amount, and term of the product
shall be underlined.
(10) A designation for the signature of the consumer and the date
of the signing.[rsqbb]
* * * * *
[rtrif](k) Reverse mortgages. Reverse mortgages under Sec.
226.33(a) that are structured as closed-end credit are subject to the
requirements in Sec. 226.33(c) and (d), not the requirements in Sec.
226.38(a) through (i).[ltrif]
23. A new Sec. 226.40 is added to Subpart E to read as follows:
[rtrif]Sec. 226.40 Prohibited acts or practices in connection with
reverse mortgages.
(a) Requiring the purchase of other financial or insurance
products. Neither a creditor nor a loan originator, as defined in Sec.
226.36(a)(1), may require a consumer to purchase any financial or
insurance product as a condition of obtaining a reverse mortgage
subject to Sec. 226.33.
(1) Financial or insurance products. For purposes of this Sec.
226.40(a), the term ``financial or insurance product'' does not
include--
(i) A transaction account or savings deposit, as defined in
Regulation D, 12 CFR part 204, that is established to disburse proceeds
of the reverse mortgage; and
(ii) Any product or service customarily required to protect the
creditor's interest in the collateral or otherwise mitigate the
creditor's risk of loss.
(2) Safe harbor. A creditor or loan originator is deemed to have
complied with this Sec. 226.40(a) if:
(i) The consumer receives the document required by Sec. 226.33(b),
or a substantially similar document, on or with the application; and
(ii) For a reverse mortgage subject to Sec. 226.5b, the account is
opened, or, for any other reverse mortgage, the loan is consummated, at
least 10 calendar days before the consumer becomes obligated to
purchase any other financial or insurance product from--
(A) The creditor;
(B) The loan originator;
(C) An affiliate of either the creditor or loan originator; or
[[Page 58711]]
(D) Any other party, if the creditor, loan originator, or an
affiliate of either will receive compensation for the purchase.
(b) Counseling. (1) Counseling required. Neither a creditor nor any
other person may originate a reverse mortgage subject to Sec. 226.33
before the consumer has obtained counseling from a counselor or
counseling agency that meets the counselor qualification standards
established by the Secretary of the U.S. Department of Housing and
Urban Development pursuant to 12 U.S.C. 1715z-20(f), or substantially
similar qualification standards.
(2) Nonrefundable fees prohibited. (i) Neither a creditor nor any
other person may impose a nonrefundable fee in connection with a
reverse mortgage subject to Sec. 226.33 until three business days
after the consumer, as defined in paragraph (b)(7) of this section, has
obtained the counseling required in paragraph (b)(1) of this section.
(ii) A bona fide and reasonable charge for counseling required
under paragraph (b)(1) of this section imposed by a counselor or
counseling agency meeting the counselor qualifications described in
paragraph (b)(1) of this section is not a ``fee'' for purposes of
paragraph (b)(2)(i) of this section.
(3) Content of counseling. The counseling required under paragraph
(b)(1) of this section must include information regarding reverse
mortgages and their suitability to the consumer's financial needs and
circumstances.
(4) Timing of counseling. For each reverse mortgage subject to
Sec. 226.33, the counseling required under paragraph (b)(1) of this
section must be completed no earlier than 180 days prior to the
creditor's receipt of the consumer's application for the reverse
mortgage.
(5) Type of counseling. The counseling required under paragraph
(b)(1) of this section must occur face-to-face or by telephone.
(6) Independence of counselor. (i) Counselor compensation. Neither
a creditor nor any other person involved in originating a reverse
mortgage subject to Sec. 226.33 may compensate a counselor or
counseling agency for providing counseling required under paragraph
(b)(1) of this section in relation to a particular reverse mortgage
transaction.
(ii) Steering. Neither a creditor nor any other person involved in
originating a reverse mortgage subject to Sec. 226.33 may steer or
otherwise direct a consumer to choose a particular counselor or
counseling agency for the counseling required under paragraph (b)(1) of
this section. A creditor or other person involved in originating a
reverse mortgage is deemed to have complied with this Sec.
226.40(b)(6)(ii) if the creditor or other person provides to the
consumer a list of at least five counselors or counseling agencies
meeting the requirements specified in paragraph (b)(1) of this section.
(7) Definition of ``consumer.'' Except for purposes of paragraph
(b)(2) of this section, the term ``consumer'' in paragraph (b) of this
section includes all persons who, at the time of origination of a
reverse mortgage subject to Sec. 226.33, will be shown as owners on
the property deed of the dwelling that will secure the applicable
reverse mortgage. For purposes of this Sec. 226.40(b)(2), the term
``consumer'' includes only persons who will be obligors on the
applicable reverse mortgage.[ltrif]
24. A new Sec. 226.41 is added to Subpart E to read as follows:
[rtrif]Sec. 226.41 Servicer's response to borrower's request for
information.
Upon receipt of a written request from the consumer for the
identity of or the contact information for the current owner of the
debt obligation and/or the current master servicer of the debt
obligation, the current servicer of the debt obligation shall provide
to the consumer, within a reasonable time and to the best of its
knowledge, the name, address, and telephone number of the owner of the
debt obligation and the master servicer of the debt obligation. For
purposes of this section, the term ``servicer'' has the same meaning as
in Sec. 226.36(c)(3).[ltrif]
25. Appendix G to Part 226 is amended by:
A. Removing the entry for G-5, adding entries for G-5(A), G-5(B),
and G-5(C), revising the entries for G-16(A) and G-16(B), and adding
entries for G-16(C) and G-16(D) in the table of contents at the
beginning of the appendix;
B. Removing G-5 and removing and reserving G-6, G-7, G-8, and G-9;
C. Removing G-16(A) and G-16(B); and
D. Adding new Model Forms G-5(A) and G-16(A), and new Samples G-
5(B), G-5(C), G-16(B), G-16(C), and G-16(D) in numerical order.
Appendix G to Part 226--Open-End Model Forms and Clauses
* * * * *
G-5[rtrif](A)[ltrif] Rescission Model Form [lsqbb](When Opening an
Account)[rsqbb] (Sec. 226.15)
[rtrif]G-5(B) Rescission Sample (When Opening an Account) (Sec.
226.15)
G-5(C) Rescission Sample (When Increasing the Credit Limit) (Sec.
226.15)[ltrif]
G-6 [rtrif]Reserved.[ltrif][lsqbb]Rescission Model Form (For Each
Transaction) (Sec. 226.15)[rsqbb]
G-7 [rtrif]Reserved.[ltrif][lsqbb]Rescission Model Form (When
Increasing the Credit Limit) (Sec. 226.15)[rsqbb]
G-8 [rtrif]Reserved.[ltrif][lsqbb]Rescission Model Form (When Adding
a Security Interest) (Sec. 226.15)[rsqbb]
G-9 [rtrif]Reserved.[ltrif][lsqbb]Rescission Model Form (When
Increasing the Security) (Sec. 226.15)[rsqbb]
* * * * *
[lsqbb]G-16(A) Debt Suspension Model Clause (Sec. 226.4(d)(3))
G-16(B) Debt Suspension Sample (Sec. 226.4(d)(3))[rsqbb]
[rtrif]G-16(A) Credit Insurance, Debt Cancellation Coverage, or Debt
Suspension Coverage Model Form (Sec. 226.4(d)(1) and (d)(3))
G-16(B) Credit Life Insurance Sample (Sec. 226.4(d)(1))
G-16(C) Disability Debt Cancellation Coverage Sample (Sec.
226.4(d)(1) and (d)(3))
G-16(D) Unemployment Debt Suspension Coverage Sample (Sec.
226.4(d)(1) and (d)(3))[ltrif]
* * * * *
BILLING CODE P
G-5 [rtrif](A)[ltrif] Rescission Model Form [(When Opening an Account)]
[rtrif]
[[Page 58712]]
[GRAPHIC] [TIFF OMITTED] TP24SE10.003
G-5(B) Rescission Sample (When Opening an Account)
[[Page 58713]]
[GRAPHIC] [TIFF OMITTED] TP24SE10.004
G-5(C) Rescission Sample (When Increasing the Credit Limit)
[[Page 58714]]
[GRAPHIC] [TIFF OMITTED] TP24SE10.005
[ltrif]G-6--[Rescission Model Form (For Each
Transaction)][rtrif]Reserved.[ltrif]
G-7--[Rescission Model Form (When Increasing the Credit Limit)]
[rtrif]Reserved.[ltrif]
G-8--[Rescission Model Form (When Adding a Security Interest)]
[rtrif]Reserved.[ltrif]
G-9--[Rescission Model Form (When Increasing the Security)]
[rtrif]Reserved.[ltrif]
* * * * *
[G-16(A) Debt Suspension Model Clause
Please enroll me in the optional [insert name of program], and
bill my account the fee of [how cost is determined]. I understand
that enrollment is not required to obtain credit. I also understand
that depending on the event, the protection may only temporarily
suspend my duty to make minimum payments, not reduce the balance I
owe. I understand that my balance will actually grow during the
suspension period as interest continues to accumulate.
[To Enroll, Sign Here]/[To Enroll, Initial Here]. X------------
G-16(B) Debt Suspension Sample
Please enroll me in the optional [name of program], and bill my
account the fee of $.83 per $100 of my month-end account balance. I
understand that enrollment is not required to obtain credit. I also
understand that depending on the event, the protection may only
temporarily suspend my duty to make minimum payments, not reduce the
balance I owe. I understand that my balance will actually grow
during the suspension period as interest continues to accumulate.
To Enroll, Initial Here. X------------[rsqbb]
[rtrif]G-16(A) Credit Insurance, Debt Cancellation Coverage, or Debt
Suspension Coverage Model Form
[[Page 58715]]
[GRAPHIC] [TIFF OMITTED] TP24SE10.006
G-16(B) Credit Life Insurance Sample
[GRAPHIC] [TIFF OMITTED] TP24SE10.007
G-16(C) Disability Debt Cancellation Coverage Sample
[[Page 58716]]
[GRAPHIC] [TIFF OMITTED] TP24SE10.008
G-16(D) Unemployment Debt Suspension Coverage Sample (Sec. 226.4(d)(1)
and (d)(3))
[GRAPHIC] [TIFF OMITTED] TP24SE10.009
[[Page 58717]]
* * * * *
26. Appendix H to Part 226 is amended by:
A. Removing the entry for H-(8) and adding entries for H-8(A),
and H-8(B), revising the entry for H-9, H-17(A), and H-17(B), and
adding entries for H-17(C) and H-17(D) in the table of contents at
the beginning of the appendix;
B. Removing H-8, H-17(A), and H-17(B); and
C. Adding new Model Forms H-8(A), H-9, and H-17(A), and new
Samples H-8(B), H-17(B), H-17(C), and H-17(D) in numerical order.
Appendix H to Part 226--Closed-End Model Forms and Clauses
* * * * *
H-8[rtrif](A)[ltrif] Rescission Model Form (General) (Sec. 226.23)
[rtrif]H-8(B) Rescission Sample (General) (Sec. 226.23)[ltrif]
H-9 Rescission Model Form [lsqbb](Refinancing with Original
Creditor)[rsqbb][rtrif](New Advance of Money with the Same
Creditor)[ltrif] (Sec. 226.23)
* * * * *
[lsqbb]H-17(A) Debt Suspension Model Clause
H-17(B) Debt Suspension Sample[rsqbb]
[rtrif]H-17(A) Credit Insurance, Debt Cancellation Coverage, or Debt
Suspension Coverage Model Form (Sec. 226.4(d)(1) and (d)(3))
H-17(B) Credit Life Insurance Sample (Sec. 226.4(d)(1))
H-17(C) Disability Debt Cancellation Coverage Sample (Sec.
226.4(d)(1) and (d)(3))
H-17(D) Unemployment Debt Suspension Coverage Sample (Sec.
226.4(d)(1) and (d)(3))[ltrif]
* * * * *
H-8 [rtrif](A)[ltrif] Rescission Model Form (General)[rtrif]
[GRAPHIC] [TIFF OMITTED] TP24SE10.010
H-8(B) Rescission Sample (General)
[[Page 58718]]
[GRAPHIC] [TIFF OMITTED] TP24SE10.011
[ltrif]H-9 Rescission Model Form [(Refinancing With Original
Creditor)][rtrif](New Advance of Money with the Same Creditor)
[[Page 58719]]
[GRAPHIC] [TIFF OMITTED] TP24SE10.012
[ltrif]* * * * *
[H-17(A) Debt Suspension Model Clause
Please enroll me in the optional [insert name of program], and bill
my account the fee of [insert charge for the initial term of coverage].
I understand that enrollment is not required to obtain credit. I also
understand that depending on the event, the protection may only
temporarily suspend my duty to make minimum payments, not reduce the
balance I owe. I understand that my balance will actually grow during
the suspension period as interest continues to accumulate.
[To Enroll, Sign Here]/[To Enroll, Initial Here]. X------------
H-17(B) Debt Suspension Sample
Please enroll me in the optional [name of program], and bill my
account the fee of $200. I understand that enrollment is not required
to obtain credit. I also understand that depending on the event, the
protection may only temporarily suspend my duty to make minimum
payments, not reduce the balance I owe. I understand that my balance
will actually grow during the suspension period as interest continues
to accumulate.
To Enroll, Initial Here. X------------[rsqbb]
[rtrif]H-17(A) Credit Insurance, Debt Cancellation Coverage, or Debt
Suspension Coverage Model Form
[[Page 58720]]
[GRAPHIC] [TIFF OMITTED] TP24SE10.013
H-17(B) Credit Life Insurance Sample
[GRAPHIC] [TIFF OMITTED] TP24SE10.014
H-17(C) Disability Debt Cancellation Coverage Sample
[[Page 58721]]
[GRAPHIC] [TIFF OMITTED] TP24SE10.015
H-17(D) Unemployment Debt Suspension Coverage Sample
[GRAPHIC] [TIFF OMITTED] TP24SE10.016
[ltrif]
[[Page 58722]]
* * * * *
27. Appendix K is revised to read as follows:
Appendix K to Part 226--[Total Annual Loan Cost Rate Computations for]
Reverse Mortgage [Transactions] Model Forms and Clauses
[rtrif]K-1 Open-End Reverse Mortgage Early Disclosure Model Form
(Sec. 226.33(d)(1))
K-2 Open-End Reverse Mortgage Account-Opening Disclosure Model Form
(Sec. 226.33(d)(2))
K-3 Closed-End Reverse Mortgage Model Form (Sec. 226.33(d)(3))
K-4 Open-End Reverse Mortgage Early Disclosure Sample (Sec.
226.33(d)(1))
K-5 Open-End Reverse Mortgage Account-Opening Disclosure Sample
(Sec. 226.33(d)(2))
K-6 Closed-End Reverse Mortgage Sample (Sec. 226.33(d)(3))
K-7 Shared Appreciation Model Clause (Sec. 226.33(c)(8)(iv))
[[Page 58723]]
[rtrif]K-1 Open-End Reverse Mortgage Early Disclosure Model Form
[GRAPHIC] [TIFF OMITTED] TP24SE10.017
[[Page 58724]]
[GRAPHIC] [TIFF OMITTED] TP24SE10.018
[[Page 58725]]
[GRAPHIC] [TIFF OMITTED] TP24SE10.019
[[Page 58726]]
K-2 Open-End Reverse Mortgage Account-Opening Disclosure Model Form
[GRAPHIC] [TIFF OMITTED] TP24SE10.020
[[Page 58727]]
[GRAPHIC] [TIFF OMITTED] TP24SE10.021
[[Page 58728]]
[GRAPHIC] [TIFF OMITTED] TP24SE10.022
[[Page 58729]]
K-3 Closed-End Reverse Mortgage Model Form
[GRAPHIC] [TIFF OMITTED] TP24SE10.023
[[Page 58730]]
[GRAPHIC] [TIFF OMITTED] TP24SE10.024
[[Page 58731]]
[GRAPHIC] [TIFF OMITTED] TP24SE10.025
K-4 Open-End Reverse Mortgage Early Disclosure Sample
[[Page 58732]]
[GRAPHIC] [TIFF OMITTED] TP24SE10.026
[[Page 58733]]
[GRAPHIC] [TIFF OMITTED] TP24SE10.027
[[Page 58734]]
[GRAPHIC] [TIFF OMITTED] TP24SE10.028
[[Page 58735]]
K-5 Open-End Reverse Mortgage Account-Opening Disclosure Sample
[GRAPHIC] [TIFF OMITTED] TP24SE10.029
[[Page 58736]]
[GRAPHIC] [TIFF OMITTED] TP24SE10.030
[[Page 58737]]
[GRAPHIC] [TIFF OMITTED] TP24SE10.031
[[Page 58738]]
K-6 Closed-End Reverse Mortgage Sample
[GRAPHIC] [TIFF OMITTED] TP24SE10.032
[[Page 58739]]
[GRAPHIC] [TIFF OMITTED] TP24SE10.033
[[Page 58740]]
[GRAPHIC] [TIFF OMITTED] TP24SE10.034
K-7 Shared Appreciation Model Clause
[GRAPHIC] [TIFF OMITTED] TP24SE10.035
BILLING CODE C
[lsqbb](a) Introduction. Creditors are required to disclose a
series of total annual loan cost rates for each reverse mortgage
transaction. This appendix contains the equations creditors must use
in computing the total annual loan cost rate for various
transactions, as well as instructions, explanations, and examples
for various transactions. This appendix is modeled after appendix J
of this part (Annual Percentage Rates Computations for Closed-End
Credit Transactions); creditors should consult appendix J of this
part for additional guidance in using the formulas for reverse
mortgages.
(b) Instructions and equations for the total annual loan cost
rate--(1) General rule. The total annual loan cost rate shall be the
nominal total annual loan cost rate determined by multiplying the
unit-period rate by the number of unit-periods in a year.
(2) Term of the transaction. For purposes of total annual loan
cost disclosures, the term of a reverse mortgage transaction is
assumed to begin on the first of the month in which consummation is
expected to occur. If a loan cost or any portion of a loan cost is
initially incurred beginning on a date later than consummation, the
term of the transaction is assumed to begin on the first of the
month in which that loan cost is incurred. For purposes of total
annual loan cost disclosures, the term ends on each of the assumed
loan periods specified in Sec. 226.33(c)(6).
(3) Definitions of time intervals.
(i) A period is the interval of time between advances.
(ii) A common period is any period that occurs more than once in
a transaction.
(iii) A standard interval of time is a day, week, semimonth,
month, or a multiple of a week or a month up to, but not exceeding,
1 year.
(iv) All months shall be considered to have an equal number of
days.
[[Page 58741]]
(4) Unit-period. (i) In all transactions other than single-
advance, single-payment transactions, the unit-period shall be that
common period, not to exceed one year, that occurs most frequently
in the transaction, except that:
(A) If two or more common periods occur with equal frequency,
the smaller of such common periods shall be the unit-period; or
(B) If there is no common period in the transaction, the unit-
period shall be that period which is the average of all periods
rounded to the nearest whole standard interval of time. If the
average is equally near two standard intervals of time, the lower
shall be the unit-period.
(ii) In a single-advance, single-payment transaction, the unit-
period shall be the term of the transaction, but shall not exceed
one year.
(5) Number of unit-periods between two given dates. (i) The
number of days between two dates shall be the number of 24-hour
intervals between any point in time on the first date to the same
point in time on the second date.
(ii) If the unit-period is a month, the number of full unit-
periods between two dates shall be the number of months. If the
unit-period is a month, the number of unit-periods per year shall be
12.
(iii) If the unit-period is a semimonth or a multiple of a month
not exceeding 11 months, the number of days between two dates shall
be 30 times the number of full months. The number of full unit-
periods shall be determined by dividing the number of days by 15 in
the case of a semimonthly unit-period or by the appropriate multiple
of 30 in the case of a multimonthly unit-period. If the unit-period
is a semimonth, the number of unit-periods per year shall be 24. If
the number of unit-periods is a multiple of a month, the number of
unit-periods per year shall be 12 divided by the number of months
per unit-period.
(iv) If the unit-period is a day, a week, or a multiple of a
week, the number of full unit-periods shall be determined by
dividing the number of days between the two given dates by the
number of days per unit-period. If the unit-period is a day, the
number of unit-periods per year shall be 365. If the unit-period is
a week or a multiple of a week, the number of unit-periods per year
shall be 52 divided by the number of weeks per unit-period.
(v) If the unit-period is a year, the number of full unit-
periods between two dates shall be the number of full years (each
equal to 12 months).
(6) Symbols. The symbols used to express the terms of a
transaction in the equation set forth in paragraph (b)(8) of this
appendix are defined as follows:
Aj=The amount of each periodic or lump-sum advance to the
consumer under the reverse mortgage transaction.
i=Percentage rate of the total annual loan cost per unit-period,
expressed as a decimal equivalent.
j=The number of unit-periods until the jth advance.
n=The number of unit-periods between consummation and repayment of
the debt.
Pn=Min (Baln, Valn). This is
the maximum amount that the creditor can be repaid at the specified
loan term.
Baln=Loan balance at time of repayment, including all
costs and fees incurred by the consumer (including any shared
appreciation or shared equity amount) compounded to time n at the
creditor's contract rate of interest.
Valn=Val0(1 + [sigma])\y\, where
Val0 is the property value at consummation, [sigma] is
the assumed annual rate of appreciation for the dwelling, and y is
the number of years in the assumed term. Valn must be
reduced by the amount of any equity reserved for the consumer by
agreement between the parties, or by 7 percent (or the amount or
percentage specified in the credit agreement), if the amount
required to be repaid is limited to the net proceeds of sale.
[sigma] = The summation operator.
[GRAPHIC] [TIFF OMITTED] TP24SE10.036
Symbols used in the examples shown in this appendix are defined
as follows:
w=The number of unit-periods per year.
I=wix100=the nominal total annual loan cost rate.
(7) General equation. The total annual loan cost rate for a
reverse mortgage transaction must be determined by first solving the
following formula, which sets forth the relationship between the
advances to the consumer and the amount owed to the creditor under
the terms of the reverse mortgage agreement for the loan cost rate
per unit-period (the loan cost rate per unit-period is then
multiplied by the number of unit-periods per year to obtain the
total annual loan cost rate I; that is, I = wi):
[GRAPHIC] [TIFF OMITTED] TP24SE10.037
(8) Solution of general equation by iteration process. (i) The
general equation in paragraph (b)(7) of this appendix, when applied
to a simple transaction for a reverse mortgage loan of equal monthly
advances of $350 each, and with a total amount owed of $14,313.08 at
an assumed repayment period of two years, takes the special form:
[GRAPHIC] [TIFF OMITTED] TP24SE10.038
Using the iteration procedures found in steps 1 through 4 of
(b)(9)(i) of appendix J of this part, the total annual loan cost
rate, correct to two decimals, is 48.53%.
(ii) In using these iteration procedures, it is expected that
calculators or computers will be programmed to carry all available
decimals throughout the calculation and that enough iterations will
be performed to make virtually certain that the total annual loan
cost rate obtained, when rounded to two decimals, is correct. Total
annual loan cost rates in the examples below were obtained by using
a 10-digit programmable calculator and the iteration procedure
described in appendix J of this part.
(9) Assumption for discretionary cash advances. If the consumer
controls the timing of advances made after consummation (such as in
a credit line arrangement), the creditor must use the general
formula in paragraph (b)(7) of this appendix. The total annual loan
cost rate shall be based on the assumption that 50 percent of the
principal loan amount is advanced at closing, or in the case of an
open-end transaction, at the time the consumer becomes obligated
under the plan. Creditors shall assume the advances are made at the
interest rate then in effect and that no further advances are made
to, or repayments made by, the consumer during the term of the
transaction or plan.
(10) Assumption for variable-rate reverse mortgages. If the
interest rate for a reverse mortgage transaction may increase during
the loan term and the amount or timing is not known at consummation,
creditors shall base the disclosures on the initial interest rate in
effect at the time the disclosures are provided.
(11) Assumption for closing costs. In calculating the total
annual loan cost rate, creditors shall assume all closing and other
consumer costs are financed by the creditor.
(c) Examples of total annual loan cost rate computations--(1)
Lump-sum advance at consummation.
Lump-sum advance to consumer at consummation: $30,000
Total of consumer's loan costs financed at consummation: $4,500
Contract interest rate: 11.60%
Estimated time of repayment (based on life expectancy of a consumer
at age 78): 10 years
Appraised value of dwelling at consummation: $100,000
Assumed annual dwelling appreciation rate: 4%
[GRAPHIC] [TIFF OMITTED] TP24SE10.039
[[Page 58742]]
P10= Min (103,385.84, 137,662.72)
i = .1317069438
Total annual loan cost rate (100(.1317069438 x 1)) = 13.17%
(2) Monthly advance beginning at consummation.
Monthly advance to consumer, beginning at consummation: $492.51
Total of consumer's loan costs financed at consummation: $4,500
Contract interest rate: 9.00%
Estimated time of repayment (based on life expectancy of a consumer
at age 78): 10 years
Appraised value of dwelling at consummation: $100,000
[GRAPHIC] [TIFF OMITTED] TP24SE10.040
Assumed annual dwelling appreciation rate: 8%
Total annual loan cost rate (100(.009061140 x 12))=10.87%
(3) Lump sum advance at consummation and monthly advances
thereafter.
Lump sum advance to consumer at consummation: $10,000
Monthly advance to consumer, beginning at consummation: $725
Total of consumer's loan costs financed at consummation: $4,500
Contract rate of interest: 8.5%
Estimated time of repayment (based on life expectancy of a consumer
at age 75): 12 years
Appraised value of dwelling at consummation: $100,000
[GRAPHIC] [TIFF OMITTED] TP24SE10.041
Assumed annual dwelling appreciation rate: 8%
Total annual loan cost rate (100(.007708844 x 12)) = 9.25%
(d) Reverse mortgage model form and sample form --(1) Model
form.
Total Annual Loan Cost Rate
Loan Terms
Age of youngest borrower:
Appraised property value:
Interest rate:
Monthly advance:
Initial draw:
Line of credit:
Initial Loan Charges
Closing costs:
Mortgage insurance premium:
Annuity cost:
Monthly Loan Charges
Servicing fee:
Other Charges
Mortgage insurance:
Shared Appreciation:
Repayment Limits
----------------------------------------------------------------------------------------------------------------
Total annual loan cost rate
-----------------------------------------------------------------------
Assumed annual appreciation [ ]-year loan [ ]-year loan [ ]-year loan
2-year loan term term] term term
----------------------------------------------------------------------------------------------------------------
0%...................................... ................ [ ] ................ ................
4%...................................... ................ [ ] ................ ................
8%...................................... ................ [ ] ................ ................
----------------------------------------------------------------------------------------------------------------
The cost of any reverse mortgage loan depends on how long you
keep the loan and how much your house appreciates in value.
Generally, the longer you keep a reverse mortgage, the lower the
total annual loan cost rate will be.
This table shows the estimated cost of your reverse mortgage
loan, expressed as an annual rate. It illustrates the cost for three
[four] loan terms: 2 years, [half of life expectancy for someone
your age,] that life expectancy, and 1.4 times that life expectancy.
The table also shows the cost of the loan, assuming the value of
your home appreciates at three different rates: 0%, 4% and 8%.
The total annual loan cost rates in this table are based on the
total charges associated with this loan. These charges typically
include principal, interest, closing costs, mortgage insurance
premiums, annuity costs, and servicing costs (but not costs when you
sell the home).
The rates in this table are estimates. Your actual cost may
differ if, for example, the amount of your loan advances varies or
the interest rate on your mortgage changes.
Signing an Application or Receiving These Disclosures Does Not Require
You To Complete This Loan
(2) Sample Form.
Total Annual Loan Cost Rate
Loan Terms
Age of youngest borrower: 75
Appraised property value: $100,000
Interest rate: 9%
Monthly advance: $301.80
Initial draw: $1,000
Line of credit: $4,000
Initial Loan Charges
Closing costs: $5,000
Mortgage insurance premium: None
Annuity cost: None
Monthly Loan Charges
Servicing fee: None
[[Page 58743]]
Other Charges
Mortgage insurance: None
Shared Appreciation: None
Repayment Limits
Net proceeds estimated at 93% of projected home sale
----------------------------------------------------------------------------------------------------------------
Total annual loan cost rate
-----------------------------------------------------------------------
Assumed annual appreciation 2-year loan term [6-year loan 12-year loan 17-year loan
(percent) term] (percent) term (percent) term (percent)
----------------------------------------------------------------------------------------------------------------
0%...................................... 39.00 [14.94] 9.86 3.87
4%...................................... 39.00 [14.94] 11.03 10.14
8%...................................... 39.00 [14.94] 11.03 10.20
----------------------------------------------------------------------------------------------------------------
The cost of any reverse mortgage loan depends on how long you
keep the loan and how much your house appreciates in value.
Generally, the longer you keep a reverse mortgage, the lower the
total annual loan cost rate will be.
This table shows the estimated cost of your reverse mortgage
loan, expressed as an annual rate. It illustrates the cost for three
[four] loan terms: 2 years, [half of life expectancy for someone
your age,] that life expectancy, and 1.4 times that life expectancy.
The table also shows the cost of the loan, assuming the value of
your home appreciates at three different rates: 0%,4% and 8%.
The total annual loan cost rates in this table are based on the
total charges associated with this loan. These charges typically
include principal, interest, closing costs, mortgage insurance
premiums, annuity costs, and servicing costs (but not disposition
costs--costs when you sell the home).
The rates in this table are estimates. Your actual cost may
differ if, for example, the amount of your loan advances varies or
the interest rate on your mortgage changes.
Signing an Application or Receiving These Disclosures Does Not
Require You To Complete This Loan]
Appendix L to Part 226--[rtrif][Reserved][ltrif]
28. Appendix L is removed and reserved.
29. In Supplement I to Part 226, as proposed to be amended on
August 26, 2009 (74 FR 43232, 74 FR 43428) is further amended by:
A. Under Section 226.1--Authority, Purpose, Coverage, Organization,
Enforcement and Liability, 1(d) Organization, Paragraph 1(d)(5),
paragraph 1 is revised.
B. Under Section 226.2--Definitions and Rules of Construction, 2(a)
Definitions:
i. 2(a)(6) Business day, paragraph 2 is revised;
ii. 2(a)(11) Consumer, paragraphs 1 and 3 are revised, and
paragraph 4 is added;
iii. 2(a)(25) Security interest, paragraph 6 is revised.
C. Under Section 226.3--Exempt Transactions, 3(a) Business,
commercial, agricultural, or organizational credit, paragraph 8 is
revised.
D. Under Section 226.4--Finance Charge:
i. 4(a) Definition, 4(a)(1) Charges by third parties, paragraph 2
is removed;
ii. 4(d) Insurance and debt cancellation and debt suspension
coverage and 4(d)(3) Voluntary debt cancellation or suspension fees are
revised.
E. Under Section 226.5--General Disclosure Requirements:
i. 5(a) Form of disclosures, 5(a)(1) General, paragraphs 1 and 3
are revised;
ii. 5(b) Time of disclosures, 5(b)(1) Account-opening disclosures,
5(b)(1)(ii) Charges imposed as part of an open-end (not home-secured)
plan, the heading and paragraph 1 are revised.
F. Under Section 226.5b--Requirements for Home-Equity Plans:
i. 5b(c) Content of Disclosures, Paragraph 5b(c)(9)(ii), paragraph
6 is removed, and Paragraph 5b(c)(9)(iii), paragraph 3 is removed;
ii. 5b(d) Refund of fees is revised;
iii. 5b(e) Imposition of nonrefundable fees is revised.
G. Under Section 226.6--Account-Opening Disclosures, 6(a) Rules
affecting home-equity plans, paragraph 3 is added.
H. Under Section 226.9--Subsequent Disclosure Requirements, 9(c)
Change in terms, 9(c)(1) Rules affecting home-equity plans, 9(c)(1)(ii)
Charges not covered by Sec. 226.6(a)(1) and (a)(2) is revised, and
9(c)(1)(iii) Disclosure requirements, 9(c)(1)(iii)(A) Changes to terms
described in account-opening table, paragraphs 2 and 6 are revised.
I. Under Section 226.15--Right of Rescission:
i. Paragraph 1 is revised;
ii. 15(a) Consumer's right to rescind, Paragraph 15(a)(1) is
revised;
iii. 15(a) Consumer's right to rescind, Paragraph 15(a)(2), the
heading is revised; new heading 15(a)(2)(i) Provision of written
notification is added and paragraph 1 is revised; and 15(a)(2)(ii)
Party the consumer shall notify, 15(a)(2)(ii)(B) After the three-
business day period following the transaction, paragraph 1 is added;
iv. 15(a) Consumer's right to rescind, Paragraph 15(a)(3) is
revised;
v. 15(a) Consumer's right to rescind, Paragraph 15(a)(4) is
revised;
vi. 15(a) Consumer's right to rescind, Paragraph 15(a)(5) is added;
vii. 15(b) Notice of right to rescind is revised;
viii. 15(c) Delay of creditor's performance is revised;
ix. 15(d) Effects of rescission is revised;
x. 15(e) Consumer's waiver of right to rescind is revised.
J. Under Section 226.16--Advertising, 16(d) Additional requirements
for home-equity plans, paragraph 5 is revised, and paragraphs 10, 11,
and 12 are added.
K. Under Section 226.17--General Disclosure Requirements:
i. 17(c) Basis of disclosures and use of estimates, Paragraph
17(c)(1), paragraph 14 is removed;
ii. 17(d) Multiple creditors; multiple consumers, paragraph 2 is
revised;
iii. 17(f) Early disclosures, Paragraph 17(f)(2), paragraph 1 is
revised.
L. Under Section 226.18--Content of Disclosures, 18(k) Prepayment,
Paragraph 18(k)(1), paragraph 1 is revised.
M. Under Section 226.19--Certain Mortgage and Variable-Rate
Transactions:
i. The heading is revised and paragraph 1 is added;
ii. 19(a) Mortgage transactions is added;
iii. 19(a)(1)(i) Time of disclosure through 19(a)(5)(iii)
Redisclosure for timeshare plans are revised;
iv. 19(b) Certain variable-rate transactions, the heading is
revised and paragraph 1 is revised.
N. Under Section 226.20--Subsequent Disclosure Requirements:
i. 20(a) Refinancings is redesignated 20(a)(2), Refinancings by the
same creditor--Non-mortgage credit, and revised.
ii. 20(a) Modifications to terms by the same creditor, 20(a)(1)
Mortgages is added;
[[Page 58744]]
iii. 20(a) Modifications to terms by the same creditor, 20(a)(3)
Unearned finance charge is added;
iv. 20(c) Rate adjustments, paragraphs 1 and 2 are revised,
paragraph 3 is republished, and paragraph 4 is added;
v. 20(c)(1) Timing of disclosures, Paragraph 20(c)(2)(ii),
Paragraph 20(c)(2)(iv), Paragraph 20(c)(2)(vi), Paragraph
20(c)(2)(vii), Paragraph 20(c)(3)(iii) and Paragraph 20(c)(3)(v) are
republished.
O. Under Section 226.22--Determination of the Annual Percentage
Rate, 22(a) Accuracy of the annual percentage rate:
i. Paragraph 22(a)(1) is revised;
ii. Paragraph 22(a)(2), the heading and paragraph 1 are revised;
iii. Paragraph 22(a)(3), the heading and paragraph 1 are revised;
iv. Paragraph 22(a)(4) Mortgage loans is revised.
v. Paragraph 22(a)(5) is revised.
P. Under Section 226.23--Right of Rescission:
i. 23(a) Consumer's right to rescind is revised;
ii. 23(b) Notice of the right to rescind is revised;
iii. 23(c) Delay of creditor's performance is revised;
iv. 23(d) Effects of rescission is revised;
v. 23(e) Consumer's waiver of right to rescind is revised;
vi. 23(f) Exempt transactions is revised;
vii. 23(g) Tolerances for accuracy is removed;
viii. 23(h) Special rules for foreclosures is redesignated as 23(g)
Special rules for foreclosures and revised.
Q. Under Section 226.31--General Rules:
i. 31(c) Timing of disclosure, 31(c)(1) Disclosures for certain
closed-end home mortgages, Paragraph 31(c)(1)(iii) is revised and
31(c)(2) Disclosures for reverse mortgages is removed;
iii. 31(d) Basis of disclosures and use of estimates, paragraph 2
is added.
R. Under Section 32--Requirements for Certain Closed-End Home
Mortgages:
i. 32(a) Coverage, Paragraph 32(a)(1)(ii), paragraph 1 is revised;
ii. Paragraph 32(a)(2)(ii) is added;
iii. 32(b) Definitions, new heading Paragraph 32(b)(1) is added;
iv. 32(b) Definitions, Paragraph 32(b)(1)(i), Paragraph
32(b)(1)(ii), Paragraph 32(b)(1)(iii), and Paragraph 32(b)(1)(iv) are
revised.
S. Section 226.33--Requirements for Reverse Mortgages is revised.
T. Under Section 226.34--Prohibited Acts or Practices in Connection
with Credit Subject to Sec. 226.32, 34(a) Prohibited acts or practices
for loans subject to Sec. 226.32, 34(a)(4) Repayment ability,
paragraph 4 is removed and reserved, and 34(a)(4)(iv) Exclusions from
presumption of compliance, paragraph 3 is added.
U. Under Section 226.35--Prohibited Acts or Practices in Connection
With Higher-Priced Mortgage Loans:
i. 35(a) Higher-priced mortgage loans, Paragraph 35(a)(2), the
heading is revised;
ii. 35(a) Higher-priced mortgage loans, Paragraph 35(a)(2),
Paragraph 35(a)(2)(i) is revised;
iii. 35(a) Higher-priced mortgage loans, Paragraph 35(a)(2), new
heading 35(a)(2)(ii) is added;
iv. 35(a) Higher-priced mortgage loans, Paragraph 35(a)(3) is
added;
v. 35(b) Rules for higher-priced mortgage loans, paragraph 1 is
revised.
V. Under Section 226.38--Content of Disclosures for Closed-End
Mortgages:
i. 38(a) Loan summary, 38(a)(5) Prepayment penalty, paragraph 2 is
revised;
ii. 38(h) Credit insurance and debt cancellation coverage and debt
suspension coverage is revised.
W. Section 226.40--Prohibited Acts or Practices in Connection with
Reverse Mortgages is added.
X. Section 226.41--Servicer's Response to Borrower's Request for
Information is added.
Y. Under Appendices G and H--Open-End and Closed-End Model Forms
and Clauses, paragraph 1 is revised.
Z. Appendix G to Part 226 is amended by revising paragraph 4.
AA. Appendix H to Part 226 is amended by revising paragraphs 1, 3,
11, and 12.
BB. Appendix K to Part 226--Total Annual Loan Cost Rate
Computations for Reverse Mortgage Transactions Model Forms and Clauses
is redesignated as Reverse Mortgage Model Forms and Clauses and
revised.
CC. Appendix L--Assumed Loan Periods for Computations of Total
Annual Loan Cost Rates is removed and reserved.
Supplement I to Part 226--Official Staff Interpretations
* * * * *
Subpart A--General
Section 226.1--Authority, Purpose, Coverage, Organization,
Enforcement and Liability
* * * * *
1(d) Organization.
* * * * *
Paragraph 1(d)(5).
1. Effective dates. The Board's revisions to Regulation Z
published on July 30, 2008 (the ``final rules'') apply to covered
loans (including [lsqbb]refinance
loans[rsqbb][rtrif]modifications[ltrif] and assumptions considered
new transactions under Sec. 226.20[rtrif](a)(1)(i) or (b)[ltrif]
for which the creditor receives an application on or after October
1, 2009, except for the final rules on advertising, escrows, and
loan servicing. But see comment 1(d)(3)-1. The final rules on
escrows in Sec. 226.35(b)(3) are effective for covered loans
(including [refinances] [rtrif]modifications[ltrif] and assumptions
in Sec. 226.20[rtrif](a)(1)(i) and (b)[ltrif]) for which the
creditor receives an application on or after April 1, 2010; but for
such loans secured by manufactured housing on or after October 1,
2010. The final rules applicable to servicers in Sec. 226.36(c)
apply to all covered loans serviced on or after October 1, 2009. The
final rules on advertising apply to advertisements occurring on or
after October 1, 2009. For example, a radio ad occurs on the date it
is [lsqbb]first[rsqbb] broadcast; a solicitation occurs on the date
it is mailed to the consumer. The following examples illustrate the
application of the effective dates for the final rules.
i. General. A [lsqbb]refinancing[rsqbb]
[rtrif]modification[ltrif] [or assumption] as defined in Sec.
226.20(a)[rtrif](1)(i)[ltrif] or [rtrif]assumption as defined in
Sec. 226.20(b)[ltrif] is a new transaction and is covered by a
provision of the final rule if the creditor receives an application
for the transaction on or after that provision's effective date. For
example, if a creditor receives an application for a [refinance
loan] [rtrif]modification[ltrif] covered by Sec. 226.35(a) on or
after October 1, 2009, and the [refinance loan]
[rtrif]modification[ltrif] is consummated on October 15, 2009, the
provision restricting prepayment penalties in Sec. 226.35(b)(2)
applies. However, if the transaction were a modification of an
existing obligation's terms that does not [constitute a refinance
loan] [rtrif] result in a new transaction as provided[ltrif] under
Sec. 226.20(a)[rtrif](1)(ii)[ltrif], the final rules, including for
example the restriction on prepayment penalties, would not apply.
* * * * *
Section 226.2--Definitions and Rules of Construction
2(a) Definitions.
* * * * *
2(a)(6) Business day.
* * * * *
2. Rule for rescission, disclosures for certain mortgage
[rtrif]and home-equity line of credit[ltrif] transactions, and
private education loans[rtrif], and the restriction on imposing
nonrefundable fees in connection with reverse mortgages subject to
Sec. 226.33[ltrif]. A more precise rule for what is a business day
(all calendar days except Sundays and the Federal legal holidays
specified in 5 U.S.C. 6103(a)) applies when the right of rescission,
the receipt of disclosures for certain [lsqbb]dwelling-
secured[rsqbb] mortgage transactions under Sec. Sec.
[rtrif]226.5b(e), 226.9(j)(2),[ltrif] 226.19(a)(1)(ii),
226.19(a)(2), 226.31(c), [rtrif]226.33(d)(1)(ii),
226.33(d)(2),[ltrif] [lsqbb]or [rsqbb]the receipt of disclosures for
private education loans under Sec. 226.46(d)(4)[rtrif], the
restriction on imposing nonrefundable fees for certain mortgage
transactions under Sec. 226.19(a)(1)(iv), or the restriction on
[[Page 58745]]
imposing nonrefundable fees under Sec. 226.40(b)(2) in connection
with reverse mortgages subject to Sec. 226.33[ltrif] is involved.
Four Federal legal holidays are identified in 5 U.S.C. 6103(a) by a
specific date: New Year's Day, January 1; Independence Day, July 4;
Veterans Day, November 11; and Christmas Day, December 25. When one
of these holidays (July 4, for example) falls on a Saturday, Federal
offices and other entities might observe the holiday on the
preceding Friday (July 3). In cases where the more precise rule
applies, the observed holiday (in the example, July 3) is a business
day.
* * * * *
2(a)(11) Consumer.
1. Scope. i. Guarantors, endorsers, and sureties are not
generally consumers for the purposes of the regulation, but
[lsqbb]they[rsqbb] [rtrif]such parties[ltrif] may be entitled to
rescind under [rtrif]the following[ltrif][lsqbb]certain[rsqbb]
circumstances [lsqbb]and they may[rsqbb]:
[rtrif]A. The borrower has the right to rescind because he or
she is a natural person to whom consumer credit is offered or
extended and in whose principal dwelling a security interest is or
will be retained or acquired; and
B. The guarantor, endorser, or surety personally guarantees the
borrower's repayment of the consumer credit transaction and pledges
his or her principal dwelling as security for the borrower's
consumer credit transaction.
ii. Guarantors, endorsers, or sureties may also[ltrif] have
certain rights if they are obligated on credit card plans.
* * * * *
3. Land trusts [rtrif]and revocable living trusts[ltrif]. Credit
extended to land trusts [rtrif]or revocable living trusts[ltrif], as
described in the commentary to Sec. 226.3(a), is considered to be
extended to a natural person for purposes of the definition of
consumer.
[rtrif]4. Reverse mortgages subject to Sec. 226.33. For
purposes of the counseling requirements under Sec. 226.40(b) for
reverse mortgages subject to Sec. 226.33, with one exception, a
consumer includes any person who, at the time of origination of a
reverse mortgage subject to Sec. 226.33, will be shown as an owner
on the property deed of the dwelling that will secure the applicable
reverse mortgage. See Sec. 226.40(b)(7). For purposes of the
prohibition on imposing nonrefundable fees in connection with a
reverse mortgage transaction until after the third business day
following the consumer's completion of counseling (Sec.
226.40(b)(2)), however, the term consumer includes only persons on
the property deed who will be obligors on the applicable reverse
mortgage.[ltrif]
* * * * *
2(a)(25) Security interest.
* * * * *
6. Specificity of disclosure. A creditor need not separately
disclose multiple security interests that it may hold in the same
collateral. The creditor need only disclose that the transaction is
secured by the collateral, even when security interests from prior
transactions remain of record and a new security interest is taken
in connection with the transaction. In disclosing the fact that the
transaction is secured by the collateral, the creditor also need not
disclose how the security interest arose. For example, in a closed-
end credit transaction, a [lsqbb]rescission[rsqbb] notice need not
specifically state that a new security interest is ``acquired'' or
an existing security interest is ``retained'' in the transaction.
[lsqbb]The acquisition or retention of a security interest in the
consumer's principal dwelling instead may be disclosed in a
rescission notice with a general statement such as the following:
``Your home is the security for the new transaction.''[rsqbb]
* * * * *
Section 226.3--Exempt Transactions 3(a) Business, commercial,
agricultural, or organizational credit.
* * * * *
8. Land trusts [rtrif]and revocable living trusts[ltrif]. Credit
extended for consumer purposes to a land trust [rtrif]a or revocable
living trust[ltrif] is considered to be credit extended to a natural
person rather than credit extended to an organization. In some
jurisdictions, [rtrif]land trusts are established to serve a
function similar to that of a mortgage between[ltrif] a financial
institution [lsqbb]financing[rsqbb] [rtrif]and a natural person for
the financing of[ltrif] a residential real estate transaction[lsqbb]
for an individual uses a land trust mechanism[rsqbb]. Title to the
property is conveyed to the land trust for which the financial
institution itself is a trustee. [lsqbb]The underlying installment
note is executed by the financial institution in its capacity as
trustee and payment is secured by a trust deed, reflecting title in
the financial institution as trustee. In some instances, the
consumer executes a personal guaranty of the indebtedness. The note
provides that it is payable only out of the property specifically
described in the trust deed and that the trustee has no personal
liability on the note.[rsqbb] [rtrif]Revocable living trusts
generally are established by a natural person to serve an estate
planning function, such as avoidance of probate. The natural person
often uses the revocable living trust to hold title to real and
personal property.[ltrif] Assuming the transactions are for
personal, family, or household purposes, [lsqbb]these
transactions[rsqbb] [rtrif]extensions of credit to a land trust or a
revocable living trust[ltrif] are subject to the regulation since in
substance (if not form) consumer credit is being extended.
* * * * *
Section 226.4--Finance Charge
* * * * *
4(a) Definition.
* * * * *
4(a)(1) Charges by third parties.
* * * * *
[lsqbb]2. Annuities associated with reverse mortgages. Some
creditors offer annuities in connection with a reverse-mortgage
transaction. The amount of the premium is a finance charge if the
creditor requires the purchase of the annuity incident to the
credit. Examples include the following:
i. The credit documents reflect the purchase of an annuity from
a specific provider or providers.
ii. The creditor assesses an additional charge on consumers who
do not purchase an annuity from a specific provider.
iii. The annuity is intended to replace in whole or in part the
creditor's payments to the consumer either immediately or at some
future date.[rsqbb]
* * * * *
4(d) Insurance and debt cancellation and debt suspension
coverage.
1. General. Section 226.4(d) permits insurance premiums and
charges and debt cancellation and debt suspension charges to be
excluded from the finance charge[rtrif], except for certain
transactions secured by real property or a dwelling, as provided in
Sec. 226.24(g)[ltrif]. The required disclosures must be made
[rtrif]clearly and conspicuously[ltrif] in writing, except as
provided in Sec. 226.4(d)(4). The rules on
[lsqbb]location[rsqbb][rtrif]the form[ltrif] of insurance and debt
cancellation and debt suspension disclosures [lsqbb]for closed-end
transactions[rsqbb] are in Sec. Sec. 226.17(a)[rtrif] and
226.37(a)(1) for closed-end transactions and Sec. 226.5(a)(1) for
open-end transactions.[ltrif] For purposes of Sec. 226.4(d), all
references to insurance also include debt cancellation and debt
suspension coverage unless the context indicates otherwise.
2. Timing of disclosures. [rtrif]Disclosures must be given
before the consumer enrolls in the insurance or debt cancellation or
debt suspension coverage written in connection with the credit
transaction. See comments 4(b)(7) and (b)(8)-2 and 4(b)(10)-2 for a
discussion of when insurance or coverage is written in connection
with the credit transaction.[ltrif] If disclosures are given early,
for example under Sec. 226.17(f) or 226.19(a), the creditor
[lsqbb]need not[rsqbb][rtrif]must[ltrif] redisclose if the
[lsqbb]actual premium[rsqbb][rtrif]maximum premium or charge per
period[ltrif] is different at the time of consummation [rtrif]or
account-opening[ltrif]. If [lsqbb]insurance[rsqbb] disclosures are
not given at the time of early disclosure and insurance [rtrif]or
debt cancellation or debt suspension coverage[ltrif] is in fact
written in connection with the transaction, the disclosures under
Sec. 226.4(d) must be made in order to exclude the premiums
[rtrif]or charges[ltrif] from the finance charge.
3. [lsqbb]Premium rate[rsqbb][rtrif]Rate[ltrif] increases. The
creditor should disclose the premium amount [rtrif]or charge[ltrif]
based on the rates currently in effect and need not designate it as
an estimate even if the premium rates [rtrif]or charges[ltrif] may
increase. An increase in insurance [rtrif]or debt cancellation or
debt suspension coverage[ltrif] rates after consummation of a
closed-end credit transaction or during the life of an open-end
credit plan does not require redisclosure in order to exclude the
additional premium [rtrif]or charge[ltrif] from treatment as a
finance charge.
4. Unit-cost disclosures [rtrif]for property insurance[ltrif].
i. Open-End credit. The premium [lsqbb]or fee[rsqbb] for insurance
[lsqbb]or debt cancellation or debt suspension[rsqbb] for the
initial term of coverage may be disclosed on a unit-cost basis in
open-end credit transactions. The cost per unit should be based on
the initial term of coverage, unless one of the options under
comment 4(d)-12 is available.
ii. Closed-end credit. One of the transactions for which unit-
cost disclosures (such as 50 cents per year for each $100 of the
amount financed) may be used in place of the total insurance premium
involves a particular kind of insurance plan. For
[[Page 58746]]
example, a consumer with a current indebtedness of $8,000 is covered
by a plan of [lsqbb]credit life[rsqbb] insurance coverage with a
maximum of $10,000. The consumer requests an additional $4,000 loan
to be covered by the same insurance plan. Since the $4,000 loan
exceeds, in part, the maximum amount of indebtedness that can be
covered by the plan, the creditor may properly give the insurance-
cost disclosures on the $4,000 loan on a unit-cost basis.
5. Required credit life insurance or debt cancellation or
suspension coverage. Credit life, accident, health, or loss-of-
income insurance [rtrif]described in Sec. 226.4(b)(7)[ltrif], and
debt cancellation and suspension coverage described in Sec.
226.4(b)(10), must be voluntary in order for the premium or charges
to be excluded from the finance charge [rtrif](except that, as
provided in Sec. 226.4(g), even charges for voluntary insurance or
coverage may not be excluded) [ltrif]. Whether the insurance or
coverage is in fact required or optional is a factual question. If
the insurance or coverage is required, the premiums [rtrif]or
charges[ltrif] must be included in the finance charge, whether the
insurance or coverage is purchased from the creditor or from a third
party. If the consumer is required to elect one of several options--
such as to purchase credit life insurance, or to assign an existing
life insurance policy, or to pledge security such as a certificate
of deposit--and the consumer purchases the credit life insurance
policy, the premium must be included in the finance charge. (If the
consumer assigns a preexisting policy or pledges security instead,
no premium is included in the finance charge. The security interest
would be disclosed under Sec. 226.6(a)(4), Sec. 226.6(b)(5)(ii),
or Sec. 226.18(m). See the commentary to Sec. 226.4(b)(7) and
(b)(8).)
6. Other types of voluntary insurance. Insurance is not credit
life, accident, health, or loss-of-income insurance if the creditor
or the credit account of the consumer is not the beneficiary of the
insurance coverage. If the premium for such insurance is not imposed
by the creditor [lsqbb]as an incident to or a condition of
credit[rsqbb][rtrif]in connection with the credit
transaction[ltrif], it is not covered by Sec. 226.4.
7. Signatures. If the creditor offers a number of insurance
[rtrif]or debt cancellation or debt suspension coverage[ltrif]
options under Sec. 226.4(d), the creditor may provide a means for
the consumer to sign or initial for each option, or it may provide
for a single authorizing signature or initial with the options
selected designated by some other means, such as a check mark. The
[lsqbb]insurance[rsqbb] authorization may be signed or initialed by
any consumer, as defined in Sec. 226.2(a)(11), or by an authorized
user on a credit card account.
8. Property insurance. To exclude property insurance premiums or
charges from the finance charge, the creditor must allow the
consumer to choose the insurer and disclose that fact. This
disclosure must be made whether or not the property insurance is
available from or through the creditor. The requirement that an
option be given does not require that the insurance be readily
available from other sources. The premium [lsqbb]or charge[rsqbb]
must be disclosed only if the consumer elects to purchase the
insurance from [rtrif]or through[ltrif] the creditor; in such a
case, the creditor must also disclose the term of the property
insurance coverage if it is less than the term of the obligation.
[rtrif]Insurance is available ``from or through'' a creditor if it
is available from the creditor's affiliate, as defined under the
Bank Holding Company Act, 12 U.S.C. 1841(k).[ltrif]
9. Single-interest insurance. Blanket and specific single-
interest coverage are treated the same for purposes of the
regulation. A charge for either type of single-interest insurance
may be excluded from the finance charge if:
i. The insurer waives any right of subrogation.
ii. The other requirements of Sec. 226.4(d)(2) are met. This
includes, of course, giving the consumer the option of obtaining the
insurance from a person of the consumer's choice. The creditor need
not ascertain whether the consumer is able to purchase the insurance
from someone else.
10. Single-interest insurance defined. The term single-interest
insurance as used in the regulation refers only to the types of
coverage traditionally included in the term vendor's single-interest
insurance (or VSI), that is, protection of tangible property against
normal property damage, concealment, confiscation, conversion,
embezzlement, and skip. Some comprehensive insurance policies may
include a variety of additional coverages, such as repossession
insurance and holder-in-due-course insurance. These types of
coverage do not constitute single-interest insurance for purposes of
the regulation, and premiums for them do not qualify for exclusion
from the finance charge under Sec. 226.4(d). If a policy that is
primarily VSI also provides coverages that are not VSI or other
property insurance, a portion of the premiums must be allocated to
the nonexcludable coverages and included in the finance charge.
However, such allocation is not required if the total premium in
fact attributable to all of the non-VSI coverages included in the
policy is $1.00 or less (or $5.00 or less in the case of a multiyear
policy).
11. Initial term [rtrif]for property insurance[ltrif].
i. The initial term of [rtrif]property[ltrif] insurance
[lsqbb]or debt cancellation or debt suspension coverage[rsqbb]
determines the period for which a premium amount must be disclosed,
unless one of the options discussed under comment 4(d)-12 is
available. For purposes of Sec. 226.4(d), the initial term is the
period for which the insurer or creditor is obligated to provide
coverage, even though the consumer may be allowed to cancel the
coverage or coverage may end due to nonpayment before that term
expires.
ii. For example:
A. The initial term of a property insurance policy on an
automobile that is written for one year is one year even though
premiums are paid monthly and the term of the credit transaction is
four years.
B. The initial term of an insurance policy is the full term of
the credit transaction if the consumer pays or finances a single
premium in advance.
12. Initial term; alternative.
i. General. A creditor has the option of providing cost
disclosures on the basis of one year of [rtrif]property[ltrif]
insurance [lsqbb]or debt cancellation or debt suspension
coverage[rsqbb] instead of a longer initial term (provided the
premium [lsqbb]or fee[rsqbb] is clearly labeled as being for one
year) if:
A. The initial term is indefinite or not clear, or
B. The consumer has agreed to pay a premium [lsqbb]or fee[rsqbb]
that is assessed periodically but the consumer is under no
obligation to continue the coverage, whether or not the consumer has
made an initial payment.
ii. Open-End plans. For open-end plans, a creditor also has the
option of providing unit-cost disclosure on the basis of a period
that is less than one year if the consumer has agreed to pay a
premium [lsqbb]or fee[rsqbb] that is assessed periodically, for
example monthly, but the consumer is under no obligation to continue
the coverage.
iii. Examples. To illustrate:
A. A [lsqbb]credit life insurance[rsqbb] policy providing
coverage for a [lsqbb]30-year mortgage[rsqbb][rtrif]seven-year
automobile[ltrif] loan has an initial term of
[lsqbb]30[rsqbb][rtrif]seven[ltrif] years, even though premiums are
paid monthly and the consumer is not required to continue the
coverage. Disclosures may be based on the initial term, but the
creditor also has the option of making disclosures on the basis of
coverage for an assumed initial term of one year.
13. Loss-of-income insurance. The loss-of-income insurance
mentioned in Sec. 226.4(d) includes involuntary unemployment
insurance, which provides that some or all of the consumer's
payments will be made if the consumer becomes unemployed
involuntarily.
[rtrif]14. Age or employment eligibility criteria. A premium or
charge for credit life, accident, health, or loss-of-income
insurance, or debt cancellation or debt suspension coverage is
voluntary and can be excluded from the finance charge only if the
consumer meets the product's age or employment eligibility criteria
prior to or at the time of enrollment in the product. To exclude
such a premium or charge from the finance charge, the creditor must
determine prior to or at the time of enrollment that the consumer is
eligible for the product as of enrollment under the product's age or
employment eligibility restrictions. The creditor may use reasonably
reliable evidence of the consumer's age or employment status to
satisfy this condition. Reasonably reliable evidence of a consumer's
age would include using the date of birth on the consumer's credit
application, on the driver's license or other government-issued
identification, or on the credit report. Reasonably reliable
evidence of a consumer's employment status would include the
consumer's information on a credit application, an Internal Revenue
Service Form W-2, tax returns, payroll receipts, or other evidence
such as a letter or e-mail from the consumer or the consumer's
employer. If the consumer does not meet the product's age or
employment eligibility criteria at the time of enrollment, then the
premium or charge is not voluntary. In such
[[Page 58747]]
circumstances, the premium or charge is a finance charge. If the
creditor offers a bundled product (such as credit life insurance
combined with credit involuntary unemployment insurance) and the
consumer is not eligible for all of the bundled products, the
creditor must either: (1) Treat the entire premium or charge for the
bundled product as a finance charge, or (2) offer the consumer the
option of selecting only the products for which the consumer is
eligible and exclude the premium or charge from the finance charge
if the consumer chooses an optional product for which the consumer
meets the age or employment eligibility criteria prior to or at the
time of enrollment.
15. Covered event. The term ``covered event'' in Sec.
226.4(d)(1)(i)(D)(1) refers to the event that would trigger coverage
under the policy or agreement, such as loss of life, disability, or
involuntary unemployment.
16. Cost disclosures for credit insurance or debt cancellation
or debt suspension coverage. To comply with the disclosure
requirements of Sec. 226.4(d)(1)(i)(D)(3), the creditor must
disclose the maximum premium or charge per period. The creditor must
use the maximum rate under the policy or coverage. If the premium or
charge is based on the outstanding balance or periodic principal and
interest payment, the creditor must base the disclosure on the
maximum outstanding balance or periodic principal and interest
payment possible under the loan contract or line of credit
plan.[ltrif]
4(d)(3) Voluntary debt cancellation or debt suspension fees.
1. General. Fees charged for the specialized form of debt
cancellation agreement known as guaranteed automobile protection
(``GAP'') agreements must be disclosed according to Sec.
226.4(d)(3) rather than according to Sec. 226.4(d)(2) for property
insurance.
2. Disclosures. Creditors can comply with Sec. 226.4(d)(3) by
providing a disclosure that refers to debt cancellation or debt
suspension coverage whether or not the coverage is considered
insurance. Creditors may use the model credit insurance disclosures
only if the debt cancellation or debt suspension coverage
constitutes insurance under State law. (See Model
[lsqbb]Clauses[rsqbb][rtrif]Forms[ltrif] and Samples at G-
16[rtrif](A) and (D)[ltrif] and H-17[rtrif](A) and (D)[ltrif] in
appendix G and appendix H to part 226 for guidance on how to provide
the disclosure required by Sec.
226.4(d)(3)[lsqbb](iii)[rsqbb][rtrif](i)[ltrif] for debt suspension
products.)
3. Multiple events. If debt cancellation or debt suspension
coverage for two or more events is provided at a single charge, the
entire charge may be excluded from the finance charge if at least
one of the events is accident or loss of life, health, or income and
the conditions specified in Sec. 226.4(d)(3) or, as applicable,
Sec. 226.4(d)(4), are satisfied.
4. Disclosures in programs combining debt cancellation and debt
suspension features. If the consumer's debt can be cancelled under
certain circumstances, the disclosure may be modified to reflect
that fact. The disclosure could, for example, state (in addition to
the language required by Sec.
226.4(d)(3)[lsqbb](iii)[rsqbb][rtrif](i)[ltrif]) that ``In some
circumstances, [lsqbb]my[rsqbb][rtrif]your[ltrif] debt may be
cancelled.'' However, the disclosure would not be permitted to list
the specific events that would result in debt cancellation.
4(d)(4) Telephone purchases.
1. Affirmative request. A creditor would not satisfy the
requirement to obtain a consumer's affirmative request if the
``request'' was a response to a script that uses leading questions
or negative consent. A question asking whether the consumer wishes
to enroll in the credit insurance or debt cancellation or suspension
plan and seeking a yes-or-no response (such as ``Do you want to
enroll in this optional debt cancellation plan?'') would not be
considered leading.
* * * * *
Subpart B--Open-End Credit
Section 226.5--General Disclosure Requirements
5(a) Form of disclosures.
5(a)(1) General.
1. Clear and conspicuous standard. The ``clear and conspicuous''
standard generally requires that disclosures be in a reasonably
understandable form. Disclosures for credit card applications and
solicitations under Sec. 226.5a, [rtrif]disclosures for home-equity
plans required three business days after application under Sec.
226.5b(b) and Sec. 226.33(d)(1),[ltrif] highlighted account-opening
disclosures under [rtrif]Sec. 226.6(a)(1),[ltrif] Sec.
226.6(b)(1), [rtrif]and Sec. 226.33(d)(4),[ltrif] highlighted
disclosure on checks that access a credit card under Sec.
226.9(b)(3), highlighted change-in-terms disclosures under
[rtrif]Sec. 226.9(c)(1)(iii)(B) and[ltrif] Sec.
226.9(c)(2)(iii)(B), and highlighted disclosures when a rate is
increased due to delinquency, default or [rtrif]otherwise as[ltrif]
[for] a penalty under Sec. 226.9(g)(3)(ii) [rtrif]and Sec.
226.9(i)(4)[ltrif] must also be readily noticeable to the consumer
[rtrif]to meet the ``clear and conspicuous'' standard[ltrif].
* * * * *
3. Clear and conspicuous--readily noticeable standard. To meet
the readily noticeable standard, disclosures for credit card
applications and solicitations under Sec. 226.5a,
[rtrif]disclosures for home-equity plans required three business
days after application under Sec. 226.5b(b) and Sec.
226.33(d)(1),[ltrif] highlighted account-opening disclosures under
[rtrif]Sec. 226.6(a)(1),[ltrif] Sec. 226.6(b)(1), [rtrif]and Sec.
226.33(d)(4),[ltrif] highlighted disclosures on checks that access a
credit card account under Sec. 226.9(b)(3), highlighted change-in-
terms disclosures under [rtrif]Sec. 226.9(c)(1)(iii)(B) and[ltrif]
Sec. 226.9(c)(2)(iii)(B), and highlighted disclosures when a rate
is increased due to delinquency, default or penalty pricing under
Sec. 226.9(g)(3)(ii) [rtrif]and Sec. 226.9(i)(4)[ltrif] must be
given in a minimum of 10-point font. (See special rule for font size
requirements for the annual percentage rate for purchases [rtrif]in
an open-end (not home-secured) plan[ltrif] under Sec. Sec.
226.5a(b)(1) and 226.6(b)(2)(i) [rtrif], and for the annual
percentage rate in a home-equity plan under Sec. Sec.
226.5b(c)(10), 226.6(a)(2)(vi), and 226.33(c)(6)(i)[ltrif].)
* * * * *
5(b) Time of disclosures.
* * * * *
5(b)(1) Account-opening disclosures.
* * * * *
5(b)(1)(ii) Charges imposed as part of an open-end [(not home-
secured)] plan.
1. Disclosing charges before the fee is imposed. Creditors may
disclose charges imposed as part of an open-end [(not home-secured)]
plan orally or in writing at any time before a consumer agrees to
pay the fee or becomes obligated for the charge, unless the charge
is specified under [rtrif]Sec. 226.6(a)(2),[ltrif] Sec.
226.6(b)(2) [rtrif], or Sec. 226.33(c)[ltrif]. (Charges imposed as
part of an open-end [lsqbb](not home-secured)[rsqbb] plan that are
not specified under [rtrif]Sec. 226.6(a)(2),[ltrif] Sec.
226.6(b)(2)[rtrif], or Sec. 226.33(c)[ltrif] may alternatively be
disclosed in electronic form; see the commentary to Sec.
226.5(a)(1)(ii)(A).) Creditors must provide such disclosures at a
time and in a manner [rtrif]such[ltrif] that a consumer would be
likely to notice them. For example, if a consumer telephones a
[rtrif]creditor[ltrif] [lsqbb]card issuer[rsqbb] to discuss a
particular service, a creditor would meet the standard if the
creditor clearly and conspicuously discloses the fee associated with
the service that is the topic of the telephone call orally to the
consumer. Similarly, a creditor providing marketing materials in
writing to a consumer about a particular service would meet the
standard if the creditor provided a clear and conspicuous written
disclosure of the fee for that service in those same materials. A
creditor that provides written materials to a consumer about a
particular service but provides a fee disclosure for another service
not promoted in such materials would not meet the standard. For
example, if a creditor provided marketing materials promoting
payment by Internet, but included the fee for a replacement card on
such materials with no explanation, the creditor would not be
disclosing the fee at a time and in a manner that the consumer would
be likely to notice the fee.
* * * * *
Section 226.5b-Requirements for Home-Equity Plans
* * * * *
5b(c) Content of disclosures.
* * * * *
5b(c)(9) Payment terms.
* * * * *
Paragraph 5b(c)(9)(ii).
* * * * *
[6. Reverse mortgages. Reverse mortgages, also known as reverse
annuity or home-equity conversion mortgages, in addition to
permitting the consumer to obtain advances, may involve the
disbursement of monthly advances to the consumer for a fixed period
or until the occurrence of an event such as the consumer's death.
Repayment of the reverse mortgage (generally a single payment of
principal and accrued interest) may be required to be made at the
end of the disbursements or, for example, upon the death of the
consumer. In disclosing these plans, creditors must apply the
following rules, as applicable:
i. If the reverse mortgage has a specified period for advances
and disbursements but repayment is due only upon occurrence of a
future event such as the death of the consumer, the creditor must
assume that disbursements will be made until they are
[[Page 58748]]
scheduled to end. The creditor must assume repayment will occur when
disbursements end (or within a period following the final
disbursement which is not longer than the regular interval between
disbursements). This assumption should be used even though repayment
may occur before or after the disbursements are scheduled to end. In
such cases, the creditor may include a statement such as ``The
disclosures assume that you will repay the line at the time the
borrowing period and our payments to you end. As provided in your
agreement, your repayment may be required at a different time.'' The
single payment should be considered the ``minimum periodic payment''
and consequently would not be treated as a balloon payment. The
examples of the minimum payment under Sec. 226.5b(c)(9)(iii) should
assume the consumer borrows the full credit line (as disclosed in
Sec. 226.5b(c)(17)) at the beginning of the draw period.
ii. If the reverse mortgage has neither a specified period for
advances or disbursements nor a specified repayment date and these
terms will be determined solely by reference to future events,
including the consumer's death, the creditor may assume that the
draws and disbursements will end upon the consumer's death
(estimated by using actuarial tables, for example) and that
repayment will be required at the same time (or within a period
following the date of the final disbursement which is not longer
than the regular interval for disbursements). Alternatively, the
creditor may base the disclosures upon another future event it
estimates will be most likely to occur first. (If terms will be
determined by reference to future events which do not include the
consumer's death, the creditor must base the disclosures upon the
occurrence of the event estimated to be most likely to occur first.)
iii. In making the disclosures, the creditor must assume that
all draws and disbursements and accrued interest will be paid by the
consumer. For example, if the note has a non-recourse provision
providing that the consumer is not obligated for an amount greater
than the value of the house, the creditor must nonetheless assume
that the full amount to be drawn or disbursed will be repaid. In
this case, however, the creditor may include a statement such as
``The disclosures assume full repayment of the amount advanced plus
accrued interest, although the amount you may be required to pay is
limited by your agreement.''
iv. Some reverse mortgages provide that some or all of the
appreciation in the value of the property will be shared between the
consumer and the creditor. The creditor must disclose the
appreciation feature, including describing how the creditor's share
will be determined, any limitations, and when the feature may be
exercised.]
Paragraph 5b(c)(9)(iii).
* * * * *
[lsqbb]3. Reverse mortgages. See comment 5b(c)(9)(ii)-6 for
guidance on providing the payment examples required under Sec.
226.5b(c)(9)(iii) for reverse mortgages.[rsqbb]
* * * * *
5b(d) Refund of fees.
1. Refund of fees required. If any disclosed term, including any
term provided upon request pursuant to Sec. 226.5b(c)[rtrif]or
Sec. 226.33(c)(7)(iv)[ltrif], changes between the time the early
disclosures are provided to the consumer and the time the plan is
opened, and the consumer decides to not enter into the plan, a
creditor must refund all fees paid by the consumer. All fees,
including credit-report fees and appraisal fees, must be refunded
whether such fees are paid to the creditor or directly to third
parties. A consumer is entitled to a refund of fees under these
circumstances whether or not terms are guaranteed by the creditor
under Sec. 226.5b (c)(4)(i) [rtrif]or 226.33(c)(12)(iii)[ltrif].
2. Changes not requiring refund. The right to a refund of fees
does not apply to changes in the annual percentage rate resulting
from fluctuations in the index value in a variable-rate plan. Also,
if the maximum annual percentage rate is an amount over the initial
rate, the right to refund of fees would not apply to changes in the
cap resulting from fluctuations in the index value. [rtrif]In
addition, the right to a refund does not apply to changes to the
disclosures required by Sec. 226.33(c)(3), (c)(5) or (c)(8) due to
changes in the type of payment the consumer receives, or
verification of the appraised property value or the consumer's age.
For example, if the disclosure is based on the consumer's choice to
receive only monthly payments, and after the disclosure is provided,
the consumer decides instead to receive funds in the form of a line
of credit, the creditor would not be required to refund the
consumer's fees if the consumer later decides not to proceed with
the reverse mortgage.[ltrif]
3. Changes in terms. If a term, such as a fee, is stated as a
range in the early disclosures required under Sec. 226.5b(b)
[rtrif]or 226.33(d)(1)[ltrif], and the term ultimately applicable to
the plan falls within that range, a change does not occur for
purposes of this section. If, however, no range is used and the term
is changed (for example, a rate cap of 6 rather than 5 percentage
points over the initial rate), the change would permit the consumer
to obtain a refund of fees. If a fee imposed by the creditor is
stated in the early disclosures as an estimate and the fee changes,
the consumer could elect to not enter into the agreement and would
be entitled to a refund of fees.
4. Timing of refunds and relation to other provisions. The
refund of fees must be made as soon as reasonably possible after the
creditor is notified [rtrif],after a term has changed,[ltrif] that
the consumer is not entering into the plan [because of the changed
term,] or that the consumer wants a refund of fees. The fact that an
application fee may be refunded to some applicants under this
provision does not render such fees finance charges under section
226.4(c)(1) of the regulation.
5b[lsqbb](h)[rsqbb][rtrif](e)[ltrif] Imposition of nonrefundable
fees.
1. Collection of fees after consumer receives disclosures. A fee
may be collected after the consumer receives the disclosures
[rtrif]required under Sec. 226.5b(e) or 226.33(d)(1)[ltrif] [and
brochure] and before the expiration of three [rtrif]business[ltrif]
days, although the fee must be refunded if, within three
[rtrif]business[ltrif] days of receiving the required information,
the consumer decides not to enter into the agreement. In such a
case, the consumer must be notified that the fee is refundable for
three [rtrif]business[ltrif] days. The notice must be clear and
conspicuous and in writing, and [rtrif]must [ltrif] [may] be
included with the disclosures required under Sec.
226.5b[(d)][rtrif](b) or Sec. 226.33(d)(1)[ltrif] [or as an
attachment to them]. If disclosures [rtrif]required under Sec.
226.5b(b) or Sec. 226.33(d)(1)[ltrif] [and brochure] are mailed to
the consumer, [footnote 10d of] the regulation provides that a
nonrefundable fee may not be imposed until six business days after
the mailing.
2. Collection of fees before consumer receives disclosures. An
application fee may be collected before the consumer receives the
disclosures [rtrif]required under Sec. 226.5b(b) or
226.33(d)(1)[ltrif] [and brochure] (for example, when an application
contained in a magazine is mailed in with an application fee)
provided that [it] [rtrif]the fee[ltrif] remains refundable until
three business days after the consumer receives the Sec.
226.5b[rtrif](b) or 226.33(d)(1)[ltrif] disclosures. No other fees
except a refundable membership fee may be collected until after the
consumer receives the disclosures required under Sec.
226.5b[rtrif](b) or 226.33(d)(1)[ltrif].
3. Relation to other provisions. A fee collected before
disclosures [rtrif]required under Sec. 226.5b(b) or
226.33(d)(1)[ltrif] are provided may become nonrefundable except
that, under Sec. 226.5b(g), it must be refunded if [rtrif]a term
changes and[ltrif] the consumer elects not to enter into the plan
[because of a change in terms]. (Of course, all fees must be
refunded if the consumer later rescinds under Sec. 226.15.)
[rtrif]4. Definition of ``Business Day''. For purposes of Sec.
226.5b(e), the more precise definition of business day (meaning all
calendar days except Sundays and specified Federal holidays) under
Sec. 226.2(a)(6) applies. See comment 2(a)(6)-2.
5. Reverse mortgages subject to Sec. 226.33. For reverse
mortgages subject to Sec. Sec. 226.5b and 226.33, creditors and
other persons must also comply with the restriction on imposing a
nonrefundable fee in Sec. 226.40(b)(2). See comment 40(b)(2)(i)-
3.[ltrif]
* * * * *
Section 226.6--Account-Opening Disclosures
6(a) Rules affecting home-equity plans.
* * * * *
[rtrif]3. Reverse mortgages. Open-end reverse mortgages that are
subject to Sec. 226.5b are not subject to the account-opening
disclosure requirements in Sec. 226.6(a)(1) and (a)(2), but rather
are subject to the account-opening disclosure requirements in Sec.
226.33(c) and (d)(2). Open-end reverse mortgages are also subject to
Sec. 226.6(a)(3), (a)(4), and (a)(5)(ii) through (iv).[ltrif]
* * * * *
Section 226.9--Subsequent Disclosure Requirements
* * * * *
9(c) Change in terms.
9(c)(1) Rules affecting home equity plans.
* * * * *
[[Page 58749]]
[rtrif]9(c)(1)(ii) Charges not covered by Sec. 226.6(a)(1) and
(a)(2) or Sec. 226.33.
1. Applicability. Generally, if a creditor increases any
component of a charge, or introduces a new charge (assuming in
either case that such action is permitted under Sec. 226.5b(f)),
that is imposed as part of the plan under Sec. 226.6(a)(3) but is
not required to be disclosed as part of the account-opening summary
table under Sec. 226.6(a)(2) or Sec. 226.33(d)(4), the creditor
may either, at its option, provide at least 45 days' written advance
notice before the change becomes effective to comply with the
requirements of Sec. 226.9(c)(1)(i), or provide notice orally or in
writing, or electronically if the consumer requests the service
electronically, of the amount of the charge to an affected consumer
before the consumer agrees to or becomes obligated to pay the
charge, at a time and in a manner that a consumer would be likely to
notice the disclosure. (See the commentary under Sec.
226.5(a)(1)(iii) regarding disclosure of such changes in electronic
form.) For example, a fee for expedited delivery of a credit card is
a charge imposed as part of the plan under Sec. 226.6(a)(3) but is
not required to be disclosed in the account-opening summary table
under Sec. 226.6(a)(2) or Sec. 226.33(d)(4). If a creditor adds
expedited delivery of a credit card as a new service, the new
service and the accompanying fee would be permissible under Sec.
226.5b(f)(3)(iv) as a beneficial change. In these circumstances, the
creditor may provide written advance notice of the change to
affected consumers at least 45 days before the change becomes
effective. Alternatively, the creditor may provide oral or written
notice, or electronic notice if the consumer requests the service
electronically, of the amount of the charge to an affected consumer
before the consumer agrees to or becomes obligated to pay the
charge, at a time and in a manner that the consumer would be likely
to notice the disclosure. (See comment 5(b)(1)(ii)-1 for examples of
disclosures given at a time and in a manner such that the consumer
would be likely to notice them.)
9(c)(1)(iii) Disclosure requirements.
9(c)(1)(iii)(A) Changes to terms described in account-opening
table.[ltrif]
* * * * *
[rtrif]2. Changing index for calculating a variable rate. If the
creditor is changing the index pursuant to Sec. 226.5b(f)(3)(ii),
the creditor must disclose the amount of the new rate (as calculated
using the new index) and indicate that the rate varies and the how
the rate is determined, as explained in Sec. 226.6(a)(2)(vi)(A) or
Sec. 226.33(c)(6)(i)(A). For example, if a creditor is changing
from using a prime rate to using the LIBOR in calculating a variable
rate, the creditor would disclose in the table the new rate (using
the new index) and indicate that the rate varies with the market
based on the LIBOR.[ltrif]
* * * * *
[rtrif]6. Changes in fees. If a creditor is changing part of how
a fee that is disclosed in a tabular format under Sec. 226.6(a)(2)
or Sec. 226.33(d)(4) is determined, the creditor must redisclose
all relevant information related to that fee regardless of whether
this other information is changing. For example, if a creditor
currently charges a cash advance fee of ``Either $5 or 3% of the
transaction amount, whichever is greater. (Max: $100),'' and the
creditor is only changing the minimum dollar amount from $5 to $10,
the issuer must redisclose the other information related to how the
fee is determined. The creditor in this example would disclose the
following: ``Either $10 or 3% of the transaction amount, whichever
is greater. (Max: $100).'' (See Sec. 226.5b(f) for restrictions on
a creditor's right to change terms.)[ltrif]
* * * * *
Section 226.15--Right of Rescission
1. Transactions not covered. Credit extensions that are not
subject to the regulation are not covered by Sec. 226.15 even if
the customer's principal dwelling is the collateral securing the
credit. For this purpose, credit extensions also would include the
[rtrif]transactions[ltrif] [lsqbb]occurrences[rsqbb] listed in
comment 15(a)(1)-1. For example, the right of rescission does not
apply to the opening of a business-purpose credit line, even though
the loan is secured by the customer's principal dwelling.
15(a) Consumer's right to rescind.
[lsqbb]Paragraph[rsqbb] 15(a)(1) [rtrif]Coverage[ltrif].
1. [rtrif]Transactions[ltrif] [lsqbb]Occurrences[rsqbb] subject
to right. Under an open-end credit plan secured by the consumer's
principal dwelling, the right of rescission generally arises with
each of the following
[rtrif]transactions[ltrif][lsqbb]occurrences[rsqbb]:
[rtrif]i.[ltrif][lsqbb][rsqbb] Opening the account.
[rtrif]ii.[ltrif][lsqbb][rsqbb] Each credit extension.
[rtrif]iii.[ltrif][lsqbb][rsqbb] Increasing the credit
limit.
[rtrif]iv.[ltrif][lsqbb][rsqbb] Adding to an existing
account a security interest in the consumer's principal dwelling.
[rtrif]v.[ltrif][lsqbb][rsqbb] Increasing the dollar
amount of the security interest taken in the dwelling to secure the
plan. For example, a consumer may open an account with a $10,000
credit limit, $5,000 of which is initially secured by the consumer's
principal dwelling. The consumer has the right to rescind at that
time and (except as noted in Sec. 226.15(a)(1)(ii)) with each
extension on the account. Later, if the creditor decides that it
wants the credit line fully secured, and increases the amount of its
interest in the consumer's dwelling, the consumer has the right to
rescind the increase.
2. Exceptions. Although the consumer generally has the right to
rescind with each transaction on the account, section 125(e) of the
Act provides an exception: the creditor need not provide the right
to rescind at the time of each credit extension made under an open-
end credit plan secured by the consumer's principal dwelling to the
extent that the credit extended is in accordance with a previously
established credit limit for the plan. This limited rescission
option is available whether or not the plan existed prior to the
effective date of the Act.
3. Security interest arising from transaction. [rtrif]i.[ltrif]
In order for the right of rescission to apply, the security interest
must be retained as part of the credit transaction. For example:
[lsqbb][rsqbb][rtrif]A.[ltrif] A security interest that
is acquired by a contractor who is also extending the credit in the
transaction.
[lsqbb][rsqbb][rtrif]B.[ltrif] A mechanic's or
materialman's lien that is retained by a subcontractor or supplier
of a contractor-creditor, even when the latter has waived its own
security interest in the consumer's home.
[rtrif]ii.[ltrif] The security interest is not part of the
credit transaction, and therefore the transaction is not subject to
the right of rescission when, for example:
[lsqbb][rsqbb][rtrif]A.[ltrif] A mechanic's or
materialman's lien is obtained by a contractor who is not a party to
the credit transaction but merely is paid with the proceeds of the
consumer's cash advance.
[lsqbb][rsqbb][rtrif]B.[ltrif] All security interests
that may arise in connection with the credit transaction are validly
waived.
[lsqbb][rsqbb][rtrif]C.[ltrif] The creditor obtains a
lien and completion bond that in effect satisfies all liens against
the consumer's principal dwelling as a result of the credit
transaction.
[rtrif]iii.[ltrif] Although liens arising by operation of law
are not considered security interests for purposes of disclosure
under Sec. 226.2, that section specifically includes them in the
definition for purposes of the right of rescission. Thus, even
though an interest in the consumer's principal dwelling is not a
required disclosure under [lsqbb]Sec. 226.6(c)[rsqbb][rtrif]Sec.
226.6(a)(5)(ii)[ltrif], it may still give rise to the right of
rescission.
4. Consumer. To be a consumer within the meaning of Sec. 226.2,
that person must at least have an ownership interest in the dwelling
that is encumbered by the creditor's security interest, although
that person need not be a signatory to the credit agreement. For
example, if only one spouse enters into a secured plan, the other
spouse is a consumer if the ownership interest of that spouse is
subject to the security interest.
5. Principal dwelling. A consumer can only have one principal
dwelling at a time. (But see comment 15(a)(1)-6.) A vacation or
other second home would not be a principal dwelling. A transaction
secured by a second home (such as a vacation home) that is not
currently being used as the consumer's principal dwelling is not
rescindable, even if the consumer intends to reside there in the
future. When a consumer buys or builds a new dwelling that will
become the consumer's principal dwelling within one year or upon
completion of construction, the new dwelling is considered the
principal dwelling if it secures the open-end credit line. In that
case, the transaction secured by the new dwelling is a residential
mortgage transaction and is not rescindable. For example, if a
consumer whose principal dwelling is currently A builds B, to be
occupied by the consumer upon completion of construction, an advance
on an open-end line to finance B and secured by B is a residential
mortgage transaction. Dwelling, as defined in Sec. 226.2, includes
structures that are classified as personalty under State law. For
example, a transaction secured by a mobile home, trailer, or
houseboat used as the consumer's principal dwelling may be
rescindable.
6. Special rule for principal dwelling. Notwithstanding the
general rule that consumers may have only one principal dwelling,
when the consumer is acquiring or constructing a new principal
dwelling, a credit plan or extension that is subject to Regulation Z
and is secured by the equity in
[[Page 58750]]
the consumer's current principal dwelling is subject to the right of
rescission regardless of the purpose of that loan (for example, an
advance to be used as a bridge loan). For example, if a consumer
whose principal dwelling is currently A builds B, to be occupied by
the consumer upon completion of construction, a loan to finance B
and secured by A is subject to the right of rescission. Moreover, a
loan secured by both A and B is, likewise, rescindable.
[lsqbb]Paragraph[rsqbb] 15(a)(2) [rtrif]Exercise of the right.
15(a)(2)(i) Provision of written notification.[ltrif]
1. Consumer's exercise of right. The consumer must exercise the
right of rescission in writing [rtrif]and may, but is not required
to, use[ltrif] [lsqbb]but not necessarily on[rsqbb] the notice
supplied under Sec. 226.15(b). [lsqbb]Whatever the means of sending
the notification of rescission--mail, telegram or other written
means--the time period for the creditor's performance under Sec.
226.15(d)(2) does not begin to run until the notification has been
received. The creditor may designate an agent to receive the
notification so long as the agent's name and address appear on the
notice provided to the consumer under Sec. 226.15(b). Where the
creditor fails to provide the consumer with a designated address for
sending the notification of rescission, delivery of the notification
to the person or address to which the consumer has been directed to
send payments constitutes delivery to the creditor or assignee.
State law determines whether delivery of the notification to a third
party other than the person to whom payments are made is delivery to
the creditor or assignee, in the case where the creditor fails to
designate an address for sending the notification of
rescission.[rsqbb]
[rtrif]15(a)(2)(ii) Party the consumer shall notify.
15(a)(2)(ii)(B) After the three-business-day period following
the transaction.
1. In general. To exercise an extended right of rescission, the
consumer must notify the current owner of the debt obligation. Under
Sec. 226.15(a)(2)(ii)(B), the current owner of the debt obligation
is deemed to have received the consumer's notification if the
consumer provides it to the servicer, as defined in Sec.
226.36(c)(3). Therefore, the period for the creditor's or owner's
actions in Sec. 226.15(d)(2) begins on the day the servicer
receives the consumer's notification.[ltrif]
[lsqbb]Paragraph[rsqbb] 15(a)(3) [rtrif]Rescission period.
15(a)(3)(i) Three business days.[ltrif]
1. Rescission period. [rtrif]i.[ltrif] The consumer's right to
rescind does not expire until midnight after the third business day
following the last of three events:
[lsqbb][rsqbb][rtrif]A.[ltrif] The
[rtrif]transaction[ltrif][lsqbb]occurrence[rsqbb] that gives rise to
the right of rescission.
[lsqbb][rsqbb][rtrif]B.[ltrif] Delivery of all material
disclosures [lsqbb]that are relevant to the plan[rsqbb].
[lsqbb][rsqbb][rtrif]C.[ltrif] Delivery to the consumer
of the required rescission notice.
[rtrif]ii.[ltrif] For example, [lsqbb]an account is opened on
Friday, June 1, and the disclosures and notice of the right to
rescind were given on Thursday, May 31; the rescission period will
expire at midnight of the third business day after June 1--that
is,[rsqbb] [rtrif]assume the consumer received all material
disclosures on Wednesday, May 23 and received the notice of the
right to rescind on Thursday, May 31, and the transaction giving
rise to the right of rescission occurred on Friday, June 1. The
rescission period will expire at midnight after the third business
day, which is[ltrif] Tuesday June 5. [lsqbb]In another example, if
the disclosures are given and the account is opened on Friday, June
1, and the rescission notice is given on Monday, June 4, the
rescission period expires at midnight of the third business day
after June 4--that is, Thursday, June 7. The consumer must place the
rescission notice in the mail, file it for telegraphic transmission,
or deliver it to the creditor's place of business within that period
in order to exercise the right.[rsqbb]
[rtrif]iii. The provision of incorrect or incomplete material
disclosures or an incorrect or incomplete notice of the right to
rescind does not constitute delivery of the disclosures or notice.
If the creditor originally provided incorrect or incomplete material
disclosures, to commence the three-business-day rescission period,
the creditor must deliver to the consumer complete, correct material
disclosures together with a complete, correct, updated notice of the
right to rescind. If the creditor originally provided an incorrect
or incomplete notice of the right to rescind, to commence the three-
business-day rescission period, the creditor must deliver to the
consumer a complete, correct, updated notice of the right to
rescind. In either situation, the consumer would have three business
days after proper delivery to rescind the transaction.[ltrif]
[lsqbb]2. Material disclosures. Footnote 36 sets forth the
material disclosures that must be provided before the rescission
period can begin to run. The creditor must provide sufficient
information to satisfy the requirements of Sec. 226.6 for these
disclosures. A creditor may satisfy this requirement by giving an
initial disclosure statement that complies with the regulation.
Failure to give the other required initial disclosures (such as the
billing rights statement) or the information required under Sec.
226.5b does not prevent the running of the rescission period,
although that failure may result in civil liability or
administrative sanctions. The payment terms set forth in footnote 36
apply to any repayment phase set forth in the agreement. Thus, the
payment terms described in Sec. 226.6(e)(2) for any repayment phase
as well as for the draw period are ``material disclosures.''
3. Material disclosures--variable rate program. For a variable
rate program, the material disclosures also include the disclosures
listed in footnote 12 to Sec. 226.6(a)(2): The circumstances under
which the rate may increase; the limitations on the increase; and
the effect of an increase. The disclosures listed in footnote 12 to
Sec. 226.6(a)(2) for any repayment phase also are material
disclosures for variable-rate programs.[rsqbb]
[lsqbb]4.[rsqbb] [rtrif]15(a)(3)(ii)[ltrif] Unexpired right of
rescission.
[rtrif]15(a)(3)(ii)(A) Up to three years.[ltrif]
[lsqbb]When the creditor has failed to take the action necessary
to start the three-day rescission period running the right to
rescind automatically lapses on the occurrence of the earliest of
the following three events:
The expiration of three years after the occurrence
giving rise to the right of rescission.
Transfer of all the consumer's interest in the
property.
Sale of the consumer's interest in the property,
including a transaction in which the consumer sells the dwelling and
takes back a purchase money note and mortgage or retains legal title
through a device such as an installment sale contract.[rsqbb]
[rtrif]1. Transfer. A[ltrif] transfer of all the consumer's
interest [rtrif]that terminates the right of rescission[ltrif]
includes [lsqbb]such[rsqbb] transfers [as bequests and] [rtrif]by
operation of law following the consumer's death and by[ltrif]
gift[lsqbb]s[rsqbb]. [A sale or transfer of the property need not be
voluntary to terminate the right to rescind. For example, a
foreclosure sale would terminate an unexpired right to rescind. As
provided in section 125 of the act, the three-year limit may be
extended by an administrative proceeding to enforce the provisions
of Sec. 226.15.[rsqbb] A partial transfer of the consumer's
interest, such as a transfer bestowing co-ownership on a spouse,
does not terminate the right of rescission. [rtrif]Filing for
bankruptcy generally does not terminate the right of rescission if
the consumer retains an interest in the property after the
bankruptcy estate is created.
2. Sale. A sale of the consumer's interest in the property that
terminates the right of rescission includes a transaction in which
the consumer sells the dwelling and takes back a purchase money note
and mortgage or retains legal title through a device such as an
installment sale contract.
3. Involuntary sale or transfer. A sale or transfer of the
property need not be voluntary to terminate the right to rescind.
For example, a foreclosure sale would terminate an unexpired right
to rescind.[ltrif]
[lsqbb]Paragraph[rsqbb] 15(a)(4) [rtrif]Joint owners[ltrif].
1. [rtrif]In general[ltrif][lsqbb]Joint owners[rsqbb]. When more
than one consumer has the right to rescind a transaction, any one of
them may exercise that right and cancel the transaction on behalf of
all. For example, if both a husband and wife have the right to
rescind a transaction, either spouse acting alone may exercise the
right and both are bound by the rescission.
[rtrif]Paragraph 15(a)(5)
15(a)(5)(i) Definition of material disclosures.
1. In general. The right to rescind generally does not expire
until midnight after the third business day following the latest of
(1) the transaction that gives rise to the right of rescission, (2)
delivery of the notice of the right to rescind, as set forth in
Sec. 226.15(b), or (3) delivery of all material disclosures, as set
forth in Sec. 226.15(a)(5)(i). See Sec. 226.15(a)(3). A creditor
must make the material disclosures clearly and conspicuously,
consistent with the requirements of Sec. 226.6(a)(2) or Sec.
226.33(c). A creditor may satisfy the requirement to provide
material disclosures by giving an account-opening table described in
Sec. 226.6(a)(1) or Sec. 226.33(d)(2) and (d)(4) that complies
with the regulation. Failure to provide the required non-material
[[Page 58751]]
disclosures set forth in Sec. 226.6 or Sec. 226.33 or the
information required under Sec. 226.5b does not affect the right of
rescission, although such failure may be a violation subject to the
liability provisions of section 130 of the Act, or administrative
sanctions.
2. Repayment phase. Section 226.6(a)(2) requires that
disclosures described in that section be given for the draw period
and any repayment period, as applicable. See comment 6(a)-2. Thus,
the terms described in Sec. 226.15(a)(5) for any repayment phase as
well as for the draw period are ``material disclosures.''
3. Format. Failing to satisfy terminology or format requirements
set forth in Sec. 226.6(a)(1) or (a)(2) or Sec. 226.33(c), (d)(2),
or (d)(4) in the model forms in Appendix G or Appendix K is not by
itself a failure to provide material disclosures. Nonetheless, a
creditor must provide the material disclosures clearly and
conspicuously, as described in Sec. 226.5(a)(1) and comments
5(a)(1)-1 and -2.
4. Annual percentage rates. Under Sec. 226.15(a)(5)(i)(A), any
annual percentage rates that must be disclosed in the account-
opening table under Sec. Sec. 226.6(a)(2)(vi) or 226.33(c)(6)(i)
are considered material disclosures. This includes all annual
percentage rates that may be imposed on the HELOC plan related to
the payment plan disclosed in the table, except for any penalty
annual percentage rates or any annual percentage rates for fixed-
rate and fiexed-term advances during the draw period (unless those
are the only advances allowed during the draw period). See
Sec. Sec. 226.6(a)(2) and (a)(2)(vi).
5. Introductory rates. Under Sec. 226.15(a)(5)(i)(A),
information related to introductory rates required to be disclosed
in the account-opening table under Sec. 226.6(a)(2)(vi)(B) or Sec.
226.33(c)(6)(i)(B) are considered material disclosures. Thus, the
term ``material disclosures'' would include the following
introductory rate information that is required to be disclosed in
the account-opening table: (1) The introductory rate; (2) the time
period during which the introductory rate will remain in effect; and
(3) the rate that will apply after the introductory rate expires.
6. Variable-rate plans. Under Sec. 226.15(a)(5)(i)(A),
information related to variable-rate plans required to be disclosed
in the account-opening table under Sec. 226.6(a)(2)(vi)(A) or Sec.
226.33(c)(6)(i)(A) generally is considered material disclosures.
Specifically, the term ``material disclosures'' would include the
following information related to variable-rate plans required to be
disclosed in the account-opening table: (1) The fact that the annual
percentage rate may change due to the variable-rate feature; (2) an
explanation of how the annual percentage rate will be determined;
(3) the frequency of changes in the annual percentage rate; (4) any
rules relating to changes in the index value and the annual
percentage rate, and resulting changes in the payment amount,
including, for example, an explanation of payment limitations and
rate carryover; and (5) a statement of any limitations on changes in
the annual percentage rate, including the minimum and maximum annual
percentage rate that may be imposed under the payment plan disclosed
in the table, or if no annual or other periodic limitations apply to
changes in the annual percentage rate, a statement that no annual
limitation exists. The term ``material disclosures,'' however, does
not include the disclosure of the lowest and highest value of the
index in the past 15 years, even though this information is required
to be included in the account-opening table as part of the variable
rate information.
15(a)(5)(ii) Tolerances for accuracy of total of all one-time
fees imposed by the creditor and any third parties to open the plan.
1. Effect of the total of all one-time fees imposed to open the
plan on termination fee disclosure. Section 226.15(a)(5)(ii)
provides tolerances for the accuracy of the total of all one-time
fees imposed by the creditor and any third parties to open the plan
and other disclosures affected by the total costs. Fees imposed by
the creditor if a consumer terminates the plan prior to its
scheduled maturity, which are also a material disclosure for
purposes of rescission under Sec. 226.15(a)(5), include waived
total costs of one-time fees imposed to open the plan if the
creditor will impose those costs on the consumer should the consumer
terminate the plan within a certain amount of time after account
opening. The tolerances set forth in Sec. 226.15(a)(5)(ii) apply to
these waived total costs of one-time fees imposed to open the plan
that would be considered fees imposed by the creditor if a consumer
terminates the plan prior to its scheduled maturity.[ltrif]
15(b) Notice of right to rescind.
[rtrif]15(b)(1) Who receives notice.[ltrif]
1. [lsqbb]Who receives notice[rsqbb][rtrif]In general. i.[ltrif]
Each consumer entitled to rescind must be given:
[lsqbb][rsqbb][rtrif]A.[ltrif] [lsqbb]Two copies of
the[rsqbb][rtrif]The[ltrif] rescission notice.
[lsqbb][rsqbb][rtrif]B. [ltrif] The material
disclosures.
[rtrif]ii.[ltrif] [lsqbb]In[rsqbb][rtrif]For example, in[ltrif]
a transaction involving joint owners, both of whom are entitled to
rescind, both must receive the notice of the right to rescind and
disclosures. [For example, if both spouses are entitled to rescind a
transaction, each must receive two copies of the rescission notice
(one copy to each if the notice is provided in electronic form in
accordance with the consumer consent and other applicable provisions
of the E-Sign Act) and one copy of the disclosures.[rsqbb]
[lsqbb]2. Format. The rescission notice may be physically
separated from the material disclosures or combined with the
material disclosures, so long as the information required to be
included on the notice is set forth in a clear and conspicuous
manner. See the model notices in appendix G.[rsqbb]
[rtrif]15(b)(2) Format of notice.
1. Failure to format correctly. The creditor's failure to comply
with the format requirements in Sec. 226.15(b)(2) does not by
itself constitute a failure to deliver the notice of the right to
rescind. However, to deliver the notice properly for purposes of
Sec. 226.15(a)(3), the creditor must provide the disclosures
required under Sec. 226.15(b)(3) clearly and conspicuously, as
described in Sec. 226.15(b)(3) and comment 15(b)(3)-1.
2. Notice must be in writing in a form the consumer may keep.
The rescission notice must be in writing in a form that the consumer
may keep. See Sec. 226.5(a)(1)(ii).
15(b)(3) Required content of notice.[ltrif]
[lsqbb]3. Content. The notice must include all of the
information outlined in Sec. 226.15(b)(1) through (5). The
requirement in Sec. 226.15(b) that the transaction or occurrence be
identified may be met by providing the date of the transaction or
occurrence. The notice may include additional information related to
the required information, such as:
A description of the property subject to the security
interest.
A statement that joint owners may have the right to
rescind and that a rescission by one is effective for all.
The name and address of an agent of the creditor to
receive notice of rescission.[rsqbb]
[rtrif]1. Clear and conspicuous standard. Section 226.15(b)(3)
requires that the disclosures in Sec. 226.15(b)(3) be given clearly
and conspicuously. See comments 5(a)(1)-1 and 5(a)(1)-2 for guidance
on the clear and conspicuous standard.
2. Methods for sending notification of exercise. In addition to
providing a postal address for regular mail in the disclosure
required under Sec. 226.15(b)(3)(vi), the creditor, at its option,
may describe overnight courier, fax, e-mail, in-person, or other
methods of communication that the consumer may use to send or
deliver written notification to the creditor of exercise of the
right of rescission.
3. Creditor's or its agent's address. If the creditor designates
an agent to receive the consumer's rescission notice, the creditor
may include its name along with the agent's name and address in the
disclosure required by Sec. 226.15(b)(3)(vi).
4. Calendar date on which the rescission period expires. i. In
some cases, the creditor cannot provide the calendar date on which
the three-business-day period for rescission expires, such as when
the transaction is conducted through the mail or when the
transaction giving rise to the right of rescission occurs through an
escrow agent and involves two or more borrowers who do not sign at
the same time. If the creditor cannot provide an accurate deadline,
the creditor must provide the calendar date on which it reasonably
and in good faith expects the three-business-day period for
rescission to expire. For example, when opening a HELOC account,
assume that a consumer receives all material disclosures on February
15. If the creditor uses an overnight courier service to deliver
closing documents and the rescission notice to the consumer on
Monday, March 1, the creditor could instruct the consumer to sign
the documents no later than Wednesday, March 3, in which case the
creditor should provide Saturday, March 6 as the calendar date after
which the three-business-day period for rescission expires. In this
example, Saturday, March 6 is the calendar date on which the
creditor can reasonably expect the rescission period to expire
because the creditor expects that the consumer will receive the
notice of the right of rescission on Monday, March 1 with the rest
of the closing documents and because the creditor can reasonably
assume that the consumer will wait until the deadline of Wednesday,
March 3 to sign the closing documents and complete the transaction.
[[Page 58752]]
ii. If the creditor provides a date in the notice that gives the
consumer a longer period within which to rescind than the actual
period for rescission, the notice shall be deemed to comply with the
requirement in Sec. 226.15(b)(3)(vii), as long as the creditor
permits the consumer to rescind the transaction through the end of
the date in the notice. For instance, in the example in comment
15(b)(3)-4.i. above, if the consumer signs the closing documents
upon receipt on Monday, March 1, the actual expiration date of the
right to rescind would be at the end of Thursday, March 4. The
creditor's notice stating that the expiration date is Saturday,
March 6 would be deemed compliant with Sec. 226.15(b)(3)(vii), as
long as the creditor permits the consumer to rescind through the end
of Saturday, March 6.
iii. If the creditor provides a date in the notice that gives
the consumer a shorter period within which to rescind than the
actual period for rescission, the creditor shall be deemed to comply
with the requirement in Sec. 226.15(b)(3)(vii) if the creditor
notifies the consumer that the deadline in the first notice of the
right of rescission has changed and provides a second notice to the
consumer stating that the consumer's right to rescind expires on a
calendar date, which is three business days from the date the
consumer receives the second notice. For instance, in the example in
comment 15(b)(3)-4.i. above, if the consumer disregards the
creditor's instructions to sign the closing documents no later than
Wednesday, March 3, and signs the closing documents on Thursday,
March 4, the actual date after which the right of rescission expires
would be Monday, March 8. The creditor's notice stating that the
expiration date is Saturday, March 6 would not violate Sec.
226.15(b)(3)(vii) if the creditor discloses to the consumer that the
expiration date in the first notice (March 6) has changed and
provides a corrected notice with an additional three-business-day
period to rescind. For example, the creditor could prepare on
Monday, March 8 a second notice stating that the expiration date for
the right to rescind is the end of Friday, March 12 and include that
second notice in a package delivered by overnight courier to the
consumer on Tuesday, March 9. The creditor also could include in the
package a cover letter stating that the deadline to cancel the
transaction has changed, and refer to the ``Deadline to Cancel''
section in the second notice.
5. Form for consumer's exercise of right. Creditors must provide
a space for the consumer's name and property address on the form.
Creditors are not obligated to complete the lines in the form for
the consumer's name and property address, but may wish to do so to
ensure that the consumer who uses the form to exercise the right can
be readily identified. At its option, a creditor may include the
account number on the form. A creditor may not, however, request or
require that the consumer provide the account number on the form
(such as including a space labeled ``account number'' for the
consumer to complete).
15(b)(4) Optional content of notice.
1. Related information. Section 226.15(b)(4) lists optional
disclosures that are related to the disclosures required by Sec.
226.15(b)(3) that may be added to the notice. In addition, at the
creditor's option, other information directly related to the
disclosures required by Sec. 226.15(b)(3) may be included in the
notice. An explanation of the use of pronouns or other references to
the parties to the transaction is directly related information. For
example, a creditor might add to the notice a statement that ```You'
refers to the customer and `we' refers to the creditor.''
15(b)(5)[ltrif][lsqbb]4.[rsqbb] Time of providing notice.
[rtrif]1.[ltrif] The notice required by Sec. 226.15(b)
[rtrif]must be given[ltrif][lsqbb]need not be given[rsqbb] before
the [rtrif]transaction[ltrif] [lsqbb]occurrence[rsqbb] giving rise
to the right of rescission. [rtrif]If t[ltrif][lsqbb]T[rsqbb]he
creditor [lsqbb]may[rsqbb] deliver[rtrif]s[ltrif] the notice after
the [rtrif]transaction,[ltrif] [lsqbb]occurrence but[rsqbb][rtrif]
the timing requirement of Sec. 226.15(b)(5) is violated and the
right of rescission does not expire until the earlier of three
business days after[ltrif] [lsqbb]rescission period will not begin
to run until[rsqbb] the notice is [rtrif]properly[ltrif] given
[rtrif]or upon the occurrence of one of the events listed in Sec.
226.15(a)(3)(ii)(A)[ltrif]. For example, if the creditor
[rtrif]delivers the material disclosures on Monday, March 1 and
account opening occurs on that same day, but the creditor provides
the rescission notice on Wednesday, March 24, the right of
rescission does not expire until the end of the third business day
after Wednesday, March 24, that is, until the end of Saturday, March
27[ltrif] [provides the notice on May 15, but disclosures were given
and the credit limit was raised on May 10, the 3-business-day
rescission period will run from May 15[rsqbb].
[rtrif]15(b)(6) Proper form of notice.
1. A creditor satisfies Sec. 226.15(b)(3) if it provides the
model form in Appendix G, or a substantially similar notice, which
is properly completed with the disclosures required by Sec.
226.15(b)(3). For example, a notice would not fulfill the
requirement to deliver the notice of the right to rescind if the
date on which the three-business-day period for rescission
terminates was not properly completed because the date was missing
or incorrectly calculated. If the creditor provides a date that is
later deemed inaccurate, the notice may be deemed to comply with
Sec. 226.15(b)(3) if the creditor follows Sec. 226.15(b)(3)(vii)
and the guidance in comment 15(b)(3)-4.[ltrif]
15(c) Delay of creditor's performance.
1. General rule. [rtrif]i.[ltrif] Until the rescission period
has expired and the creditor is reasonably satisfied that the
consumer has not rescinded, the creditor must not, either directly
or through a third party:
[lsqbb][rsqbb][rtrif]A.[ltrif] Disburse advances to the
consumer.
[lsqbb][rsqbb][rtrif]B.[ltrif] Begin performing services
for the consumer.
[lsqbb][rsqbb][rtrif]C.[ltrif] Deliver materials to the
consumer.
[rtrif]ii.[ltrif] A creditor may, however, continue to allow
transactions under an existing open-end credit plan during a
rescission period that results solely from the addition of a
security interest in the consumer's principal dwelling. (See comment
15(c)-3 for other actions that may be taken during the delay
period.)
2. Escrow. The creditor may disburse advances during the
rescission period in a valid escrow arrangement. The creditor may
not, however, appoint the consumer as ``trustee'' or ``escrow
agent'' and distribute funds to the consumer in that capacity during
the delay period.
3. Actions during the delay period. Section 226.15(c) does not
prevent the creditor from taking other steps during the delay, short
of beginning actual performance. Unless otherwise prohibited, such
as by State law, the creditor may, for example:
[lsqbb][rsqbb][rtrif]i.[ltrif] Prepare the cash advance
check.
[lsqbb][rsqbb][rtrif]ii.[ltrif] Perfect the security
interest.
[lsqbb][rsqbb][rtrif]iii.[ltrif] Accrue finance charges
during the delay period.
4. Performance by third party. The creditor is relieved from
liability for failure to delay performance if a third party with no
knowledge that the rescission right has been activated provides
materials or services, as long as any debt incurred for materials or
services obtained by the consumer during the rescission period is
not secured by the security interest in the consumer's dwelling. For
example, if a consumer uses a bank credit card to purchase materials
from a merchant in an amount below the floor limit, the merchant
might not contact the card issuer for authorization and therefore
would not know that materials should not be provided.
5. Delay beyond rescission period. [rtrif]i.[ltrif] The creditor
must wait until it is reasonably satisfied that the consumer has not
rescinded [rtrif]within the applicable time period[ltrif]. For
example, the creditor may satisfy itself by doing one of the
following:
[lsqbb][rsqbb][rtrif]A.[ltrif] Waiting a reasonable time
after expiration of the rescission period to allow for delivery of a
mailed notice.
[lsqbb][rsqbb][rtrif]B.[ltrif] Obtaining a written
statement from the consumer that the right has not been exercised.
[rtrif]The statement must be signed and dated by the consumer only
at the end of the three-day period.[ltrif]
[rtrif]ii.[ltrif] When more than one consumer has the right to
rescind, the creditor cannot reasonably rely on the assurance of
only one consumer, because other consumers may exercise the right.
15(d) Effects of rescission.
15(d)[rtrif](1)[ltrif] Effects of rescission [rtrif]prior to the
creditor disbursing funds[ltrif].
[Paragraph] 15(d)(1)[rtrif](i) Effect of consumer's notice of
rescission[ltrif].
1. Termination of security interest. Any security interest
giving rise to the right of rescission becomes void when the
consumer [lsqbb]exercises the right of
rescission[rsqbb][rtrif]provides a notice of rescission to a
creditor[ltrif]. The security interest is automatically negated
regardless of its status and whether or not it was recorded or
perfected. Under Sec.
226.15[lsqbb](d)(2)[rsqbb][rtrif](d)(1)(ii)[ltrif], however, the
creditor must take [lsqbb]any action[rsqbb][rtrif]whatever steps
are[ltrif] necessary to [lsqbb]reflect the fact
that[rsqbb][rtrif]terminate[ltrif] the security interest [lsqbb]no
longer exists[rsqbb].
2. Extent of termination. The creditor's security interest is
void to the extent that it is related to the occurrence giving rise
to the right of rescission. For example, upon rescission:
[lsqbb][rsqbb][rtrif]i.[ltrif] If the consumer's right
to rescind is activated by the opening of a plan, any security
interest in the principal dwelling is void.
[[Page 58753]]
[lsqbb][rsqbb][rtrif]ii.[ltrif] If the right arises due
to an increase in the credit limit, the security interest is void as
to the amount of credit extensions over the prior limit, but the
security interest in amounts up to the original credit limit is
unaffected.
[lsqbb][rsqbb][rtrif]iii.[ltrif] If the right arises
with each individual credit extension, then the interest is void as
to that extension, and other extensions are unaffected.
[lsqbb]Paragraph[rsqbb] 15[lsqbb](d)(2)[rsqbb][rtrif](d)(1)(ii)
Creditor's obligations[ltrif].
1. Refunds to consumer. The consumer cannot be required to pay
any amount [lsqbb]in the form of money or property[rsqbb] either to
the creditor or to a third party as part of the credit transaction
subject to the right of rescission. Any amounts [of this nature]
already paid by the consumer must be refunded. Any amount includes
finance charges already accrued, as well as other charges, such as
broker fees, application and commitment fees, or fees for a title
search or appraisal, whether paid to the creditor, paid by the
consumer directly to the third party, or passed on from the creditor
to the third party. It is irrelevant that these amounts may not
represent profit to the creditor. For example:
[lsqbb][rsqbb][rtrif]i.[ltrif] If the occurrence is the
opening of the plan, the creditor must return any membership or
application fee paid.
[lsqbb][rsqbb][rtrif]ii.[ltrif] If the occurrence is the
increase in a credit limit or the addition of a security interest,
the creditor must return any fee imposed for a new credit report or
filing fees.
[lsqbb][rsqbb][rtrif]iii.[ltrif] If the occurrence is a
credit extension, the creditors must return fees such as
application, title, and appraisal or survey fees, as well as any
finance charges related to the credit extension.
2. Amounts not refundable to consumer. Creditors need not return
any money given by the consumer to a third party outside of the
credit transaction, such as costs incurred for a building permit or
for a zoning variance. [lsqbb]Similarly, the term any amount does
not apply to any money or property given by the creditor to the
consumer; those amounts must be tendered by the consumer to the
creditor under Sec. 226.15(d)(3).[rsqbb]
3. Reflection of security interest termination. The creditor
must take whatever steps are necessary to [lsqbb]indicate
that[rsqbb][rtrif]terminate[ltrif] the security interest [lsqbb]is
terminated[rsqbb]. Those steps include the cancellation of documents
creating the security interest, and the filing of release or
termination statements in the public record. [lsqbb]In a transaction
involving subcontractors or suppliers that also hold security
interests related to the credit transaction, the
creditor[rsqbb][rtrif]If a mechanic's or materialman's lien is
retained by a subcontractor or supplier of a creditor-contractor,
the creditor-contractor[ltrif] must ensure that the termination of
[lsqbb]their[rsqbb][rtrif]that[ltrif] security
interest[lsqbb]s[rsqbb] is also reflected. The 20-day period for the
creditor's action refers to the time within which the creditor must
begin the process. It does not require all necessary steps to have
been completed within that time, but the creditor is responsible for
[lsqbb]seeing the process through to
completion[rsqbb][rtrif]ensuring that the process is
completed[ltrif].
[rtrif]4. Twenty-calendar-day period. The 20-calendar-day period
begins to runs from the date the creditor receives the consumer's
notice. The creditor is deemed to have received the consumer's
notice of rescission if the consumer provides the notice to the
creditor or the creditor's agent designated on the notice. Where no
designation is provided, the creditor is deemed to have received the
notice if the consumer provides it to the servicer. See Sec.
226.15(a)(2)(ii)(A).[ltrif]
[lsqbb]Paragraph 15(d)(3).
1. Property exchange. Once the creditor has fulfilled its
obligations under Sec. 226.15(d)(2), the consumer must tender to
the creditor any property or money the creditor has already
delivered to the consumer. At the consumer's option, property may be
tendered at the location of the property. For example, if fixtures
or furniture have been delivered to the consumer's home, the
consumer may tender them to the creditor by making them available
for pick-up at the home, rather than physically returning them to
the creditor's premises. Money already given to the consumer must be
tendered at the creditor's place of business. For purposes of
property exchange, the following additional rules apply:
A cash advance is considered money for purposes of this
section even if the creditor knows what the consumer intends to
purchase with the money.
In a 3-party open-end credit plan (that is, if the
creditor and seller are not the same or related persons), extensions
by the creditor that are used by the consumer for purchases from
third-party sellers are considered to be the same as cash advances
for purposes of tendering value to the creditor, even though the
transaction is a purchase for other purposes under the regulation.
For example, if a consumer exercises the unexpired right to rescind
after using a 3-party credit card for one year, the consumer would
tender the amount of the purchase price for the items charged to the
account, rather than tendering the items themselves to the creditor.
2. Reasonable value. If returning the property would be
extremely burdensome to the consumer, the consumer may offer the
creditor its reasonable value rather than returning the property
itself. For example, if building materials have already been
incorporated into the consumer's dwelling, the consumer may pay
their reasonable value.
Paragraph 15(d)(4).
1. Modifications. The procedures outlined in Sec. 226.15(d)(2)
and (3) may be modified by a court. For example, when a consumer is
in bankruptcy proceedings and prohibited from returning anything to
the creditor, or when the equities dictate, a modification might be
made. The sequence of procedures under Sec. 226.15(d)(2) and (3),
or a court's modification of those procedures under Sec.
226.15(d)(4), does not affect a consumer's substantive right to
rescind and to have the loan amount adjusted accordingly. Where the
consumer's right to rescind is contested by the creditor, a court
would normally determine whether the consumer has a right to rescind
and determine the amounts owed before establishing the procedures
for the parties to tender any money or property.[rsqbb]
[rtrif]15 (d)(2) Effects of rescission after the creditor
disburses funds.
15(d)(2)(i) Effects of rescission if the parties are not in a
court proceeding.
1. Effect of the process. The process set forth in Sec.
226.15(d)(2)(i) does not affect the consumer's ability to seek a
remedy in court, such as an action to recover damages under section
130 of the act, and/or an action to seek to tender in installments.
In addition, a creditor's written statement as described in Sec.
226.15(d)(2)(i)(B) is not an admission by the creditor that the
consumer's claim is a valid exercise of the right to rescind.
15(d)(2)(i)(A) Creditor's acknowledgment of receipt.
1. Twenty-calendar-day period. The 20-calendar-day period begins
to run from the date the creditor receives the consumer's notice.
The creditor is deemed to have received the consumer's notice of
rescission if the consumer provides the notice to the servicer. See
comment 15(a)(2)(ii)(B)-1.
15(d)(2)(i)(B) Creditor's written statement.
1. Written statement regarding tender of money. If the creditor
disbursed money to the consumer, then the creditor's written
statement must state the amount of money that the creditor will
accept as the consumer's tender. For example, suppose the principal
balance owed at the time the creditor received the consumer's notice
of rescission was $165,000, the costs paid directly by the consumer
at closing were $8,000, and the consumer made interest payments
totaling $20,000 from the date of consummation to the date of the
creditor's receipt of the consumer's notice of rescission. The
creditor's written statement could provide that the acceptable
amount of tender is $137,000, or some amount higher or lower than
that amount.
2. Reasonable date. The creditor must provide the consumer with
a reasonable date by which the consumer may tender the money or
property described in paragraph (d)(2)(i)(B)(1) of this section. For
example, it would be reasonable under most circumstances to permit
the consumer's tender within 60 days of the creditor mailing or
delivering the written statement.
3. Tender of money or property. For purposes of determining
whether the consumer should tender money or property, the following
additional rules apply:
i. A cash advance is considered money for purposes of this
section even if the creditor knows what the consumer intends to
purchase with the money.
ii. In a three-party open-end credit plan (that is, if the
creditor and seller are not the same or related persons), extensions
by the creditor that are used by the consumer for purchases from
third-party sellers are considered to be the same as cash advances
for purposes of tendering value to the creditor, even though the
transaction is a purchase for other purposes under the regulation.
For example, if a consumer exercises the unexpired right to rescind
after using a three-party credit card for one year, the consumer
would tender the amount of the purchase price for the items charged
to the account, rather than tendering the items themselves to the
creditor.
15(d)(2)(i)(C) Consumer's response.
[[Page 58754]]
1. Reasonable value of property. If returning the property would
be extremely burdensome to the consumer, the consumer may offer the
creditor its reasonable value rather than returning the property
itself. For example, if aluminum siding has already been
incorporated into the consumer's dwelling, the consumer may pay its
reasonable value.
2. Location for tender of property. At the consumer's option,
property may be tendered at the location of the property. For
example, if aluminum siding or windows have been delivered to the
consumer's home, the consumer may tender them to the creditor by
making them available for pick-up at the home, rather than
physically returning them to the creditor's premises. For example,
if aluminum siding has already been incorporated into the consumer's
dwelling, the consumer may pay its reasonable value.
15(d)(2)(i)(D) Creditor's security interest.
1. Extent of termination. See comment 15(d)(1)(i)-2.
2. Reflection of security interest termination. See comment
15(d)(1)(ii)-3.
15(d)(2)(ii) Effects of rescission in a court proceeding.
1. Valid right of rescission. The procedures set forth in Sec.
226.15(d)(2)(ii) assume that the consumer's right to rescind has not
expired as provided in Sec. 226.15(a)(3)(ii). Thus, if the consumer
provides a notice of rescission more than three years after
consummation of the transaction, then the consumer's right to
rescind has expired, and these procedures do not apply. See Sec.
226.15(a)(3)(ii)(A).
15(d)(2)(ii)(A) Consumer's obligation.
1. Tender of money. If the creditor disbursed money to the
consumer, the consumer shall tender to the creditor the principal
balance owed at the time the creditor received the consumer's notice
of rescission less any amounts the consumer has given to the
creditor or a third party in connection with the transaction. For
example, suppose the principal balance owed at the time the creditor
received the consumer's notice of rescission was $165,000, the costs
paid directly by the consumer at closing were $8,000, and the
consumer made interest payments totaling $20,000 from the date of
consummation to the date the creditor received the consumer's notice
of rescission. The amount of the consumer's tender would be
$137,000. This amount may be reduced by any amounts for damages,
attorney's fees, or costs, as the court may determine.
2. Refunds to consumer. See comment 15(d)(1)(ii)-1.
3. Amounts not refundable to consumer. For purposes of Sec.
226.15(d)(2)(ii)(A), the term any amount does not include any money
given by the consumer to a third party outside of the credit
transaction, such as costs the consumer incurred for a building
permit or for a zoning variance. Similarly, the term any amount does
not apply to any money or property given by the creditor to the
consumer.
4. Condition of consumer's tender. There may be circumstances
where the consumer has no obligation to tender and, therefore, the
creditor's obligations would not be conditioned on the consumer's
tender. In that case, within 20 calendar days after the creditor's
receipt of a consumer's notice of rescission, the creditor would
terminate the security interest and refund any amounts the consumer
has given to the creditor or a third party in connection with the
transaction.
5. Tender of money or property. See comment 15(d)(2)(i)(B)-3.
6. Reasonable value of property. See comment 15(d)(2)(i)(C)-1.
7. Location for tender of property. See comment 15(d)(2)(i)(C)-
2.
15(d)(2)(ii)(B) Creditor's obligation.
1. Extent of termination. See comment 15(d)(1)(i)-2.
2. Reflection of security interest termination. See comment
15(d)(1)(ii)-3.
15(d)(2)(ii)(C) Judicial modification.
1. Determination of the consumer's right to rescind. The
sequence of procedures under Sec. Sec. 226.15(d)(2)(ii)(A) and (B),
or a court's modification of those procedures under Sec.
226.15(d)(2)(ii)(C), does not affect a consumer's substantive right
to rescind and to have the loan amount adjusted accordingly. Where
the consumer's right to rescind is contested by the creditor, a
court would normally determine first whether the consumer's right to
rescind has expired, then the amounts owed by the consumer and the
creditor, and then the procedures for the consumer to tender any
money or property.
2. Judicial modification of procedures. The procedures outlined
in Sec. Sec. 226.15(d)(2)(ii)(A) and (B) may be modified by a
court. For example, when a consumer is in bankruptcy proceedings and
prohibited from returning anything to the creditor, or when the
equities dictate, a modification might be made. A court may modify
the consumer's form or manner of tender, such as by ordering payment
in installments or by approving the parties' agreement to an
alternative form of tender.[ltrif]
15(e) Consumer's waiver of right to rescind.
[lsqbb]1. Need for waiver. To waive the right to rescind, the
consumer must have a bona fide personal financial emergency that
must be met before the end of the rescission period. The existence
of the consumer's waiver will not, of itself, automatically insulate
the creditor from liability for failing to provide the right of
rescission.[rsqbb]
[lsqbb]2.[rsqbb][rtrif]1.[ltrif] Procedure. [lsqbb]To waive or
modify the right to rescind, the consumer must give a written
statement that specifically waives or modifies the right, and also
includes a brief description of the emergency. Each consumer
entitled to rescind must sign the waiver statement. In a transaction
involving multiple consumers, such as a husband and wife using their
home as collateral, the waiver must bear the signatures of both
spouses.[rsqbb][rtrif]A consumer may modify or waive the right to
rescind only after the creditor delivers the notice required by
Sec. 226.15(b) and the disclosures required by Sec. 226.6. After
delivery of the required notice and disclosures, the consumer may
waive or modify the right to rescind by giving the creditor a dated,
written statement that specifically waives or modifies the right and
describes the bona fide personal financial emergency. A waiver is
effective only if each consumer entitled to rescind signs a waiver
statement. Where there are multiple consumers entitled to rescind,
the consumers may, but need not, sign the same waiver statement. See
Sec. 226.2(a)(11) to determine which natural persons are consumers
with the right to rescind.
2. Bona fide personal financial emergency. To modify or waive
the right to rescind, there must be a bona fide personal financial
emergency that requires disbursement of loan proceeds before the end
of the rescission period. Whether there is a bona fide personal
financial emergency is determined by the facts surrounding
individual circumstances. A bona fide personal financial emergency
typically, but not always, will involve imminent loss of or harm to
a dwelling or harm to the health or safety of a natural person. A
waiver is not effective if the consumer's statement is inconsistent
with facts known to the creditor. The following examples describe
circumstances that are and are not a bona fide personal financial
emergency.
i. Examples--bona fide personal financial emergency. Examples of
a bona fide personal financial emergency include the following:
A. The imminent sale of the consumer's home at foreclosure,
where the foreclosure sale will proceed unless the loan proceeds are
made available to the consumer during the rescission period.
B. The need for loan proceeds to fund immediate repairs to
ensure that a dwelling is habitable, such as structural repairs
needed due to storm damage, where loan proceeds are needed during
the rescission period to pay for the repairs.
C. The imminent need for health care services, such as in-home
nursing care for a patient recently discharged from the hospital,
where loan proceeds are needed during the rescission period to
obtain the services.
ii. Examples--not a bona fide personal financial emergency.
Examples of circumstances that are not a bona fide personal
financial emergency include the following:
A. The consumer's desire to purchase goods or services not
needed on an emergency basis, even though the price may increase if
purchased after the rescission period.
B. The consumer's desire to invest immediately in a financial
product, such as purchasing securities.
iii. Consumer's waiver statement inconsistent with facts. The
conditions for a waiver are not met where the consumer's waiver
statement is inconsistent with facts known to the creditor. For
example, the conditions for a waiver are not met where the
consumer's waiver statement states that loan proceeds are needed
during the rescission period to abate flooding in a consumer's
basement, but the creditor is aware that there is no
flooding.[ltrif]
* * * * *
Section 226.16--Advertising
* * * * *
16(d) Additional requirements for home-equity plans.
* * * * *
5. Promotional rates and payments in advertisements for home-
equity plans. Section 226.16(d)(6) requires additional
[[Page 58755]]
disclosures for promotional rates or payments.
i. Variable-rate plans. In advertisements for variable-rate
plans, if the advertised annual percentage rate is based on
[lsqbb](or the advertised payment is derived from)[rsqbb] the index
and margin that will be used to make rate [lsqbb](or payment)[rsqbb]
adjustments over the term of the [lsqbb]loan[rsqbb] [rtrif] plan
[ltrif], then there is no promotional rate[lsqbb] or promotional
payment[rsqbb]. If, however, the advertised annual percentage rate
is not based on [lsqbb](or the advertised payment is not derived
from)[rsqbb] the index and margin that will be used to make rate
[lsqbb](or payment)[rsqbb] adjustments, and a reasonably current
application of the index and margin would result in a higher annual
percentage rate [lsqbb](or, given an assumed balance, a higher
payment)[rsqbb] then there is a promotional rate[lsqbb] or
promotional payment[rsqbb]. [rtrif] If the advertised payment is the
same as other minimum payments under the plan derived by applying a
reasonably current index and margin and given an assumed balance,
then there is no promotional payment. If, however, the advertised
payment is less than other minimum payments under the plan based on
the same assumptions, then there is a promotional payment. For
example, if the advertised payment is an interest-only payment
applicable during the draw period, and minimum payments during the
repayment period will be higher because they are based on a schedule
that fully amortizes the outstanding balance by the end of the
repayment period, or there is no repayment period and a balloon
payment would result at the end of the draw period, then the
advertised payment is a promotional payment. [ltrif]
ii. Equal prominence, close proximity. Information required to
be disclosed in Sec. 226.16(d)(6)(ii) that is immediately next to
or directly above or below the promotional rate or payment (but not
in a footnote) is deemed to be closely proximate to the listing.
Information required to be disclosed in Sec. 226.16(d)(6)(ii) that
is in the same type size as the promotional rate or payment is
deemed to be equally prominent.
iii. Amounts and time periods of payments. Section
226.16(d)(6)(ii)(C) requires disclosure of the amount and time
periods of any payments that will apply under the plan. This section
may require disclosure of several payment amounts, including any
balloon payment. For example, if an advertisement for a home-equity
plan offers a $100,000 five-year line of credit and assumes that the
entire line is drawn resulting in a minimum payment of $800 per
month for the first six months, increasing to $1,000 per month after
month six, followed by a $50,000 balloon payment after five years,
the advertisement must disclose the amount and time period of each
of the two monthly payment streams, as well as the amount and timing
of the balloon payment, with equal prominence and in close proximity
to the promotional payment. However, if the final payment could not
be more than twice the amount of other minimum payments, the final
payment need not be disclosed. [rtrif] In another example, if an
advertisement for a home-equity plan offers a $100,000 line of
credit with a 10-year draw period and a 10-year repayment period and
assumes that the entire line is drawn resulting in an interest-only
minimum payment of $300 per month during the draw period, increasing
to $750 per month during the repayment period, the advertisement
must disclose the amount and time period of each of the two monthly
payment streams, with equal prominence and in close proximity to the
promotional payment. [ltrif]
iv. [lsqbb]Plans other than variable-rate plans[rsqbb]
[rtrif]Additional draw [ltrif]. [lsqbb]For a plan other than a
variable-rate plan, if[rsqbb] [rtrif] If [ltrif] an advertised
payment is calculated in the same way as other payments based on an
assumed balance, the fact that the minimum payment could increase
[lsqbb]solely[rsqbb] if the consumer made an additional draw does
not make the payment a promotional payment. For example, if a
payment of $500 results from an assumed $10,000 draw, and the
payment would increase to $1,000 if the consumer made an additional
$10,000 draw, the payment is not a promotional payment.
v. Conversion option. Some home-equity plans permit the consumer
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 fixed-rate conversion option does not, by itself, make
the rate or payment that would apply if the consumer exercised the
fixed-rate conversion option a promotional rate or payment.
vi. Preferred-rate provisions. Some home-equity plans contain a
preferred-rate provision, where the rate will increase upon the
occurrence of some event, such as the consumer-employee leaving the
creditor's employ, the consumer closing an existing deposit account
with the creditor, or the consumer revoking an election to make
automated payments. A preferred-rate provision does not, by itself,
make the rate or payment under the preferred-rate provision a
promotional rate or payment.
* * * * *
[rtrif] 10. Comparisons in advertisements. The requirements of
Sec. 226.16(d)(8) apply to all advertisements for home-equity
plans, including radio and television advertisements. A comparison
includes a claim about the amount a consumer may save under the
advertised plan. For example, a statement such as: ``Save $400 per
month on a balance of $35,000,'' constitutes an implied comparison
between the advertised plan's payment and a consumer's actual or
hypothetical payment under alternative credit plans.
11. Variable-rate plans. The requirements of Sec. 226.16(d)(8)
apply to comparisons in advertisements for variable-rate plans even
if the payments or rates shown for the advertised plan are not
promotional payments or rates, as defined in Sec. 226.16(d)(6)(i).
In this case, the payment or rate may not be available for the full
term of the plan because the rate may vary in accordance with the
index.
12. Misleading claims of debt elimination. The prohibition in
Sec. 226.16(d)(11) against misleading claims of debt elimination or
waiver or forgiveness does not apply to legitimate statements that
the advertised product may reduce debt payments, consolidate debts,
or shorten the term of the debt. Examples of misleading claims of
debt elimination or waiver or forgiveness of loan terms with, or
obligations to, another creditor of debt include: ``Get out of
debt;'' ``Take advantage of this great deal to get rid of all your
debt;'' ``Celebrate life, debt-free;'' and ``[lsqbb]Name of home-
equity plan[rsqbb] gives you an easy-to-follow plan for being debt-
free.'' [ltrif]
* * * * *
Subpart C--Closed-End Credit
Section 226.17--General Disclosure Requirements
* * * * *
17(c) Basis of disclosures and use of estimates.
* * * * *
Paragraph 17(c)(1).
* * * * *
[lsqbb]14. Reverse mortgages. Reverse mortgages, also known as
reverse annuity or home equity conversion mortgages, typically
involve the disbursement of monthly advances to the consumer for a
fixed period or until the occurrence of an event such as the
consumer's death. Repayment of the loan (generally a single payment
of principal and accrued interest) may be required to be made at the
end of the disbursements or, for example, upon the death of the
consumer. In disclosing these transactions, creditors must apply the
following rules, as applicable:
If the reverse mortgage has a specified period for
disbursements but repayment is due only upon the occurrence of a
future event such as the death of the consumer, the creditor must
assume that disbursements will be made until they are scheduled to
end. The creditor must assume repayment will occur when
disbursements end (or within a period following the final
disbursement which is not longer than the regular interval between
disbursements). This assumption should be used even though repayment
may occur before or after the disbursements are scheduled to end. In
such cases, the creditor may include a statement such as ``The
disclosures assume that you will repay the loan at the time our
payments to you end. As provided in your agreement, your repayment
may be required at a different time.''
If the reverse mortgage has neither a specified period
for disbursements nor a specified repayment date and these terms
will be determined solely by reference to future events including
the consumer's death, the creditor may assume that the disbursements
will end upon the consumer's death (estimated by using actuarial
tables, for example) and that repayment will be required at the same
time (or within a period following the date of the final
disbursement which is not longer than the regular interval for
disbursements). Alternatively, the creditor may base the disclosures
upon another future event it estimates will be most likely to occur
first. (If terms will be determined by reference to future events
which do not include the consumer's death, the creditor must base
the disclosures upon the occurrence of the event estimated to be
most likely to occur first.)
In making the disclosures, the creditor must assume
that all disbursements and
[[Page 58756]]
accrued interest will be paid by the consumer. For example, if the
note has a nonrecourse provision providing that the consumer is not
obligated for an amount greater than the value of the house, the
creditor must nonetheless assume that the full amount to be
disbursed will be repaid. In this case, however, the creditor may
include a statement such as ``The disclosures assume full repayment
of the amount advanced plus accrued interest, although the amount
you may be required to pay is limited by your agreement.''
Some reverse mortgages provide that some or all of the
appreciation in the value of the property will be shared between the
consumer and the creditor. Such loans are considered variable-rate
mortgages, as described in comment 17(c)(1)-11, and the appreciation
feature must be disclosed in accordance with Sec. 226.18(f)(1). If
the reverse mortgage has a variable interest rate, is written for a
term greater than one year, and is secured by the consumer's
principal dwelling, the shared appreciation feature must be
described under Sec. 226.19(b)(2)(vii).[rsqbb]
* * * * *
17(d)-Multiple creditors; multiple consumers.
* * * * *
2. Multiple consumers. When two consumers are joint obligors
with primary liability on an obligation, the disclosures may be
given to either one of them. If one consumer is merely a surety or
guarantor, the disclosures must be given to the principal [rtrif]
obligor [ltrif] [lsqbb]debtor[rsqbb]. In rescindable transactions,
however, separate disclosures must be given to each consumer who has
the right to rescind under Sec. 226.23, [lsqbb]although the[rsqbb]
[rtrif] except that:
i. The [ltrif] disclosures required under Sec. 226.19(b) need
only be provided to the consumer who expresses an interest in a
variable-rate loan program.
[rtrif]ii. The disclosures required under Sec. 226.19(a) need
only be provided to one consumer who will have primary liability on
the obligation. Material disclosures under Sec. 226.23(a)(5) and
the notice of the right to rescind required by Sec. 226.23(b),
however, must be given before consummation to each consumer who has
the right to rescind, including any such consumer who is not an
obligor. See Sec. Sec. 226.2(a)(11), 226.17(b), 226.23(b). [ltrif]
* * * * *
17(f) Early disclosures.
* * * * *
Paragraph 17(f)(2).
1. Irregular transactions. For purposes of this paragraph, a
transaction is deemed to be ``irregular'' according to the
definition in [lsqbb]footnote 46 of[rsqbb] Sec. 226.22(a)(3).
* * * * *
Section 226.18--Content of Disclosures
* * * * *
18(k) Prepayment.
* * * * *
Paragraph 18(k)(1).
1. Penalty. [lsqbb]This[rsqbb] [rtrif] Section 226.18(k)(1)
[ltrif] applies only to those transactions in which the interest
calculation takes account of all scheduled reductions in principal,
as well as transactions in which interest calculations are made
daily. The term penalty as used here encompasses only those charges
that are assessed strictly because of the prepayment in full of a
simple-interest obligation, as an addition to all other amounts.
Items which are penalties include, for example:
[lsqbb] Interest charges for any period after prepayment
in full is made.[rsqbb] [rtrif]i. Charges determined by treating the
loan balance as outstanding for a period after prepayment in full
and applying the interest rate to such ``balance,'' even if the
charge results from the interest accrual amortization method used on
the transaction. ``Interest accrual amortization'' refers to the
method by which the amount of interest due for each period (e.g.,
month) in a transaction's term is determined. For example, ``monthly
interest accrual amortization'' treats each payment as made on the
scheduled, monthly due date even if it is actually paid early or
late (until the expiration of a grace period). Thus, under monthly
interest accrual amortization, if the amount of interest due on May
1 for the preceding month of April is $3000, the creditor will
require payment of $3000 in interest whether the payment is made on
April 20, on May 1, or on May 10. In this example, if the interest
charged for the month of April upon prepayment in full on April 20
is $3000, the charge constitutes a prepayment penalty of $1000
because the amount of interest actually earned through April 20 is
only $2000. [ltrif] (See the commentary to Sec. 226.17(a)(1)
regarding disclosure of [lsqbb]interest[rsqbb] [rtrif] such [ltrif]
charges assessed for periods after prepayment in full as directly
related information [rtrif], for transactions not secured by real
property or a dwelling [ltrif].)
[lsqbb][rsqbb] [rtrif]ii. [ltrif] A minimum finance
charge in a simple-interest transaction. (See the commentary to
Sec. 226.17(a)(1) regarding the disclosure of a minimum finance
charge as directly related information.) Items which are not
penalties include, for example, loan guarantee fees.
* * * * *
Section 226.19--[lsqbb]Certain Mortgage and Variable-Rate
Transactions.[rsqbb] [rtrif] Early Disclosures and Adjustable-rate
Disclosures for Transactions Secured by Real Property or a
Dwelling.[ltrif]
1. Coverage. Section 226.19 applies to transactions secured by
real property or a dwelling, other than home equity lines of credit
subject to Sec. 226.5b. Creditors must make the disclosures
required by Sec. 226.19 even if the transaction is not subject to
the Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. 2602 et
seq., and its implementing Regulation X, 24 CFR 3500.1 et seq.,
administered by the U.S. Department of Housing and Urban
Development. For example, disclosures are required for construction
loans that are not covered by RESPA or Regulation X because they are
not considered ``federally related mortgage loans.'' See 12 U.S.C.
2602(1); 15 CFR 3500.2(b). However, Sec. 226.19 only applies to
transactions that are offered or extended to a consumer primarily
for personal, family, or household purposes, even if the
transactions are secured by real property or a dwelling. TILA and
Regulation Z do not apply to transactions that are primarily for
business, commercial, or agricultural purposes. See 15 U.S.C.
1603(1); Sec. 226.3(a)(2). See also Sec. 226.2(a)(12) and (b)(2).
Section 226.19(a)(4) contains special disclosure timing requirements
for mortgage transactions secured by a consumer's interest in a
timeshare plan described in 11 U.S.C. 101(53(D)).
19(a) Mortgage transactions.
1. Multiple consumers. For a discussion of how to determine to
which consumers creditors must provide the disclosures required
under Sec. 226.19(a), see comment 17(d)-2.[ltrif]
[rtrif] Paragraph 19(a)(1) [ltrif]
19(a)(1)(i) Time of [rtrif] good faith estimates of [ltrif]
disclosure [rtrif]s [ltrif].
[lsqbb]1. Coverage. This section requires early disclosure of
credit terms in mortgage transactions that are secured by a
consumer's dwelling (other than home equity lines of credit subject
to Sec. 226.5b or mortgage transactions secured by an interest in a
timeshare plan) that are also subject to the Real Estate Settlement
Procedures Act (RESPA) and its implementing Regulation X,
administered by the Department of Housing and Urban Development
(HUD). To be covered by Sec. 226.19, a transaction must be a
Federally related mortgage loan under RESPA. ``Federally related
mortgage loan'' is defined under RESPA (12 U.S.C. 2602) and
Regulation X (24 CFR 3500.2), and is subject to any interpretations
by HUD.[rsqbb]
[lsqbb]2.[rsqbb][rtrif]1.[ltrif] Timing and use of estimates.
The disclosures required by Sec. 226.19(a)(1)(i) must be delivered
or mailed not later than three business days after the creditor
receives the consumer's written application. The general definition
of ``business day'' in Sec. 226.2(a)(6)--a day on which the
creditor's offices are open to the public for substantially all of
its business functions--is used for purposes of Sec.
226.19(a)(1)(i). See comment 2(a)(6)-1. This general definition is
consistent with the definition of ``business day'' in HUD's
Regulation X--a day on which the creditor's offices are open to the
public for carrying on substantially all of its business functions.
See 24 CFR 3500.2. Accordingly, the three-business-day period in
Sec. 226.19(a)(1)(i) for making early disclosures coincides with
the time period within which creditors [lsqbb]subject to
RESPA[rsqbb] must provide good faith estimates of settlement costs
[rtrif]for transactions subject to RESPA[ltrif]. If the creditor
does not know the precise credit terms, the creditor must base the
disclosures [rtrif]required by Sec. 226.19(a)(1)(i)[ltrif] on the
best information reasonably available and indicate that the
disclosures are estimates under Sec. 226.17(c)(2). If many of the
disclosures are estimates, the creditor may include a statement to
that effect (such as ``all numerical disclosures [lsqbb]except the
late-payment disclosure[rsqbb] are estimates'') instead of
separately labeling each estimate. In the alternative, the creditor
may label as an estimate only the items primarily affected by
unknown information. (See the commentary to Sec. 226.17(c)(2).) The
creditor may provide explanatory material concerning the
[[Page 58757]]
estimates and the contingencies that may affect the actual terms, in
accordance with the commentary to Sec.
226.17(a)(1)[lsqbb].[rsqbb][rtrif]and Sec. 226.37. The disclosures
required by Sec. 226.19(a)(2) may not contain estimates, however,
with limited exceptions. See the commentary on Sec. 226.19(a)(2)
for a discussion of limitations on estimates in disclosures made
under that subsection.[ltrif]
[lsqbb]3.[rsqbb][rtrif]2.[ltrif] Written application. Creditors
may rely on RESPA and Regulation X (including any interpretations
issued by HUD) in deciding whether a ``written application'' has
been received. In general, Regulation X defines an ``application''
to mean the submission of a borrower's financial information in
anticipation of a credit decision relating to a federally-related
mortgage loan. See 24 CFR 3500.2(b). [rtrif]Creditors may rely on
RESPA and Regulation X even for a transaction not subject to
RESPA.[ltrif]An application is received when it reaches the creditor
in any of the ways applications are normally transmitted--by mail,
hand delivery, or through an intermediary agent or broker. (See
[lsqbb]comment 19(b)-3[rsqbb][rtrif]the commentary on Sec.
226.19(d)(3)[ltrif] for guidance in determining whether or not the
transaction involves an intermediary agent or broker.) If an
application reaches the creditor through an intermediary agent or
broker, the application is received when it reaches the creditor,
rather than when it reaches the agent or broker.
[lsqbb]4.[rsqbb][rtrif]3.[ltrif] Denied or withdrawn
application. The creditor may determine within the three-business-
day period that the application will not or cannot be approved on
the terms requested, as, for example, when a consumer applies for a
type or amount of credit that the creditor does not offer, or the
consumer's application cannot be approved for some other reason. In
that case, or if the consumer withdraws the application within the
three-business-day waiting period, the creditor need not make the
disclosures under this section. If the creditor fails to provide
early disclosures and the transaction is later consummated on the
original terms, the creditor will be in violation of this provision.
If, however, the consumer amends the application because of the
creditor's unwillingness to approve it on its original terms, no
violation occurs for not providing disclosures based on the original
terms. But the amended application is a new application subject to
Sec. 226.19(a)(1)(i).
[lsqbb]5.[rsqbb][rtrif]4.[ltrif] Itemization of amount financed.
In many mortgage transactions [rtrif]subject to RESPA[ltrif], the
itemization of the amount financed required by [lsqbb]Sec.
226.18(c)[rsqbb][rtrif]Sec. 226.38(j)[ltrif] will contain items,
such as origination fees or points, that also must be disclosed as
part of the good faith estimates of settlement costs required under
RESPA. Creditors furnishing the RESPA good faith estimates need not
give consumers any itemization of the amount financed[rtrif],
whether or not a transaction is subject to RESPA[ltrif].
19(a)(1)(ii) Imposition of fees.
1. Timing of fees. The consumer must receive the disclosures
required by this section before paying or incurring any fee imposed
by a creditor or other person in connection with the consumer's
application for a mortgage transaction that is subject to Sec.
226.19(a)(1)(i), except as provided in Sec. 226.19(a)(1)(iii).
[rtrif](Under Sec. 226.19(a)(1)(iv), fees paid after the consumer
receives disclosures must be refundable for three business days
after the consumer receives those disclosures.)[ltrif] If the
creditor delivers the disclosures to the consumer in person, a fee
may be imposed anytime after delivery. If the creditor places the
disclosures in the mail, the creditor may impose a fee after the
consumer receives the disclosures or, in all cases, after midnight
[on the third business day] following [rtrif]the third business day
after[ltrif] mailing of the disclosures. [rtrif]Creditors that use
electronic mail or a courier to provide disclosures may also follow
this approach. Whatever method is used to provide disclosures,
creditors may rely on documentation of receipt in determining when a
fee may be imposed.[ltrif] For purposes of Sec. 226.19(a)(1)(ii),
the term ``business day'' means all calendar days except Sundays and
legal public holidays referred to in Sec. 226.2(a)(6). See
[lsqbb]C[rsqbb][rtrif]c[ltrif]omment 2(a)(6)-2. For example,
assuming that there are no intervening legal public holidays, a
creditor that receives the consumer's written application on Monday
and mails the early mortgage loan disclosure on Tuesday may impose a
fee on the consumer [lsqbb]after midnight on Friday.[rsqbb][rtrif]on
Saturday[ltrif].
2. Fees restricted. A creditor or other person may not impose
any fee, such as for an appraisal, underwriting, or broker services,
until the consumer has received the disclosures required by Sec.
226.19(a)(1)(i). [lsqbb]The only[rsqbb][rtrif]An[ltrif] exception to
the fee restriction allows the creditor or other person to impose a
bona fide and reasonable fee for obtaining a consumer's credit
history, such as for a credit report(s). [rtrif]See Sec.
226.19(a)(1)(iii).[ltrif] Further, if housing or credit counseling
is required by applicable law, a bona fide and reasonable charge
imposed by a counselor or counseling agency for such counseling is
not a ``fee'' for purposes of Sec. 226.19(a)(1)(ii). See Sec.
226.19(a)(1)(v).[ltrif]
3. Collection of fees. A creditor complies with Sec.
226.19(a)(1)(ii) if--
i. The creditor receives a consumer's written application
directly from the consumer and does not collect any fee, other than
a fee for obtaining a consumer's credit history, until the consumer
receives the early mortgage loan disclosure.
ii. A third party submits a consumer's written application to a
creditor and both the creditor and third party do not collect any
fee, other than a fee for obtaining a consumer's credit history,
until the consumer receives the early mortgage loan disclosure from
the creditor.
iii. A third party submits a consumer's written application to a
[lsqbb]second[rsqbb][rtrif]subsequent[ltrif] creditor following a
prior creditor's denial of an application made by the same consumer
(or following the consumer's withdrawal), and, if a fee already has
been assessed, the new creditor or third party does not collect or
impose any additional fee[rtrif], other than a fee for obtaining a
consumer's credit history,[ltrif] until the consumer receives an
early mortgage loan disclosure from the new creditor.
[rtrif]4. Examples. Under Sec. 226.19(a)(1)(ii), neither a
creditor nor any other person may impose a fee on a consumer in
connection with the consumer's application for a mortgage
transaction before the consumer has received the disclosures
required by Sec. 226.19(a)(1)(i) to be provided within three
business days after the creditor receives the consumer's
application. A fee is imposed in violation of Sec. 226.19(a)(1)(ii)
if, before a consumer receives the early disclosures required by
Sec. 226.19(a)(1)(i), the consumer is obligated to pay a fee or the
consumer pays a fee, even if the fee is refundable. For example, a
fee is imposed if a creditor takes the consumer's check for payment,
whether or not the check is post-dated and/or the creditor agrees to
wait to until the consumer receives the disclosures required by
Sec. 226.19(a)(1)(i) to deposit the check. For further example, a
fee is imposed if a creditor uses the consumer's credit card or
debit card to initiate payment or places a hold on the consumer's
account. A fee is not imposed, however, if a creditor or other
person takes a number, code, or other information that identifies a
consumer's account before a consumer receives the disclosures
required by Sec. 226.19(a)(1)(i), for example, on an application
form, but does not use the information to initiate payment from or
place a hold on the account until after the consumer receives those
disclosures.
5. Reverse mortgages subject to Sec. 226.33. Under Sec.
226.19(a)(1)(ii), fees generally may be imposed after a consumer
receives the disclosures required by Sec. 226.19(a)(1)(i). However,
under Sec. 226.19(a)(1)(iv), a nonrefundable fee may not be imposed
within three business days after a consumer receives the early
disclosures. For reverse mortgages subject to Sec. Sec. 226.19 and
226.33, moreover, creditors and other persons also must comply with
the restriction on imposing a nonrefundable fee within three
business days after a consumer completes required counseling, under
Sec. 226.40(b)(2). See comment 40(b)(2)(i)-4.i.[ltrif]
19(a)(1)(iii) Exception to fee restriction.
1. Requirements. A creditor or other person may impose a fee
before the consumer receives the required disclosures if it is for
obtaining the consumer's credit history, such as by purchasing a
credit report(s) on the consumer. The fee also must be bona fide and
reasonable in amount. For example, a creditor may collect a fee for
obtaining a credit report(s) if it is in the creditor's ordinary
course of business to obtain a credit report(s). If the criteria in
Sec. 226.19(a)(1)(iii) are met, the creditor may describe or refer
to this fee, for example, as an ``application fee.''
[rtrif]19(a)(1)(iv) Imposition of nonrefundable fees.
1. Business day. For purposes of Sec. 226.19(a)(1)(iv), the
term ``business day'' means all calendar days except Sundays and the
legal public holidays referred to in Sec. 226.2(a)(6). See comment
2(a)(6)-2.
2. Refund period. A fee may be imposed after the consumer
receives the disclosures required under Sec. 226.19(a)(1)(i) and
before the expiration of three business days, but the fee must be
refunded if, within three
[[Page 58758]]
business days after receiving the required information, the consumer
decides not to enter into a loan agreement and requests a refund. (A
notice of the right to receive a refund is provided in the
publication entitled ``Key Questions to Ask About Your Mortgage,''
which must be provided at the time an application form is provided
to the consumer or before the consumer pays a nonrefundable fee,
whichever is earlier. See Sec. 226.19(c).) A creditor or other
person may, but need not, rely on the presumption that a consumer
receives those disclosures three business days after they are mailed
to the consumer or delivered to the consumer by means other than
delivery in person. See Sec. 226.19(a)(1)(ii) and comment
19(a)(1)(ii)-1. If a creditor or other person relies on that
presumption of receipt, a nonrefundable fee may not be imposed until
after the end of the sixth business day following the day
disclosures are mailed or delivered by means other than in person.
The following examples illustrate how to determine when the refund
period ends (assuming that all referenced days are business days and
there are no intervening legal public holidays):
i. Assume a creditor receives a consumer's application on
Monday, and the consumer receives the early disclosures in person on
Tuesday and that same day pays an application fee (distinct from a
previously paid fee for obtaining the consumer's credit history).
The fee must be refundable through the end of Friday, the third
business day after the consumer received the early disclosures. If
the consumer does not request a refund of the fee by the end of
Friday, however, the fee ceases to be refundable under Sec.
226.19(a)(1)(iv), even if on Saturday or thereafter the consumer
decides not to enter into the transaction.
ii. Assume a creditor receives a consumer's application on
Monday and places the early disclosures in the mail on Tuesday. The
creditor relies on the presumption of receipt and the consumer is
considered to receive the early disclosures on Friday, the third
business day after the disclosures are mailed. The consumer pays an
appraisal fee the next Monday. The fee must be refundable through
the end of Tuesday, the third business day after the consumer
received the early disclosures and the sixth business day after the
disclosures were mailed. If the consumer does not request a refund
of the fee by the end of Tuesday, however, the fee ceases to be
refundable under Sec. 226.19(a)(1)(iv), even if on Wednesday or
thereafter the consumer decides not to enter into the transaction.
iii. Assume a creditor receives a consumer's application on
Monday and places the early disclosures in the mail on Wednesday.
The consumer receives the disclosures on Friday and pays an
application fee the following Wednesday. The fee need not be
refundable, because the refund period expired at the end of the
previous day, Tuesday, the third business day after the consumer
received the early disclosures.
3. Reverse mortgages subject to Sec. 226.33. Under Sec.
226.19(a)(1)(iv), a nonrefundable fee may not be imposed within
three business days after a consumer receives the early disclosures
required by Sec. 226.19(a)(1)(i) for a closed-end mortgage secured
by real property or a dwelling. See Sec. 226.19(a)(1)(iv). For
reverse mortgages subject to Sec. Sec. 226.19 and 226.33, moreover,
creditors and other persons also must comply with the restriction on
imposing a nonrefundable fee within three business days after a
consumer completes required counseling, under Sec. 226.40(b)(2).
See comment 40(b)(2)(i)-4.ii.
19(a)(1)(v) Counseling fee.
1. In general. For purposes of Sec. 226.19(a)(1)(ii), if
housing or credit counseling is required by applicable law, a bona
fide and reasonable charge imposed for such counseling is not a fee
imposed on a consumer in connection with the consumer's application
for a mortgage transaction and therefore may be imposed before the
consumer receives the early disclosures required by Sec.
226.19(a)(1)(i). For example, a fee for housing counseling that a
consumer must complete in connection with a reverse mortgage insured
by the U.S. Department of Housing and Urban Development may be
imposed before the consumer receives the early disclosures.
Notwithstanding Sec. 226.19(a)(1)(iv), a charge for counseling that
is not considered a fee imposed in connection with a mortgage
transaction under Sec. 226.19(a)(1)(ii) need not be refundable if
the consumer does not proceed with a loan transaction.[ltrif]
[rtrif]Paragraph[ltrif] 19(a)(2) [lsqbb]Waiting periods
required.[rsqbb]
1. Business day definition. For purposes of Sec. 226.19(a)(2),
``business day'' means all calendar days except Sundays and the
legal public holidays referred to in Sec. 226.2(a)(6). See comment
2(a)(6)-2.
2. Consummation after [lsqbb]both[rsqbb][rtrif]all[ltrif]
waiting periods expire. Consummation may not occur until both the
seven-business-day waiting period and the three-business-day waiting
period[rtrif](s)[ltrif] have expired. For example, assume a creditor
delivers the early disclosures to the consumer in person or places
them in the mail on Monday, June 1, and the creditor then delivers
[lsqbb]corrected[rsqbb][rtrif]new[ltrif] disclosures in person to
the consumer on Wednesday, June 3. Although Saturday, June 6 is the
third business day after the consumer received the
[lsqbb]corrected[rsqbb][rtrif]new[ltrif] disclosures, consummation
may not occur before Tuesday, June 9, the seventh business day
following delivery or mailing of the early disclosures.
19(a)(2)(i) Seven-business-day waiting period.
1. Timing. The disclosures required by Sec. 226.19(a)(1)(i)
must be delivered or placed in the mail no later than the seventh
business day before consummation. The seven-business-day waiting
period begins [lsqbb]when[rsqbb][rtrif]the first business day
after[ltrif] the creditor delivers the early disclosures or places
them in the mail, not [lsqbb]when[rsqbb][rtrif]the first business
day after[ltrif] the consumer receives or is deemed to have received
the early disclosures. For example, if a creditor delivers the early
disclosures to the consumer in person or places them in the mail on
[lsqbb]Monday, June 1[rsqbb][rtrif]Sunday, May 31[ltrif],
consummation may occur on or after [lsqbb]Tuesday, June
9[rsqbb][rtrif]Monday, June 8[ltrif], the seventh business day
following delivery or mailing of the early disclosures.
[rtrif]19(a)(2)(ii) Three-business-day waiting period.
1. New disclosures in all cases. The creditor must provide new
disclosures under Sec. 226.38 so that the consumer receives them
not later than the third business day before consummation, even if
the new disclosures are identical to the early disclosures provided
under Sec. 226.19(a)(1)(i).
2. Content of disclosures. Disclosures made under Sec.
226.19(a)(2)(ii) must contain each of the applicable disclosures
required by Sec. 226.38.
3. Estimates. Section 226.19(a)(2)(ii) provides that only the
disclosures required by Sec. Sec. 226.38(c)(3)(i)(C),
226.38(c)(3)(ii)(C), 226.38(c)(6)(i), and 226.38(e)(5)(i) may be
estimated disclosures. Because estimated amounts of escrowed taxes
and insurance premiums and mortgage insurance premiums disclosed (as
applicable) under Sec. Sec. 226.38(c)(3)(i)(C),
226.38(c)(3)(ii)(C), and 226.38(c)(6)(i) are components of the total
periodic payments disclosure required by Sec. Sec.
226.38(c)(3)(i)(D) and 226.38(c)(3)(ii)(D) and the total payments
disclosure required by Sec. 226.38(e)(5)(i), those disclosures are
estimated disclosures. (A total payments disclosure is not required
for loans with a negative amortization feature subject to Sec.
226.38(c)(6).) Creditors may estimate components of the total
periodic payments disclosures required by Sec. Sec.
226.38(c)(3)(i)(C), 226.38(c)(3)(ii)(C) and 226.38(c)(6)(i) and the
total payment disclosure required by Sec. 226.38(e)(5)(i) only to
the extent the estimated escrowed amounts and mortgage insurance
premiums affect those disclosures.
4. Timing. The creditor must provide final disclosures so that
the consumer receives them not later than the third business day
before consummation. For example, for consummation to occur on
Thursday, June 11, the consumer must receive the disclosures on or
before Monday, June 8.[ltrif]
Alternative 1--Paragraph 19(a)(2)(iii)
[rtrif]19(a)(2)(iii) Additional three-business-day waiting
period.
1. Conditions for corrected disclosures. A disclosed annual
percentage rate is accurate for purposes of Sec. 226.19(a)(2)(iii)
if the disclosure is accurate under Sec. 226.19(a)(2)(iv). If a
change occurs that does not render the annual percentage rate
inaccurate and no other change occurs, the creditor must disclose
the changed terms before consummation, consistent with Sec.
226.17(f).
2. Content of corrected disclosures. Disclosures made under
Sec. 226.19(a)(2)(iii) must contain each of the applicable
disclosures required by Sec. 226.38.
3. Estimates. In disclosures provided under Sec.
226.19(a)(2)(iii), only the disclosures required by Sec. Sec.
226.38(c)(3)(i)(C), 226.38(c)(3)(ii)(C), 226.38(c)(6)(i) and
226.38(e)(5)(i) may be estimates. See comment 19(a)(2)(ii)-3 for a
discussion of which of the disclosures required under Sec. 226.38
creditors may estimate.
4. Timing. The creditor must provide the corrected disclosures
so that the consumer receives them not later than the third business
day before consummation. For example, for consummation to occur on
[[Page 58759]]
Saturday, June 13, the consumer must receive the disclosures on or
before Wednesday, June 10.[ltrif]
[lsqbb]19(a)(2)(ii) Three-business-day waiting period.
1. Conditions for redisclosure. If, at the time of consummation,
the annual percentage rate disclosed is accurate under Sec. 226.22,
the creditor does not have to make corrected disclosures under Sec.
226.19(a)(2). If, on the other hand, the annual percentage rate
disclosed is not accurate under Sec. 226.22, the creditor must make
corrected disclosures of all changed terms (including the annual
percentage rate) so that the consumer receives them not later than
the third business day before consummation. For example, assume
consummation is scheduled for Thursday, June 11 and the early
disclosures for a regular mortgage transaction disclose an annual
percentage rate of 7.00%.
i. On Thursday, June 11, the annual percentage rate will be
7.10%. The creditor is not required to make corrected disclosures
under Sec. 226.19(a)(2).
ii. On Thursday, June 11, the annual percentage rate will be
7.15%. The creditor must make corrected disclosures so that the
consumer receives them on or before Monday, June 8.
2. Content of new disclosures. If redisclosure is required, the
creditor may provide a complete set of new disclosures, or may
redisclose only the changed terms. If the creditor chooses to
provide a complete set of new disclosures, the creditor may but need
not highlight the new terms, provided that the disclosures comply
with the format requirements of Sec. 226.17(a). If the new creditor
chooses to disclose only the new terms, all the new terms must be
disclosed. For example, a different annual percentage rate will
almost always produce a different finance charge, and often a new
schedule of payments; all of these changes would have to be
disclosed. If, in addition, unrelated terms such as the amount
financed or prepayment penalty vary from those originally disclosed,
the accurate terms must be disclosed. However, no new disclosures
are required if the only inaccuracies involve estimates other than
the annual percentage rate, and no variable-rate feature has been
added. See Sec. 226.17(f). For a discussion of the requirement to
redisclose when a variable-rate feature is added, see comment 17(f)-
2. For a discussion of redisclosure requirements in general, see the
commentary on Sec. 226.17(f).
3. Timing. When redisclosures are necessary because the annual
percentage rate has become inaccurate, they must be received by the
consumer no later than the third business day before consummation.
(For redisclosures triggered by other events, the creditor must
provide corrected disclosures before consummation. See Sec.
226.17(f).) If the creditor delivers the corrected disclosures to
the consumer in person, consummation may occur any time on the third
business day following delivery. If the creditor provides the
corrected disclosures by mail, the consumer is considered to have
received them three business days after they are placed in the mail,
for purposes of determining when the three-business-day waiting
period required under Sec. 226.19(a)(2)(ii) begins. Creditors that
use electronic mail or a courier other than the postal service may
also follow this approach.
4. Basis for annual percentage rate comparison. To determine
whether a creditor must make corrected disclosures under Sec.
226.22, a creditor compares (a) what the annual percentage rate will
be at consummation to (b) the annual percentage rate stated in the
most recent disclosures the creditor made to the consumer. For
example, assume consummation for a regular mortgage transaction is
scheduled for Thursday, June 11, the early disclosures provided in
May stated an annual percentage rate of 7.00%, and corrected
disclosures received by the consumer on Friday, June 5 stated an
annual percentage rate of 7.15%:
i. On Thursday, June 11, the annual percentage rate will be
7.25%, which exceeds the most recently disclosed annual percentage
rate by less than the applicable tolerance. The creditor is not
required to make additional corrected disclosures or wait an
additional three business days under Sec. 226.19(a)(2).
ii. On Thursday, June 11, the annual percentage rate will be
7.30%, which exceeds the most recently disclosed annual percentage
rate by more than the applicable tolerance. The creditor must make
corrected disclosures such that the consumer receives them on or
before Monday, June 8.[rsqbb]
Alternative 2--Paragraph 19(a)(2)(iii)
[rtrif]19(a)(2)(iii) Additional three-business-day waiting
period.
1. Conditions for corrected disclosures. If the annual
percentage rate disclosed under Sec. 226.19(a)(2)(ii) changes so
that it is not accurate under Sec. 226.19(a)(2)(iv) or an
adjustable-rate feature is added (see comment 17(f)-2), the creditor
must make corrected disclosures of all changed terms (including the
annual percentage rate) so that the consumer receives them not later
than the third business day before consummation. (If a change occurs
that does not render the annual percentage rate on the early
disclosures inaccurate, the creditor must disclose the changed terms
before consummation, consistent with Sec. 226.17(f).) For an
example illustrating whether or not and by when a consumer must
receive corrected disclosures when a disclosed annual percentage
rate changes, see comment 19(a)(2)(iii)-4.[ltrif]
[lsqbb]19(a)(2)(ii) Three-business-day waiting period.
1. Conditions for redisclosure. If, at the time of consummation,
the annual percentage rate disclosed is accurate under Sec. 226.22,
the creditor does not have to make corrected disclosures under Sec.
226.19(a)(2). If, on the other hand, the annual percentage rate
disclosed is not accurate under Sec. 226.22, the creditor must make
corrected disclosures of all changed terms (including the annual
percentage rate) so that the consumer receives them no later than
the third business day before consummation. For example, assume
consummation is scheduled for Thursday, June 11 and the early
disclosures for a regular mortgage transaction disclose an annual
percentage rate of 7.00%:
i. On Thursday, June 11, the annual percentage rate will be
7.10%. The creditor is not required to make corrected disclosures
under Sec. 226.19(a)(2).
ii. On Thursday, June 11, the annual percentage rate will be
7.15%. The creditor must make corrected disclosures so that the
consumer receives them on or before Monday, June 8.[rsqbb]
2. Content of [lsqbb]new[rsqbb][rtrif]corrected[ltrif]
disclosures. If redisclosure is required [rtrif]under Sec.
226.19(a)(2)(iii)[ltrif], the creditor may provide a complete set of
new disclosures, or may redisclose only the changed terms
[rtrif]together with the disclosures required by Sec. 226.38(f) and
(g)[ltrif]. If the creditor chooses to provide a complete set of new
disclosures, the creditor may but need not highlight the new terms,
provided that the disclosures comply with the format requirements of
Sec. 226.17(a) [rtrif]and Sec. 226.37[ltrif]. If the new creditor
chooses to disclose only the new terms, all the new terms must be
disclosed. For example, a different annual percentage rate will
almost always produce [lsqbb]a different finance charge, and often a
new schedule of payments[rsqbb][rtrif]different interest and
settlement charges, and often a new payment summary[ltrif]; all of
these changes would have to be disclosed. If, in addition, unrelated
terms such as the amount financed or prepayment penalty vary from
those originally disclosed [rtrif]or an adjustable-rate feature is
added (see comment 17(f)-2)[ltrif], the accurate terms must be
disclosed. [lsqbb]However, no new disclosures are required if the
only inaccuracies involve estimates other than the annual percentage
rate, and no variable-rate feature has been added. For a discussion
of the requirement to redisclose when a variable-rate feature is
added, see comment 17(f)-2. For a discussion of redisclosure
requirements in general, see the commentary on Sec.
226.17(f).[rsqbb]
[lsqbb]3. Timing. When redisclosures are necessary because the
annual percentage rate has become inaccurate, they must be received
by the consumer no later than the third business day before
consummation. (For redisclosures triggered by other events, the
creditor must provide corrected disclosures before consummation. See
Sec. 226.17(f).) If the creditor delivers the corrected disclosures
to the consumer in person, consummation may occur any time on the
third business day following delivery. If the creditor provides the
corrected disclosures by mail, the consumer is considered to have
received them three business days after they are placed in the mail,
for purposes of determining when the three-business-day waiting
periods required under Sec. 226.19(a)(2)(ii) begins. Creditors that
use electronic mail or a courier other than the postal service may
also follow this approach.[rsqbb]
[rtrif]3. Estimates. In disclosures provided under Sec.
226.19(a)(2)(iii), only the disclosures required by Sec. Sec.
226.38(c)(3)(i)(C), 226.38(c)(3)(ii)(C), 226.38(c)(6)(i) and
226.38(e)(5)(i) may be estimates. See comment 19(a)(2)(ii)-3 for a
discussion of which of the disclosures required under Sec. 226.38
creditors may estimate.[ltrif]
4. Basis for annual percentage rate comparison. To determine
whether a creditor
[[Page 58760]]
must make corrected disclosures under [lsqbb]Sec.
226.22[lsqbb][rtrif]Sec. 226.19(a)(2)(iii)[ltrif], a creditor
compares (a) what the annual percentage rate will be at consummation
to (b) the annual percentage rate stated in the most recent
disclosures the creditor made to the consumer. For example, assume
consummation for a regular mortgage transaction is scheduled for
Thursday, June 11, the early disclosures provided in May stated an
annual percentage rate of 7.00%, and
[lsqbb]corrected[rsqbb][rtrif]new[ltrif] disclosures received by the
consumer on Friday, June 5 stated an annual percentage rate of
7.15%:
i. On Thursday, June 11, the annual percentage rate will be
7.25%, which exceeds the most recently disclosed annual percentage
rate [rtrif]of 7.15%[ltrif] by less than the
[lsqbb]applicable[rsqbb] tolerance [rtrif]for a regular transaction
under Sec. 226.22(a)(2)[ltrif]. The creditor is not required to
make additional corrected disclosures or wait an additional three
business days under Sec. 226.19(a)(2).
ii. On Thursday, June 11, the annual percentage rate will be
7.30%, which exceeds the most recently disclosed annual percentage
rate [rtrif]of 7.15%[ltrif] by more than the [lsqbb]applicable
tolerance. The[rsqbb][rtrif]tolerance for a regular transaction
under Sec. 226.22(a)(2). If the most recently disclosed annual
percentage rate of 7.15% is not accurate under Sec. 226.22(a)(4) or
(5) and no other tolerance applies under Sec. 226.19(a)(2)(iv),
the[ltrif] creditor must make corrected disclosures such that the
consumer receives them on or before Monday, June 8.
[rtrif]19(a)(2)(iv) Annual percentage rate accuracy.
1. Other changed terms. If a change occurs that does not render
the APR inaccurate under Sec. 226.19(a)(iv), the creditor must
disclose the changed terms before consummation, consistent with
Sec. 226.17(f).
19(a)(2)(v) Timing of receipt.
1. General. If the creditor delivers the disclosures required by
Sec. 226.19(a)(2)(ii) or (a)(2)(iii) to the consumer in person,
consummation may occur any time on the third business day following
delivery. If the creditor provides the disclosures required by Sec.
226.19(a)(2)(ii) or (a)(2)(iii) of this section by mail, the
consumer is considered to have received them three business days
after they are placed in the mail, for purposes of determining when
the three-business-day waiting periods required under Sec.
226.19(a)(2)(ii) and (iii) begin. Creditors that use electronic mail
or a courier to provide disclosures may also follow this approach.
Whatever method is used to provide disclosures, creditors may rely
on documentation of receipt in determining when the three-business-
day waiting period begins.[ltrif]
19(a)(3) Consumer's waiver of waiting period before
consummation.
1. [lsqbb]Modification or waiver.[rsqbb][rtrif]Procedure.[ltrif]
A consumer may modify or waive the right to a waiting period
required by Sec. 226.19(a)(2) only after the [lsqbb]creditor makes
the disclosures required by Sec. 226.18[rsqbb][rtrif]consumer
receives the disclosures required by Sec. 226.38[ltrif]. [lsqbb]The
consumer must have a bona fide personal financial emergency that
necessitates consummating the credit transaction before the end of
the waiting period. Whether these conditions are met is determined
by the facts surrounding individual situations. The imminent sale of
the consumer's home at foreclosure, where the foreclosure sale will
proceed unless loan proceeds are made available to the consumer
during the waiting period, is one example of a bona fide personal
financial emergency. Each consumer who is primarily liable on the
legal obligation must sign the written statement for the waiver to
be effective.[rsqbb][rtrif]After receiving the required disclosures,
the consumer may waive or modify a waiting period by giving the
creditor a dated, written statement that specifically waives or
modifies the waiting period and describes the bona fide personal
financial emergency. A waiver is effective only if each consumer
primarily liable on the legal obligation signs a waiver statement.
Where there are multiple consumers entitled to rescind, the
consumers may, but need not, sign the same waiver statement.[ltrif]
[rtrif]2. Bona fide personal financial emergency. To modify or
waive a waiting period, there must be a bona fide personal financial
emergency that requires disbursement of loan proceeds before the end
of the waiting period. Whether there is a bona fide personal
financial emergency is determined by the facts surrounding
individual circumstances. A bona fide personal financial emergency
typically, but not always, will involve imminent loss of or harm to
a dwelling or harm to the health or safety of a natural person. A
waiver is not effective if the consumer's statement is inconsistent
with facts known to the creditor. To determine whether circumstances
are or are not a bona fide personal financial emergency under Sec.
226.19(a)(3), creditors may rely on the examples and other
commentary provided in comment 23(e)-2.[ltrif]
[lsqbb]2. Examples of waivers within the seven-business-day
waiting period. Assume the early disclosures are delivered to the
consumer in person on Monday, June 1, and at that time the consumer
executes a waiver of the seven-business-day waiting period (which
would end on Tuesday, June 9) so that the loan can be consummated on
Friday, June 5:
i. If the annual percentage rate on the early disclosures is
inaccurate under Sec. 226.22, the creditor must provide a corrected
disclosure to the consumer before consummation, which triggers the
three-business-day waiting period in Sec. 226.19(a)(2)(ii). After
the consumer receives the corrected disclosure, the consumer must
execute a waiver of the three-business-day waiting period in order
to consummate the transaction on Friday, June 5.
ii. If a change occurs that does not render the annual
percentage rate on the early disclosures inaccurate under Sec.
226.22, the creditor must disclose the changed terms before
consummation, consistent with Sec. 226.17(f). Disclosure of the
changed terms does not trigger the additional waiting period, and
the transaction may be consummated on June 5 without the consumer
giving the creditor an additional modification or waiver.[rsqbb]
3. [lsqbb]Examples of waivers made after the seven-business-day
waiting period. Assume the early disclosures are delivered to the
consumer in person on Monday, June 1 and consummation is scheduled
for Friday, June 19.[rsqbb][rtrif] Examples of effect on
consummation timing. Assume consummation is scheduled for Friday,
June 19, the disclosures required by Sec. 226.19(a)(1)(i) are
delivered to the consumer in person on Monday, June 1, and the
consumer receives the disclosures required by Sec. 226.19(a)(2)(ii)
on Monday, June 15.[ltrif] On Wednesday, June 17, a change in the
annual percentage rate occurs:
i. If the annual percentage rate on the [lsqbb]early[rsqbb]
disclosures [rtrif]required by Sec. 226.19(a)(2)(ii)[ltrif] is
[lsqbb]inaccurate under Sec. 226.22[rsqbb][rtrif]not accurate under
Sec. 226.22 nor accurate under Sec. 226.19(a)(2)(iv)[ltrif], the
creditor must provide a corrected disclosure before consummation,
which triggers the three-business-day-waiting period in Sec.
226.19(a)(2)[rtrif](iii)[ltrif]. After the consumer receives the
corrected disclosure, the consumer must execute a waiver of the
three-business-day waiting period in order to consummate the
transaction on Friday, June 19.
ii. If a change occurs that does not render the annual
percentage rate on the [lsqbb]early[rsqbb] disclosures
[rtrif]required by Sec. 226.19(a)(2)(ii)[ltrif] inaccurate under
Sec. 226.22, the creditor must disclose the changed terms before
consummation, consistent with Sec. 226.17(f). Disclosure of the
changed terms does not trigger an additional waiting period, and the
transaction may be consummated on Friday, June 19 without the
consumer giving the creditor an additional modification or waiver.
19(a)(4) [lsqbb]Notice.[rsqbb][rtrif]Timeshare plans.[ltrif]
1. Inclusion in other disclosures. The notice required by Sec.
226.19(a)(4) must be grouped together with the disclosures required
by Sec. 226.19(a)(1)(i) or Sec. 226.19(a)(2). See comment
17(a)(1)-2 for a discussion of the rules for segregating
disclosures. In other cases, the notice set forth in Sec.
226.19(a)(4) may be disclosed together with or separately from the
disclosures required under Sec. 226.18. See comment 17(a)(1)-
5(xvi).[rsqbb]
19(a)[lsqbb](5)[rsqbb][rtrif]4[ltrif](ii) Time of disclosures
for timeshare plans.
1. Timing. A mortgage transaction secured by a consumer's
interest in a ``timeshare plan,'' as defined in 11 U.S.C. 101(53D),
[lsqbb]that is also a Federally related mortgage loan under
RESPA[rsqbb] is subject to the requirements of Sec.
226.19(a)[lsqbb](5)[rsqbb][rtrif](4)[ltrif] instead of the
requirements of Sec. 226.19(a)(1) through Sec.
226.19(a)[lsqbb](4)[rsqbb][rtrif](3)[ltrif]. See comment
19(a)(1)(i)-1. Early disclosures for transactions subject to Sec.
226.19(a)[lsqbb](5)[rsqbb][rtrif](4)[ltrif] must be given (a) before
consummation or (b) within three business days after the creditor
receives the consumer's written application, whichever is earlier.
The general definition of ``business day'' in Sec. 226.2(a)(6)--a
day on which the creditor's offices are open to the public for
substantially all of its business functions--applies for purposes of
Sec. 226.19(a)(5)(ii). See comment 2(a)(6)-1. These timing
requirements are different from the timing requirements under Sec.
226.19(a)(1)(i). Timeshare transactions covered by Sec.
226.19(a)[lsqbb](5)[rsqbb] may be consummated any time after the
disclosures required by Sec.
226.19(a)[lsqbb](5)[rsqbb][rtrif](4)[ltrif](ii) are provided.
[[Page 58761]]
2. Use of estimates. If the creditor does not know the precise
credit terms, the creditor must base the disclosures on the best
information reasonably available and indicate that the disclosures
are estimates under Sec. 226.17(c)(2). If many of the disclosures
are estimates, the creditor may include a statement to that effect
(such as ``all numerical disclosures [lsqbb]except the late-payment
disclosure[rsqbb] are estimates'') instead of separately labeling
each estimate. In the alternative, the creditor may label as an
estimate only the items primarily affected by unknown information.
(See the commentary to Sec. 226.17(c)(2).) The creditor may provide
explanatory material concerning the estimates and the contingencies
that may affect the actual terms, in accordance with the commentary
to Sec. 226.17(a)(1)[lsqbb].[rsqbb][rtrif]and Sec. 226.37. The
disclosures required by Sec. 226.19(a)(2) may not contain
estimates, however, with limited exceptions. See the commentary on
Sec. 226.19(a)(2) for a discussion of limitations on estimates in
disclosures made under that subsection.[ltrif]
3. Written application. For timeshare transactions, creditors
may rely on comment 19(a)(1)(i)-[lsqbb]3[rsqbb][rtrif]2[ltrif] in
determining whether a ``written application'' has been received.
4. Denied or withdrawn applications. For timeshare transactions,
creditors may rely on comment 19(a)(1)(i)-
[lsqbb]4[rsqbb][rtrif]3[ltrif] in determining that disclosures are
not required by Sec.
226.19(a)[lsqbb](5)[rsqbb][rtrif](4)[ltrif](ii) because the
consumer's application will not or cannot be approved on the terms
requested or the consumer has withdrawn the application.
5. Itemization of amount financed. For timeshare transactions,
creditors may rely on comment 19(a)(1)(i)-
[lsqbb]5[rsqbb][rtrif]4[ltrif] in determining whether providing the
good faith estimates of settlement costs required by RESPA satisfies
the requirement of Sec. 226.18(c) to provide an itemization of the
amount financed.
19(a)[lsqbb](5)[rsqbb][rtrif]4[ltrif](iii) Redisclosure for
timeshare plans.
1. Consummation or settlement. For extensions of credit secured
by a consumer's timeshare plan, when corrected disclosures are
required, they must be given no later than ``consummation or
settlement.'' ``Consummation'' is defined in Sec. 226.2(a).
``Settlement'' is defined in Regulation X (24 CFR 3500.2(b)) and is
subject to any interpretations issued by HUD. In some cases, a
creditor may delay redisclosure until settlement, which may be at a
time later than consummation. If a creditor chooses to redisclose at
settlement, disclosures may be based on the terms in effect at
settlement, rather than at consummation. For example, in a variable-
rate transaction, a creditor may choose to base disclosures on the
terms in effect at settlement, despite the general rule in comment
[lsqbb]17(c)(1)-8[rsqbb][rtrif]Sec. 226.17(c)(1)(iii)[ltrif] that
variable-rate disclosures [rtrif]generally[ltrif] should be based on
the terms in effect at consummation.
2. Content of new disclosures. Creditors may rely on comment
19(a)(2)(ii)-2 in determining the content of corrected disclosures
required under Sec.
226.19(a)[lsqbb](5)[rsqbb][rtrif](4)[ltrif](iii).
19(b) [lsqbb]Certain variable-rate
transactions[rsqbb][rtrif]Adjustable-rate loan program
disclosures[ltrif].
[lsqbb]1. Coverage. Section 226.19(b) applies to all closed-end
variable-rate transactions that are secured by the consumer's
principal dwelling and have a term greater than one year. The
requirements of this section apply not only to transactions
financing the initial acquisition of the consumer's principal
dwelling, but also to any other closed-end variable-rate transaction
secured by the principal dwelling. Closed-End variable-rate
transactions that are not secured by the principal dwelling, or are
secured by the principal dwelling but have a term of one year or
less, are subject to the disclosure requirements of Sec.
226.18(f)(1) rather than those of Sec. 226.19(b). (Furthermore,
``shared-equity'' or ``shared-appreciation'' mortgages are subject
to the disclosure requirements of Sec. 226.18(f)(1) rather than
those of Sec. 226.19(b) regardless of the general coverage of those
sections.) For purposes of this section, the term of a variable-rate
demand loan is determined in accordance with the commentary to Sec.
226.17(c)(5). In determining whether a construction loan that may be
permanently financed by the same creditor is covered under this
section, the creditor may treat the construction and the permanent
phases as separate transactions with distinct terms to maturity or a
single combined transaction. For purposes of the disclosures
required under Sec. 226.18, the creditor may nevertheless treat the
two phases either as separate transactions or as a single combined
transaction in accordance with Sec. 226.17(c)(6). Finally, in any
assumption of a variable-rate transaction secured by the consumer's
principal dwelling with a term greater than one year, disclosures
need not be provided under Sec. Sec. 226.18(f)(2)(ii) or
226.19(b).[rsqbb]
[rtrif]1. Coverage. Section 226.19(b) applies to all closed-end
adjustable-rate mortgages described in Sec. 226.38(a)(3)(i) that
are secured by real property or a dwelling, except for reverse
mortgages subject to Sec. 226.33(a). Closed-End adjustable-rate
transactions that are not secured by real property or a dwelling are
subject to the disclosure requirements of Sec. 226.18(f) rather
than those of Sec. 226.19(b). In determining whether a construction
loan that may be permanently financed by the same creditor is
covered under this section, the creditor may treat the construction
and the permanent phases as separate transactions with distinct
terms to maturity or a single combined transaction. See comment
17(c)(6)-2. In any assumption of an adjustable-rate transaction
secured by real property or a dwelling, disclosures need not be
provided under Sec. 226.19(b).[ltrif]
* * * * *
Section 226.20--Subsequent Disclosure Requirements
[rtrif]20(a) Modifications to terms by the same creditor.
20(a)(1) Mortgages.
Paragraph 20(a)(1)(i).
1. Coverage. Section 226.20(a)(1) describes certain
modifications to the terms of an existing legal obligation by the
``same creditor'' that are new transactions requiring a complete new
set of disclosures. ``Same creditor'' is defined for purposes of
this section as the current holder of an existing obligation secured
by real property or a dwelling, or the servicer acting on behalf of
such current holder. See Sec. 226.20(a)(1)(iii). All other
creditors that enter into an agreement to extend credit covered by
TILA also must make the disclosures required under this part (for
example, the disclosures required by Sec. Sec. 226.19 and 226.38),
and are otherwise subject to all applicable provisions of this part.
2. Transactions not covered. A modification to the terms of the
existing legal obligation by the same creditor and same consumer is
a new transaction under Sec. 226.20(a)(1) only if one or more of
the modifications listed in Sec. 226.20(a)(1)(i)(A)-(G) occurs. For
example, if the creditor changes the payment schedule under an
existing legal obligation by adjusting the payment frequency from
monthly to bi-weekly, with no other modification to the terms listed
under Sec. 226.20(a)(1)(i)(A)-(G), a new transaction under Sec.
226.20(a)(1) does not occur. In addition, Sec. 226.20(a)(1) applies
only if the modification rises to the level of a change in the terms
of the existing legal obligation, unless a fee is imposed on the
consumer in connection with the modification, regardless of whether
the fee is reflected in any agreement between the parties. (See
Sec. 226.17(c)(1) and corresponding commentary for a discussion of
the ``legal obligation.'') For example, the following are
modifications that do not result in a change in the terms of the
existing legal obligation, provided that no fee is imposed in
connection with the modification:
i. A creditor informally permits the consumer to defer payments
from time to time, for instance to take account of holiday seasons
or seasonal employment;
ii. A creditor enters into an informal arrangement with the
consumer to change the monthly payment amount owed, for instance by
allowing the consumer to make interest-only payments for 6 months
and subsequently increasing the monthly payment amount owed for the
remainder of the loan term to account for the 6 months of unpaid
principal amount; or
iii. A creditor informally extends the consumer's payment due
date by giving the consumer an additional 30 days to make a monthly
payment amount that is due.
3. New transaction requirements. A new transaction under Sec.
226.20(a)(1) requires a complete set of new disclosures and is
subject to all applicable provisions of this part. For example:
i. If the same creditor adds an adjustable-rate feature to an
existing legal obligation, the disclosures required under Sec.
226.19(b) must be given at the time of application (see comment
20(a)(1)(i)-4) or before the consumer pays a nonrefundable fee,
whichever is earlier, in addition to disclosures required under
Sec. Sec. 226.19(a) and 226.38;
ii. If the same creditor increases the interest rate of an
existing legal obligation which results in the new transaction being
a higher-priced mortgage loan under Sec. 226.35(a), the creditor
must provide a complete set of new disclosures and comply with the
requirements under Sec. 226.35(b);
iii. If the same creditor advances new money under an existing
legal obligation
[[Page 58762]]
secured by the consumer's principal dwelling, a new transaction
occurs under Sec. 226.20(a)(1)(i)(A) and is subject to rescission
under Sec. 226.23, whether the creditor is the original creditor or
an assignee. See Sec. 226.23(f)(2). In this case, the creditor must
provide to the consumer the rescission notice required under Sec.
226.23(b) in addition to the disclosures required under Sec. Sec.
226.19 and 226.38. (See Sec. Sec. 226.23(f)(2) and corresponding
commentary for a discussion of advance of new money);
iv. If the same creditor adds a security interest in the
consumer's principal dwelling to an existing legal obligation, a new
transaction under Sec. 226.20(a)(1)(i)(G) occurs and is subject to
rescission under Sec. 226.23, whether the creditor is the original
creditor or an assignee. In this case, the creditor must provide to
the consumer the rescission notice required under Sec. 226.23(b) in
addition to the disclosures required under Sec. Sec. 226.19 and
226.38. (See Sec. 226.23(a)(1) and corresponding commentary for a
discussion of addition of a security interest); or
v. If the same creditor extends the loan term of an existing
legal obligation (i.e., renews the loan), and imposes a fee in
connection with the modification, a new transaction under Sec.
226.20(a)(1)(i)(C) occurs that requires new disclosures. The
transaction is not subject to rescission if the same creditor
(current holder) is also the original creditor. (See Sec.
226.23(f)(2) for a discussion of the exemption from rescission for
refinancings.) In this case, the creditor must provide to the
consumer the disclosures required under Sec. Sec. 226.19 and
226.38, but need not provide a rescission notice.
4. Application. Creditors may rely on comment 19(a)(1)(i)-2 in
determining when a written application is received for a new
transaction covered by this subsection. Comment 19(a)(1)(i)-2
provides, in part, that an application is received when the consumer
submits the information set forth in the definition of
``application'' in Regulation X (see 24 CFR 3500.2(b)). In some
cases, the consumer may not need to submit information to the
creditor to make a ``written application'' for a modification. For
example, where a consumer contacts the same creditor to modify a
term of an existing legal obligation, the creditor may have
information on file that constitutes an ``application.'' Whether the
creditor requests the information from the consumer anew or uses
information on file, an application is deemed received where the
creditor has the information set forth in the definition of
``application'' as defined under Regulation X. See 24 CFR Sec.
3500.2(b).
5. Denied or withdrawn applications. A creditor must deliver or
mail an early disclosure of credit terms to the consumer not later
than three business days after the creditor receives an application
for a modification. (See Sec. 226.19(a)(1)(i) and corresponding
commentary for the early disclosure timing requirements.) Within
this three-business-day period, the creditor may determine that an
application for a modification to the terms of an existing legal
obligation will not be approved on the terms requested, or a
consumer may withdraw an application. In these cases, the creditor
need not make the early disclosures required by Sec.
226.19(a)(1)(i). (See comment 19(a)(1)(i)-3 for further discussion
of denied or withdrawn applications. See also 12 CFR 202.9(a) and
corresponding commentary regarding adverse action notice
requirements under ECOA and Regulation B.)
Paragraph 20(a)(1)(i)(A).
1. General. Under Sec. 226.20(a)(1), an increase in the loan
amount occurs when the new loan amount exceeds the unpaid principal
balance plus any earned unpaid finance charge or earned unpaid non-
finance charge, such as a late fee, on the existing obligation. (See
Sec. 226.38(a)(1) for the meaning of ``loan amount.'')
2. Costs of the transaction. An increase in the loan amount
includes any cost of the transaction, such as points, appraisal or
attorney's fees, title examination and insurance fees, or new
insurance premiums, that are paid out of the proceeds of the new
loan amount, except amounts that are used to fund an escrow account.
(See comments 20(a)(1)(i)(A)-3 regarding escrows and 20(a)(1)(i)(B)-
2 regarding fees.) For example, if the sum of the outstanding
principal balance plus the earned unpaid finance charge is $200,000
and the new loan amount is $203,000, a new transaction requiring new
disclosures would occur under Sec. 226.20(a)(1), even where the
extra $3,000 is attributable solely to costs of the transaction and
no other modifications to terms listed in Sec. Sec.
226.20(a)(1)(i)(A)-(G) occur.
3. Escrows. Amounts that are advanced to the consumer to fund an
existing or newly-established escrow account are not included in the
determination of whether there is an increase in the loan amount
under Sec. 226.20(a)(1)(i)(A). For purposes of this paragraph
20(a)(1)(i)(A), ``escrow account'' has the same meaning as in 24 CFR
3500.17(b), as amended.
Paragraph 20(a)(1)(i)(B).
1. General. Imposing a fee on the consumer in connection with
the agreement to modify an existing legal obligation results in a
new transaction under Sec. 226.20(a)(1)(i)(B). That is, the fee
does not need to be part of the new contractual arrangement to
constitute an event that results is a new transaction under Sec.
226.20(a)(1)(i)(B).
2. Payment and types of fees. A fee imposed on the consumer in
connection with the agreement to modify the existing legal
obligation includes any fee that is paid out of the proceeds of the
new loan amount or paid directly by the consumer out-of-pocket,
except amounts that are used to fund an escrow account. See comment
20(a)(1)(i)(A)-3. Fees imposed on the consumer in connection with
the agreement include, for example, points, credit report, appraisal
and underwriting fees, or new insurance premiums. Charging an
insurance premium for the continuation of coverage does not
constitute a fee under Sec. 226.20(a)(1)(i). That is, if a creditor
does not impose on the consumer additional insurance premiums or new
insurance requirements (for example, if the creditor does not
increase the existing premium for hazard insurance or require
increased property insurance amounts), but merely continues
coverage, such costs are not fees imposed on the consumer in
connection with the agreement under Sec. 226.20(a)(1)(i). (See
Sec. 226.19(a)(1)(ii) and corresponding commentary regarding
restrictions on the imposition of fees.)
3. Timing. Creditors may rely on comment 19(a)(1)(i)-2 regarding
when a written application is received for a new transaction covered
by this subsection. (See comment 20(a)(1)(i)-4 for a discussion of
application.)
Paragraph 20(a)(1)(i)(C).
1. General. A change in loan term occurs when the maturity date
of the new transaction is earlier or later than the maturity date of
the existing legal obligation. For example, a change in loan term
occurs, and a new transaction results under Sec.
226.20(a)(1)(i)(C), if the existing obligation has a maturity date
of June 30, 2020, and the creditor agrees to modify the existing
legal obligation to extend the maturity date by three years to June
30, 2023. (See Sec. 226.38(a)(2) for the meaning of ``loan term.'')
Paragraph 20(a)(1)(i)(D).
1. General. Section 226.20(a)(1)(i)(D) applies to any change in
rate, including both increases and decreases in the interest rate,
except as provided under Sec. 226.20(a)(1)(ii)(C). A change in rate
occurs for purposes of Sec. 226.20(a)(1)(i)(D) when the interest
rate (the fully-indexed rate for an adjustable-rate mortgage) for
the new obligation is different than the interest rate for the
existing obligation that is in effect within a reasonable period of
time of the modification. For example, 30 calendar days would be a
reasonable period of time. The following example illustrates the
rule. Assume that on June 15, 2010, the existing legal obligation is
a \5/1\ ARM that currently provides for a fully-indexed interest
rate of 6 percent, which adjusts annually according to changes in
the one-year LIBOR index. The next adjustment is scheduled for
September 1, 2010. The same creditor and same consumer consummate an
agreement on July 1, 2010, to modify the existing legal obligation
to provide for a 3 percent introductory rate, that will adjust to
the fully-indexed rate of 6.25 percent after 6 months, and annually
thereafter according to changes in the one-year LIBOR index. A
change in rate occurs under Sec. 226.20(a)(1)(i)(D) because the
fully-indexed rate on the new transaction is 6.25 percent, which is
different than the 6 percent interest rate in effect under the
existing legal obligation within 30 calendar days of consummation of
the modification. If, however, the fully-indexed rate on the new
transaction at consummation is 6 percent and adjusts annually
thereafter according to changes in the one-year LIBOR index, a
change in rate does not occur under Sec. 226.20(a)(1)(i)(D). (See
Sec. 226.38(c)(7)(iii) for the meaning of the term ``fully-indexed
rate,'' and Sec. 226.38(a)(3)(i)(A) for the meaning of the term
``adjustable-rate mortgage.'')
2. Rate calculation and limits. A change in rate based on an
adjustable-rate feature disclosed as required by Sec. 226.38(e)(1)-
(2) in connection with the existing obligation is not a new
transaction under Sec. 226.20(a)(1). For example, assume the
disclosures for an existing adjustable-rate mortgage provide that
the 5.25 percent introductory rate will expire after three years,
adjust to 7.25 percent in the fourth year, and adjust annually
thereafter
[[Page 58763]]
based on the one-year LIBOR index plus 2 percent with a lifetime cap
of 12 percent. A change in rate made in accordance with these
disclosures does not result in a new transaction under Sec.
226.20(a)(1). However, a change in the interest rate of an existing
legal obligation occurs where the same parties to an existing
obligation modify, for example, the index or formula used (e.g.,
from the one-year LIBOR to the 6-month Treasury), the margin (e.g.,
from 2 percent to 1.5 percent), or rate limit (e.g., from 12 percent
to 15 percent) not previously disclosed in accordance with Sec.
226.38(e)(1)-(2). One or more of these modifications results in a
new transaction requiring new disclosures for purposes of Sec.
226.20(a)(1).
Paragraph 20(a)(1)(i)(E).
1. General. An increase in the periodic payment amount based on
payment change limits disclosed as required under Sec. 226.38(e)(2)
in connection with the existing legal obligation is not a new
transaction under Sec. 226.20(a)(1). For example, assume the
disclosures for an existing fixed-rate mortgage with negative
amortization provides for minimum payments that can increase by 5
percent each year for the first 10 years, and thereafter the full
monthly principal and interest payments will be required for the
remainder of the loan term. A change in the monthly payment amount
owed in the seventh year that is made in accordance with these
disclosures does not result in a new transaction under Sec.
226.20(a)(1). However, an increase in the periodic payment amount
owed under the existing legal obligation as a result of a change in
any limitations on payment adjustments not previously disclosed in
accordance with Sec. 226.38(e)(2) is a new transaction requiring
new disclosures. Using the same example as above, a new transaction
requiring new disclosures occurs under Sec. 226.20(a)(1) if the
minimum payment owed in the seventh year is increased by 6 percent
rather than by the disclosed 5 percent increase.
2. Escrows. Amounts that are advanced to the consumer to fund an
existing or newly-established escrow account are not included in the
determination of whether there is an increase in the periodic
payment amount under Sec. 226.20(a)(1)(i)(E). For purposes of this
paragraph 20(a)(1)(i)(E), ``escrow account'' has the same meaning as
in 24 CFR 3500.17(b), as amended.
Paragraph 20(a)(1)(i)(F).
1. Adjustable-rate feature. A creditor adds an adjustable-rate
feature to an existing legal obligation by changing the index or
formula used to adjust the rate to a different index or formula. A
creditor does not add an adjustable-rate feature to an existing
legal obligation if it changes the index or formula used to adjust
the rate because the original index or formula becomes unavailable,
as long as historical fluctuations in the original and replacement
indices or formulas were substantially similar, and as long as the
replacement index or formula will produce a rate similar to the rate
that was in effect at the time the original index or formula became
unavailable. If the replacement index or formula is newly
established and therefore does not have any rate history, it may be
used if it produces a rate substantially similar to the rate in
effect when the original index or formula became unavailable.
2. Other risk features. A new transaction requiring new
disclosures occurs where a creditor adds one or more of the
following features or conditions to an existing legal obligation:
prepayment penalty; interest-only; negative amortization; balloon
payment; demand; no-documentation or low-documentation; or shared-
equity or shared-appreciation.
20(a)(1)(ii) Exceptions.
Paragraph 20(a)(1)(ii)(A).
1. Court agreements. This exception includes, for example,
agreements such as reaffirmations of debts discharged in bankruptcy,
settlement agreements, and post-judgment agreements. (See commentary
to Sec. 226.2(a)(14) for a discussion of court-approved agreements
that are not considered new extensions of ``credit.'')
Paragraph 20(a)(1)(ii)(B).
1. Workout agreements. An agreement entered into as a result of
the consumer's default or delinquency includes, for example,
forbearance, repayment or loan modification agreements. The
exception under Sec. 226.20(a)(1)(ii)(B) does not apply, however,
if there is an increase in the loan amount or the interest rate, or
a fee is imposed on the consumer in connection with the agreement.
(See Sec. 226.20(a)(1)(i)(B) and corresponding commentary regarding
fees.)
Paragraph 20(a)(1)(ii)(C).
1. Decreases in interest rate. A decrease in the interest rate
occurs if the contractual interest rate (the fully-indexed rate for
an adjustable-rate mortgage) for the new loan at the time the new
transaction is consummated is lower than the interest rate (the
fully-indexed rate for an adjustable-rate mortgage) of the existing
obligation in effect at the time of the modification. Section
226.20(a)(1)(ii)(C) provides that a decrease in the interest rate is
not a new transaction under Sec. 226.20(a)(1) under the following
circumstances: No additional fees or other changes are made to the
existing legal obligation, except that the payment schedule may
reflect lower periodic payments or a lengthened maturity date. The
exception in Sec. 226.20(a)(1)(ii)(C) does not apply if the
maturity date is shortened, or if the payment amount or number of
payments is increased beyond that remaining on the existing
transaction. For example, if a creditor lowers the interest rate of
an existing legal obligation and retains the existing loan term of
30 years (resulting in lower monthly payments), no new disclosures
are required. Similarly, if a creditor lowers the interest rate and
also enters into a 6-month payment forbearance arrangement with the
consumer, with those six months of payments to be added to the end
of the loan term (resulting in a longer loan term), no new
disclosures are required. However, a new transaction requiring new
disclosures occurs if the creditor lowers the interest rate and
shortens the loan term from, for example, 30 to 20 years. A new
transaction requiring new disclosures also occurs if the creditor
lowers the interest rate but adds a new term, such as a prepayment
penalty, or imposes a fee on the consumer. (See comment
20(a)(1)(i)(C) for a discussion of changes in the loan term, comment
20(a)(1)(i)(D)-1 for a discussion of changes in the interest rate,
and comment 20(a)(1)(i)(B)-1 regarding fees.)[ltrif]
20(a) [rtrif](2)[ltrif] Refinancings [rtrif]by the same
creditor--Non-mortgage credit[ltrif].
1. Definition. [rtrif]For transactions not secured by real
property or a dwelling, a[ltrif][lsqbb]A[rsqbb] refinancing is a new
transaction requiring a complete new set of disclosures. Whether a
refinancing has occurred is determined by reference to whether the
original obligation has been satisfied or extinguished and replaced
by a new obligation, based on the parties' contract and applicable
law. The refinancing may involve the consolidation of several
existing obligations, disbursement of new money to the consumer or
on the consumer's behalf, or the rescheduling of payments under an
existing obligation. In any form, the new obligation must completely
replace the prior one.
i. Changes in the terms of an existing obligation, such as the
deferral of individual installments, will not constitute a
refinancing unless accomplished by the cancellation of that
obligation and the substitution of a new obligation.
ii. A substitution of agreements that meets the refinancing
definition will require new disclosures, even if the substitution
does not substantially alter the prior credit terms.
2. Exceptions. A [rtrif]non-mortgage[ltrif] transaction is
subject to Sec. 226.20(a)[rtrif](2)[ltrif] only if it meets the
general definition of a refinancing. Section
226.20(a)[rtrif](2)[ltrif] [lsqbb](1)[rsqbb][rtrif](i)[ltrif]
through [lsqbb](5)[rsqbb][rtrif](v)[ltrif] lists 5 events that are
not treated as refinancings, even if they are accomplished by
cancellation of the old obligation and substitution of a new one.
3. Variable-rate. i. If a variable-rate feature was properly
disclosed under the regulation, a rate change in accord with those
disclosures is not a refinancing. For example, no new disclosures
are required when the variable-rate feature is invoked on a
renewable balloon-payment
[lsqbb]mortgage[rsqbb][rtrif]transaction[ltrif] that was previously
disclosed as a variable-rate transaction.
ii. Even if it is not accomplished by the cancellation of the
old obligation and substitution of a new one, a new transaction
subject to new disclosures results if the creditor either:
A. Increases the rate based on a variable-rate feature that was
not previously disclosed; or
B. Adds a variable-rate feature to the obligation. A creditor
does not add a variable-rate feature by changing the index of a
variable-rate transaction to a comparable index, whether the change
replaces the existing index or substitutes an index for one that no
longer exists.
[lsqbb]iii. If either of the events in paragraph 20(a)3.ii.A. or
ii.B. occurs in a transaction secured by a principal dwelling with a
term longer than one year, the disclosures required under Sec.
226.19(b) also must be given at that time.[rsqbb]
[lsqbb]4. Unearned finance charge. In a transaction involving
precomputed finance charges, the creditor must include in the
[[Page 58764]]
finance charge on the refinanced obligation any unearned portion of
the original finance charge that is not rebated to the consumer or
credited against the underlying obligation. For example, in a
transaction with an add-on finance charge, a creditor advances new
money to a consumer in a fashion that extinguishes the original
obligation and replaces it with a new one. The creditor neither
refunds the unearned finance charge on the original obligation to
the consumer nor credits it to the remaining balance on the old
obligation. Under these circumstances, the unearned finance charge
must be included in the finance charge on the new obligation and
reflected in the annual percentage rate disclosed on refinancing.
Accrued but unpaid finance charges are included in the amount
financed in the new obligation.[rsqbb]
[lsqbb]5[rsqbb][rtrif]4[ltrif]. Coverage. Section
226.20(a)[rtrif](2)[ltrif] applies only to refinancings undertaken
by the original creditor or a holder or servicer of the original
obligation. A ``refinancing'' by any other person is a new
transaction under the regulation, not a refinancing under this
section.
Paragraph 20(a)[lsqbb](1)[rsqbb][rtrif](2)(i)[ltrif]
1. Renewal. This exception applies both to obligations with a
single payment of principal and interest and to obligations with
periodic payments of interest and a final payment of principal. In
determining whether a new obligation replacing an old one is a
renewal of the original terms or a refinancing, the creditor may
consider it a renewal even if:
i. Accrued unpaid interest is added to the principal balance.
ii. Changes are made in the terms of renewal resulting from the
factors listed in Sec. 226.17(c)(3).
iii. The principal at renewal is reduced by a curtailment of the
obligation.
Paragraph 20(a)(2)[rtrif](ii)[ltrif]
1. Annual percentage rate reduction. A reduction in the annual
percentage rate with a corresponding change in the payment schedule
is not a refinancing. If the annual percentage rate is subsequently
increased (even though it remains below its original level) and the
increase is effected in such a way that the old obligation is
satisfied and replaced, new disclosures must then be made.
2. Corresponding change. A corresponding change in the payment
schedule to implement a lower annual percentage rate would be a
shortening of the maturity, or a reduction in the payment amount or
the number of payments of an obligation. The exception in Sec.
226.20(a)(2)[rtrif](ii)[ltrif] does not apply if the maturity is
lengthened, or if the payment amount or number of payments is
increased beyond that remaining on the existing transaction.
Paragraph 20(a)[lsqbb](3)[rsqbb][rtrif](2)(iii)[ltrif]
1. Court agreements. This exception includes, for example,
agreements such as reaffirmations of debts discharged in bankruptcy,
settlement agreements, and post-judgment agreements. (See the
commentary to Sec. 226.2(a)(14) for a discussion of court-approved
agreements that are not considered ``credit.'')
Paragraph 20(a)[lsqbb](4)[rsqbb][rtrif](2)(iv)[ltrif]
1. Workout agreements. A workout agreement is not a refinancing
unless the annual percentage rate is increased or additional credit
is advanced beyond amounts already accrued plus insurance premiums.
Paragraph 20(a)[lsqbb](5)[rsqbb][rtrif](2)(v)[ltrif]
1. Insurance renewal. The renewal of optional insurance added to
an existing credit transaction is not a refinancing, assuming that
appropriate Truth in Lending disclosures were provided for the
initial purchase of the insurance.
[rtrif]20(a)(3) Unearned finance charge.
1. Unearned finance charge. In a transaction involving
precomputed finance charges, the creditor must include in the
finance charge on the new obligation any unearned portion of the
original finance charge that is not rebated to the consumer or
credited against the underlying obligation. For example, in a
mortgage transaction with an add-on finance charge, a creditor
increases the loan amount (or, in a non-mortgage transaction with an
add-on finance charge, a creditor advances new money to a consumer)
in a manner that extinguishes the original obligation and replaces
it with a new one. The creditor neither refunds the unearned finance
charge on the existing obligation to the consumer nor credits it to
the remaining balance on the existing obligation. Under these
circumstances, the unearned finance charge must be included in the
finance charge on the new obligation and reflected in the annual
percentage rate disclosed on the new obligation. Accrued but unpaid
finance charges are included in the amount financed in the new
obligation.[ltrif]
* * * * *
[lsqbb]Paragraph 20(c) Variable-rate
adjustments[rsqbb][rtrif]20(c) Rate adjustments.[ltrif]
[lsqbb]1. Timing of adjustment notices. This section requires a
creditor (or a subsequent holder) to provide certain disclosures in
cases where an adjustment to the interest rate is made in a
variable-rate mortgage transaction subject to Sec. 226.19(b). There
are two timing rules, depending on whether payment changes accompany
interest rate changes. A creditor is required to provide at least
one notice each year during which interest-rate adjustments have
occurred without accompanying payment adjustments. For payment
adjustments, a creditor must deliver or place in the mail notices to
borrowers at least 25, but not more than 120, calendar days before a
payment at a new level is due. The timing rules also apply to the
notice required to be given in connection with the adjustment to the
rate and payment that follows conversion of a transaction subject to
Sec. 226.19(b) to a fixed-rate transaction. (In cases where an
open-end account is converted to a closed-end transaction subject to
Sec. 226.19(b), the requirements of this section do not apply until
adjustments are made following conversion.)[rsqbb]
[rtrif]1. General. Section 226.20(c) requires a creditor (or a
subsequent holder) to provide certain disclosures in cases where an
adjustment to the interest rate is made in an adjustable-rate
mortgage subject to Sec. 226.19(b). (For a discussion of ``price
level adjusted mortgages'' and other mortgages not subject to Sec.
226.19(b), see comment 19(b)-3.) Section 226.20(c) applies only if
adjustments are made under the terms of the existing legal
obligation between the parties. Typically, these adjustments will be
made based on a change in the value of the applicable index or on
the application of a formula. If an adjustment to the interest rate
is made that is not based on the terms of the legal obligation, then
no disclosures are required under Sec. 226.20(c). Such an
adjustment likely would require new TILA disclosures under Sec.
226.20(a). For example, no disclosures are required under Sec.
226.20(c) when an adjustment to the interest rate is made pursuant
to a modification of the legal obligation, but such modification may
be a new transaction for which the creditor must provide new
disclosures under Sec. 226.20(a). Further, disclosures must be
given under Sec. 226.20(c) if such new transaction is an
adjustable-rate mortgage subject to Sec. 226.19(b) and the interest
rate is adjusted based on a change in the value of the applicable
index or on the application of a formula. The following examples
illustrate whether or not disclosures are required under Sec.
226.20(c) in different circumstances:
i. Disclosure required. Assume that the loan agreement provides
that the interest rate on an ARM subject to Sec. 226.19(b) will be
determined by the 1-year LIBOR plus a margin of 2.75 percentage
points. Currently the consumer's interest rate is 6%, based on the
index and margin. The loan agreement provides that the interest rate
will adjust annually and the corresponding payment will be due on
October 1. Assume that, when the adjusted interest rate is
determined, the 1-year LIBOR for 2010 has increased by 2 percentage
points over the 1-year LIBOR for 2009. Under the terms of the loan
agreement, the interest rate will be adjusted to 8%, and the
corresponding payment will be due on October 1, 2010. The creditor
or holder must provide the notice required by Sec. 226.20(c)(1) 60
to 120 days before the corresponding payment is due, that is,
between June 3 and August 2, 2010. (Disclosures may be required
before modification under Sec. 226.20(a), however.)
ii. Disclosure not required. Assume the same loan agreement and
facts as in the previous example, except that on January 4, 2010 the
parties modify the loan agreement and the consumer pays a $500
modification fee. They agree that the consumer's current interest
rate will be reduced temporarily from 6% to 4.5%, with the
corresponding payment due on February 1, 2010. They also agree that
after modification interest rate adjustments will continue to be
made based on adjustments to the 1-year LIBOR and the corresponding
payment will continue to be due on October 1. Assume that, when the
adjusted interest rate is determined, the 1-year LIBOR for 2010 has
increased by 2 percentage points over the 1-year LIBOR for 2009.
Under the terms of the modified loan agreement, the interest rate
will be adjusted to 8%, and the corresponding payment will be due on
October 1, 2010.
A. The creditor need not send a notice under Sec. 226.20(c)(1)
60 to 120 days before payment based on the interest rate of 4.5% is
due on February 1 because the payment
[[Page 58765]]
change is not made based on an interest rate adjustment provided for
in the original loan agreement. Disclosures may be required under
Sec. 226.20(a) in connection with the modification, however.
B. The creditor must send a notice under Sec. 226.20(c)(1) 60
to 120 days before payment based on the interest rate of 8% is due
on October 1, that is, the creditor must send a notice between June
3 and August 2, 2010. This is because the payment due on October 1
is based on an interest rate adjusted based on a change to the index
value and as provided for in the modified loan agreement.[ltrif]
2. [lsqbb]Exceptions.[rsqbb][rtrif]Not applicable.[ltrif]
Section 226.20(c) does not apply to [lsqbb]``shared-equity,''
``shared-appreciation,'' or ``price level adjusted'' or similar
mortgages[rsqbb][rtrif]``price-level adjusted mortgages and certain
other mortgages that are not adjustable-rate mortgages subject to
the disclosure requirements of Sec. 226.19(b). See comment 19(b)-
3[ltrif].
3. Basis of disclosures. The disclosures required under this
section shall reflect the terms of the parties' legal obligation, as
required under Sec. 226.17(c)(1).
[rtrif]4. Conversion. Section 226.20(c) applies to adjustments
made when an adjustable-rate mortgage subject to Sec. 226.19(b) is
converted to a fixed-rate mortgage if the existing legal obligation
provides for such conversion and establishes an index or formula to
be used to determine the interest rate upon conversion. New
disclosures instead may be required under Sec. 226.20(a), however,
if the existing legal obligation does not provide for conversion or
provides for conversion but does not state a specific index and
margin or formula to be used to determine the new interest rate, or
if the parties agree to change the index, margin, or formula to be
used to determine the interest rate upon conversion. New disclosures
may be required under Sec. 226.20(a), moreover, if a conversion fee
is charged (whether or not the existing legal obligation establishes
the amount of the conversion fee) or loan terms other than the
interest rate and corresponding payment are modified. If an open-end
account is converted to a closed-end transaction subject to Sec.
226.19(b), disclosures need not be provided under Sec. 226.20(c)
until adjustments subject to Sec. 226.20(c) are made following
conversion.[ltrif]
[rtrif]20(c)(1) Timing of disclosures.
1. When required. Payment changes due to changes in property tax
obligations or mortgage-related insurance premiums do not trigger
the requirement to make disclosures under Sec.
226.20(c)(1)(i).[ltrif]
[lsqbb]Paragraph 20(c)(1)[rsqbb][rtrif]Paragraph
20(c)(2)(ii)[ltrif].
1. Current and [lsqbb]prior[rsqbb][rtrif]new[ltrif] interest
rates. The requirements under this paragraph are satisfied by
disclosing the interest rate used to compute the new adjusted
payment amount [lsqbb](``current rate'')[rsqbb][rtrif](``new
rate'')[ltrif] and the adjusted interest rate that was disclosed in
the last adjustment notice[lsqbb], as well as all other interest
rates applied to the transaction in the period since the last notice
(``prior rates'')[rsqbb][rtrif](``current rate'')[ltrif]. (If there
has been no prior adjustment notice, the [lsqbb]prior rates
are[rsqbb][rtrif]current rate is[ltrif] the interest rate applicable
to the transaction at consummation[rtrif].)[ltrif] [lsqbb], as well
as all other interest rates applied to the transaction in the period
since consummation.) If no payment adjustment has been made in a
year, the current rate is the new adjusted interest rate for the
transaction, and the prior rates are the adjusted interest rate
applicable to the loan at the time of the last adjustment notice,
and all other rates applied to the transaction in the period between
the current and last adjustment notices. In disclosing all other
rates applied to the transaction during the period between notices,
a creditor may disclose a range of the highest and lowest rates
applied during that period.[rsqbb]
[lsqbb]Paragraph 20(c)(2).
1. Current and prior index values. This section requires
disclosure of the index or formula values used to compute the
current and prior interest rates disclosed in Sec. 226.20(c)(1).
The creditor need not disclose the margin used in computing the
rates. If the prior interest rate was not based on an index or
formula value, the creditor also need not disclose the value of the
index that would otherwise have been used to compute the prior
interest rate.[rsqbb]
[lsqbb]Paragraph 20(c)(3)[rsqbb][rtrif]Paragraph
20(c)(2)(iv)[ltrif].
1. Unapplied index increases. The requirement that the consumer
receive information about the extent to which the creditor has
foregone any increase in the interest rate [rtrif]and the earliest
date a creditor may apply foregone interest to future adjustments,
subject to rate caps,[ltrif] is applicable only to those
transactions permitting interest rate carryover. The amount of
increase that is foregone at an adjustment is the amount that,
subject to rate caps, can be applied to future adjustments
independently to increase, or offset decreases in, the rate that is
determined according to the index or formula.
[lsqbb]Paragraph 20(c)(4).
1. Contractual effects of the adjustment. The contractual
effects of an interest rate adjustment must be disclosed including
the payment due after the adjustment is made whether or not the
payment has been adjusted. A contractual effect of a rate adjustment
would include, for example, disclosure of any change in the term or
maturity of the loan if the change resulted from the rate
adjustment. In transactions where paying the periodic payments will
not fully amortize the outstanding balance at the end of the loan
term and where the final payment will equal the periodic payment
plus the remaining unpaid balance, the amount of the adjusted
payment must be disclosed if such payment has changed as a result of
the rate adjustment. A statement of the loan balance also is
required. The balance required to be disclosed is the balance on
which the new adjusted payment is based. If no payment adjustment is
disclosed in the notice, the balance disclosed should be the loan
balance on which the payment disclosed under Sec. 226.20(c)(5) is
based, if applicable, or the balance at the time the disclosure is
prepared.[rsqbb]
[lsqbb]Paragraph 20(c)(5)[rsqbb][rtrif]Paragraph
20(c)(2)(vi)[ltrif].
1. Fully-amortizing payment. This paragraph requires a
disclosure [rtrif]of the fully amortizing payment[ltrif] only when
negative amortization occurs as a result of the adjustment. A
disclosure is not required simply because a loan calls for non-
amortizing or partially amortizing payments. For example, in a
transaction with a five-year term and payments based on a longer
amortization schedule, and where the final payment will equal the
periodic payment plus the remaining unpaid balance, the creditor
would not have to disclose the payment necessary to fully amortize
the loan in the remainder of the five-year term. A disclosure is
required, however, if the [rtrif]new[ltrif] payment disclosed under
[lsqbb]Sec. 226.20(c)(4)[rsqbb] [rtrif]Sec.
226.20(c)(2)(ii)(C)[ltrif] is not sufficient to prevent negative
amortization in the loan. The adjustment notice must state the
payment required to prevent negative amortization. (This paragraph
does not apply if the payment disclosed in [lsqbb]Sec.
226.20(c)(4)[rsqbb] [rtrif]Sec. 226.20(c)(2)(ii)(C)[ltrif] is
sufficient to prevent negative amortization in the loan but the
final payment will be a different amount due to rounding.)
[rtrif]2. Effect on loan term. The creditor must disclose any
change in the term or maturity of the loan if the change resulted
from the rate adjustment. The creditor need not make that disclosure
if the loan term or maturity has not changed.[ltrif]
Paragraph 20(c)(2)(vii).
1. Basis of disclosure. A statement of the loan balance must be
disclosed. The balance required to be disclosed is the balance on
which the new adjusted payment is based.
Paragraph 20(c)(3)(iii).
1. Unapplied index increases. Creditors may rely on comment
20(c)(2)(iv)-1 in determining which transactions the requirement to
disclose foregone interest increases applies to and how to disclose
such increases. Although creditors must disclose the earliest date
the creditor may apply foregone interest to future adjustments under
Sec. 226.20(c)(2)(iv), creditors need not disclose this information
in the disclosures required by Sec. 226.20(c)(3)(iii), which are
made when interest rate changes do not cause payment changes during
a year.
Paragraph 20(c)(3)(v).
1. Basis of disclosure. A statement of the loan balance must be
disclosed. The balance required to be disclosed is the balance on
the last day of the period for which the creditor discloses the
highest and lowest interest rates.[ltrif]
* * * * *
Section 226.22--Determination of the Annual Percentage Rate
22(a) Accuracy of the annual percentage rate.
[rtrif]22(a)(1) Actual annual percentage rate.[ltrif]
Paragraph 22(a)(1)[rtrif](i)[ltrif].
1. Calculation method. The regulation recognizes both the
actuarial method and the United States Rule Method (U.S. Rule) as
measures of an exact annual percentage rate. Both methods yield the
same annual percentage rate when payment intervals are equal. They
differ in their treatment of unpaid accrued interest.
2. Actuarial method. When no payment is made, or when the
payment is insufficient to
[[Page 58766]]
pay the accumulated finance charge, the actuarial method requires
that the unpaid finance charge be added to the amount financed and
thereby capitalized. Interest is computed on interest since in
succeeding periods the interest rate is applied to the unpaid
balance including the unpaid finance charge. Appendix J provides
instructions and examples for calculating the annual percentage rate
using the actuarial method. [rtrif](The fact that Sec.
226.38(e)(5)(ii) requires the ``finance charge'' to be disclosed as
``interest and settlement charges'' for purposes of mortgage
transaction disclosures does not affect how an annual percentage
rate is calculated using the actuarial method.)[ltrif]
3. U.S. Rule. The U.S. Rule produces no compounding of interest
in that any unpaid accrued interest is accumulated separately and is
not added to principal. In addition, under the U.S. Rule, no
interest calculation is made until a payment is received.
4. Basis for calculations. When a transaction involves ``step
rates'' or ``split rates''--that is, different rates applied at
different times or to different portions of the principal balance--a
single composite annual percentage rate must be calculated and
disclosed for the entire transaction. Assume, for example, a step-
rate transaction in which a $10,000 loan is repayable in 5 years at
10 percent interest for the first 2 years, 12 percent for years 3
and 4, and 14 percent for year 5. The monthly payments are $210.71
during the first 2 years of the term, $220.25 for years 3 and 4, and
$222.59 for year 5. The composite annual percentage rate, using a
calculator with a ``discounted cash flow analysis'' or ``internal
rate of return'' function, is 10.75 percent.
[rtrif]Paragraph 22(a)(1)(ii).[ltrif]
[lsqbb]5.[rsqbb][rtrif]1.[ltrif] Good faith reliance on faulty
calculation tools. [lsqbb]Footnote 45d[rsqbb][rtrif]Section
226.22(a)(1)(ii)[ltrif] absolves a creditor of liability for an
error in the [rtrif]disclosed[ltrif] annual percentage rate or
finance charge that resulted from a corresponding error in a
calculation tool used in good faith by the creditor. [rtrif](For a
mortgage transaction, the finance charge is disclosed as the
``interest and settlement charges'' (see Sec.
226.38(e)(5)(ii)).[ltrif] Whether or not the creditor's use of the
tool was in good faith must be determined on a case-by-case basis,
but the creditor must in any case have taken reasonable steps to
verify the accuracy of the tool, including any instructions, before
using it. Generally, [lsqbb]the footnote[rsqbb][rtrif]Sec.
226.22(a)(1)(ii)[ltrif] is available only for errors directly
attributable to the calculation tool itself, including software
programs; it is not intended to absolve a creditor of liability for
its own errors, or for errors arising from improper use of the tool,
from incorrect data entry, or from misapplication of the law.
[lsqbb]Paragraph [rsqbb]22(a)(2)[rtrif] Regular
transaction[ltrif].
1. [lsqbb]Regular transactions[rsqbb][rtrif]General[ltrif]. The
annual percentage rate for a regular transaction is considered
accurate if it varies in either direction by not more than \1/8\ of
1 percentage point from the actual annual percentage rate. For
example, when the exact annual percentage rate is determined to be
10\1/8\%, a disclosed annual percentage rate from 10% to 10\1/4\%,
or the decimal equivalent, is deemed to comply with the regulation.
[lsqbb]Paragraph [rsqbb]22(a)(3)[rtrif] Irregular
transaction[ltrif].
1. [lsqbb]Irregular transactions[rsqbb][rtrif]General[ltrif].
The annual percentage rate for an irregular transaction is
considered accurate if it varies in either direction by not more
than \1/4\ of 1 percentage point from the actual annual percentage
rate. This tolerance is intended for more complex transactions that
do not call for a single advance and a regular series of equal
payments at equal intervals. The \1/4\ of 1 percentage point
tolerance may be used, for example, in a construction loan where
advances are made as construction progresses, or in a transaction
where payments vary to reflect the consumer's seasonal income
[rtrif]or due to changes in a premium for or termination of mortgage
insurance[ltrif]. It may also be used in transactions with graduated
payment schedules where the contract commits the consumer to several
series of payments in different amounts. It does not apply, however,
to loans with variable rate features where the initial disclosures
are based on [lsqbb]a regular amortization
schedule[rsqbb][rtrif]having regular payment periods[ltrif] over the
life of the loan, even though payments may later change because of
the variable rate feature.
22(a)(4) Mortgage loans.
1. Example [rtrif]s. i.[ltrif] If a creditor improperly omits a
$75 fee from the [lsqbb]finance charge[rsqbb][rtrif]interest and
settlement charges[ltrif] on a regular transaction, the understated
[lsqbb]finance charge is[rsqbb][rtrif]interest and settlement
charges are[ltrif] considered accurate under [lsqbb]Sec.
226.18(d)(1)[rsqbb] [rtrif]Sec. 226.38(e)(5)(ii)[ltrif], and the
annual percentage rate corresponding to [lsqbb]that understated
finance charge also is considered accurate even if it
falls[rsqbb][rtrif]those interest and settlement charges also are
considered accurate even if they fall[ltrif] outside the tolerance
of \1/8\ of 1 percentage point provided under Sec. 226.22(a)(2).
Because a $75 error was made, [rtrif]however,[ltrif] an annual
percentage rate corresponding to a $100 understatement of the
[lsqbb]finance charge[rsqbb][rtrif]interest and settlement
charges[ltrif] would not be considered accurate.
[rtrif]ii. If a creditor improperly includes a $200 fee in the
interest and settlement charges on a regular transaction, the
overstated interest and settlement charges are considered accurate
under Sec. 226.38(e)(5)(ii), and the annual percentage rate
corresponding to those overstated interest and settlement charges is
considered accurate even if it falls outside the tolerance of \1/8\
of 1 percentage point provided under Sec. 226.22(a)(2). Because a
$200 error was made, however, an annual percentage rate
corresponding to a $225 overstatement of the interest and settlement
charges would not be considered accurate.
2. Rescission purposes. Section 226.22(a)(4)(ii)(B) does not
establish a special tolerance for determining whether corrected
disclosures are required for rescindable mortgage transactions under
Sec. 226.19(a)(2). The tolerances for interest and settlement
charges under Sec. 226.23[rtrif](a)(5)(ii)[ltrif][lsqbb](g) and
(h)[rsqbb] apply only when the consumer asserts the right of
rescission under Sec. 226.23.[ltrif]
22(a)(5) Additional tolerance for mortgage loans.
1. Example [rtrif]s. Section 226.22(a)(5)[ltrif][lsqbb]. This
paragraph[rsqbb] contains an additional tolerance for a disclosed
annual percentage rate that is incorrect but is closer to the actual
annual percentage rate than the rate that would be considered
accurate under the tolerance in Sec. 226.22(a)(4). To illustrate:
In an irregular transaction subject to a \1/4\ of 1 percentage point
tolerance[lsqbb], if[rsqbb][rtrif]--
i. If[ltrif] the actual annual percentage rate is 9.00 percent
and a $75 omission from the [lsqbb]finance
charge[rsqbb][rtrif]interest and settlement charges[ltrif]
corresponds to [lsqbb]a[rsqbb][rtrif]an annual percentage[ltrif]
rate of 8.50 percent that is considered accurate under Sec.
226.22(a)(4), a disclosed APR of 8.65 percent is within the
tolerance in Sec. 226.22(a)(5). In this example of [lsqbb]an
understated finance charge[rsqbb][rtrif]understated interest and
settlement charges[ltrif], a disclosed annual percentage rate below
8.50 [rtrif](the annual percentage rate that corresponds to the
disclosed interest and settlement charges)[ltrif] or above 9.25
percent [rtrif](the annual percentage rate that corresponds to the
\1/4\ of 1 percentage tolerance for an irregular transaction)[ltrif]
would not be considered accurate.
[rtrif]ii. If the actual annual percentage rate is 9.00 percent
and the improper inclusion of a $500 fee in the interest and
settlement charges corresponds to an annual percentage rate of 9.40
percent that is considered accurate under Sec. 226.22(a)(4), a
disclosed annual percentage rate of 9.30 percent is within the
tolerance in Sec. 226.22(a)(5). In this example of overstated
interest and settlement charges, a disclosed annual percentage rate
below 8.75 percent (the annual percentage rate that corresponds to
the \1/4\ of one percentage point tolerance for an irregular
transaction) or above 9.40 percent (the annual percentage rate that
corresponds to the disclosed interest and settlement charges) would
not be considered accurate.[ltrif]
* * * * *
Section 226.23--Right of Rescission
1. Transactions not covered. Credit extensions that are not
subject to the regulation are not covered by Sec. 226.23 even if a
customer's principal dwelling is the collateral securing the credit.
For example, the right of rescission does not apply to a business
purpose loan, even though the loan is secured by the customer's
principal dwelling.
23(a) Consumer's right to rescind.
[lsqbb]Paragraph[rsqbb] 23(a)(1) [rtrif]Coverage.[ltrif]
1. Security interest arising from transaction. [rtrif]i.[ltrif]
In order for the right of rescission to apply, the security interest
must be retained as part of the credit transaction. For example:
[lsqbb][rsqbb][rtrif]A.[ltrif] A security interest that
is acquired by a contractor who is also extending the credit in the
transaction.
[lsqbb][rsqbb][rtrif]B.[ltrif] A mechanic's or
materialman's lien that is retained by a subcontractor or supplier
of the contractor-creditor, even when the latter has waived its own
security interest in the consumer's home.
[rtrif]ii.[ltrif] The security interest is not part of the
credit transaction and therefore the transaction is not subject to
the right of rescission when, for example:
[lsqbb][rsqbb][rtrif]A.[ltrif] A mechanic's or
materialman's lien is obtained by a contractor who is not
[[Page 58767]]
a party to the credit transaction but is merely paid with the
proceeds of the consumer's unsecured bank loan.
[lsqbb][rsqbb][rtrif]B.[ltrif] All security interests
that may arise in connection with the credit transaction are validly
waived.
[lsqbb][rsqbb][rtrif]C.[ltrif] The creditor obtains a
lien and completion bond that in effect satisfies all liens against
the consumer's principal dwelling as a result of the credit
transaction.
[rtrif]iii.[ltrif] Although liens arising by operation of law
are not considered security interests for purposes of disclosure
under Sec. 226.2, that section specifically includes them in the
definition for purposes of the right of rescission. Thus, even
though an interest in the consumer's principal dwelling is not a
required disclosure under [lsqbb]Sec. 226.18(m)[rsqbb][rtrif]Sec.
226.38(f)(2)[ltrif], it may still give rise to the right of
rescission.
2. Consumer. To be a consumer within the meaning of Sec. 226.2,
that person must at least have an ownership interest in the dwelling
that is encumbered by the creditor's security interest, although
that person need not be a signatory to the credit agreement. For
example, if only one spouse signs a credit contract, the other
spouse is a consumer if the ownership interest of that spouse is
subject to the security interest.
3. Principal dwelling. A consumer can only have one principal
dwelling at a time. (But see comment 23(a)(1)-4.) A vacation or
other second home would not be a principal dwelling. A transaction
secured by a second home (such as a vacation home) that is not
currently being used as the consumer's principal dwelling is not
rescindable, even if the consumer intends to reside there in the
future. When a consumer buys or builds a new dwelling that will
become the consumer's principal dwelling within one year or upon
completion of construction, the new dwelling is considered the
principal dwelling if it secures the acquisition or construction
loan. In that case, the transaction secured by the new dwelling is a
residential mortgage transaction and is not rescindable. For
example, if a consumer whose principal dwelling is currently A
builds B, to be occupied by the consumer upon completion of
construction, a construction loan to finance B and secured by B is a
residential mortgage transaction. Dwelling, as defined in Sec.
226.2, includes structures that are classified as personalty under
State law. For example, a transaction secured by a mobile home,
trailer, or houseboat used as the consumer's principal dwelling may
be rescindable.
4. Special rule for principal dwelling. Notwithstanding the
general rule that consumers may have only one principal dwelling,
when the consumer is acquiring or constructing a new principal
dwelling, any loan subject to Regulation Z and secured by the equity
in the consumer's current principal dwelling (for example, a bridge
loan) is subject to the right of rescission regardless of the
purpose of that loan. For example, if a consumer whose principal
dwelling is currently A builds B, to be occupied by the consumer
upon completion of construction, a construction loan to finance B
and secured by A is subject to the right of rescission. A loan
secured by both A and B is, likewise, rescindable.
5. Addition of a security interest. [lsqbb]Under footnote 47,
the[rsqbb][rtrif]The[ltrif] addition of a security interest in a
consumer's principal dwelling to an existing obligation is
rescindable even if the existing obligation is not satisfied and
replaced by a new obligation, and even if the existing obligation
was previously exempt (because it was credit over $25,000 not
secured by real property or a consumer's principal dwelling). The
right of rescission applies only to the added security interest,
however, and not to the original obligation. [lsqbb]In those
situations, only the Sec. 226.23(b) notice need be delivered, not
new material disclosures; the rescission period will begin to run
from the delivery of the notice.[rsqbb][rtrif]Except as provided in
Sec. 226.20(a), the creditor need only deliver the Sec. 226.23(b)
notice, not new material disclosures. If the addition of a security
interest in the consumer's principal dwelling is a new transaction
under Sec. 226.20(a)(1) or a refinancing under Sec. 226.20(a)(2),
then the creditor must deliver new material disclosures. The
rescission period will begin to run from the delivery of the notice
and, as applicable, the delivery of the material disclosures.[ltrif]
[lsqbb]Paragraph[rsqbb] 23(a)(2)[rtrif] Exercise of the right.
23(a)(2)(i) Provision of written notification.[ltrif]
1. Consumer's exercise of right. The consumer must exercise the
right of rescission in writing [rtrif]and may, but is not required
to, use[ltrif] [lsqbb]but not necessarily on[rsqbb] the notice
supplied under Sec. 226.23(b). [lsqbb]Whatever the means of sending
the notification of rescission--mail, telegram or other written
means--the time period for the creditor's performance under Sec.
226.23(d)(2) does not begin to run until the notification has been
received. The creditor may designate an agent to receive the
notification so long as the agent's name and address appear on the
notice provided to the consumer under Sec. 226.23(b). Where the
creditor fails to provide the consumer with a designated address for
sending the notification of rescission, delivering the notification
to the person or address to which the consumer has been directed to
send payments constitutes delivery to the creditor or assignee.
State law determines whether delivery of the notification to a third
party other than the person to whom payments are made is delivery to
the creditor or assignee, in the case where the creditor fails to
designate an address for sending the notification of
rescission.[rsqbb]
[rtrif]23(a)(2)(ii) Party the consumer shall notify.
23(a)(2)(ii)(B) After the three-business-day period following
consummation.
1. In general. To exercise an extended right of rescission, the
consumer must notify the current owner of the debt obligation. Under
Sec. 226.23(a)(2)(ii)(B), the current owner of the debt obligation
is deemed to have received the consumer's notification if the
consumer provides it to the servicer, as defined in Sec.
226.36(c)(3). Therefore, the period for the creditor's or owner's
actions in Sec. 226.23(d)(2) begins on the day the servicer
receives the consumer's notification.[ltrif]
[lsqbb]Paragraph[rsqbb] 23(a)(3) [rtrif]Rescission period.
23(a)(3)(i) Three business days.[ltrif]
1. Rescission period. [rtrif]i.[ltrif] The consumer's right to
rescind does not expire until midnight after the third business day
following the last of three events:
[lsqbb][rsqbb][rtrif]A.[ltrif] Consummation of the
transaction.
[lsqbb][rsqbb][rtrif]B.[ltrif] Delivery of all material
disclosures.
[lsqbb][rsqbb][rtrif]C.[ltrif] Delivery to the consumer
of the required rescission notice.
&rtrifii.◂ For example, [lsqbb]if a transaction is
consummated on Friday, June 1, and the disclosures and notice of the
right to rescind were given on Thursday, May 31, the rescission
period will expire at midnight of the third business day after June
1--that is,[rtrif]assume the consumer received all material
disclosures on Wednesday, May 23 and received the notice of the
right to rescind on Thursday, May 31, and the transaction was
consummated on Friday, June 1. The rescission period will expire on
midnight after the third business day, which is[ltrif] Tuesday, June
5. [lsqbb]In another example, if the disclosures are given and the
transaction consummated on Friday, June 1, and the rescission notice
is given on Monday, June 4, the rescission period expires at
midnight of the third business day after June 4--that is Thursday,
June 7. The consumer must place the rescission notice in the mail,
file it for telegraphic transmission, or deliver it to the
creditor's place of business within that period in order to exercise
the right.[rsqbb]
[rtrif]iii. The provision of incorrect or incomplete material
disclosures or an incorrect or incomplete notice of the right to
rescind does not constitute delivery of the disclosures or notice.
If the creditor originally provided incorrect or incomplete material
disclosures, to commence the three-business-day rescission period,
the creditor must deliver to the consumer complete, correct material
disclosures together with a complete, correct, updated notice of the
right to rescind. If the creditor originally provided an incorrect
or incomplete notice of the right to rescind, to commence the three-
business-day rescission period, the creditor must deliver to the
consumer a complete, correct, updated notice of the right to
rescind. In either situation, the consumer would have three business
days after proper delivery to rescind the transaction.[ltrif]
[lsqbb]2. Material disclosures. Footnote 48 sets forth the
material disclosures that must be provided before the rescission
period can begin to run. Failure to provide information regarding
the annual percentage rate also includes failure to inform the
consumer of the existence of a variable rate feature. Failure to
give the other required disclosures does not prevent the running of
the rescission period, although that failure may result in civil
liability or administrative sanctions.[rsqbb]
[lsqbb]3.[rsqbb][rtrif]23(a)(3)(ii)[ltrif] Unexpired right of
rescission.
[rtrif]23(a)(3)(ii)(A) Up to three years.[ltrif]
[lsqbb]When the creditor has failed to take the action necessary
to start the three-business day rescission period running, the right
to rescind automatically lapses on the occurrence of the earliest of
the following three events:
[[Page 58768]]
The expiration of three years after consummation of the
transaction.
Transfer of all the consumer's interest in the
property.
Sale of the consumer's interest in the property,
including a transaction in which the consumer sells the dwelling and
takes back a purchase money note and mortgage or retains legal title
through a device such as an installment sale contract.[rsqbb]
[rtrif]1. Transfer. A [ltrif] transfer of all the consumer's
interest [rtrif]that terminates the right of rescission[ltrif]
includes [lsqbb]such[rsqbb] transfers [lsqbb]as bequests
and[rsqbb][rtrif]by operation of law following the consumer's death
and by [ltrif] gift[lsqbb]s[rsqbb]. [lsqbb]A sale or transfer of the
property need not be voluntary to terminate the right to rescind.
For example, a foreclosure sale would terminate an unexpired right
to rescind. As provided in section 125 of the Act, the three-year
limit may be extended by an administrative proceeding to enforce the
provisions of this section.[rsqbb] A partial transfer of the
consumer's interest, such as a transfer bestowing co-ownership on a
spouse, does not terminate the right of rescission. [rtrif] Filing
for bankruptcy generally does not terminate the right of rescission
if the consumer retains an interest in the property after the
bankruptcy estate is created.
2. Sale. A sale of the consumer's interest in the property that
terminates the right of rescission includes a transaction in which
the consumer sells the dwelling and takes back a purchase money note
and mortgage or retains legal title through a device such as an
installment sale contract.
3. Involuntary sale or transfer. A sale or transfer of the
property need not be voluntary to terminate the right to rescind.
For example, a foreclosure sale would terminate an unexpired right
to rescind.[ltrif]
[lsqbb]Paragraph[rsqbb] 23(a)(4)[rtrif] Joint Owners[ltrif].
1. [lsqbb]Joint owners[rsqbb][rtrif] In general[ltrif]. When
more than one consumer has the right to rescind a transaction, any
of them may exercise that right and cancel the transaction on behalf
of all. For example, if both husband and wife have the right to
rescind a transaction, either spouse acting alone may exercise the
right and both are bound by the rescission.
[rtrif]23(a)(5) Definition of material disclosures.
Paragraph 23(a)(5)(i)
1. In general. The right to rescind generally does not expire
until midnight after the third business day following the latest of
(1) consummation, (2) delivery of the notice of the right to
rescind, as set forth in Sec. 226.23(b), or (3) delivery of all
material disclosures, as set forth in Sec. 226.23(a)(5)(i). See
Sec. 226.23(a)(3). A creditor must make the material disclosures
clearly and conspicuously consistent with the requirements of
Sec. Sec. 226.32(c) and 226.38. A creditor may satisfy the
requirements of Sec. 226.32(c) by using the Section 32 Loan Model
Clauses in Appendix H-16 of this part, or substantially similar
disclosures. A creditor may satisfy the requirements of Sec. 226.38
by providing the appropriate model form in Appendix H or, for
reverse mortgages, Appendix K of this part, or a substantially
similar disclosure, which is properly completed with the disclosures
required by Sec. 226.38. Failure to provide the required non-
material disclosures does not affect the right of rescission,
although such failure may be a violation subject to the liability
provisions of section 130 of the Act, or administrative sanctions.
2. Format. Failing to satisfy any specific terminology or format
requirements set forth in Sec. 226.33 or Sec. 226.37 or in the
model forms in Appendix H or Appendix K is not by itself a failure
to provide material disclosures. Nonetheless, a creditor must
provide the material disclosures clearly and conspicuously, as
described in Sec. 226.37(a)(1) and comments 37(a)-1 and 37(a)(1)-1
and -2.
23(a)(5)(ii) Tolerance for accuracy of the interest and
settlement charges.
1. Current holder. If there is no new advance of money and no
consolidation of existing loans, a refinancing with the current
holder who is not the original creditor is subject to the special
tolerance for interest and settlement charges set forth in Sec.
226.23(a)(5)(ii)(B). If there is no new advance of money, a new
transaction under Sec. 226.20(a)(1) with the original creditor who
is the current holder is exempt from the right of rescission under
Sec. 226.23(f)(2).
2. New advance. The term new advance has the same meaning as in
Sec. 226.23(f)(2)(ii).
3. Interest and settlement charges. This section is based on the
accuracy of the total interest and settlement charges as disclosed
under Sec. 226.33(c)(14)(ii) or Sec. 226.38(e)(5)(ii) rather than
the component charges, such as a document preparation fee.
23(a)(5)(iii) Tolerances for accuracy of the loan amount.
1. HOEPA loans. Paragraphs (a)(5)(iii)(A) and (B) provide
certain tolerances for the loan amount. However, if the mortgage is
subject to Sec. 226.32, then the tolerance for the amount borrowed
as provided in Sec. 226.32(c)(5) would apply to the disclosure of
the loan amount for purposes of rescission. For example, the loan
amount for a HOEPA loan would be treated as accurate if it is not
more than $100 above or below the amount required to be disclosed.
2. Current holder. If there is no new advance of money and no
consolidation of existing loans, a refinancing with the current
holder who is not the original creditor is subject to the special
tolerance for the loan amount set forth in Sec.
226.23(a)(5)(iii)(B). If there is no new advance of money, a new
transaction under Sec. 226.20(a)(1) with the original creditor who
is the current holder is exempt from the right of rescission under
Sec. 226.23(f)(2).
3. New advance. The term new advance has the same meaning as in
Sec. 226.23(f)(2)(ii).
23(a)(5)(iv) Tolerances for accuracy of the total settlement
charges, the prepayment penalty, and the payment summary.
1. HOEPA loans. Paragraph (a)(5)(iv) provides a tolerance for
disclosure of the payment summary. However, if the mortgage is
subject to Sec. 226.32, then the tolerance for the regular payment
as provided in Sec. 226.32(c)(3) would apply. In a HOEPA loan,
there is no tolerance for a payment other than the regular payment.
Thus, the disclosure of the regular payment in the payment summary
for a HOEPA loan is accurate if it based on a loan amount that is
not more than $100 above or below the amount required to be
disclosed. The disclosure of any other payment, such as the maximum
monthly payment, is not subject to a tolerance.[ltrif]
23(b) Notice of right to rescind.
[rtrif]23(b)(1) Who receives notice.[ltrif]
1. [lsqbb]Who receives notice[lsqbb] [rtrif]In general.
i.[ltrif] Each consumer entitled to rescind must be given:
[lsqbb][rsqbb][rtrif]A.[ltrif] [lsqbb]Two copies of
the[rsqbb] [rtrif]The[ltrif] rescission notice.
[lsqbb][rsqbb][rtrif]B.[ltrif] The material disclosures.
[rtrif]ii.[ltrif] [lsqbb]In[rsqbb][rtrif]For example, in[ltrif]
a transaction involving joint owners, both of whom are entitled to
rescind, both must receive the notice of the right to rescind and
disclosures. [For example, if both spouses are entitled to rescind a
transaction, each must receive two copies of the rescission notice
(one copy to each if the notice is provided in electronic form in
accordance with the consumer consent and other applicable provisions
of the E-Sign Act) and one copy of the disclosures.]
[lsqbb]2. Format. The notice must be on a separate piece of
paper, but may appear with other information such as the itemization
of the amount financed. The material must be clear and conspicuous,
but no minimum type size or other technical requirements are
imposed. The notices in appendix H provide models that creditors may
use in giving the notice.[rsqbb]
[rtrif]23(b)(2) Format of notice.
1. Failure to format correctly. The creditor's failure to comply
with the format requirements in Sec. 226.23(b)(2) does not by
itself constitute failure to deliver the notice of the right to
rescind. However, to deliver the notice properly for purposes of
Sec. 226.23(a)(3), the creditor must provide the disclosures
required under Sec. 226.23(b)(3) clearly and conspicuously, as
described in Sec. 226.23(b)(3) and comment 23(b)(3)-1.
2. Notice must be in writing in a form the consumer may keep.
The rescission notice must be in writing in a form that the consumer
may keep. See Sec. 226.17(a).
23(b)(3) Required content of notice.[ltrif]
[lsqbb]3. Content. The notice must include all of the
information outlined in Sec. 226.23(b)(1)(i) through (v). The
requirement in Sec. 226.23(b) that the transaction be identified
may be met by providing the date of the transaction. The creditor
may provide a separate form that the consumer may use to exercise
the right of rescission, or that form may be combined with the other
rescission disclosures, as illustrated in appendix H. The notice may
include additional information related to the required information,
such as:
A description of the property subject to the security
interest.
A statement that joint owners may have the right to
rescind and that a rescission by one is effective for all.
The name and address of an agent of the creditor to
receive notice of rescission.]
[rtrif]1. Clear and conspicuous standard. The clear and
conspicuous standard generally requires that disclosures be in a
reasonably understandable form and readily noticeable to the
consumer.
2. Methods for sending notification of exercise. In addition to
providing a postal address for regular mail in the disclosure
[[Page 58769]]
required under Sec. 226.23(b)(3)(v), the creditor, at its option,
may describe overnight courier, fax, e-mail, in-person or other
methods of communication that the consumer may use to send or
deliver written notification to the creditor of exercise of the
right of rescission.
3. Creditor's or its agent's address. If the creditor designates
an agent to receive the consumer's rescission notice, the creditor
may include its name along with the agent's name and address in the
disclosure required by Sec. 226.23(b)(3)(v).
4. Calendar date on which the rescission period expires. i. In
some cases, the creditor cannot provide the calendar date on which
the three-business-day period for rescission expires, such as when
the transaction is conducted through the mail or occurs through an
escrow agent and involves two or more borrowers who do not sign the
closing documents at the same time. If the creditor cannot provide
an accurate calendar date on which the three-business-day rescission
period expires, the creditor must provide the calendar date on which
it reasonably and in good faith expects the three-business-day
period for rescission to expire. For example, assume that a consumer
receives all material disclosures on February 15. If the creditor
uses an overnight courier service to deliver closing documents and
the rescission notice to the consumer on Monday, March 1, the
creditor could instruct the consumer to sign the documents no later
than Wednesday, March 3, in which case the creditor should provide
Saturday, March 6, as the calendar date after which the three-
business-day period for rescission expires. In this example,
Saturday, March 6, is the calendar date on which the creditor can
reasonably expect the rescission period to expire because the
creditor expects that the consumer will receive the notice of the
right of rescission on Monday, March 1 with the rest of the closing
documents and because the creditor can reasonably assume that the
consumer will wait until the deadline of Wednesday, March 3, to sign
the closing documents and consummate the transaction.
ii. If the creditor provides a date in the notice that gives the
consumer a longer period within which to rescind than the actual
period for rescission, the notice shall be deemed to comply with the
requirement in Sec. 226.23(b)(3)(vi), as long as the creditor
permits the consumer to rescind the transaction through the end of
the date in the notice. For instance, in the example in comment
23(b)(3)-4.i. above, if the consumer signs the closing documents
upon receipt on Monday, March 1, the actual expiration date of the
right to rescind would be at the end of Thursday, March 4. The
creditor's notice stating that the expiration date is Saturday,
March 6 would be deemed compliant with Sec. 226.23(b)(3)(vi), as
long as the creditor permits the consumer to rescind through the end
of Saturday, March 6.
iii. If the creditor provides a date in the notice that gives
the consumer a shorter period within which to rescind than the
actual period for rescission, the creditor shall be deemed to comply
with the requirement in Sec. 226.23(b)(3)(vi) if the creditor
notifies the consumer that the deadline in the first notice of the
right of rescission has changed and provides a second notice to the
consumer stating that the consumer's right to rescind expires on a
calendar date which is three business days from the date the
consumer receives the second notice. For instance, in the example in
comment 23(b)(3)-4.i. above, if the consumer disregards the
creditor's instructions to sign the closing documents no later than
Wednesday, March 3, and signs the closing documents on Thursday,
March 4, the actual date after which the right of rescission expires
would be Monday, March 8. The creditor's notice stating that the
expiration date is Saturday, March 6, would not violate Sec.
226.23(b)(3)(vi) if the creditor discloses to the consumer that the
expiration date in the first notice (March 6) has changed and
provides a corrected notice with an additional three-business-day
period to rescind. For example, the creditor could prepare on
Monday, March 8 a second notice stating that the expiration date for
the right to rescind is the end of Friday, March 12 and include that
second notice in a package delivered by overnight courier to the
consumer on Tuesday, March 9. The creditor also could include in the
package a cover letter stating that the deadline to cancel the
transaction has changed, and refer to the ``Deadline to Cancel''
section in the second notice.
5. Form for consumer's exercise of right. Creditors must provide
a space for the consumer's name and property address on the form.
Creditors are not obligated to complete the lines in the form for
the consumer's name and property address, but may wish to do so to
ensure that the consumer who uses the form to exercise the right can
be readily identified. At its option, a creditor may include the
loan number on the form. A creditor may not, however, request or
require the consumer to provide the loan number on the form (such as
including a space labeled ``loan number'' for the consumer to
complete).
6. New advance of money with the same creditor under Sec.
226.23(f)(2). Under Sec. 226.23(f)(2), a consumer may rescind a new
transaction with the same creditor only if there is a new advance of
money as defined in Sec. 226.23(f)(2)(ii). The new transaction is
rescindable only to the extent of the new advance. In such
transactions, the creditor must provide the consumer with the
information in Sec. 226.23(b)(3)(iv) regarding the previous loan.
Model Form H-9 is designed for providing notice of the right of
rescission to a consumer obtaining a new advance of money with the
same creditor.
23(b)(4) Optional content of notice.
1. Related information. Section 226.23(b)(4) lists optional
disclosures that are related to the disclosures required by Sec.
226.23(b)(3) that may be added to the notice. In addition, at the
creditor's option, other information directly related to the
disclosures required by Sec. 226.23(b)(3) may be included in the
notice. An explanation of the use of pronouns or other references to
the parties to the transaction is directly related information. For
example, a creditor might add to the notice a statement that ``
`You' refers to the customer and `we' refers to the creditor.''
23(b)(5)[ltrif][lsqbb]4.[rsqbb] Time of providing notice.
[rtrif]1. In those cases where Sec. 226.23(b)(5)(i) applies,
the[ltrif][lsqbb]The[rsqbb] notice required by Sec. 226.23(b)
[rtrif]must be given[ltrif][lsqbb]need not be given [rsqbb] before
consummation of the transaction. [rtrif] If
t[ltrif][lsqbb]T[rsqbb]he creditor [lsqbb]may[rsqbb]
deliver[rtrif]s[ltrif] the notice after the transaction is
consummated, [lsqbb]but the[rsqbb][rtrif]the timing requirement of
Sec. 226.23(b)(5)(i) is violated and the right of rescission does
not expire until the earlier of three business days after [ltrif]
[lsqbb]rescission period will not begin to run until[rsqbb] the
notice is [rtrif]properly[ltrif] given [rtrif]or upon the occurrence
of one of the events listed in Sec. 226.15(a)(3)(ii)(A)[ltrif]. For
example, if the creditor [rtrif]delivers the material disclosures to
the consumer in person on Monday, March 1 and the loan is
consummated on Thursday, March 4 (after all applicable waiting
periods under Sec. 226.19(a)(2) have expired), but the creditor
provides the rescission notice on Wednesday, March 24, the right of
rescission does not expire until the end of the third business day
after Wednesday, March 24, that is, until the end of Saturday, March
27[ltrif][lsqbb]provides the notice on May 15, but disclosures were
given and the transaction was consummated on May 10, the 3-business-
day rescission period will run from May 15[rsqbb].
[rtrif]23(b)(6) Proper form of notice.
1. A creditor satisfies Sec. 226.23(b)(3) if it provides the
appropriate model form in Appendix H, or a substantially similar
notice, which is properly completed with the disclosures required by
Sec. 226.23(b)(3). For example, a notice would not fulfill the
requirement to deliver the notice of the right to rescind if the
date on which the three-business-day period for rescission
terminates was not properly completed because the date was missing
or incorrectly calculated. If the creditor provides a date that is
later deemed inaccurate, the notice may be deemed to comply with
Sec. 226.23(b)(3) if the creditor follows the guidance in Sec.
226.23(b)(3)(vi) and comment 23(b)(3)-4.[ltrif]
23(c) Delay of creditor's performance.
1. General rule. Until the rescission period has expired and the
creditor is reasonably satisfied that the consumer has not
rescinded, the creditor must not, either directly or through a third
party:
[lsqbb][rsqbb][rtrif]A.[ltrif] Disburse loan proceeds to
the consumer.
[lsqbb][rsqbb][rtrif]B.[ltrif] Begin performing services
for the consumer.
[lsqbb][rsqbb][rtrif]C.[ltrif] Deliver materials to the
consumer.
2. Escrow. The creditor may disburse loan proceeds during the
rescission period in a valid escrow arrangement. The creditor may
not, however, appoint the consumer as ``trustee'' or ``escrow
agent'' and distribute funds to the consumer in that capacity during
the delay period.
3. Actions during the delay period. Section 226.23(c) does not
prevent the creditor from taking other steps during the delay, short
of beginning actual performance. Unless otherwise prohibited, such
as by State law, the creditor may, for example:
[lsqbb][rsqbb][rtrif]A.[ltrif] Prepare the loan check.
[lsqbb][rsqbb][rtrif]B.[ltrif] Perfect the security
interest.
[lsqbb][rsqbb][rtrif]C.[ltrif] Prepare to discount or
assign the contract to a third party.
[lsqbb][rsqbb][rtrif]D.[ltrif] Accrue finance charges
during the delay period.
[[Page 58770]]
4. Delay beyond rescission period. [rtrif]i.[ltrif] The creditor
must wait until it is reasonably satisfied that the consumer has not
rescinded [rtrif]within the applicable time period[ltrif]. For
example, the creditor may satisfy itself by doing one of the
following:
[lsqbb][rsqbb][rtrif]A.[ltrif] Waiting a reasonable time
after expiration of the rescission period to allow for delivery of a
mailed notice.
[lsqbb][rsqbb][rtrif]B.[ltrif] Obtaining a written
statement from the consumer that the right has not been exercised.
[rtrif]The statement must be signed and dated by the consumer only
at the end of the three-day period.[ltrif]
[rtrif]ii.[ltrif] When more than one consumer has the right to
rescind, the creditor cannot reasonably rely on the assurance of
only one consumer, because other consumers may exercise the right.
23(d) Effects of rescission
23(d) [rtrif](1)[ltrif] Effects of rescission [rtrif]prior to
the creditor disbursing funds[ltrif].
[lsqbb]Paragraph[rsqbb] 23(d)(1)[rtrif](i) Effect of consumer's
notice of rescission[ltrif].
1. Termination of security interest. Any security interest
giving rise to the right of rescission becomes void when the
consumer [lsqbb]exercises the right of
rescission[rsqbb][rtrif]provides a notice of rescission to a
creditor[ltrif]. The security interest is automatically negated
regardless of its status and whether or not it was recorded or
perfected. Under Sec.
226.23[lsqbb](d)(2)[rsqbb][rtrif](d)(1)(ii)[ltrif], however, the
creditor must take [lsqbb]any action[rsqbb][rtrif]whatever steps
are[ltrif] necessary to [lsqbb]reflect the fact
that[rsqbb][rtrif]terminate[ltrif] the security interest [lsqbb]no
longer exists[rsqbb].
[lsqbb]Paragraph[rsqbb] 23[lsqbb](d)(2)[rsqbb][rtrif](d)(1)(ii)
Creditor's obligations[ltrif].
1. Refunds to consumer. The consumer cannot be required to pay
any amount [lsqbb]in the form of money or property[rsqbb] either to
the creditor or to a third party as part of the credit transaction.
Any amounts [lsqbb]of this nature[rsqbb] already paid by the
consumer must be refunded. Any amount includes finance charges
already accrued, as well as other charges, [lsqbb]such as broker
fees, application and commitment fees, or fees for a title search or
appraisal,[rsqbb] whether paid to the creditor, paid directly to a
third party, or passed on from the creditor to the third party. It
is irrelevant that these amounts may not represent profit to the
creditor.
2. Amounts not refundable to consumer. Creditors need not return
any money given by the consumer to a third party outside of the
credit transaction, such as costs incurred for a building permit or
for a zoning variance. [lsqbb]Similarly, the term any amount does
not apply to any money or property given by the creditor to the
consumer; those amounts must be tendered by the consumer to the
creditor under Sec. 226.23(d)(3).[rsqbb]
3. Reflection of security interest termination. The creditor
must take whatever steps are necessary to [lsqbb]indicate
that[rsqbb][rtrif]terminate[ltrif] the security interest [lsqbb]is
terminated[rsqbb]. Those steps include the cancellation of documents
creating the security interest, and the filing of release or
termination statements in the public record. [lsqbb]In a transaction
involving subcontractors or suppliers that also hold security
interests related to the credit transaction, the
creditor[rsqbb][rtrif]If a mechanic's or materialman's lien is
retained by a subcontractor or supplier of a creditor-contractor,
the creditor-contractor[ltrif] must ensure that the termination of
[lsqbb]their[rsqbb][rtrif]that[ltrif] security
interest[lsqbb]s[rsqbb] is also reflected. The 20-day period for the
creditor's action refers to the time within which the creditor must
begin the process. It does not require all necessary steps to have
been completed within that time, but the creditor is responsible for
[lsqbb]seeing the process through to
completion[rsqbb][rtrif]ensuring that the process is
completed[ltrif].
[rtrif]4. Twenty-calendar-day period. The 20-calendar-day period
begins to runs from the date the creditor receives the consumer's
notice. The creditor is deemed to have received the consumer's
notice of rescission if the consumer provides the notice to the
creditor or the creditor's agent designated on the notice. Where no
designation is provided, the creditor is deemed to have received the
notice if the consumer provides it to the servicer. See Sec.
226.23(a)(2)(ii)(A).[ltrif]
[lsqbb]Paragraph 23(d)(3).
1. Property exchange. Once the creditor has fulfilled its
obligations under Sec. 226.23(d)(2), the consumer must tender to
the creditor any property or money the creditor has already
delivered to the consumer. At the consumer's option, property may be
tendered at the location of the property. For example, if lumber or
fixtures have been delivered to the consumer's home, the consumer
may tender them to the creditor by making them available for pick-up
at the home, rather than physically returning them to the creditor's
premises. Money already given to the consumer must be tendered at
the creditor's place of business.
2. Reasonable value. If returning the property would be
extremely burdensome to the consumer, the consumer may offer the
creditor its reasonable value rather than returning the property
itself. For example, if building materials have already been
incorporated into the consumer's dwelling, the consumer may pay
their reasonable value.
Paragraph 23(d)(4).
1. Modifications. The procedures outlined in Sec. 226.23(d)(2)
and (3) may be modified by a court. For example, when a consumer is
in bankruptcy proceedings and prohibited from returning anything to
the creditor, or when the equities dictate, a modification might be
made. The sequence of procedures under Sec. 226.23(d)(2) and (3),
or a court's modification of those procedures under Sec.
226.23(d)(4), does not affect a consumer's substantive right to
rescind and to have the loan amount adjusted accordingly. Where the
consumer's right to rescind is contested by the creditor, a court
would normally determine whether the consumer has a right to rescind
and determine the amounts owed before establishing the procedures
for the parties to tender any money or property.[rsqbb]
[rtrif]23(d)(2) Effects of rescission after the creditor
disburses funds.
23(d)(2)(i) Effects of rescission if the parties are not in a
court proceeding.
1. Effect of the process. The process set forth in Sec.
226.23(d)(2)(i) does not affect the consumer's ability to seek a
remedy in court, such as an action to recover damages under section
130 of the act, and/or an action to seek to tender in installments.
In addition, a creditor's written statement as described in Sec.
226.23(d)(2)(i)(B), is not an admission by the creditor that the
consumer's claim is a valid exercise of the right to rescind.
23(d)(2)(i)(A) Creditor's acknowledgment of receipt.
1. Twenty-calendar-day period. The 20-calendar-day period begins
to run from the date the creditor receives the consumer's notice.
The creditor is deemed to have received the consumer's notice of
rescission if the consumer provides the notice to the servicer. See
comment 23(a)(2)(ii)(B)-1.
23(d)(2)(i)(B) Creditor's written statement.
1. Written statement regarding tender of money. If the creditor
disbursed money to the consumer, then the creditor's written
statement must state the amount of money that the creditor will
accept as the consumer's tender. For example, suppose the principal
balance owed at the time the creditor received the consumer's notice
of rescission was $165,000, the costs paid directly by the consumer
at closing were $8,000, and the consumer made interest payments
totaling $20,000 from the date of consummation to the date of the
creditor's receipt of the consumer's notice of rescission. The
creditor's written statement could provide that the acceptable
amount of tender is $137,000, or some amount higher or lower than
that amount.
2. Reasonable date. The creditor must provide the consumer with
a reasonable date by which the consumer may tender the money or
property described in paragraph (d)(2)(i)(B)(1) of this section. For
example, it would be reasonable under most circumstances to permit
the consumer's tender within 60 days of the creditor mailing or
delivering the written statement.
23(d)(2)(i)(C) Consumer's response.
1. Reasonable value of property. If returning the property would
be extremely burdensome to the consumer, the consumer may offer the
creditor its reasonable value rather than returning the property
itself. For example, if aluminum siding has already been
incorporated into the consumer's dwelling, the consumer may pay its
reasonable value.
2. Location for tender of property. At the consumer's option,
property may be tendered at the location of the property. For
example, if aluminum siding or windows have been delivered to the
consumer's home, the consumer may tender them to the creditor by
making them available for pick-up at the home, rather than
physically returning them to the creditor's premises.
23(d)(2)(i)(D) Creditor's security interest.
1. Reflection of security interest termination. See comment
23(d)(1)(ii)-3.
23(d)(2)(ii) Effects of rescission in a court proceeding.
1. Valid right of rescission. The procedures set forth in Sec.
226.23(d)(2)(ii) assume that the consumer's right to rescind has not
expired as provided in Sec. 226.23(a)(3)(ii). Thus, if the consumer
provides a notice of rescission more than three years after
consummation of the transaction, then the consumer's right to
rescind has expired, and these procedures do not apply. See Sec.
226.23(a)(3)(ii)(A).
[[Page 58771]]
23(d)(2)(ii)(A) Consumer's obligation.
1. Tender of money. If the creditor disbursed money to the
consumer, the consumer shall tender to the creditor the principal
balance owed at the time the creditor received the consumer's notice
of rescission less any amounts the consumer has given to the
creditor or a third party in connection with the transaction. For
example, suppose the principal balance owed at the time the creditor
received the consumer's notice of rescission was $165,000, the costs
paid directly by the consumer at closing were $8,000, and the
consumer made interest payments totaling $20,000 from the date of
consummation to the date the creditor received the consumer's notice
of rescission. The amount of the consumer's tender would be
$137,000. This amount may be reduced by any amounts for damages,
attorney's fees or costs, as the court may determine.
2. Refunds to consumer. See comment 23(d)(1)(ii)-1.
3. Amounts not refundable to consumer. For purposes of Sec.
226.23(d)(2)(ii)(A), the term any amount does not include any money
given by the consumer to a third party outside of the credit
transaction, such as costs the consumer incurred for a building
permit or for a zoning variance. Similarly, the term any amount does
not apply to any money or property given by the creditor to the
consumer.
4. Condition of consumer's tender. There may be circumstances
where the consumer has no obligation to tender and, therefore, the
creditor's obligations would not be conditioned on the consumer's
tender. For example, in the case of a new transaction with the same
creditor and a new advance of money, the new transaction is
rescindable only to the extent of the new advance. See Sec.
226.23(f)(2)(ii). Suppose the amount of the new advance was $3,000,
but the costs paid directly by the consumer at closing were $5,000.
The creditor would need to provide $2,000 to the consumer. In that
case, within 20 calendar days after the creditor's receipt of a
consumer's notice of rescission, the creditor would refund the
$2,000 and terminate the security interest.
5. Reasonable value of property. See comment 23(d)(2)(i)(C)-1.
6. Location for tender of property. See comment 23(d)(2)(i)(C)-
2.
23(d)(2)(ii)(B) Creditor's obligation.
1. Reflection of security interest termination. See comment
23(d)(1)(ii)-3.
23(d)(2)(ii)(C) Judicial modification.
1. Determination of the consumer's right to rescind. The
sequence of procedures under Sec. Sec. 226.23(d)(2)(ii)(A) and (B),
or a court's modification of those procedures under Sec.
226.23(d)(2)(ii)(C), does not affect a consumer's substantive right
to rescind and to have the loan amount adjusted accordingly. Where
the consumer's right to rescind is contested by the creditor, a
court would normally determine first whether the consumer's right to
rescind has expired, then the amounts owed by the consumer and the
creditor, and then the procedures for the consumer to tender any
money or property.
2. Judicial modification of procedures. The procedures outlined
in Sec. Sec. 226.23(d)(2)(ii)(A) and (B) may be modified by a
court. For example, when a consumer is in bankruptcy proceedings and
prohibited from returning anything to the creditor, or when the
equities dictate, a modification might be made. A court may modify
the consumer's form or manner of tender, such as by ordering payment
in installments or by approving the parties' agreement to an
alternative form of tender.[ltrif]
23(e) Consumer's waiver of right to rescind.
[lsqbb]1. Need for waiver. To waive the right to rescind, the
consumer must have a bona fide personal financial emergency that
must be met before the end of the rescission period. The existence
of the consumer's waiver will not, of itself, automatically insulate
the creditor from liability for failing to provide the right of
rescission.[rsqbb]
[2.][rtrif]1.[ltrif] Procedure. [lsqbb]To waive or modify the
right to rescind, the consumer must give a written statement that
specifically waives or modifies the right, and also includes a brief
description of the emergency. Each consumer entitled to rescind must
sign the waiver statement. In a transaction involving multiple
consumers, such as a husband and wife using their home as
collateral, the waiver must bear the signatures of both
spouses.[rsqbb][rtrif]A consumer may modify or waive the right to
rescind only after the creditor delivers the notice required by
Sec. 226.23(b) and the disclosures required by Sec. Sec. 226.32(c)
and 226.38, as applicable. After delivery of the required notice and
disclosures, the consumer may waive or modify the right to rescind
by giving the creditor a dated, written statement that specifically
waives or modifies the right and describes the bona fide personal
financial emergency. A waiver is effective only if each consumer
entitled to rescind signs a waiver statement. Where there are
multiple consumers entitled to rescind, the consumers may, but need
not, sign the same waiver statement. See Sec. 226.2(a)(11) to
determine which natural persons are consumers with the right to
rescind.
2. Bona fide personal financial emergency. To modify or waive
the right to rescind, there must be a bona fide personal financial
emergency that requires disbursement of loan proceeds before the end
of the rescission period. Whether there is a bona fide personal
financial emergency is determined by the facts surrounding
individual circumstances. A bona fide personal financial emergency
typically, but not always, will involve imminent loss of or harm to
a dwelling or harm to the health or safety of a natural person. A
waiver is not effective if the consumer's statement is inconsistent
with facts known to the creditor. The following examples describe
circumstances that are and are not a bona fide personal financial
emergency.
i. Examples--bona fide personal financial emergency. Examples of
a bona fide personal financial emergency include the following:
A. The imminent sale of the consumer's home at foreclosure,
where the foreclosure sale will proceed unless the loan proceeds are
made available to the consumer during the rescission period.
B. The need for loan proceeds to fund immediate repairs to
ensure that a dwelling is habitable, such as structural repairs
needed due to storm damage, where loan proceeds are needed during
the rescission period to pay for the repairs.
C. The imminent need for health care services, such as in-home
nursing care for a patient recently discharged from the hospital,
where loan proceeds are needed during the rescission period to pay
for the services.
ii. Examples--not a bona fide personal financial emergency.
Examples of circumstances that are not a bona fide personal
financial emergency include the following:
A. The consumer's desire to purchase goods or services not
needed on an emergency basis, even though the price may increase if
purchased after the rescission period.
B. The consumer's desire to invest immediately in a financial
product, such as purchasing securities.
iii. Consumer's waiver statement inconsistent with facts. The
conditions for a waiver are not met where the consumer's waiver
statement is inconsistent with facts known to the creditor. For
example, the conditions for a waiver are not met where the
consumer's waiver statement states that loan proceeds are needed
during the rescission period to abate flooding in a consumer's
basement, but the creditor is aware that there is no
flooding.[ltrif]
23(f) Exempt transactions.
[rtrif]1. Converting open-end to closed-end credit. Under
certain State laws, consummation of a closed-end credit transaction
may occur at the time a consumer enters into the initial open-end
credit agreement that is subject to a closed-end conversion feature.
As provided in the commentary to Sec. 226.17(b), closed-end credit
disclosures may be delayed under these circumstances until the
conversion of the open-end account to a closed-end transaction. In
accounts secured by the consumer's principal dwelling, no new right
of rescission arises at the time of conversion. Rescission rights
under Sec. 226.15 are unaffected.
Paragraph 23(f)(1).[ltrif]
1. Residential mortgage
[lsqbb]transaction[rsqbb][rtrif]transactions exempt[ltrif]. Any
transaction to construct or acquire a principal dwelling, whether
considered real or personal property, is exempt. (See the commentary
to Sec. 226.23(a).) For example, a credit transaction to acquire a
mobile home or houseboat to be used as the consumer's principal
dwelling would not be rescindable.
2. Lien status. The lien status of the mortgage is irrelevant
for purposes of the exemption in Sec. 226.23(f)(1); the fact that a
loan has junior lien status does not by itself preclude application
of this exemption. For example, a home buyer may assume the existing
first mortgage and create a second mortgage to finance the balance
of the purchase price. Such a transaction would not be rescindable.
3. Combined-purpose transaction. A loan to acquire a principal
dwelling and make improvements to that dwelling is exempt if treated
as one transaction. If, on the other hand, the loan for the
acquisition of the principal dwelling and the subsequent
[[Page 58772]]
advances for improvements are treated as more than one transaction,
then only the transaction that finances the acquisition of that
dwelling is exempt.
[rtrif]Paragraph 23(f)(2).[ltrif]
[4.][rtrif]1.[ltrif] New advances. [The exemption in Sec.
226.23(f)(2) applies only to refinancings (including consolidations)
by the original creditor. The original creditor is the creditor to
whom the written agreement was initially made payable. In a merger,
consolidation or acquisition, the successor institution is
considered the original creditor for purposes of the exemption in
Sec. 226.23(f)(2). If the refinancing involves a new advance of
money, the amount of the new advance is rescindable.] In determining
whether there is a new advance, a creditor may rely on [lsqbb]the
amount financed, refinancing costs,[rsqbb][rtrif]the loan amount,
the new transaction costs,[ltrif] and other figures stated in the
final Truth in Lending disclosures provided to the consumer and is
not required to use, for example, more precise information that may
only become available when the loan is closed. [rtrif]See Sec.
226.38(a)(1) regarding the meaning of the term loan amount.[ltrif]
[rtrif]2. Costs of the new transaction.[ltrif] For purposes of
the right of rescission, a new advance does not include amounts
attributed solely to [the][rtrif]any bona fide and reasonable[ltrif]
costs of the [refinancing][rtrif]new transaction[ltrif]. [These
amounts would include Sec. 226.4(c)(7) charges (such as attorneys
fees and title examination and insurance fees, if bona fide and
reasonable in amount), as well as insurance premiums and other
charges that are not finance charges. (Finance charges on the new
transaction--points, for example--would not be considered in
determining whether there is a new advance of money in a refinancing
since finance charges are not part of the amount financed.)] To
illustrate, if the sum of the outstanding principal balance plus the
earned unpaid finance charge is $50,000 and the new [amount
financed][rtrif]loan amount[ltrif] is $51,000, then the
[refinancing][rtrif]new transaction[ltrif] would be exempt if the
extra $1,000 is attributed solely to [rtrif]bona fide and
reasonable[ltrif] costs financed in connection with the [rtrif]new
transaction[ltrif][lsqbb]refinancing that are not finance
charges[rsqbb].
[rtrif]3. Refund of costs. If[ltrif][Of course, if] new advances
of money are made (for example, to pay for home improvements) and
the consumer exercises the right of rescission, the consumer must be
placed in the same position as he or she was in prior to entering
into the new [credit] transaction. Thus, all amounts of money (which
would include all the costs of the
[lsqbb]refinancing[rsqbb][rtrif]new transaction[ltrif]) already paid
by the consumer to the creditor or to a third party as part of the
[lsqbb]refinancing[rsqbb][rtrif]new transaction[ltrif] would have to
be refunded to the consumer. (See the commentary to Sec.
226.23(d)(2) for a discussion of refunds to consumers.)
[rtrif]4. Escrows. Amounts that are financed to fund an existing
or newly-established escrow account do not constitute a new advance.
For purposes of this paragraph, the term escrow account has the same
meaning as in 24 CFR 3500.17(b).[ltrif]
[rtrif]5. Model rescission notice.[ltrif] A model rescission
notice applicable to [transactions] [rtrif]a new advance of money
with the same creditor[ltrif][involving new advances] appears
[in][rtrif]as model form H-9[ltrif] in appendix H.
[lsqbb]The[rsqbb][rtrif]Otherwise, the[ltrif] general rescission
notice (model form H-8) is the appropriate form for use by creditors
[lsqbb]not considered original creditors in refinancing
transactions[rsqbb].
[rtrif]Paragraph 23(f)(3).[ltrif]
[5.][rtrif]1.[ltrif] State creditors. Cities and other political
subdivisions of states acting as creditors are not exempted from
this section.
[rtrif]Paragraph 23(f)(4).[ltrif]
[lsqbb]6.[rsqbb][rtrif]1.[ltrif] Multiple advances. Just as new
disclosures need not be made for subsequent advances when treated as
one transaction, no new rescission rights arise so long as the
appropriate notice and disclosures are given at the outset of the
transaction. For example, the creditor extends credit for home
improvements secured by the consumer's principal dwelling, with
advances made as repairs progress. As permitted by Sec.
226.17(c)(6), the creditor makes a single set of disclosures at the
beginning of the construction period, rather than separate
disclosures for each advance. The right of rescission does not arise
with each advance. However, if the advances are treated as separate
transactions, the right of rescission applies to each advance.
[lsqbb]7.[rsqbb][rtrif]2.[ltrif] Spreader clauses. When the
creditor holds a mortgage or deed of trust on the consumer's
principal dwelling and that mortgage or deed of trust contains a
``spreader clause,'' subsequent loans made are separate transactions
and are subject to the right of rescission. Those loans are
rescindable unless the creditor effectively waives its security
interest under the spreader clause with respect to the subsequent
transactions.
[lsqbb]8. Converting open-end to closed-end credit. Under
certain State laws, consummation of a closed-end credit transaction
may occur at the time a consumer enters into the initial open-end
credit agreement. As provided in the commentary to Sec. 226.17(b),
closed-end credit disclosures may be delayed under these
circumstances until the conversion of the open-end account to a
closed-end transaction. In accounts secured by the consumer's
principal dwelling, no new right of rescission arises at the time of
conversion. Rescission rights under Sec. 226.15 are
unaffected.[rsqbb]
[lsqbb]23(g) Tolerances for accuracy.
23(g)(2) One percent tolerance.
1. New advance. The phrase ``new advance'' has the same meaning
as in comment 23(f)-4.
23(h)[rsqbb] [rtrif]23(g)[ltrif]Special rules for foreclosures.
1. Rescission. Section
[lsqbb]226.23(h)[rsqbb][rtrif]226.23(g)[ltrif] applies only to
transactions that are subject to rescission under Sec.
226.23(a)(1).
Paragraph [lsqbb]23(h)(1)(i)[rsqbb][rtrif]23(g)(1)[ltrif].
1. Mortgage broker fees. A consumer may rescind a loan in
foreclosure if a mortgage broker fee that should have been included
in the [lsqbb]finance charge[rsqbb][rtrif]interest and settlement
charges[ltrif] was omitted, without regard to the dollar amount
involved. If the amount of the mortgage broker fee is included but
misstated the rule in [lsqbb]Sec. 226.23(h)(2)[rsqbb][rtrif]Sec.
226.23(a)(5)(ii)(C)[ltrif] applies.
[lsqbb]23(h)(2) Tolerance for disclosures.
1. General. This section is based on the accuracy of the total
finance charge rather than its component charges.[rsqbb]
* * * * *
Subpart E--Special Rules for Certain Home Mortgage Transactions
Section 226.31--General Rules
* * * * *
31(c) Timing of disclosure.
* * * * *
31(c)(1) Disclosures for certain closed-end home mortgages
* * * * *
[lsqbb]Paragraph[rsqbb]31(c)(1)(iii) Consumer's waiver of
waiting period before consummation.
1. [lsqbb]Modification or waiver.[rsqbb][rtrif]Procedure.[ltrif]
A consumer may modify or waive the right to the three-day waiting
period only after receiving the disclosures required by Sec.
226.32[rtrif].[ltrif] [lsqbb]and only if the circumstances meet the
criteria for establishing a bona fide personal financial emergency
under Sec. 226.23(e). Whether these criteria are met is determined
by the facts surrounding individual situations. The imminent sale of
the consumer's home at foreclosure during the three-day period is
one example of a bona fide personal financial emergency. Each
consumer entitled to the three-day waiting period must sign the
handwritten statement for the waiver to be
effective.[rsqbb][rtrif]After delivery of the required disclosures,
the consumer may waive or modify the three-day waiting period by
giving the creditor a dated, written statement that specifically
waives or modifies the right and describes the bona fide personal
financial emergency. A waiver is effective only if each consumer
primarily liable on the obligation signs a waiver statement. Where
there are multiple consumers entitled to rescind, the consumers may,
but need not, sign the same waiver statement.[ltrif]
[rtrif]2. Bona fide personal financial emergency. To modify or
waive a waiting period, there must be a bona fide personal financial
emergency that requires disbursement of loan proceeds before the end
of the waiting period. Whether there is a bona fide personal
financial emergency is determined by the facts surrounding
individual circumstances. A bona fide personal financial emergency
typically, but not always, will involve imminent loss of or harm to
a dwelling or harm to the health or safety of a natural person. A
waiver is not effective if the consumer's statement is inconsistent
with facts known to the creditor. To determine whether circumstances
are or are not a bona fide personal financial emergency under Sec.
226.31(c)(1)(iii), creditors may rely on the examples and other
commentary provided in comment 23(e)-2.[ltrif]
* * * * *
[31(c)(2) Disclosures for reverse mortgages.
1. Business days. For purposes of providing reverse mortgage
disclosures, ``business day'' has the same meaning as in comment
31(c)(1)-1--all calendar days
[[Page 58773]]
except Sundays and the Federal legal holidays listed in 5 U.S.C.
6103(a). This means if disclosures are provided on a Friday,
consummation could occur any time on Tuesday, the third business day
following receipt of the disclosures.
2. Open-end plans. Disclosures for open-end reverse mortgages
must be provided at least three business days before the first
transaction under the plan (see Sec. 226.5(b)(1)).]
31(d) Basis of disclosures and use of estimates.
1. Redisclosure. Section 226.31(d) allows the use of estimates
when information necessary for an accurate disclosure is unknown to
the creditor, provided that the disclosure is clearly identified as
an estimate. For purposes of Subpart E, the rule in Sec.
226.31(c)(1)(i) requiring new disclosures when the creditor changes
terms also applies to disclosures labeled as estimates.
[rtrif]2. Reverse mortgages subject to Sec. 226.19. For reverse
mortgages subject to Sec. 226.19, the disclosures required by Sec.
226.19(a)(2) may not be estimated disclosures.[ltrif]
* * * * *
Section 226.32--Requirements for Certain Closed-End Home
Mortgages
32(a) Coverage.
* * * * *
Paragraph 32(a)(1)(ii).
1. Total loan amount. For purposes of the ``points and fees''
test, the total loan amount is calculated by taking the amount
financed, as determined according to Sec. 226.18(b), and deducting
any cost listed in Sec. 226.32(b)(1)(iii) and Sec.
226.32(b)(1)(iv) that is both included as points and fees under
Sec. 226.32(b)(1) and financed by the creditor. [rtrif]In
calculating the total loan amount, however, the creditor determines
a transaction's prepaid finance charge and amount financed without
regard to Sec. 226.4(g), consistent with Sec.
226.32(b)(1)(i)(B).[ltrif] Some examples follow, each using a
$10,000 amount borrowed, a $300 appraisal fee, and $400 in points. A
$500 premium for optional credit life insurance is used in one
example. [rtrif]In the following examples, ``prepaid finance
charge'' and ``amount financed'' refer to those amounts as
determined without regard to Sec. 226.4(g). Thus, those amounts
reflect the exclusions found in Sec. Sec. 226.4(a)(2) and 226.4(c)-
(e) for purposes of determining the total loan amount, even though
Sec. 226.4(g) provides that many of those exclusions do not apply
for purposes of determining the finance charge.[ltrif]
* * * * *
[rtrif]Paragraph 32(a)(2)(ii).
1. Nonrecourse reverse mortgage. A nonrecourse reverse mortgage
limits the homeowner's liability under the contract to the proceeds
of the sale of the home (or any lesser amount specified in the
contract). If a closed-end reverse mortgage allows recourse against
the consumer, and the annual percentage rate or the points and fees
exceed those specified under Sec. 226.32(a)(1), the transaction is
subject to all the requirements of Sec. 226.32, including the
limitations concerning balloon payments and negative
amortization.[ltrif]
32(b) Definitions.
[rtrif]Paragraph 32(b)(1).[ltrif]
Paragraph 32(b)(1)(i).
1. General. Section 226.32(b)(1)(i) includes in the total
``points and fees'' items [rtrif]included in the finance charge
pursuant to Sec. 226.4, except interest and the time-price
differential. In addition, for purposes of Sec. 226.32(b)(1)(i),
Sec. 226.4(g) does not apply. Section 226.4(g) contains special
rules governing which other provisions of Sec. 226.4 apply to the
determination of the finance charge for transactions secured by real
property or a dwelling. Consequently, all closed-end transactions
that are secured by a consumer's principal dwelling are subject to
the special rules in Sec. 226.4(g). Under Sec. 226.32(b)(1)(i)(B),
however, those special rules are ignored in determining a
transaction's ``points and fees.'' Thus, the exclusions for certain
charges in Sec. Sec. 226.4(a)(2) and 226.4(c)-(e) are observed for
purposes of determining a mortgage transaction's ``points and
fees,'' even though the same exclusions do not apply for purposes of
determining the transaction's finance charge. For example, fees
actually paid to public officials for perfecting a security
interest, if itemized and disclosed, may be excluded from the
finance charge for non-mortgage transactions under Sec. 226.4(e),
but Sec. 226.4(g) includes such fees in the finance charge for
transactions secured by real property or a dwelling. Notwithstanding
their inclusion in the finance charge for such transactions,
however, Sec. 226.32(b)(1)(i) does not include such fees in
``points and fees.'' Certain fees that are not included in ``points
and fees'' pursuant to Sec. 226.32(b)(1)(i), however, nevertheless
may be included in ``points and fees'' under Sec. 226.32(b)(1)(ii)
or (iii).[ltrif] [lsqbb]defined as finance charges under Sec. Sec.
226.4(a) and 226.(4)(b). Items excluded from the finance charge
under other provisions of Sec. 226.4 are not included in the total
``points and fees'' under paragraph 32(b)(1)(i), but may be included
in ``points and fees'' under paragraphs 32(b)(1)(ii) and
32(b)(1)(iii).[rsqbb] Interest, including per-diem interest, is
excluded from ``points and fees'' under Sec. 226.32(b)(1).
Paragraph 32(b)(1)(ii).
1. Mortgage broker fees. In determining ``points and fees'' for
purposes of [rtrif]Sec. 226.32(a)(1)(ii),[ltrif] [lsqbb]this
section,[rsqbb] compensation paid by a consumer to a mortgage broker
(directly or through the creditor for delivery to the broker) is
included in the calculation [lsqbb]whether or not the amount is
disclosed as a finance charge[rsqbb]. Mortgage broker fees that are
not paid by the consumer are not included. [rtrif]See comment
4(a)(3)-3.[ltrif] Mortgage broker fees already included in the
calculation as finance charges under Sec. 226.32(b)(1)(i) need not
be counted again under Sec. 226.32(b)(1)(ii).
[rtrif]Paragraph 32(b)(1)(iii).
1.[ltrif] [lsqbb]2.[rsqbb]Example. Section 226.32(b)(1)(iii)
defines ``points and fees'' to include all items listed in Sec.
226.4(c)(7), other than amounts held for the future payment of
taxes. An item listed in Sec. 226.4(c)(7) may be excluded from the
``points and fees'' calculation, however, if the charge is
reasonable, the creditor receives no direct or indirect compensation
from the charge, and the charge is not paid to an affiliate of the
creditor. For example, a reasonable fee paid by the consumer to an
independent, third-party appraiser may be excluded from the ``points
and fees'' calculation (assuming no compensation is paid to the
creditor). A fee paid by the consumer for an appraisal performed by
the creditor must be included in the calculation, [lsqbb]even though
the fee may be excluded from the finance charge if it is bona fide
and reasonable in amount.[rsqbb] [rtrif]however, because the
creditor is compensated for the appraisal.[ltrif]
Paragraph 32(b)(1)(iv).
1. Premium amount. In determining ``points and fees'' for
purposes of [rtrif]Sec. 226.32(a)(1)(ii)[ltrif] [lsqbb]this
section,[rsqbb] premiums paid at or before closing for credit
insurance are included whether they are paid in cash or financed,
and whether the amount represents the entire premium for the
coverage or an initial payment.
* * * * *
Section 226.33--Requirements for Reverse Mortgages
33(a) Definition.
[lsqbb]1. Nonrecourse transaction. A nonrecourse reverse
mortgage transaction limits the homeowner's liability to the
proceeds of the sale of the home (or any lesser amount specified in
the credit obligation). If a transaction structured as a closed-end
reverse mortgage transaction allows recourse against the consumer,
and the annual percentage rate or the points and fees exceed those
specified under Sec. 226.32(a)(1), the transaction is subject to
all the requirements of Sec. 226.32, including the limitations
concerning balloon payments and negative amortization.[rsqbb]
Paragraph 33(a)(2).
1. Default. Default is not defined by the statute or regulation,
but rather by the legal obligation between the parties and state or
other law.
2. Definite term or maturity date. To meet the definition of a
reverse mortgage transaction, a creditor cannot require any
principal, interest, or shared appreciation or equity to be due and
payable (other than in the case of default) until after the
consumer's death, transfer of the dwelling, or the consumer ceases
to occupy the dwelling as a principal dwelling. Some State laws
require legal obligations secured by a mortgage to specify a
definite maturity date or term of repayment in the instrument. An
obligation may state a definite maturity date or term of repayment
and still meet the definition of a reverse mortgage
[lsqbb]transaction[rsqbb] if the maturity date or term of repayment
used would not operate to cause maturity prior to the occurrence of
any of the maturity events recognized in the regulation. For
example, some reverse mortgage programs specify that the final
maturity date is the borrower's 150th birthday; other programs
include a shorter term but provide that the term is automatically
extended for consecutive periods if none of the other maturity
events has yet occurred. These programs would be permissible.
[rtrif]33(b) Reverse mortgage document provided on or with the
application.
33(b)(1) In general.
1. Mail and telephone applications. If an application is sent
through the mail, the
[[Page 58774]]
document required by Sec. 226.33(b) must accompany the application.
If an application is taken over the telephone, the document must be
delivered or mailed not later than consummation or account opening
or three business days following receipt of a consumer's application
by the creditor, whichever is earlier. If an application is mailed
to the consumer following a telephone request, however, the document
must be sent along with the application.
2. General purpose applications. The document required by Sec.
226.33(b) 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 reverse
mortgage or (2) the application is provided in response to a
consumer's specific inquiry about a reverse mortgage. On the other
hand, if a general purpose application is provided in response to a
consumer's specific inquiry only about credit other than a reverse
mortgage, the document need not be provided even if the application
indicates it can be used for a reverse mortgage, unless it is
accompanied by promotional information about reverse mortgages.
3. Publicly-available applications. Some creditors make
applications for reverse mortgages, such as take-ones, available
without the need for a consumer to request them. These applications
must be accompanied by the document required by Sec. 226.33(b),
such as by attaching the document to the application form.
4. Response cards. A creditor may solicit consumers for its
reverse mortgage product by mailing a response card which the
consumer returns to the creditor to indicate interest in the
product. 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 reverse mortgage product, the
creditor need not send the document required by Sec. 226.33(b) with
the response card. See comment 33(b)(1)-1 discussing mail and
telephone applications.
5. Denial or withdrawal of application. Section 226.33(b)(2)
provides that for telephone applications and applications received
through an intermediary agent or broker, creditors must deliver or
mail the document required by Sec. 226.33(b)(1) to the consumer not
later than consummation or account opening, or three business days
following receipt of a consumer's application by the creditor,
whichever is earlier. If the creditor determines within that three-
day period that an application will not be approved, the creditor
need not provide the document. Similarly, if the consumer withdraws
the application within this three-day period, the creditor need not
provide the document.
6. Prominent location.
i. When document not given in electronic form. The document
required by Sec. 226.33(b)(1) must be prominently located on or
with the application. The document is deemed to be 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 reverse mortgages.
ii. Form of electronic document provided on or with electronic
applications. Generally, creditors must provide the document
required by Sec. 226.33(b)(1) 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. (See
comment 33(b)(2)-1.) Creditors have flexibility in satisfying this
requirement. Whatever method is used to satisfy the disclosure
requirement, a creditor need not confirm that the consumer has read
the document. Methods creditors could use to satisfy the requirement
include, but are not limited to, the following examples:
A. The document could automatically appear on the screen when
the application appears;
B. The 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 provides
information about reverse mortgages.
C. Creditors could provide a link to the electronic 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; or
D. The 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.
33(b)(2) Application made by telephone or through an
intermediary.
1. Intermediary agent or broker. In determining whether an
application involves an intermediary agent or broker as discussed in
Sec. 226.33(b)(2), creditors should consult the provisions in
comment 19(d)(3)-3.
33(b)(3) Electronic disclosures.
1. When electronic disclosure must be given. Whether the
document required by Sec. 226.33(b)(1) must be in electronic form
depends upon the following:
i. If a consumer accesses a reverse mortgage application
electronically (other than as described under ii. below), such as
online at a home computer, the creditor must provide the disclosure
required by Sec. 226.33(b)(1) in electronic form (such as with the
application form on its Web site) in order to meet the requirement
to provide the disclosure in a timely manner on or with the
application. If the creditor instead mailed a paper disclosure to
the consumer, this requirement would not be met.
ii. In contrast, if a consumer is physically present in the
creditor's office, and accesses a reverse mortgage 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 disclosure
in either electronic or paper form, provided the creditor complies
with the timing, delivery, and retainability requirements of the
regulation.
33(b)(4) Duties of third parties.
1. Duties of third parties. The duties under Sec. 226.33(b)(4)
are those of the third party; the creditor is not responsible for
ensuring that a third party complies with those obligations.
2. Effect of third party delivery of document required by Sec.
226.33(b)(1). If a creditor determines that a third party has
provided a consumer with the document required by Sec.
226.33(b)(1), the creditor need not give the consumer a second copy
of the document.
3. Telephone applications taken by third party. For telephone
applications taken by a third party, the third party is not required
to provide the document required by Sec. 226.33(b)(1). The document
required by Sec. 226.33(b)(1) must be provided by the creditor not
later than three business days before account opening or three
business days following receipt of the consumer's application by the
creditor, whichever is earlier, along with the disclosures required
by Sec. 226.33(d)(1).[ltrif]
33(c) [rtrif] Content of disclosures for reverse
mortgages[ltrif] [lsqbb]Projected total cost of credit[rsqbb].
[rtrif]1. Disclosures given as applicable. The disclosures
required under this section need be made only as applicable. Thus,
for example, if there are no transactions requirements for a reverse
mortgage, reference to them need not be made.[ltrif]
[lsqbb]33(c)(1) Costs to consumer.[rsqbb]
[rtrif]33(c)(2) Identification information.
1. Identification of creditor. The creditor must be identified.
Use of the creditor's name is sufficient, but the creditor may also
include an address and/or telephone number. In transactions with
multiple creditors, any one of them may make the disclosures; the
one doing so must be identified.
2. Multiple loan originators. In transactions with multiple loan
originators, each loan originator's unique identifier must be
disclosed. For example, in a transaction where a mortgage broker
meets the definition of a loan originator under the Secure and Fair
Enforcement for Mortgage Licensing Act of 2008, Section 1503(3), 12
U.S.C. 5102(3), the identifiers for the broker and for its employee
originator meeting that definition must be disclosed.
33(c)(5) Payment of loan funds.
1. Use of the term ``line of credit.'' If the reverse mortgage
allows the consumer to make discretionary cash withdrawals, the
disclosure must use the term ``line of credit'' regardless of
whether the reverse mortgage is open-end or closed-end credit.
2. Disclosures where consumer has not yet elected the type of
payments.
i. If the creditor provides the consumer with more than one of
the payment options described in Sec. 226.33(c)(5)(i) and the
consumer has not selected the type of payment at the time the
disclosure is provided, the creditor must disclose the consumer's
options in the manner described in Sec. 226.33(c)(5)(ii). If the
creditor offers the consumer the option to receive funds in the form
of discretionary cash advances, the creditor must disclose the total
dollar amount
[[Page 58775]]
of the line of credit the consumer could receive. The creditor must
also describe any other types of payments the consumer may receive
but must not disclose any dollar amounts with those descriptions.
ii. If the creditor does not offer the consumer the option to
receive discretionary cash advances, the creditor must disclose the
total dollar amount the consumer could receive in an initial advance
and describe any other types of payments that the consumer may
receive without using dollar amounts.
iii. If the creditor offers consumers only one type of payment,
the creditor need only disclose that payment type.
33(c)(6) Annual percentage rate.
33(c)(6)(i) Open-end annual percentage rate.
1. Rates disclosed. The only rates that may be disclosed in the
table required by Sec. 226.33(d)(4) are annual percentage rates
determined under Sec. 226.14(b). Periodic rates must not be
disclosed in the table.
2. Rate changes set forth in initial agreement. This paragraph
requires disclosure of the rate changes set forth in the initial
agreement, as discussed in Sec. 226.5b(f)(3)(i). For example, this
paragraph requires 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 creditor
must disclose the preferred rate that applies to the plan, and the
rate that would apply if the event occurs, such as the borrower-
employee leaving the creditor's employ or the consumer closing an
existing deposit account with the creditor. If the preferred rate
and the rate that would apply if the event occurs are variable
rates, the creditor must disclose those rates based on the
applicable index or formula, and disclose other information required
by Sec. 226.33(c)(6)(i)(A).
33(c)(6)(i)(A) Disclosures for variable-rate plans.
1. Variable-rate accounts--definition. For purposes of Sec.
226.33(c)(6)(i)(A), a variable-rate account exists when rate changes
are part of the plan and are tied to an index or formula. (See the
commentary to Sec. 226.6(a)(4)(ii)-1 for examples of variable-rate
plans.)
2. Variable-rate accounts--fact that the rate varies and how the
rate will be determined. In describing how the applicable rate will
be determined, the creditor must identify in the table described in
Sec. 226.33(d)(4) the type of index used and the amount of any
margin. In describing the index, a creditor may not include in the
table details about the index. For example, if a creditor uses a
prime rate, the creditor must disclose the rate as a ``prime rate''
and may not disclose in the table other details about the prime
rate, such as the fact that it is the highest prime rate published
in the Wall Street Journal two business days before the closing date
of the statement for each billing period. A creditor may not
disclose in the table the current value of the index (such as that
the prime rate is currently 7.5 percent). See Samples K-4, and K-5
for guidance on how to disclose the fact that the applicable rate
varies and how it is determined.
3. Limitations on increases in rates. The creditor must disclose
in the table required by Sec. 226.33(d) any limitations on
increases in the annual percentage rate, including the minimum and
maximum annual percentage rate that may be imposed. A creditor must
disclose any rate limitations that occur, for example, every two
years, annually or less than an annual basis. If the creditor bases
its rate limitation on 12 monthly billing cycles, such a limitation
must be treated as an annual cap. Rate limitations imposed on more
or 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 annual or other periodic limitations on rate increases,
the fact must be stated in the table described in Sec. 226.33(d).
5. Maximum limitations on increases in rates. The maximum annual
percentage rate that may be imposed over the term of the plan must
be provided in the table described in Sec. 226.33(d). 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 do not include legal limits in the nature of
usury or rate ceilings under state or Federal statutes or
regulations.
6. Sample forms. Samples K-4, and K-5 provide illustrative
guidance on the variable-rate rules.
33(c)(6)(i)(B) Introductory initial rate.
1. Preferred rates. 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 is not an introductory rate under Sec. 226.33(c)(6)(i)(B), but
must be disclosed in accordance with Sec. 226.33(c)(6)(i). See
comment 33(c)(6)(i)-2.
2. Immediate proximity. i. In general. 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'' has used the word ``introductory'' within the same phrase
as the rate.
ii. More than one introductory rate. 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% on the plan for six months, and an
introductory rate of 10.99% for the following six months, the term
``introductory'' need only be used to describe the 8.99% rate.
3. Rate that applies after introductory rate expires. If the
initial rate is an introductory rate, the creditor must disclose the
introductory rate, how long the introductory rate will remain in
effect, and the rate that would otherwise apply to the plan. Where
the rate that would otherwise apply is fixed, the creditor must
disclose the rate that will apply after the introductory rate
expires. Where the rate that would otherwise apply is variable, the
creditor must disclose the rate based on the applicable index or
formula, and disclose the other variable-rate disclosures required
under Sec. 226.33(c)(6)(i)(A).
33(c)(6)(ii) Closed-end annual percentage rate.
1. Disclosure required. The creditor must disclose the cost of
the credit as an annual rate, expressed as a percentage and using
the term ``annual percentage rate,'' plus a brief descriptive phrase
as required under Sec. 226.33(c)(6)(ii). Under Sec.
226.33(d)(4)(vi)(C), the annual rate, expressed as a percentage,
must be more conspicuous than the other required disclosures and in
at least 16 point font.
33(c)(6)(ii)(B) Rate type.
1. Rate type. The rate type to be disclosed corresponds to the
loan type required to be disclosed for closed-end credit secured by
a dwelling under Sec. 226.38(a)(3). Creditors may follow the
commentary to Sec. 226.38(a)(3) in determining the rate type of the
reverse mortgage.
33(c)(6)(ii)(C) Rate calculation and rate change limits.
1. Calculation. If the interest rate will be calculated based on
an index, an identification of the index to which the rate is tied,
the amount of any margin that will be added to the index, and any
conditions or events on which the increase is contingent must be
disclosed. When no specific index is used, the factors used to
determine any rate increase must be disclosed. When the increase in
the rate is discretionary, the fact that any increase is within the
creditor's discretion must be disclosed. When the index is
internally defined (for example, by that creditor's prime rate), the
creditor may comply with this requirement by providing either a
brief description of that index or a statement that any increase is
in the discretion of the creditor.
2. Limitations on interest rate increases. Limitations include
any maximum imposed on the amount of an increase in the rate at any
time, as well as any maximum on the total increase over the loan's
term to maturity.
33(c)(7) Fees and transaction requirements.
33(c)(7)(i) Fees imposed by creditor and third parties to
consummate the transaction or open the plan.
1. Applicability. Section 226.33(c)(7)(i) applies only to one-
time fees imposed by the creditor or third parties to consummate the
transaction or open the plan. The fees include items such as
application fees, points, appraisal or other property valuation
fees, credit report fees, government agency fees, and attorneys'
fees. Monthly fees or other periodic fees that may be imposed for
the availability of the reverse mortgage would not be disclosed
under Sec. 226.33(c)(7)(i), but must be disclosed under Sec.
226.33(c)(7)(ii). A creditor must not state the amount of any
property insurance premiums in the table, even if property insurance
is required by the creditor.
2. Manner of describing itemized fees.
i. Section 226.33(c)(7)(i)(B) provides that if the dollar amount
of a one-time account opening fee is not known at the time the
[[Page 58776]]
open-end early disclosures under Sec. 226.33(d)(1) are delivered or
mailed, a creditor must provide a range for such fee. If a range is
shown, the highest and lowest amounts of the fee in that range must
be the highest and lowest amounts of the fee that may be imposed.
ii. For the open-end account-opening disclosures required by
Sec. 226.33(d)(2), a creditor must disclose in the reverse mortgage
account-opening table the total of all one-time fees imposed by the
creditor and third parties to open the plan, and may not disclose
the highest amount of possible fees as allowed under Sec.
226.33(c)(7)(i)(A) for the disclosure table required under Sec.
226.33(d)(1). In addition, a creditor must disclose in the account-
opening table an itemization of all one-time fees imposed by the
creditor and third parties to open the plan, and may not disclose a
range for those fees, as otherwise allowed under Sec.
226.33(c)(7)(i)(B) for the disclosure table required under Sec.
226.33(d)(1).
3. Fees not required to be disclosed. Fees that are not imposed
to consummate the transaction or open the plan, such as fees for
researching an account, photocopying, exceeding the credit limit, or
closing out an account, do not have to be disclosed under this
section. For open-end reverse mortgages property valuation fees
imposed to investigate whether a condition permitting a freeze
continues to exist--as discussed in Sec. 226.5b(g)(2)(iv) and
accompanying commentary--are not required to be disclosed under this
section.
4. Rebates of fees. If one-time fees for consummation or account
opening are imposed 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).
5. Disclosure of itemized list of fees to open a plan. A
creditor will be deemed to provide the itemization of the
consummation or account-opening fees clearly and conspicuously if
the creditor provides this information in a format as shown in
Samples K-3, K-4 and K-5.
33(c)(7)(ii) Fees imposed by the creditor for availability of
the reverse mortgage.
1. Fee to obtain access devices. The fees referred to in Sec.
226.33(c)(7)(ii) include fees to obtain access devices, such as fees
to obtain checks or credit cards to access the reverse mortgage. For
example, a fee to obtain checks or a credit card on the account must
be disclosed in the table as a fee for issuance or availability
under Sec. 226.33(c)(7)(ii). This fee must 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.
2. Fees kept by third party. The fees referred to in Sec.
226.33(c)(7)(ii) include any fees that are imposed by the creditor
for the availability of the reverse mortgage, whether the fees are
kept by the creditor or a third party. For example, if a creditor
charges the consumer for a monthly mortgage insurance premium and
this fee is paid directly to a third party, the fee must be
disclosed under Sec. 226.33(e)(7)(ii).
3. Waived or reduced fees. If fees required to be disclosed
under Sec. 226.33(c)(7)(ii) are waived or reduced for a limited
time, the introductory fees or the fact of fee waivers may be
provided in the table in addition to the required fees if the
creditor also discloses how long the reduced fees or waivers will
remain in effect.
33(c)(7)(iii) Fees imposed by the creditor for early termination
of the reverse mortgage.
1. Applicability. This disclosure applies to fees (such as
penalty or prepayment fees) that the creditor imposes if the
consumer terminates the reverse mortgage, or prepays the obligation
in full, prior to its scheduled maturity. This disclosure includes
waived consummation or account-opening fees for the plan, if the
creditor will impose those costs on the consumer if the consumer
terminates the plan or pays off the loan within a certain amount of
time after account opening or consummation, respectively. The
disclosure does not apply to fees that are imposed when the reverse
mortgage expires in accordance with the agreement or that are
associated with collection of the debt if the creditor terminates
the reverse mortgage, such as attorneys' fees and court costs.
33(c)(7)(iv) Statement about other fees.
Paragraph 33(c)(7)(iv)(A).
1. Disclosure of additional information upon request. A creditor
generally must include in the early open-end disclosure table
required by Sec. 226.33(d)(1) and (d)(4) a statement that the
consumer may receive, upon request, additional information about
fees applicable to the plan. Alternatively, a creditor may provide
additional information about fees applicable to the plan along with
the table required by Sec. 226.33(d)(1) and (d)(4). In that case,
the creditor must disclose in the table that is required by Sec.
226.33(d)(1) and (d)(4) that additional information about fees
applicable to the plan is enclosed with the table. In providing
additional information about fees to a consumer upon the consumer's
request prior to account opening (or along with the table required
under Sec. 226.33(d)(1) and (d)(4)), a creditor must disclose the
transaction fees that are required to be disclosed under Sec.
226.33(c)(7)(v), (c)(13)(i), and (c)(13)(ii), 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 with the table required by Sec. 226.33(d)(1)
and (d)(4). If the consumer, prior to consummation or the opening of
a plan, requests additional information about fees applicable to the
plan, the creditor must provide this information as soon as
reasonably possible after the request.
33(c)(7)(v) Transaction requirements.
1. Applicability. A limitation on automated teller machine usage
need not be disclosed under this paragraph unless that is the only
means by which the consumer can obtain funds.
33(c)(1) Costs to consumer.
[rtrif]33(c)(8) Loan balance growth.[ltrif]
1. Costs and charges to consumer--relation to finance charge.
All costs and charges to the consumer that are incurred in a reverse
mortgage are included in the [rtrif]loan balance table[ltrif]
[lsqbb]projected total cost of credit, and thus in the total annual
loan cost rates[rsqbb], whether or not the cost or charge is a
finance charge under Sec. 226.4.
2. Annuity costs [rtrif]and annuity payments[ltrif]. [lsqbb]As
part of the credit transaction, some creditors require or permit a
consumer to purchase an annuity that immediately--or at some future
time--supplements or replaces the creditor's
payments.[rsqbb][rtrif]Section 226.40(a) prohibits a creditor from
requiring a consumer to purchase any financial or insurance product,
including an annuity, as a condition of obtaining a reverse
mortgage. Under the safe harbor for compliance in Sec.
226.40(a)(2), a creditor is deemed to comply with the prohibition on
required purchases of financial or insurance products if, among
other things, the reverse mortgage transaction is completed at least
10 calendar days before the purchase of another product. The cost of
an annuity purchased after the reverse mortgage transaction is
completed in accordance with the safe harbor is not considered a
cost to the consumer under this section. Similarly, payments from an
annuity that the consumer purchases after the reverse mortgage
transaction is completed in accordance with the safe harbor are not
required to be disclosed as the advances to the consumer under this
section. However, if the consumer voluntarily purchases an annuity
along with a reverse mortgage, and the creditor does not follow the
safe harbor in Sec. 226.40(a)(2), t[ltrif][lsqbb]T[rsqbb]he amount
paid by the consumer for the annuity is a cost to the consumer under
this section, regardless of whether the annuity is purchased through
the creditor or a third party[lsqbb], or whether the purchase is
mandatory or voluntary[rsqbb]. For example, this includes the costs
of an annuity that a creditor offers, arranges, assists the consumer
in purchasing, or that the creditor is aware the consumer is
purchasing as a part of the transaction. [rtrif]Similarly, if the
consumer voluntarily purchases an annuity along with a reverse
mortgage, and the creditor does not follow the safe harbor in Sec.
226.40(a)(2), the advances that the consumer will receive from the
annuity must be disclosed as the advances to the consumer, rather
than the proceeds used to finance the annuity.[ltrif]
3. Disposition costs excluded. Disposition costs incurred in
connection with the sale or transfer of the property subject to the
reverse mortgage are not included in the costs to the consumer under
this paragraph. (However, see [lsqbb]the definition of Valn in
appendix K to the regulation[rsqbb] comment 33(c)(8)-8 to determine
the effect certain disposition costs may have on [rtrif]the
disclosure of the amount the consumer will owe[ltrif][lsqbb]the
total annual loan cost rates[rsqbb].)
[lsqbb]33(c)(2) Payments to consumer.[rsqbb]
[rtrif]4[ltrif][lsqbb]1[rsqbb]. Payments upon a specified event.
The [rtrif]disclosure of the amount advanced to the consumer[ltrif]
[lsqbb]projected total cost of credit[rsqbb] should not reflect
contingent payments in which a credit to the outstanding loan
balance or a payment to the consumer's estate is made upon the
occurrence of an event (for example, a ``death benefit'' payable if
the consumer's death occurs within a certain period of time).
[lsqbb]Thus, the table of total annual loan cost rates required
under Sec. 226.33(b)(2) would not reflect such payments.[rsqbb] At
its option, however, a creditor may put an asterisk, footnote, or
similar type of notation in the table next to the applicable
[rtrif]payment
[[Page 58777]]
total[ltrif] [lsqbb]total annual loan cost rate[rsqbb], and state in
the body of the note, apart from the table, the assumption upon
which the [rtrif]payment total[ltrif] [lsqbb]total annual loan
cost[rsqbb] is made and any different [rtrif]payment[ltrif]
[lsqbb]rate[rsqbb] that would apply if the contingent benefit were
paid.
[lsqbb]Paragraph 33(c)(3) Additional creditor
compensation.[rsqbb]
[rtrif]5[ltrif][lsqbb]1[rsqbb]. Shared appreciation or equity.
Any shared appreciation or equity that the creditor is entitled to
receive pursuant to the legal obligation must be included in the
[rtrif]amount the consumer will owe[ltrif] [lsqbb]total cost of a
reverse mortgage loan[rsqbb]. For example, if a creditor agrees to a
reduced interest rate on the transaction in exchange for a portion
of the appreciation or equity that may be realized when the dwelling
is sold, that portion is included in the amount the consumer will
owe.
[rtrif]6. Assumed dwelling appreciation for shared appreciation
or equity disclosure. The creditor must assume that the dwelling's
value does not appreciate unless the creditor is entitled by
contract to shared appreciation or equity. Because the cost to the
consumer must reflect any shared appreciation or equity, the
creditor must assume that the dwelling appreciates by 4 percent per
year and must state this assumption.[ltrif]
[lsqbb]Paragraph 33(c)(4) Limitations on consumer
liability.[rsqbb]
[rtrif]7[ltrif][lsqbb]1[rsqbb]. [rtrif] Limitations on consumer
liability[ltrif][lsqbb]In general[rsqbb]. Creditors must include any
limitation on the consumer's liability (such as a nonrecourse limit
or an equity conservation agreement) in the [rtrif]disclosure of the
amount owed by the consumer[ltrif] [lsqbb]projected total cost of
credit[rsqbb]. These limits and agreements protect a portion of the
equity in the dwelling for the consumer or the consumer's estate.
For example, the following are limitations on the consumer's
liability that must be included in the [rtrif]disclosure of the
amount owed by the consumer[ltrif] [lsqbb]projected total cost of
credit[rsqbb]:
i. A limit on the consumer's liability to a certain percentage
of the projected value of the home.
ii. A limit on the consumer's liability to the net proceeds from
the sale of the property subject to the reverse mortgage.
[rtrif]8[ltrif][lsqbb]2[rsqbb]. Uniform assumption for ``net
proceeds'' recourse limitations. If the legal obligation between the
parties does not specify a percentage for the ``net proceeds''
liability of the consumer, for purposes of the disclosures
[lsqbb]required by[rsqbb] [rtrif]of the amount the consumer will be
required to repay under[ltrif] Sec.
226.33[rtrif](c)(8)(ii)(C)[ltrif], a creditor must assume that the
costs associated with selling the property will equal 7 percent of
the projected sale price [lsqbb](see the definition of the Valn
symbol under appendix K(b)(6))[rsqbb].
[rtrif]9. Set-asides. In some reverse mortgages the creditor
will set aside a portion of the loan amount to be paid for the
benefit of the consumer, such as for making required repairs to the
dwelling. The creditor must treat the entire amount of the funds set
aside as an advance to the consumer and not merely the portion of
the set-aside that the creditor estimates will be used. For example,
if the creditor estimates that repairs will cost $1,000 but sets
aside $1,500 (150% of the estimated cost of repairs), the entire
$1,500 amount of the repair set-aside is considered an advance for
the benefit of the consumer.
10. Assumptions about type of payments to consumer.
i. If the creditor provides the consumer with more than one of
the payment options described in Sec. 226.33(c)(5)(i) and the
consumer has selected the type of payment(s) at the time the
disclosure is provided, the creditor must base the disclosures on
the consumer's selection(s). If the consumer has not yet selected
the types of payments, the creditor must base the disclosures on the
assumptions in Sec. 226.33(c)(5)(ii).
ii. In some cases the consumer may choose to receive an initial
advance, a periodic payment, or some combination of the two, but
also leave some of the principal amount available for discretionary
cash advances. In these instances, the creditor must assume that the
consumer does not take any discretionary advances if the scheduled
advances account for 50 percent or more of the principal loan
amount. Otherwise, the creditor must assume that the consumer draws
the entire available principal loan amount at closing or, in an
open-end transaction, when the consumer becomes obligated under the
plan.
(A) For example, assume that the reverse mortgage has a
principal loan amount of $105,000 and that the creditor finances
$5,000 in closing costs, leaving an available loan amount of
$100,000. The consumer elects to take $25,000 in an initial advance,
and have $25,000 paid out in the form of regular monthly
installments, for a total of $50,000. The consumer chooses to leave
the remaining $50,000 in a line of credit. Because the initial
advance and the monthly payments account for 50 percent of the
available principal amount, the creditor must assume that the
consumer takes no advances from the line of credit.
(B) Alternatively, assume that the consumer elects to take
$24,000 in an initial advance, have $25,000 paid out in the form of
regular monthly installments and leave $51,000 in a line of credit.
Because the initial advance and the monthly payments account for
less than 50 percent of the available loan amount the creditor must
assume that the consumer draws all $51,000 from the line of credit
at closing.
11. Shared appreciation or equity disclosure. The creditor must
disclose if it is entitled by contract to any shared appreciation or
equity. For example, if the creditor is entitled by contract to 25
percent of any appreciation in the value of the dwelling, the
creditor may state, ``This loan includes a Shared Appreciation
Agreement, which means that we will be entitled to 25 percent of any
gain made when you sell or refinance your home. For example, if your
home were worth $100,000 more when the loan becomes due than it is
worth today, you would owe us an additional $25,000 on the loan.''
The disclosure must be in a form substantially similar to the Model
Clause in K-7 in Appendix K to this part.
33(c)(10) Statements about risks.
1. Changes to the plan. If changes may occur pursuant to Sec.
226.5b(f)(3)(i)-(v), a creditor must state that it can make changes
to the plan.
33(c)(12) Additional early disclosures for open-end reverse
mortgages.
33(c)(12)(i) Refund of fees under Sec. 226.5b(e).
1. Relation to other provisions. 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
disclosures required by Sec. 226.33(d)(1).
33(c)(12)(ii) Refund of fees under Sec. 226.40(b).
1. Relation to other provisions. Creditors should consult the
rules in Sec. 226.40(b) regarding refund of fees if the consumer
rejects the plan within three business days of receiving counseling
as required by Sec. 226.40(b).
33(c)(12)(i)(B) Changes to disclosed terms.
1. Relation to other provisions. Creditors should consult the
rules in Sec. 226.5b(d) regarding refund of fees when terms change.
33(c)(12)(iv) Statement about refundability of fees.
Paragraph 33(c)(12)(iv)(A).
1. Guaranteed 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 is permitted to guarantee
some terms and not others, but must indicate which terms are subject
to change.
Paragraph 33(c)(13) Additional disclosures before the first
transaction under an open-end reverse mortgage.
Paragraph 33(c)(13)(i) Transaction charges.
1. Charges imposed by person other than creditor. Charges
imposed by a third party, such as a seller of goods, shall not be
disclosed in the table under this section; the third party would be
responsible for disclosing the charge under Sec. 226.9(d)(1).
Paragraph 33(c)(14) Additional disclosures for closed-end
reverse mortgages.
Paragraph 33(c)(14)(i) Total payments.
1. Calculation of total payments scheduled. Creditors should use
the assumptions in Sec. 226.33(c)(16) and the rules under Sec.
226.18(g) and associated commentary, and comments 17(c)(1)(iii)-1
and -3 for adjustable-rate transactions, to calculate the total
payments amount.
33(c)(14)(ii) Interest and settlement charges.
1. Calculation of interest and settlement charges. The interest
and settlement charges disclosure is identical to the finance
charge, as calculated under Sec. 226.4.
2. Disclosure required. The creditor must disclose the interest
and settlement charges as a dollar amount, using the term interest
and settlement charges, together with a brief statement as required
by Sec. 226.33(c)(14)(ii). The interest and settlement charges must
be disclosed only as a total amount; the components of the interest
and settlement charges amount may not be itemized in the table
required by Sec. 226.33(d)(4) except as required or permitted by
Sec. 226.33(c)(7), although the regulation does not prohibit
itemization elsewhere.
33(c)(14)(iii) Amount financed.
1. Principal loan amount. In a closed-end reverse mortgage, the
principal loan amount is the same as the loan amount disclosed for
[[Page 58778]]
closed-end mortgage transactions under Sec. 226.38(a)(1). As
provided in that section, the loan amount is the principal amount
the consumer will borrow reflected in the loan contract. Thus the
principal loan amount includes all amounts financed as part of the
transaction, whether they are finance charges or not.
2. Disclosure required. The net amount of credit extended must
be disclosed using the term ``amount financed'' together with a
descriptive statement as required by Sec. 226.33(c)(14)(iii).
33(c)(16) Assumptions for closed-end disclosures.
1. Basis of disclosures. The creditor's use of the rules in
Sec. 226.33(c)(16) does not, by itself, make the disclosures
estimates. Thus, creditors may use these rules for the disclosures
required by proposed Sec. 226.19(a)(2) and comply with that
section's limitation on using estimated disclosures.
33(d) Special disclosure requirements for reverse mortgages.
1. Business days.
i. For purposes of providing the early open-end reverse mortgage
disclosure within three business days after application as required
by Sec. 226.33(d)(1)(i), the term ``business day'' means a day on
which the creditor's offices are open to the public for carrying on
substantially all of its business functions.
ii. For purposes of providing disclosures for open-end reverse
mortgages at least three business days before account opening as
required by Sec. 226.33(d)(1)(ii) and (d)(2), ``business day'' has
the same meaning as in comment 31(c)(1)-1--all calendar days except
Sundays and the Federal legal holidays listed in 5 U.S.C. 6103(a).
Thus, for example, if disclosures are provided on a Friday, June 1,
consummation could occur any time on Tuesday, June 5, the third
business day following receipt of the disclosures.
33(d)(1) Timing of early open-end reverse mortgage disclosures.
1. Denial or withdrawal of application. Section 226.33(d)(1)
provides that creditors must deliver or mail disclosures required by
Sec. 226.33(c) to the consumer not later than three business days
before the first transaction under the plan, or three business days
following receipt of a consumer's application by the creditor,
whichever is earlier. If the creditor determines within the three-
day period that an application will not be approved, the creditor
need not provide the disclosures. Similarly, if the consumer
withdraws the application within this three-day period, the creditor
need not provide the disclosures.
33(d)(4) Form of disclosures; tabular format.
1. Terminology. Section 226.33(d)(4) 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 Appendix K to part 226. See Sec. 226.5(a)(2) for
terminology requirements applicable to disclosures provided pursuant
to Sec. 226.33(d)(1) and (d)(2).
2. Other format requirements. See Sec. 226.33(c)(6)(i)(A)(1)(i)
for formatting requirements applicable to disclosure of variable
rates in the table required by Sec. 226.33(d)(1) and (d)(2). See
comment 33(c)(7)(iv)(A)-1 for format requirements that apply to
information that a creditor provides to a consumer upon request.
3. Highlighting of disclosures. i. In general. See Samples K-4,
K-5 and K-6 for guidance on providing the disclosures described in
Sec. 226.33(d)(4)(vi) in bold text.
ii. Itemized list of fees to open the plan. The total amount of
fees for consummation or account opening disclosed under Sec.
226.33(c)(7)(i) must be disclosed in bold text. The itemization of
those fees that is also required to be disclosed under Sec.
226.33(c)(7)(i) must not be disclosed in bold text.
4. Clear and conspicuous standard. See comment 5(a)(1)-1 for the
clear and conspicuous standard applicable to Sec. 226.33(d)(1) and
(d)(2) disclosures. See comments 37(a)-1, and 37(a)(1)-1 through -3
for the clear and conspicuous standard applicable to Sec.
226.33(d)(3) disclosures.
5. Tabular disclosures required under Sec. 226.33(d)(2). The
account-opening disclosures required by Sec. 226.33(d)(2) and early
open-end disclosures required by Sec. 226.33(d)(1) generally follow
the same formatting requirements, except for the following:
i. A creditor may not disclose below the account-opening table
an identification of any disclosed term that is subject to change
prior to opening the plan.
ii. A creditor may not disclose in the account-opening table a
statement about the right to a refund of fees pursuant to Sec. Sec.
226.5b(e) or 226.40(b).
iii. A creditor must disclose in the account-opening table the
total of all one-time fees imposed by the creditor and third parties
to open the plan, and may not disclose the highest amount of
possible fees as allowed under Sec. 226.33(c)(7)(i)(A). In
addition, a creditor must disclose in the account-opening table an
itemization of all one-time fees imposed by the creditor and third
parties to open the plan, and may not disclose a range for those
fees, as otherwise allowed under Sec. 226.33(c)(7)(i)(B).
iv. A creditor may not disclose below the account-opening table
a statement that the consumer may be entitled to a refund of all
fees paid if the consumer decides not to open the plan pursuant to
Sec. 226.5b(d).
33(d)(5) Disclosures based on a percentage.
1. Transaction requirements. Section 226.33(c)(7)(v) requires a
creditor to disclose in the table required under Sec. 226.33(d) 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 draw requirements. If any amount that must be disclosed
under Sec. 226.33(c)(7)(v) 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 transaction amount.
33(e) Reverse mortgage advertising.
33(e)(1) Scope.
1. In general. The requirements and limitations of Sec.
226.33(e) apply to both open-end and closed-end reverse mortgages.
The requirements and limitations are in addition to those contained
in other subparts of this part, including advertising requirements
in Sec. 226.16 in Subpart B or Sec. 226.24 in Subpart C, as
applicable. See Sec. 226.31(a).
33(e)(2) Clear and conspicuous standard.
1. Clear and conspicuous standard--general. Advertisements for
reverse mortgages are subject to the general ``clear and
conspicuous'' standard for Subpart B or Subpart C, as applicable.
See comment 33(e)(1)-1. Section 226.33(e) prescribes no specific
rules for the format of the required disclosures other than the
following: The disclosures required by Sec. 226.33(e)(3)-(9) must
be made with equal prominence and in close proximity to each
triggering statement, and the disclosure required by Sec.
226.33(e)(10) must be at least as conspicuous as the triggering
statement. Disclosures need not be printed in a certain type size
and need not appear in any particular place in the advertisement,
except as necessary to comply with the aforementioned requirements.
For a discussion of the equal prominence and close proximity
requirements, see comment 33(e)(2)-2.
2. Clear and conspicuous standard--advertisements for reverse
mortgages. Information required to be disclosed under Sec.
226.33(e) that is in the same type size as the statement that
triggered the required disclosure is deemed to be equally prominent
with such statement. If a disclosure required by Sec. 226.33(e) is
made with greater prominence than the statement that triggered the
required disclosure, the equal prominence requirement is satisfied.
Information required to be disclosed under Sec. 226.33(e) that is
immediately next to or directly above or below a statement that
triggered the required disclosure, without any intervening text or
graphical displays and not in a footnote, is deemed to be closely
proximate to such statement.
3. Clear and conspicuous standard--Internet advertisements for
reverse mortgages. For purposes of Sec. 226.33(e)(2), creditors may
rely on comment 16-3 or comment 24(b)-3, as applicable, in
determining whether a required disclosure in an Internet
advertisement for a reverse mortgage is made clearly and
conspicuously.
4. Clear and conspicuous standard--televised advertisements for
reverse mortgages. For purposes of Sec. 226.33(e)(2), creditors may
rely on comment 16-4 or comment 24(b)-4, as applicable, to determine
whether a required disclosure in a televised advertisement for a
reverse mortgage is made clearly and conspicuously.
5. Clear and conspicuous standard--oral advertisements for
reverse mortgages. For purposes of Sec. 226.33(e)(2), creditors may
rely on comment 16-5 or comment 24(b)-5, as applicable, to determine
whether a required disclosure in an oral advertisement for a reverse
mortgage is made clearly and conspicuously.
33(e)(3) Need to repay loan.
1. Examples. The following examples illustrate how an
advertisement may disclose the clarifying information required by
Sec. 226.33(e)(3):
i. ``You are eligible for benefits under the government's Home
Equity Conversion
[[Page 58779]]
Mortgage program. A reverse mortgage under the program is a loan
that must be repaid.''
ii. ``Congress recently improved the HECM benefits you can
receive. A HECM is a loan that you must repay.''
iii. ``The U.S. Department of Housing and Urban Development has
increased the aid available to people over the age of 62. The aid is
available through a loan that must be repaid.''
2. Applicability. An advertisement may not state that a reverse
mortgage is a government benefit unless the reverse mortgage is
associated with a government program, such as the U.S. Department of
Housing and Urban Development's Home Equity Conversion Mortgage
program. If a reverse mortgage is associated with a government
program, then an advertisement may contain a statement that a
reverse mortgage is a government benefit; however, the statement
must be accompanied by a statement that a reverse mortgage is a loan
that must be repaid, as illustrated in the examples provided in
comment 33(e)(3)-1. A statement that a reverse mortgage is a loan
that must be repaid will not cure a violation of Sec. 226.16(d)(9)
or Sec. 226.24(i)(3). These provisions prohibit misrepresentations
of government endorsement or sponsorship in an advertisement for,
respectively, open-end or closed-end mortgages, including reverse
mortgages. See comment 33(e)(1)-1.
3. Statements regarding government insurance or other support. A
statement that a reverse mortgage is a ``government-supported loan''
or a ``government loan program'' or is a loan insured, authorized,
developed, created, or otherwise sponsored or endorsed by a Federal,
state, or local government entity does not trigger the requirement
under Sec. 226.33(e)(3) to disclose that a reverse mortgage is a
loan that must be repaid. The following examples illustrate
statements that do not trigger the requirement to disclose this
clarifying information:
i. ``A Home Equity Conversion Mortgage is a loan insured by the
U.S. Department of Housing and Urban Development.''
ii. ``Congress developed the HECM loan program to help senior
citizens.''
4. Other meanings or terms. A reference to benefits or other aid
through a government program unrelated to reverse mortgages does not
trigger the requirement under Sec. 226.33(e)(3) to disclose
clarifying information. Further, using the term ``government
benefit'' to mean ``advantage'' does not trigger the requirement to
disclose clarifying information. The following examples illustrate
statements that do not trigger a requirement to disclose clarifying
information:
i. ``A reverse mortgage does not affect your Social Security
benefits.'' The term ``benefits'' is used to refer to benefits
through a government program unrelated to reverse mortgages and
therefore does not trigger the requirement in Sec. 226.33(e)(3) to
disclose clarifying information. (However, the statement triggers
the requirement to disclose that a reverse mortgage may affect
benefits under some government programs, such as Supplemental
Security Income and Medicaid. See Sec. 226.33(e)(9) and
accompanying commentary.)
ii. ``A home equity conversion mortgage provides several
benefits, including the ability to stay in your home.'' The term
``benefits'' is used to mean ``advantages'' and, therefore, does not
trigger the requirement to disclose clarifying information.
33(e)(4) Events that end loan term.
1. Examples. The following examples illustrate how an
advertisement may disclose the clarifying information required by
Sec. 226.33(e)(4):
i. ``You get payments for as long as you live, except that
payments may end sooner in some circumstances. For example, you do
not get payments for as long as you live if you sell the home or
live somewhere else for longer than the loan agreement allows.''
ii. ``You can have lifetime access to a line of credit. However,
you may not have lifetime access in certain circumstances, including
if you sell your home or live in another place longer than [specify
time period].''
iii. ``Never repay during your lifetime, except that you may
have to repay early in some cases, such as if you sell your house or
live somewhere else for longer than the time stated in the loan
contract.''
2. Applicability. The disclosures required by Sec.
226.33(e)(4)(A) and (B) need be made only if applicable. Any
disclosure not relevant to a particular statement or advertisement
may be omitted.
3. Format; order of disclosures. Section 226.33(e)(4) does not
require the use of a particular format in providing the disclosures
set forth in Sec. 226.33(e)(4)(A) and (B), other than requiring
that they be equally prominent with and in close proximity to each
triggering statement. An advertisement need not make all of the
disclosures required by Sec. 226.33(e)(4) in a single sentence. For
example, an advertisement may make the required disclosures using a
list format. An advertisement may state the disclosures required by
Sec. 226.33(e)(4) in any order.
4. Additional circumstances. An advertisement for a reverse
mortgage may state additional circumstances in which payments or
access to a line of credit for a reverse mortgage or the term of a
reverse mortgage will end during a consumer's lifetime, for example,
where a consumer chooses to receive payments for a specific time
period. A statement of such additional circumstances must be
presented in a way that does not obscure the disclosures set forth
in Sec. 226.33(e)(4)(A) and (B), however.
33(e)(5) Risk of foreclosure.
1. Examples. The following examples illustrate how an
advertisement for a reverse mortgage may disclose the clarifying
information required by Sec. 226.33(e)(5):
i. ``You cannot lose your home except in certain circumstances,
including if you live somewhere else for longer than allowed by the
loan agreement or you do not pay taxes or insurance.''
ii. ``There is no risk to your house unless you do not meet the
loan conditions, for example if you live in another place for longer
than [specify time period] or do not pay taxes and insurance.''
2. Applicability. The disclosures required by Sec.
226.33(e)(5)(A) and (B) need be made only if applicable. Any
disclosure not relevant to a particular advertisement may be
omitted.
3. Format; order of disclosures. Section 226.33(e)(5) does not
require the use of a particular format in providing the disclosures
set forth in Sec. 226.33(e)(5)(A) and (B), other than requiring
that they be equally prominent with and in close proximity to each
triggering statement. An advertisement need not make all of the
disclosures required by Sec. 226.33(e)(4) in a single sentence. For
example, an advertisement may make the required disclosures using a
list format. An advertisement may state the disclosures required by
Sec. 226.33(e)(4) in any order.
4. Additional circumstances. An advertisement for a reverse
mortgage may state additional circumstances in which foreclosure may
occur. A statement of such additional circumstances must be
presented in a way that does not obscure the disclosures set forth
in Sec. 226.33(e)(5)(A) and (B), however.
33(e)(6) Amount owed.
1. Examples. The following examples illustrate how an
advertisement for a reverse mortgage may disclose the clarifying
information required by Sec. 226.33(e)(6):
i. ``Your heirs cannot owe more than the value of your house,
unless they want to keep the house when the reverse mortgage is due.
To keep the house, they must pay the entire loan balance, which may
be higher than the house's value.''
ii. ``You never repay more than your home is worth, unless you
want to keep your home when the reverse mortgage is due. If you want
to keep your home, you must pay the whole loan balance, which may be
more than your home is worth.''
iii. ``Your repayment is limited to your home's value if your
home is sold to repay the loan. You can keep your home if you pay
the total loan balance, which may be more than the home is worth.''
33(e)(7) Payments for taxes and insurance.
1. Examples. Under Sec. 226.33(e)(7), if an advertisement
states that payments are not required for a reverse mortgage, the
advertisement must disclose that a consumer must pay taxes and
insurance premiums, if applicable. The following examples illustrate
how an advertisement for a reverse mortgage may disclose the
clarifying information required by Sec. 226.33(e)(7):
i. ``There are no loan payments for a reverse mortgage. You
continue to pay for property taxes and insurance.''
ii. ``You do not have to make monthly mortgage payments, but you
must pay for property taxes and insurance.''
33(e)(8) Government fee limitation.
1. Examples. Under Sec. 226.33(e)(8), if an advertisement
states that a government limits or regulates fees or other costs for
a reverse mortgage, the advertisement shall clearly and
conspicuously disclose that costs may vary among creditors and loan
types and less expensive alternatives may be available. The
following examples illustrate how an advertisement for a reverse
mortgage may disclose the clarifying information required by Sec.
226.33(e)(8):
i. ``The government has capped fees for HECMs. Costs may vary by
lender or loan
[[Page 58780]]
type, and cheaper alternatives may be available.''
ii. ``Maximum HECM fees are set by law. There can be different
charges by creditor or loan type, and you may be able to find less
expensive loans.''
33(e)(9) Disclosure of effects on eligibility for government
programs.
1. Examples. Under Sec. 226.33(e)(9), if an advertisement
states that a reverse mortgage does not affect a consumer's benefits
from or eligibility for a government program, the advertisement must
disclose that a reverse mortgage may affect benefits from or
eligibility for some government programs such as Supplemental
Security Income and Medicaid. The following examples illustrate how
an advertisement may disclose the clarifying information required by
Sec. 226.33(e)(9):
i. ``A reverse mortgage usually does not affect your eligibility
for Social Security or Medicare. It may affect eligibility for other
government programs, such as Supplemental Security Income and
Medicaid.''
ii. ``Social Security and Medicare benefits are not affected,
but some other government benefits may be affected, such as
Supplemental Security Income and Medicaid.''
33(e)(10) Credit counseling information.
1. Accompanying telephone number and Internet Web site. Under
Sec. 226.33(e)(10), if an advertisement for a reverse mortgage
contains a reference to housing or credit counseling, the
advertisement must disclose a telephone number and Internet Web site
for housing counseling resources maintained by the U.S. Department
of Housing and Urban Development. The disclosure of the telephone
number and Web site must be at least as conspicuous as any reference
to housing or credit counseling, but this disclosure need not
accompany each reference to housing or credit counseling in the
advertisement. Identifying language must accompany the statement of
the telephone number and Internet Web site for housing counseling
resources maintained by U.S. Department of Housing and Urban
Development, such as: ``For information about housing counseling
options, call [telephone number] or go to [Internet Web
site].''[ltrif]
* * * * *
Section 226.34--Prohibited Acts or Practices in Connection With
Credit Subject to Sec. 226.32
34(a) Prohibited acts or practices for loans subject to Sec.
226.32.
* * * * *
34(a)(4) Repayment ability.
* * * * *
4. [lsqbb]Discounted introductory rates and non-amortizing or
negatively-amortizing payments. A credit agreement may determine a
consumer's initial payments using a temporarily discounted interest
rate or permit the consumer to make initial payments that are non-
amortizing or negatively amortizing. (Negative amortization is
permissible for loans covered by Sec. 226.35(a), but not Sec.
226.32). In such cases the creditor may determine repayment ability
using the assumptions provided in Sec.
226.34(a)(4)(iv).[rsqbb][rtrif][lsqbb]Reserved.[rsqbb][ltrif]
* * * * *
34(a)(4)(iv) Exclusions from presumption of compliance.
* * * * *
[rtrif]3. Short-term balloon loans. Under Sec.
226.34(a)(4)(iv)(B), a creditor cannot obtain the presumption of
compliance provided in Sec. 226.34(a)(4)(iii) for a balloon loan
with a term of less than seven years (``short-term balloon loan'').
Section 226.34(a)(4) does not, however, prohibit short-term balloon
loans that are higher-priced mortgage loans. In making a short-term
balloon loan that is a higher-priced mortgage loan, the creditor
must use prudent underwriting standards and, after considering a
consumer's income, employment, obligations and assets other than the
collateral, determine that the value of the collateral (the home) is
not the basis for repaying the obligation (including the balloon
payment). This requirement does not require the creditor to verify
that the consumer has assets and income at the time of consummation
that would be sufficient to pay the balloon payment when it comes
due. In addition to verifying the consumer's ability to make the
regular periodic payments, the creditor should verify that the
consumer would likely be able to satisfy the balloon payment by
refinancing the loan or through income or assets other than the
collateral. The creditor should consider factors such as the loan-
to-value ratio and the borrower's debt-to-income ratio or residual
income at the time of consummation. For instance, a consumer with a
high debt-to-income ratio, or with little or no equity in the
property, may be less likely to be able to refinance the loan before
the balloon payment comes due than a borrower with lower debt-to-
income and loan-to-value ratios. The creditor is not required to
estimate the consumer's future financial circumstances, interest
rate environment, and home value.[ltrif]
* * * * *
Section 226.35--Prohibited Acts or Practices in Connection with
Higher-Priced Mortgage Loans
35(a) Higher-priced mortgage loans.
[rtrif]35(a)(2) Definitions.[ltrif]
Paragraph 35(a)(2)[rtrif](i)[ltrif].
[rtrif]1. Transaction coverage rate. The transaction coverage
rate is calculated solely for purposes of determining whether a
transaction is subject to Sec. 226.35. The creditor is not required
to disclose it to the consumer. The creditor determines the
transaction coverage rate in the same manner as the transaction's
annual percentage rate, except that, for purposes of calculating the
transaction coverage rate and determining Sec. 226.35 coverage, the
value of the prepaid finance charge is modified in accordance with
Sec. 226.35(a)(2)(i). Under that section, only prepaid finance
charges retained by the creditor, its affiliate, or a mortgage
broker are treated as prepaid finance charges in determining the
transaction coverage rate, and any other fees or charges that are
otherwise included in the prepaid finance charge for purposes of
calculating the annual percentage rate are disregarded. For example,
assume a transaction in which the creditor charges one discount
point, an underwriting fee is imposed and paid to an affiliate of
the creditor, an origination charge is imposed and paid to a
mortgage broker, and a mortgage insurance premium is paid at
consummation to a mortgage insurer that is not the creditor's
affiliate. For purposes of the annual percentage rate disclosed to
the consumer, all of the listed charges are included in the prepaid
finance charge; for purposes of the transaction coverage rate,
however, the mortgage insurance premium is excluded from the
modified prepaid finance charge. The transaction coverage rate that
results from these special rules must be compared to the average
prime offer rate to determine whether the transaction is subject to
Sec. 226.35.
2. Inclusion of finance charges in modified prepaid finance
charge; mortgage broker charges. For purposes of the special rules
under Sec. 226.35(a)(2)(i), the modified prepaid finance charge
includes only items that are finance charges, consistent with the
definition of prepaid finance charge in Sec. 226.2(a)(23); charges
that are not included in the prepaid finance charge for annual
percentage rate purposes also should not be included in the modified
prepaid finance charge for transaction coverage rate purposes.
Accordingly, the inclusion of charges retained by a mortgage broker
is limited to broker compensation that otherwise constitutes a
prepaid finance charge. Compensation paid by the creditor to a
mortgage broker under a separate arrangement (e.g., compensation
that comes from ``yield spread premium'') is not included because it
is not included for annual percentage rate purposes, although it may
be included if it comes from amounts paid by the consumer to the
creditor that are prepaid finance charges, such as points. See
comment 4(a)(3)-3. If mortgage broker compensation comes from
amounts paid by the consumer to the creditor that are finance
charges but not prepaid finance charges, such as interest, those
amounts affect the transaction coverage rate just as they affect the
annual percentage rate, but the broker compensation itself does not
affect the transaction coverage rate directly. For example, assume a
transaction in which a mortgage broker imposes a $1,000 origination
charge:
i. If the $1,000 charge comes from yield-spread premium derived
from the interest rate that will be charged to the consumer during
the loan's term, the charge is excluded from the modified prepaid
finance charge for transaction coverage rate purposes, just as it is
excluded from the prepaid finance charge for annual percentage rate
purposes in accordance with comment 4(a)(3)-3.
ii. In contrast, if the consumer pays the $1,000 charge directly
in cash or by check at consummation or it is withheld from the
proceeds of the credit, the charge is included for both annual
percentage rate and transaction coverage rate purposes.
Paragraph 35(a)(2)(ii).[ltrif]
* * * * *
[rtrif]Paragraph 35(a)(3).
1. Construction-permanent loans. Under Sec. 226.35(a)(3), Sec.
226.35 does not apply to a
[[Page 58781]]
transaction to finance the initial construction of a dwelling. When
such a transaction may be permanently financed by the same creditor,
Sec. 226.17(c)(6)(ii) permits the creditor to give either one
combined disclosure for both the construction financing and the
permanent financing, or a separate set of disclosures for each of
the two phases as though they were two separate transactions. See
also comment 17(c)(6)-2. Section 226.17(c)(6)(ii) addresses only how
a creditor may elect to disclose a combined construction-permanent
transaction. Which disclosure option a creditor elects under Sec.
226.17(c)(6)(ii) does not affect the determination of whether the
transaction is subject to Sec. 226.35. Whether the creditor
discloses the two phases as a single transaction or as two separate
transactions, a single transaction coverage rate, reflecting the
appropriate charges from both phases, must be calculated for the
transaction in accordance with Sec. 226.35(a). The transaction
coverage rate must be compared to the average prime offer rate for a
comparable transaction to determine coverage under Sec. 226.35. If
the transaction is determined to be a higher-priced mortgage loan,
only the permanent phase is subject to the requirements of Sec.
226.35. Thus, for example, the requirement to establish an escrow
account prior to consummation of a higher-priced mortgage loan
secured by a first lien on a principal dwelling, under Sec.
226.35(b)(3), applies only to the permanent phase and not to the
construction phase.[ltrif]
35(b) Rules for higher-priced mortgage loans.
1. Effective date [rtrif]and scope[ltrif]. For guidance on the
applicability of the rules in section 226.35(b), see
comment[rtrif]s[ltrif] 1(d)(5)-1[rtrif] and 20(a)(1)(i)-2[ltrif].
* * * * *
Section 226.38--Content of Disclosures for Closed-End Mortgages
* * * * *
38(a) Loan summary.
* * * * *
38(a)(5) Prepayment penalty.
* * * * *
2. Penalty. The term ``penalty'' as used in Sec. 226.38(a)(5)
encompasses only those charges that are assessed solely because of
the prepayment in full of a transaction in which the interest
calculation takes account of all scheduled reductions in principal.
Charges which are penalties include, for example:
i. Charges determined by treating the loan balance as
outstanding for a period after prepayment in full and applying the
interest rate to such [lsqbb]``balance.''[rsqbb] [rtrif]``balance,''
even if the charge results from the interest accrual amortization
method used on the transaction. ``Interest accrual amortization''
refers to the method by which the amount of interest due for each
period (e.g., month) in a transaction's term is determined. For
example, ``monthly interest accrual amortization'' treats each
payment as made on the scheduled, monthly due date even if it is
actually paid early or late (until the expiration of a grace
period). Thus, under monthly interest accrual amortization, if the
amount of interest due on May 1 for the preceding month of April is
$3,000, the creditor will require payment of $3,000 in interest
whether the payment is made on April 20, on May 1, or on May 10. In
this example, if the interest charged for the month of April upon
prepayment in full on April 20 is $3,000, the charge constitutes a
prepayment penalty of $1,000 because the amount of interest actually
earned through April 20 is only $2,000.[ltrif]
ii. A minimum finance charge in a simple-interest transaction.
iii. Fees, such as loan closing costs, that are waived unless
the consumer prepays the obligation.
* * * * *
38(h) [lsqbb]Credit[rsqbb] [rtrif]Required or voluntary credit
[ltrif] insurance and debt cancellation coverage and debt suspension
coverage.
1. Location. This disclosure may, at the creditor's option,
appear apart from the other disclosures. It may appear with any
other information, including the amount financed itemization, any
information prescribed by State law, or other information. When this
information is disclosed with the other segregated disclosures,
however, no additional explanatory material may be included.
[lsqbb]Paragraph 38(h)(5).[rsqbb]
[lsqbb]1.[rsqbb][rtrif]2.[ltrif] Compliance. If, based on the
creditor's review of the consumer's age and/or employment status
[rtrif] prior to or [ltrif] at the time of enrollment in the
product, the consumer would not be eligible to receive the benefits
of the product, then providing the disclosure required under
[lsqbb]Sec. 226.38(h)(5)[rsqbb][rtrif]Sec.
226.4(d)(1)(i)(D)(5)[ltrif] would not comply with [lsqbb]this
provision[rsqbb][rtrif] the requirements of Sec. 226.38(h)[ltrif].
That is, if the consumer does not meet the age and/or employment
eligibility criteria, then the creditor cannot state that the
consumer may be eligible to receive benefits and cannot comply with
[lsqbb]this requirement[rsqbb][rtrif]Sec. 226.38(h)[ltrif]. If the
creditor offers a bundled product (such as credit life insurance
combined with credit involuntary unemployment insurance) and the
consumer is not eligible for all of the bundled products, then
providing the disclosure required under [lsqbb]Sec.
226.38(h)(5)[rsqbb][rtrif]Sec. 226.4(d)(1)(i)(D)(5)[ltrif] would
not comply with [lsqbb]this provision[rsqbb][rtrif]Sec.
226.38(h)[ltrif]. However, the disclosure still satisfies the
requirements of this section if an event subsequent to enrollment,
such as the consumer passing the age limit of the product, makes the
consumer ineligible for the product based on the product's age or
employment eligibility restrictions.
[lsqbb]2. Reasonably reliable evidence. A disclosure under Sec.
226.38(h)(5) shall be deemed to comply with this section if the
creditor used reasonably reliable evidence to determine whether the
consumer met the age or employment eligibility criteria of the
product. Reasonably reliable evidence of a consumer's age would
include using the date of birth on the consumer's credit
application, on the driver's license or other government-issued
identification, or on the credit report. Reasonably reliable
evidence of a consumer's employment status would include a
consumer's statement on a credit application form, an Internal
Revenue Service Form W-2, tax returns, payroll receipts, or other
written evidence such as a letter or e-mail from the consumer or the
consumer's employer.[rsqbb]
* * * * *
[rtrif] Section 226.40--Prohibited Acts or Practices in Connection
With Reverse Mortgages
40(a) Requiring the purchase of other financial or insurance
products.
40(a)(1) Financial or insurance products.
1. Covered products and services. For purposes of Sec.
226.40(a), the term ``financial or insurance product'' includes bank
products, except for transaction accounts and savings deposits (as
defined in Regulation D, 12 CFR part 204) established to disburse
reverse mortgage proceeds. The term also includes nonbank products.
For example, the term includes extensions of credit; trust services;
time deposits as defined in Regulation D, 12 CFR part 204 (such as
certificates of deposit); annuities; securities and other
nondepository investment products; financial planning services; life
insurance; long-term care insurance; credit insurance; and debt
cancellation and debt suspension coverage.
2. Exclusion for products and services customarily required.
Products and services that are customarily required to protect the
creditor's interest in the collateral or otherwise mitigate the
creditor's risk of loss are excluded from the definition of
``financial product or service'' for purposes of Sec. 226.40(a).
Examples of excluded products and services include appraisal or
other property valuation services; title insurance; hazard, flood,
or other peril insurance; home improvement services required to
originate the reverse mortgage; and mortgage insurance where
consumers are required to pay the premiums, such as the insurance
required by the U.S. Department of Housing and Urban Development to
originate a reverse mortgage under the Home Equity Conversion
Mortgage program.
40(a)(2) Safe harbor.
1. Safe harbor conditions not met. If the safe harbor conditions
in Sec. 226.40(a)(2) are not met, whether a consumer is required to
purchase a financial or insurance product to obtain a reverse
mortgage is a factual question. For example, where the safe harbor
conditions are not met for a particular reverse mortgage
transaction, and the terms or features of that reverse mortgage are
not available unless the consumer purchases another product, the
consumer has been required to purchase that product to obtain the
reverse mortgage.
Paragraph 40(a)(2)(ii).
1. Obligated to purchase. Whether a consumer has become
obligated to purchase a financial or insurance product for purposes
of the safe harbor under Sec. 226.40(a)(2) is a factual inquiry. A
consumer becomes obligated to purchase a financial or insurance
product, for example, when the consumer signs an agreement to
purchase the product, even if the purchase will occur in the future.
A consumer also becomes obligated to purchase a product when the
consumer signs an agreement to purchase a product, but has
[[Page 58782]]
the option to cancel the purchase for a period of time after the
purchase occurs. If a consumer consummates a reverse mortgage on
Monday, June 1, the creditor will qualify for the safe harbor only
if the consumer does not sign an agreement to purchase another
financial or insurance product from the persons enumerated in Sec.
226.40(a)(2)(ii)(A)-(D)) until Thursday, June 11.
Paragraph 40(a)(2)(ii)(D).
1. Examples of receiving compensation for the consumer's
purchase of another product. If, within 10 days of consummating a
reverse mortgage, the consumer purchases another financial or
insurance product from a party that is not affiliated with the
creditor, the creditor qualifies for the safe harbor under Sec.
226.40(a)(2)(ii) if the creditor and its affiliates do not receive
compensation for the purchase. The creditor receives compensation
for the consumer's purchase of another financial or insurance
product if the creditor is paid a fee because the consumer purchases
the product. By contrast, the creditor does not receive compensation
for the purchase if the creditor sells a customer list to a
nonaffiliated third party, which, in turn, sells a financial or
insurance product to a reverse mortgage consumer on the list within
the 10-day waiting period, as long as the creditor receives no
compensation directly or indirectly related to whether the consumer
purchases the product.
40(b) Counseling.
40(b)(1) Counseling required.
1. Originating a reverse mortgage. A creditor or other person
may accept an application for a reverse mortgage and begin to
process the application (by, for example, ordering an appraisal or
title search) before the consumer has obtained the counseling
required under Sec. 226.40(b)(1). A creditor or other person may
not, however, open a reverse mortgage account (for an open-end
reverse mortgage) or consummate a reverse mortgage loan (for a
closed-end reverse mortgage) before the consumer has obtained the
counseling required under Sec. 226.40(b)(1).
2. Safe harbor. A creditor may rely on a certificate of
counseling in a form approved by the Secretary of the U.S.
Department of Housing and Urban Development pursuant to 12 U.S.C.
1715z-20(f), or a substantially similar form, to confirm that the
consumer obtained the counseling required under Sec. 226.40(b)(1).
40(b)(2) Nonrefundable fees prohibited.
Paragraph 40(b)(2)(i).
1. Collection of fees. A fee, including an application fee, may
be collected earlier than three business days after the consumer
obtains counseling. However, the fee must be refunded if, within
three business days of obtaining counseling, the consumer decides
not to enter into the reverse mortgage transaction.
2. Timing for imposition of nonrefundable fees. To determine
when the consumer obtained counseling for purposes of imposing a
nonrefundable fee, a creditor or other person may rely on the date
of the counseling session indicated on a certificate of counseling
in a form approved by the Secretary of the U.S. Department of
Housing and Urban Development pursuant to 12 U.S.C. 1715z-20(f), or
a substantially similar form. See comment 40(b)(1)-2.
3. Imposition of fees--reverse mortgages subject to Sec.
226.5b. For reverse mortgages subject to Sec. 226.5b, two
restrictions on imposing nonrefundable fees apply. The first
restriction is under Sec. 226.5b(e), which prohibits imposing a
nonrefundable fee until after the third business day following the
consumer's receipt of the early disclosures required under Sec.
226.33(d)(1). The second restriction is under Sec. 226.40(b)(2),
which prohibits imposing a nonrefundable fee (other than a fee for
required counseling (see Sec. 226.40(b)(2)(ii))) until after the
third business day following the consumer's completion of
counseling. A nonrefundable fee may not be imposed until both
waiting periods have ended. Thus, if three business days have
elapsed since the consumer received the early disclosures, but fewer
than three business days have elapsed since the consumer obtained
counseling, the creditor or other person may not impose a
nonrefundable fee (except a fee for required counseling) until after
the third business day following the consumer's completion of
counseling. Alternatively, if three business days have elapsed since
the consumer obtained counseling, but fewer than three business days
have elapsed since the consumer received the early disclosures, the
creditor or other person may not impose a nonrefundable fee until
after the third business day following the consumer's receipt of the
early disclosures.
4. Imposition of fees--reverse mortgages subject to Sec.
226.19. i. Under Sec. 226.19(a)(1)(ii), which applies to closed-
end, real property- or dwelling-secured mortgages, neither the
creditor nor any other person may impose any fees (other than a fee
for obtaining a consumer's credit history (see Sec.
226.19(a)(1)(iii)) and a fee for required counseling (see Sec.
226.19(a)(1)(v))) in connection with the consumer's application
before the consumer has received the early disclosures required
under Sec. 226.19(a)(1)(i). Thus, in connection with a closed-end
reverse mortgage, neither the creditor nor any other person may
impose a fee (except for a fee for obtaining a consumer's credit
history or required counseling) until the consumer has received the
early disclosures required under Sec. Sec. 226.19(a)(1)(i) and
226.33(d)(3). In addition, the restriction on imposing nonrefundable
fees under Sec. 226.40(b)(2) applies to closed-end reverse
mortgages, so neither the creditor nor any other person may impose a
nonrefundable fee (other than a fee for required counseling (see
Sec. 226.40(b)(2)(ii))) in connection with a closed-end reverse
mortgage until after the third business day following the consumer's
completion of counseling. Thus, for closed-end reverse mortgages, if
the consumer has received the early disclosures, but fewer than
three business days have elapsed since the consumer obtained
counseling, the creditor or other person may not impose a
nonrefundable fee on the consumer (except a fee for required
counseling) until after the third business day following the
consumer's completion of counseling. Alternatively, if three
business days have elapsed since the consumer obtained counseling,
but the consumer has not received the early disclosures, the
creditor or other person may not impose any fees--refundable or
nonrefundable (except for a fee for obtaining a consumer's credit
history or required counseling)--until the consumer has received the
early disclosures.
ii. For reverse mortgages subject to Sec. 226.19, two
restrictions on imposing nonrefundable fees apply. The first
restriction is under Sec. 226.19(a)(1)(iv), which prohibits
imposing a nonrefundable fee (other than a fee for obtaining a
consumer's credit history (see Sec. 226.19(a)(1)(iii)) and a fee
for required counseling (see Sec. 226.19(a)(1)(v)) until after the
third business day following the consumer's receipt of the early
disclosures required under Sec. Sec. 226.19(a)(1)(i) and
226.33(d)(3). The second restriction is under Sec. 226.40(b)(2),
which prohibits imposing a nonrefundable fee (other than a fee for
required counseling (see Sec. 226.40(b)(2)(ii))) until after the
third business day following the consumer's completion of
counseling. A nonrefundable fee generally may not be imposed until
both waiting periods have ended. Thus, if three business days have
elapsed since the consumer received the early disclosures, but fewer
than three business days have elapsed since the consumer completed
counseling, the creditor or other person may not impose a
nonrefundable fee (except for a fee for required counseling) until
after the third business day following the consumer's completion of
counseling. Alternatively, if three business days have elapsed since
the consumer obtained counseling, but fewer than three business days
have elapsed since the consumer received the early disclosures, the
creditor or other person may not impose a nonrefundable fee (except
for a fee for obtaining a consumer's credit history or required
counseling) until after the third business day following the
consumer's receipt of the early disclosures.
5. Definition of ``business day.'' For purposes of Sec.
226.40(b)(2), the more precise definition of ``business day''
(meaning all calendar days except Sundays and specified Federal
holidays) under Sec. 226.2(a)(6) applies. See comment 2(a)(6)-2.
Paragraph 40(b)(2)(ii).
1. Counseling fee. A fee for the counseling required under Sec.
226.40(b)(1) may be imposed by a counselor or counseling agency
meeting the qualifications in Sec. 226.40(b)(1) earlier than the
expiration of three business days after the consumer obtains
counseling and need not be refunded under the circumstances
described in comment 40(b)(2)(i)-1.
40(b)(3) Content of counseling.
1. Safe harbor. Counseling that conveys the information required
by the Secretary of the U.S. Department of Housing and Urban
Development to be provided pursuant to 12 U.S.C. 1715z-20(f), or
substantially similar information, satisfies the requirements of
Sec. 226.40(b)(3).
40(b)(5) Type of counseling.
1. Internet communication. Counseling considered face-to-face or
by telephone includes counseling provided via an Internet or other
connection allowing the counselor and consumer to see and hear one
another in real time and communication via an Internet or other
connection designed to accommodate persons with disabilities.
[[Page 58783]]
40(b)(6) Independence of counselor.
40(b)(6)(i) Counselor compensation.
1. Prohibited compensation. Section 226.40(b)(6)(i) prohibits a
creditor or any person involved in originating a reverse mortgage,
such as a mortgage broker, from compensating a counselor or
counseling agency for reverse mortgage counseling services related
to a particular transaction. Section 226.40(b)(6)(i) does not
prohibit a creditor or other person from arranging for the
counseling fee to be financed as part of a reverse mortgage
transaction.
40(b)(6)(ii) Steering.
1. Safe harbor. To comply with 226.40(b)(6)(ii), a creditor or
other person need not in all cases provide a list of at least five
counselors or counseling agencies to the consumer. For example, if
the consumer received reverse mortgage counseling that complies with
Sec. 226.40(b)(i) before any initial communication between the
consumer and the creditor or other person involved in originating a
reverse mortgage, the consumer would have already obtained the
counseling needed to satisfy Sec. 226.40(b)(1). Therefore, a list
of counselors or counseling agencies would be unnecessary.[ltrif]
[rtrif]Section 226.41--Servicer's Response to Borrower's Request
for Information
1. Reasonable time. The servicer must provide the required
information to the consumer within a reasonable time after the
consumer's written request. For example, it would be reasonable
under most circumstances to provide the required information within
ten business days of receipt of the consumer's written
request.[ltrif]
* * * * *
Appendices G and H--Open-End and Closed-End Model Forms and Clauses
1. Permissible changes. Although use of the model forms and
clauses is not required, creditors using them properly will be
deemed to be in compliance with the regulation with regard to those
disclosures. Creditors may make certain changes in the format or
content of the forms and clauses and may delete any disclosures that
are inapplicable to a transaction or a plan without losing the act's
protection from liability [rtrif].[ltrif] [, except]
[rtrif]However,[ltrif] formatting changes may not be made to
[rtrif]the following[ltrif] model forms [rtrif], model
clauses,[ltrif] and samples in [rtrif]Appendices G and H:[ltrif] G-
2[(A)], G-3[(A)], G-4[(A)], [rtrif]G-5(A)-(C),[ltrif] G-10(A)-(E),
[rtrif]G-14(A)- (E), G-15(A)-(D), G-16(A)-(D)[ltrif] G-17(A)-(D), G-
18(A) (except as permitted pursuant to Sec. 226.7(b)(2)), G-18(B)-
(C), G-19, G-20, [and] G-21[rtrif], G-22(A)-(B), G-23(A)-(B), G-
24(A) (except as permitted pursuant to Sec. 226.7(a)(2)), G-25, and
G-26; and H-4(B) through H-4(L), H-8(A)-(B), H-9, H-17(A) through
(D), H-19(A)-(I), and H-20 through H-22[ltrif]. The rearrangement of
the model forms and clauses may not be so extensive as to affect the
substance, clarity, or meaningful sequence of the forms and clauses.
Creditors making revisions with that effect will lose their
protection from civil liability. Except as otherwise specifically
required, acceptable changes include, for example:
i. Using the first person, instead of the second person, in
referring to the borrower.
ii. Using ``borrower'' and ``creditor'' instead of pronouns.
iii. Rearranging the sequences of the disclosures.
iv. Not using bold type for headings.
v. Incorporating certain state ``plain English'' requirements.
vi. Deleting inapplicable disclosures by whiting out, blocking
out, filling in ``N/A'' (not applicable) or ``0,'' crossing out,
leaving blanks, checking a box for applicable items, or circling
applicable items. (This should permit use of multipurpose standard
forms [rtrif]for transactions not secured by real property or a
dwelling[ltrif].)
[vii. Using a vertical, rather than a horizontal, format for the
boxes in the closed-end disclosures.]
Appendix G--Open-End Model Forms and Clauses
* * * * *
4. [lsqbb]Models G-5 through G-9.[rsqbb] [rtrif]Model Form G-
5(A) and Samples G-5(B) and G-5(C). i. A creditor satisfies Sec.
226.15(b)(3) if it provides the Model Form G-5(A), or a
substantially similar notice, which is properly completed with the
disclosures required by Sec. 226.15(b)(3).
ii. Sample G-5(B) provides guidance where a creditor is
providing the rescission notice for opening of a HELOC account where
the credit line is being secured by the consumer's home and the full
credit line is rescindable. In this situation, a creditor may use
Sample G-5(B) to meet the content and format requirements for the
rescission notice set forth in Sec. 226.15(b) and Model Form G-
5(A).
iii. Sample G-5(C) provides guidance where a creditor is
providing the rescission notice for a credit limit increase on the
HELOC account. In this situation, a creditor may use proposed Sample
G-5(C) to meet the content and format requirements for the
rescission notice set forth in Sec. 226.15(b) and Model Form G-
5(A).
iv. Samples G-5(B) and G-5(C) contain the following optional
disclosures set forth in Sec. 226.15(b): (1) A disclosure about
joint owners; (2) an acknowledgment of receipt of the notice; (3)
the consumer's name and property address pre-printed on the form;
(4) the account number on the form; and (5) a fax number that may be
used by the consumer to exercise his or her rescission right. A
creditor may delete these optional disclosures from Samples G-5(B)
and G-5(C) and still retain the safe harbor from liability provided
by these forms.
v. Although creditors are not required to use a certain paper
size in disclosing the rescission notice required under Sec.
226.15(b), Samples G-5(B) and G-5(C) are each designed to be printed
on an 8\1/2\ x 11 inch sheet of paper. In addition, the following
formatting techniques were used in presenting the information in the
sample notices to ensure that the information is readable:
A. A readable font style and font size (10-point Arial font
style).
B. Sufficient spacing between lines of the text.
C. Adequate spacing between paragraphs when several pieces of
information were included in the same row of the table, as
appropriate.
D. Standard spacing between words and characters. In other
words, the text was not compressed to appear smaller than 10-point
type.
E. Sufficient white space around the text of the information in
each row, by providing sufficient margins above, below and to the
sides of the text.
F. Sufficient contrast between the text and the background.
Generally, black text was used on white paper.
vi. While the regulation does not require creditors to use the
above formatting techniques in presenting information in the notice
(except for the 10-point font requirement), creditors are encouraged
to consider these techniques when deciding how to disclose
information in the notice, to ensure that the information is
presented in a readable format.
vii. Creditors may use color, shading and similar graphic
techniques with respect to the notice, so long as the notice remains
substantially similar to the model and sample forms in Appendix G.
[ltrif][These models set out notices of the right to rescind that
would be used at different times in an open-end plan. The last
paragraph of each of the rescission model forms contains a blank for
the date by which the consumer's notice of cancellation must be sent
or delivered. A parenthetical is included to address the situation
in which the consumer's right to rescind the transaction exists
beyond 3 business days following the date of the transaction, for
example, when the notice or material disclosures are delivered late
or when the date of the transaction in paragraph 1 of the notice is
an estimate. The language of the parenthetical is not optional. See
the commentary to section 226.2(a)(25) regarding the specificity of
the security interest disclosure for model form G-7.[rsqbb]
* * * * *
Appendix H--Closed-End Model Forms and Clauses
1. Models H-1 and H-2. Creditors may make several types of
changes to closed-end model forms H-1 (credit sale) and H-2 (loan)
and still be deemed to be in compliance with the regulation,
provided that the required disclosures are made clearly and
conspicuously. Permissible changes include the addition of the
information permitted by [lsqbb]footnote 37 to[rsqbb] section 226.17
and ``directly related'' information as set forth in the commentary
to section 226.17(a).
The creditor may also delete, or on multi-purpose forms,
indicate inapplicable disclosures, such as:
The itemization of the amount financed option (See
sample[lsqbb]s[rsqbb] H-12[lsqbb] through H-15[rsqbb].)
The credit [lsqbb]life and disability[rsqbb] insurance
[rtrif] or debt cancellation or debt suspension coverage[ltrif]
disclosures (See [rtrif]model forms and[ltrif] samples H-
[lsqbb]11[rsqbb][rtrif]17(A), (B), (C), and (D).)
The property insurance disclosures (See [rtrif]model
clause H-18, and [ltrif] samples H-10 through H-12[lsqbb], and H-
14[rsqbb].)
The ``filing fees'' and ``nonfiling insurance''
disclosures (See samples H-11 and H-12.)
[[Page 58784]]
The prepayment penalty or rebate disclosures (See
sample[lsqbb]s[rsqbb] H-12 [lsqbb]and H-14[rsqbb].)
The total sale price (See samples H-11
[lsqbb]through[rsqbb] [rtrif]and[ltrif] H-
[lsqbb]15[rsqbb][rtrif]12[ltrif].) Other permissible changes
include:
Adding the creditor's address or telephone number. (See
the commentary to Sec. 226.18(a).)
Combining required terms where several numerical
disclosures are the same, for instance, if the ``total of payments''
equals the ``total sale price.'' (See the commentary to Sec.
226.18.)
Rearranging the sequence or location of the
disclosures--for instance, by placing the descriptive phrases
outside the boxes containing the corresponding disclosures, or by
grouping the descriptors together as a glossary of terms in a
separate section of the segregated disclosures; by placing the
payment schedule at the top of the form; or by changing the order of
the disclosures in the boxes, including the annual percentage rate
and finance charge boxes.
Using brackets, instead of checkboxes, to indicate
inapplicable disclosures.
Using a line for the consumer to initial, rather than a
checkbox, to indicate an election to receive an itemization of the
amount financed.
Deleting captions for disclosures.
Using a symbol, such as an asterisk, for estimated
disclosures, instead of an ``e.''
Adding a signature line to the insurance disclosures to
reflect joint policies.
Separately itemizing the filing fees.
Revising the late charge disclosure in accordance with
the commentary to Sec. 226.18(1).
* * * * *
3. Models H-4[rtrif](A)[ltrif][lsqbb] through[rsqbb][rtrif], H-
4(C), H-4(H), H-5,[ltrif] H-7[rtrif], H-16, H-18, and H-20 through
H-23[ltrif]. The model clauses are not included in the model forms
although they are mandatory for certain transactions. Creditors
using the model clauses when applicable to a transaction are deemed
to be in compliance with the regulation with regard to that
disclosure.
* * * * *
11. Models H-8 [rtrif](A)[ltrif] and H-9 [rtrif]and Sample H-
8(B)[ltrif]. [rtrif] Model Forms H-8(A) and H-9[ltrif] [lsqbb]These
models[rsqbb] contain the rescission notices for a typical closed-
end transaction and a [lsqbb]refinancing[rsqbb][rtrif]new advance of
money with the same creditor[ltrif], respectively.
[rtrif]i. These model forms illustrate, in the tabular format,
the disclosures required generally by Sec. 226.23(b).
ii. A creditor satisfies Sec. 226.23(b)(3) if it provides the
appropriate model form (H-8(A) or H-9), or a substantially similar
notice, which is properly completed with the disclosures required by
Sec. 226.23(b)(3).
iii. Sample H-8(B) contains the following optional disclosures
set forth in Sec. 226.23(b): (1) A disclosure about joint owners;
(2) an acknowledgment of receipt of the notice; (3) the consumer's
name and property address pre-printed on the form; (4) the loan
number on the form; and (5) a fax number that may be used by the
consumer to exercise his or her rescission right. A creditor may
delete these optional disclosures from Sample H-8(B) and still
retain the safe harbor from liability provided by this form.
iv. Although creditors are not required to use a certain paper
size in disclosing the rescission notice under Sec. 226.23(b),
Model Forms H-8(A) and H-9 and Sample H-8(B) are designed to be
printed on an 8\1/2\ x 11 sheet of paper. In addition, the following
formatting techniques were used in presenting the information in the
model forms and sample to ensure that the information is readable:
A. A readable font style and font size (10-point Arial font
style);
B. Sufficient spacing between lines of the text;
C. Adequate spacing between paragraphs when several pieces of
information were included in the same row of the table, as
appropriate.
D. Standard spacing between words and characters. In other
words, the text was not compressed to appear smaller than 10-point
type;
E. Sufficient white space around the text of the information in
each row, by providing sufficient margins above, below and to the
sides of the text;
F. Sufficient contrast between the text and the background.
Generally, black text was used on white paper.
v. While the regulation does not require creditors to use the
above formatting techniques in presenting information in the tabular
format (except for the 10-point minimum font requirement), creditors
are encouraged to consider these techniques when deciding how to
disclose information in the notice to ensure that the information is
presented in a readable format.
vii. Creditors may use color, shading and similar graphic
techniques with respect to the notice, so long as the notice remains
substantially similar to the model and sample forms in Appendix
H.[ltrif] [lsqbb]The last paragraph of each model form contains a
blank for the date by which the consumer's notice of cancellation
must be sent or delivered. A parenthetical is included to address
the situation in which the consumer's right to rescind the
transaction exists beyond 3 business days following the date of the
transaction, for example, where the notice or material disclosures
are delivered late or where the date of the transaction in paragraph
1 of the notice is an estimate. The language of the parenthetical is
not optional. See the commentary to section 226.2(a)(25) regarding
the specificity of the security interest disclosure for model form
H-9. The prior version of model form H-9 is substantially similar to
the current version and creditors may continue to use it, as
appropriate. Creditors are encouraged, however, to use the current
version when reordering or reprinting forms.[rsqbb]
12. Sample forms. [lsqbb]The sample
forms[rsqbb][rtrif]Samples[ltrif] [lsqbb]([rsqbb][rtrif]H-4(D)
through H-(F), H4(I) and H-4(J), H-8(B),[ltrif]H-10 through H-
[lsqbb]15[rsqbb][rtrif]12, H-17(B) through (D), and H-19(D) through
(I)[ltrif][lsqbb])[rsqbb] serve a different purpose than the model
forms [rtrif] and model clauses[ltrif]. The samples illustrate
various ways of adapting the model forms to the individual
transactions described in the commentary to appendix H. The
deletions and rearrangements shown relate only to the specific
transactions described. As a result, the samples do not provide the
general protection from civil liability provided by the model forms
and clauses.
* * * * *
Appendix K to Part 226--[Total Annual Loan Cost Rate Computations for]
Reverse Mortgage [Transactions] [rtrif]Model Forms and Clauses[ltrif]
[rtrif]1. Permissible changes. i. Although use of the model
forms is not required, creditors using them properly will be deemed
to be in compliance with the regulation. Creditors may make certain
types of changes to the model forms and still be deemed to be in
compliance with the regulation, provided that the required
disclosures are made clearly and conspicuously. The model forms
aggregate disclosures into groups under specific headings. Changes
may not include rearranging the sequence of disclosures, for
instance, by rearranging which disclosures are provided under each
heading or by rearranging the sequence of the headings and grouping
of disclosures. Changes to the model forms may not be so extensive
as to affect the substance or clarity of the forms. Creditors making
revisions with that effect will lose their protection from civil
liability. Acceptable changes include, for example:
A. Using the first person, instead of the second person, in
referring to the borrower
B. Using ``borrower'' and ``creditor'' instead of pronouns
C. Incorporating certain state ``plain English'' requirements
D. Deleting inapplicable disclosures by whiting out, blocking
out, filling in ``N/A'' (not applicable) or ``0,'' crossing out,
leaving blanks, checking a box for applicable items, or circling
applicable items.
ii. Although creditors are not required to use a certain paper
size in disclosing the Sec. 226.33 disclosures, samples K-4, K-5,
and K-6 are designed to be printed on three 8\1/2\ x 11 inch sheets
of paper. A creditor may use larger sheets of paper, such as 8\1/2\
x 14 inch sheets of paper, or may use multiple pages. If the
disclosures are provided on two sides of a single sheet of paper,
the creditor must include a reference or references, such as ``SEE
BACK OF PAGE'' at the bottom of each page indicating that the
disclosures continue onto the back of the page. If the disclosures
are on two or more pages, a creditor may not include any intervening
information between portions of the disclosure. In addition, the
following formatting techniques were used in presenting the
information in the sample tables to ensure that the information is
readable:
A. A readable font style and font size (10-point Ariel font
style for body text, except for annual percentage rates shown in 16-
point type).
B. Sufficient spacing between lines of the text.
C. Standard spacing between words and characters. In other
words, the body text was not compressed to appear smaller than the
10-point type size.
D. Sufficient white space around the text of the information in
each row, by providing sufficient margins above, below and to the
sides of the text.
[[Page 58785]]
E. Sufficient contrast between the text and the background.
Generally, black text was used on white paper.
iii. The Board is not requiring creditors to use the above
formatting techniques in presenting information in the tabular
format (except for the 10-point and 16-point minimum font
requirements); however, the Board encourages creditors to consider
these techniques when disclosing information in the table to ensure
that the information is presented in a readable format.
2. Models K-1 through K-3. i. These model forms illustrate, in
the tabular format, the disclosures required generally under Sec.
226.33(c) and (d) for reverse mortgages. Creditors can use model K-1
for early open-end reverse mortgages disclosures required by Sec.
226.33(d)(1); model K-2 for account-opening open-end reverse
mortgage disclosures; and model K-3 for closed-end reverse
mortgages.
ii. Except as otherwise permitted, disclosures must be
substantially similar in sequence and format to model forms K-1
through K-3, as applicable.
3. Sample forms. Samples K-4 through K-6 serve a different
purpose than the model forms and model clauses. The samples
illustrate various ways of adapting the model forms to the
individual transactions described in the commentary to appendix K.
The deletions and rearrangements shown relate only to the specific
transactions described. As a result, the samples do not provide the
general protection from civil liability provided by the model forms
and clauses.
4. Sample K-4. This sample illustrates the early disclosures
under Sec. 226.33 for an open-end variable-rate reverse mortgage.
The appraised property value is $275,000, and the age of the
youngest consumer is 82. The consumer has not yet chosen the type of
payments to receive from the creditor. Under the creditor's reverse
mortgage the consumer may receive a line of credit, and the maximum
draw on the line of credit that the consumer could take at closing
is $186,974. The variable APR is 2.93%. There are no transactions
requirements or early termination fee and therefore they are not
shown. The consumer's liability is limited to the net proceeds of
the sale of the home, and the costs associated with the sale are
assumed to be 7%.
5. Sample K-5. This sample illustrates the account-opening
disclosures under Sec. 226.33 for an open-end variable-rate reverse
mortgage. It corresponds to the early disclosure Sample K-4, and
illustrates the situation where the consumer has chosen to receive
an initial advance of $12,000, a line of credit of $15,000, and a
monthly payment amount of $1,287.
6. Sample K-6. This sample illustrates the closed-end reverse
mortgage disclosures. The appraised property value is $120,000 and
the age of the youngest borrower is 62. The consumer may only
receive funds in the form of an initial advance at closing at
$55,242. The loan has a fixed simple interest rate of 5.56%. There
are no applicable fees other than those itemized in the disclosure
and therefore the disclosure regarding other fees is not shown. The
consumer's liability is limited to the net proceeds of the sale of
the home, and the costs associated with the sale are assumed to be
7%.
7. Model K-7. Model Clause K-7 is not included in the model
forms although it is mandatory for certain transactions. Creditors
using the model clause when applicable to a transaction are deemed
to be in compliance with the regulation with regard to that
disclosure. Model Clause K-7 illustrates, in the tabular format, the
disclosures required under Sec. 226.33(c)(8)(v) regarding shared-
equity or shared-appreciation disclosures applicable to reverse
mortgages subject to Sec. 226.33.[ltrif]
[1. General. The calculation of total annual loan cost rates
under appendix K is based on the principles set forth and the
estimation or ``iteration'' procedure used to compute annual
percentage rates under appendix J. Rather than restate this
iteration process in full, the regulation cross-references the
procedures found in appendix J. In other aspects the appendix
reflects the special nature of reverse mortgage transactions.
Special definitions and instructions are included where appropriate.
(b) Instructions and equations for the total annual loan cost
rate.
(b)(5) Number of unit-periods between two given dates.
1. Assumption as to when transaction begins. The computation of
the total annual loan cost rate is based on the assumption that the
reverse mortgage transaction begins on the first day of the month in
which consummation is estimated to occur. Therefore, fractional
unit-periods (used under appendix J for calculating annual
percentage rates) are not used.
(b)(9) Assumption for discretionary cash advances.
1. Amount of credit. Creditors should compute the total annual
loan cost rates for transactions involving discretionary cash
advances by assuming that 50 percent of the initial amount of the
credit available under the transaction is advanced at closing or, in
an open-end transaction, when the consumer becomes obligated under
the plan. (For the purposes of this assumption, the initial amount
of the credit is the principal loan amount less any costs to the
consumer under section 226.33(c)(1).)
(b)(10) Assumption for variable-rate reverse mortgages.
1. Initial discount or premium rate. Where a variable-rate
reverse mortgage transaction includes an initial discount or premium
rate, the creditor should apply the same rules for calculating the
total annual loan cost rate as are applied when calculating the
annual percentage rate for a loan with an initial discount or
premium rate (see the commentary to Sec. 226.17(c)).
(d) Reverse mortgage model form and sample form.
(d)(2) Sample form.
1. General. The ``clear and conspicuous'' standard for reverse
mortgage disclosures does not require disclosures to be printed in
any particular type size. Disclosures may be made on more than one
page, and use both the front and the reverse sides, as long as the
pages constitute an integrated document and the table disclosing the
total annual loan cost rates is on a single page.[rsqbb]
Appendix L--[rtrif]Reserved[ltrif][lsqbb]Assumed Loan Periods for
Computations of Total Annual Loan Cost Rates
1. General. The life expectancy figures used in appendix L are
those found in the U.S. Decennial Life Tables for women, as rounded
to the nearest whole year and as published by the U.S. Department of
Health and Human Services. The figures contained in appendix L must
be used by creditors for all consumers (men and women). Appendix L
will be revised periodically by the Board to incorporate revisions
to the figures made in the Decennial Tables.[rsqbb]
By order of the Board of Governors of the Federal Reserve
System, August 16, 2010.
Robert deV. Frierson,
Deputy Secretary of the Board.
Note: The following attachments A and B will not appear in the
Code of Federal Regulations.
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[[Page 58786]]
Attachment A
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[[Page 58787]]
[GRAPHIC] [TIFF OMITTED] TP24SE10.043
BILLING CODE C
[[Page 58788]]
Attachment B
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[FR Doc. 2010-20667 Filed 9-23-10; 8:45 am]
BILLING CODE P