[Federal Register Volume 76, Number 41 (Wednesday, March 2, 2011)]
[Rules and Regulations]
[Pages 11319-11324]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-4384]
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Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
Prices of new books are listed in the first FEDERAL REGISTER issue of each
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Federal Register / Vol. 76, No. 41 / Wednesday, March 2, 2011 / Rules
and Regulations
[[Page 11319]]
FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Regulation Z; Docket No. R-1392]
RIN No. AD 7100-AD54
Truth in Lending
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule; official staff commentary.
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SUMMARY: The Board is publishing a final rule to amend Regulation Z,
which implements the Truth in Lending Act (TILA). The final rule
implements Section 1461 of the recently enacted Dodd-Frank Wall Street
Reform and Consumer Protection Act. Section 1461 amends TILA to provide
a separate, higher rate threshold for determining when the Board's
escrow requirement applies to higher-priced mortgage loans that exceed
the maximum principal obligation eligible for purchase by Freddie Mac.
DATES: The final rule is effective on April 1, 2011, for covered loans
for which an application is received by a creditor on or after that
date.
FOR FURTHER INFORMATION CONTACT: Jamie Z. Goodson, Attorney, or Paul
Mondor, Senior Attorney, Division of Consumer and Community Affairs,
Board of Governors of the Federal Reserve System, Washington, DC 20551,
at (202) 452-2412 or (202) 452-3667. For users of Telecommunications
Device for the Deaf (TDD) only, contact (202) 263-4869.
SUPPLEMENTARY INFORMATION:
I. Background
A. 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, and administrative
sanction.
In 1994, Congress amended TILA by enacting the Home Ownership and
Equity Protection Act (HOEPA). The HOEPA amendments created special
substantive protections for consumers obtaining mortgage loans with
annual percentage rates (APRs) or total points and fees exceeding
prescribed thresholds. In addition, TILA Section 129(l)(2)(A), as added
by HOEPA, authorizes the Board to prohibit acts and practices the Board
finds to be unfair and deceptive in connection with mortgage loans. 15
U.S.C. 1639(l)(2)(A).
B. The 2008 HOEPA Final Rule
In July of 2008, the Board adopted final rules pursuant to the
Board's authority in Section 129(l)(2)(A). 73 FR 44522, July 30, 2008
(2008 HOEPA Final Rule). The 2008 HOEPA Final Rule defined a class of
``higher-priced mortgage loans'' and prohibited certain lending and
servicing practices in connection with such transactions. Among other
things, the Board prohibited extending a higher-priced mortgage loan
secured by a first lien unless an escrow account is established before
consummation for payment of property taxes and premiums for mortgage-
related insurance required by the creditor. See Sec. 226.35(b)(3).
Under the 2008 HOEPA Final Rule, a higher-priced mortgage loan is a
consumer credit transaction secured by the consumer's principal
dwelling with an APR that exceeds the average prime offer rate for a
comparable transaction, as of the date the transaction's interest rate
is set, by 1.5 or more percentage points for loans secured by a first
lien, or by 3.5 or more percentage points for loans secured by a
subordinate lien. See Sec. 226.35(a)(1).
C. The Dodd-Frank Act
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the Dodd-Frank Act) was signed into law.\1\ Section
1461 of the Dodd-Frank Act creates TILA Section 129D.\2\ TILA Section
129D substantially codifies the requirement in Regulation Z that escrow
accounts for taxes and insurance be established for first-lien higher-
priced mortgage loans, adopted by the Board as part of the 2008 HOEPA
Final Rule. As discussed above, the 2008 HOEPA Final Rule imposed the
escrow requirement on first-lien mortgage transactions having an APR
that exceeds the average prime offer rate for a comparable transaction
by 1.5 or more percentage points. The Dodd-Frank Act incorporates this
coverage test in new TILA Section 129D for loans that do not exceed the
maximum original principal obligation for a mortgage to be eligible for
purchase by Freddie Mac. TILA Section 129D(b)(3)(A) (to be codified at
15 U.S.C. 1639d(b)(3)(A)).
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\1\ Public Law 111-203, 124 Stat. 1376.
\2\ Public Law 111-203, Sec. 1461, 124 Stat. 1376, 2178 (to be
codified at 15 U.S.C. 1639D).
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For loans with an original principal obligation that exceeds the
applicable Freddie Mac maximum principal obligation, TILA Section 129D
requires escrow accounts only if the APR exceeds the applicable average
prime offer rate by 2.5 or more percentage points. TILA Section
129D(b)(3)(B) (to be codified at 15 U.S.C. 1639d(b)(3)(B)). The current
maximum principal obligation for a mortgage loan to be eligible for
purchase in 2011 by Freddie Mac is $417,000 for a single-family
property that is not located in a designated ``high-cost'' area.\3\
(Higher limits apply for mortgage loans secured by a property with two
to four residential units.) Thus, if the original principal obligation
for a mortgage loan secured by a single-family property in such an area
is $415,000, the determination of whether the loan is
[[Page 11320]]
subject to the escrow requirement in Sec. 226.35(b)(3) would be made
using an APR threshold of 1.5 percentage points over the applicable
average prime offer rate; by contrast, if the original principal
obligation is $420,000, the determination would be made using a
threshold of 2.5 percentage points over the applicable average prime
offer rate. Loans that are not eligible for purchase by Freddie Mac
because their original principal obligation is too large are widely
referred to in the mortgage market as ``jumbo'' mortgages. The term
``jumbo'' also is used in this final rule to refer to such loans.
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\3\ See Freddie Mac, Bulletin No. 2010-28, 2011 Loan Limits,
available at http://www.freddiemac.com/sell/guide/bulletins/pdf/bll1028.pdf.
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II. The Board's September 2010 Escrow Proposal
A. Summary of the September 2010 Escrow Proposal
On September 24, 2010, the Board published a proposed rule in the
Federal Register to implement TILA Section 129D(b)(3)(B), as enacted by
Section 1461 of the Dodd-Frank Act. See 75 FR 58505 (September 2010
Escrow Proposal). Accordingly, the Board proposed to raise the rate
threshold for coverage by the escrow account requirement for first-
lien, higher-priced ``jumbo'' mortgage loans. Specifically, the Board
proposed to require escrows for ``jumbo'' loans whose APR exceeds the
average prime offer rate for a comparable transaction, as of the date
the transaction's interest rate is set, by 2.5 or more percentage
points. The Board did not propose to implement other provisions of the
Dodd-Frank Act related to escrow accounts under the September 2010
Escrow Proposal. The Board is proposing rules to implement other
escrow-related provisions of the Dodd-Frank Act in a separate notice
published elsewhere in today's Federal Register.
B. Overview of Comments Received
The comment period on the September 2010 Escrow Proposal closed on
October 25, 2010. The Board received 15 comment letters in response to
the proposed rule, from creditors, loan originators, banking trade
associations, and state banking regulators. No comments were received
from consumers or consumer advocates. Commenters generally supported
the proposed increase in the coverage threshold for the escrow
requirement, for ``jumbo'' loans.
Several commenters, however, requested that the Board clarify that
only the dollar amount specified in the sixth sentence of Section
305(a)(2) of the Federal Home Loan Mortgage Corporation Act (FHLMCA),
12 U.S.C. 1454(a)(2), should be used in determining whether or not a
loan is a ``jumbo'' loan. (Currently, the amount specified in that
sentence as the maximum principal obligation for a loan secured by a
single-family residence is $417,000.) In particular, these commenters
stated that the higher maximum principal obligation set for ``high-
cost'' areas under Section 305(a)(2) should not be considered in
determining whether a loan is a ``jumbo'' loan. For example, if the
maximum principal obligation eligible for purchase by Freddie Mac in a
particular ``high-cost'' area were $500,000 for a single-family
residence, these commenters believe that a loan with a principal
obligation between $417,000 and $500,000 secured by a single-family
residence in that area should be classified as a ``jumbo'' loan subject
to the higher rate threshold for classification as a higher-priced
mortgage loan, even though Freddie Mac may purchase that loan.
Other commenters recommended exemptions from the escrow requirement
for higher-priced mortgage loans. Recommended exemptions included for:
(1) Loans a creditor holds in portfolio; (2) loans made by community
banks; (3) loans made in rural areas; and (4) small retail loans that
are first-lien loans because a consumer has paid off his larger
mortgage. Such exceptions are outside the scope of this rulemaking. The
Board is publishing elsewhere in today's Federal Register a proposed
rule that addresses several of those proposed exceptions.
III. Summary of the Final Rule
This final rule revises Sec. 226.35(b)(3), as proposed, to provide
a higher APR threshold for determining whether ``jumbo'' mortgage loans
secured by a first lien on a consumer's principal dwelling are higher-
priced mortgage loans for which an escrow account must be established.
As revised, the threshold for coverage of the escrow requirement for
``jumbo'' loans is 2.5 percentage points (rather than 1.5 percentage
points) in excess of the average prime offer rate for a comparable
transaction, as of the date the transaction's rate is set. Raising the
APR threshold applicable to ``jumbo'' loans eliminates the mandatory
escrow requirement for loans with an APR above the existing threshold
but below the new threshold. Creditors may, at their option, elect to
continue to use the 1.5 percentage point threshold for ``jumbo'' loans.
Section 226.35 and this final rule do not apply to open-end credit
plans subject to Sec. 226.5b or to loans to finance the initial
construction of a dwelling, temporary or ``bridge'' loans with a term
of 12 months or less, or reverse mortgages. See Sec. 226.35(a)(3).
This final rule is effective on April 1, 2011 for covered loans for
which an application is received on or after that date, as discussed in
detail below in Part VI of this SUPPLEMENTARY INFORMATION.
IV. Legal Authority
The Board amends Sec. 226.35(b)(3) pursuant to its authority under
TILA Section 105(a) to prescribe regulations to carry out the purposes
of TILA and to provide for such requirements, adjustments, and
exceptions as necessary or proper to effectuate the purposes of, to
prevent circumvention of, and facilitate compliance with TILA, as
discussed in detail below. See 15 U.S.C. 1604(a) (as revised).
V. Section-by-Section Analysis
Section 226.1 Authority, Purpose, Coverage, Organization, Enforcement
and Liability
1(d) Organization
Section 226.1(d) describes how Regulation Z is organized. Section
226.1(d)(5) describes Subpart E of Regulation Z, which this interim
final rule amends by revising Sec. 226.35(a)(1) and (b)(3)(v). Comment
1(d)(5)-1 is revised to add a new subpart 1(d)(5)-1.iii, stating that
this final rule is effective on April 1, 2011, for covered transactions
for which an application is received on or after April 1, 2011.
Section 226.35 Prohibited Acts or Practices in Connection With Higher-
Priced Mortgage Loans
35(a) Higher-Priced Mortgage Loans
35(a)(1)
As discussed below, the Board revises Sec. 226.35(b)(3) to provide
a higher threshold for determining whether escrow accounts must be
established for certain closed-end mortgage loans secured by a first
lien on the consumer's principal dwelling, pursuant to the Dodd-Frank
Act. As revised, the threshold for coverage of the escrow requirement
for ``jumbo'' loans is 2.5 percentage points (rather than the 1.5
percentage points generally applicable under Sec. 226.35(a)(1)) in
excess of the average prime offer rate for a comparable transaction, as
of the date the transaction's rate is set. The Board is making a
conforming amendment to Sec. 226.35(a)(1) to reflect this exception to
the general coverage test for higher-priced mortgage loans.
[[Page 11321]]
35(b) Rules for Higher-Priced Mortgage Loans
35(b)(3) Escrows
35(b)(3)(v) ``Jumbo'' Loans
The Board adds a new Sec. 226.35(b)(3)(v) to implement TILA
Section 129D(b)(3)(B), as enacted by Section 1461 of the Dodd-Frank
Act. Section 226.35(b)(3)(v) provides a higher threshold for
determining whether escrow accounts must be established for certain
closed-end mortgage loans secured by a first lien on a consumer's
principal dwelling. Currently, under Sec. 226.35(a)(1), such a loan is
considered a higher-priced mortgage loan and is subject to the escrow
requirement if its APR exceeds the average prime offer rate for a
comparable transaction, as of the date the transaction's rate is set,
by 1.5 or more percentage points. Pursuant to TILA Section
129D(b)(3)(B), for a closed-end, first-lien mortgage loan whose
original principal obligation exceeds the current maximum principal
obligation for loans eligible for purchase by Freddie Mac, the
applicable rate threshold is 2.5 percentage points or more above the
average prime offer rate for a comparable transaction, as of the date
the transaction's rate is set.
Comment 35(b)(3)(v)-1 clarifies that adjustments to the maximum
principal obligation that are made by the Federal Housing Finance
Agency (FHFA) pursuant to FHLMCA Section 305(a)(2) or by other federal
law will apply in determining whether a mortgage loan is a ``jumbo''
loan subject to the higher APR threshold under Sec. 226.35(b)(3)(v).
Comment 35(b)(3)(v)-2 clarifies that the higher APR threshold applies
solely in determining if a ``jumbo'' loan is subject to the escrow
requirement. The determination of whether ``jumbo'' first-lien loans
are subject to the other protections in Sec. 226.35, such as the
ability to repay requirements under Sec. 226.35(b)(1) and the
restrictions on prepayment penalties under Sec. 226.35(b)(2), would
continue to be based on the 1.5 percentage point threshold.
Adjustments pursuant to FHLMCA Section 305(a)(2). TILA Section
129D(b)(3)(B) provides that a separate, higher APR threshold applies to
a first-lien mortgage loan that exceeds the applicable maximum
principal obligation eligible for purchase by Freddie Mac, established
pursuant to the sixth sentence of FHLMCA Section 305(a)(2) (the
``general maximum principal obligation''). However, the sixth sentence
of FHLMCA Section 305(a)(2), as revised by the Housing and Economic
Recovery Act of 2008 (HERA), also provides that its principal
obligation limitations are subject to other limitations in that
paragraph.\4\ See 12 U.S.C. 1454(a)(2). Other limitations in that
paragraph include annual adjustments based on changes in the housing
price index maintained by FHFA and adjustments to increase the maximum
principal obligation for loans secured by property in ``high-cost''
areas. See 12 U.S.C. 1454(a)(2). The plain language of the sixth
sentence of FHLMCA Section 305(a)(2) incorporates by reference
limitations set by other sentences in Section 305(a)(2). The Board
believes, therefore, that adjustments made pursuant to Section
305(a)(2) should apply in determining whether a loan is a ``jumbo''
loan subject to the higher APR threshold for classification as a
higher-priced mortgage loan.
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\4\ Section 1124 of HERA revises Section 305(a)(2) of the
FHLMCA. See Public Law 110-289, 122 Stat. 2654, 2692.
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The Board believes this is also consistent with statutory intent,
because taking into account adjustments to the maximum principal
obligation will ensure similar treatment of all loans eligible for
purchase by Freddie Mac. The higher threshold for ``jumbo'' loans
reflects the higher price typically associated with loans that are not
eligible for purchase by Freddie Mac (or by Fannie Mae, which is
subject to the same limit on the maximum principal obligation). Using
the higher APR threshold for loans that are eligible for purchase by
Freddie Mac after adjustments to the maximum principal obligation
pursuant to FHLMCA Section 305(a)(2) would not be consistent with the
statutory intent.
Adjustments pursuant to other federal law. Legislation enacted by
Congress in 2009 and 2010 provides for further adjustments to the
maximum principal obligation eligible for purchase by Freddie Mac. In
light of declines in home values in certain areas, Congress provided in
that legislation that the maximum principal obligation eligible for
purchase by Freddie Mac shall be the greater of: (1) The maximum
principal obligation determined pursuant to FHLMCA Section 305(a)(2);
and (2) the maximum principal obligation established for 2008 under
Section 201 of the Economic Stimulus Act of 2008.\5\ The Board believes
such adjustments also should apply in determining if a loan is a
``jumbo'' loan for purposes of Sec. 226.35(b)(3)(v). The Board
believes such adjustments are made pursuant to Section 305(a)(2),
because they incorporate FHLMCA Section 305(a)(2) in the formula used
to determine the maximum principal obligation eligible for purchase by
Freddie Mac.
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\5\ See Public Law 111-242, Sec. 146, 124 Stat. 2607, 2615
(2010) (providing for adjustments under a continuing resolution);
Public Law 111-88, Sec. 167, 122 Stat. 2904, 2973 (2009) (same);
see also Public Law 110-185, Sec. 201, 122 Stat. 613, 620 (Feb. 13,
2008) (providing for adjustments under the Economic Stimulus Act).
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Nevertheless, even if the adjustments made pursuant to this
legislation are not deemed to be made pursuant to Section 305(a)(2),
the Board believes it is appropriate to use its authority under TILA
Section 105(a) to require consideration of such adjustments. 15 U.S.C.
1604(a). TILA Section 105(a) authorizes the Board to provide for such
requirements, adjustments, and exceptions for all or any class of
transactions as in the Board's judgment are necessary or proper to
effectuate the purposes of, to prevent circumvention or evasion of, or
to facilitate compliance with TILA. The Board believes it is necessary
and proper, to effectuate the purposes of TILA Section 129D(b)(3)(B),
to make adjustments consistent with the provisions of federal law other
than FHLMCA Section 305(a)(2) to ensure all loans eligible for purchase
by Freddie Mac are treated similarly for purposes of the escrow
requirements. Further, considering the additional adjustments made by
other federal laws is consistent with the language in TILA Section
129D(b)(3)(B), which states that the determination of whether or not a
loan is a ``jumbo'' loan subject to a higher APR threshold shall be
based on the maximum principal obligation ``in effect'' for Freddie Mac
as of the date the transaction's rate is set. The maximum principal
obligation in effect is the obligation FHFA establishes pursuant to
both FHLMCA Section 305(a)(2) and other federal law.
The Board also believes those adjustments are necessary and proper
to facilitate compliance with TILA Section 129D(b)(3)(B). Considering
only adjustments made under FHLMCA Section 305(a)(2) would require
creditors that sell loans to Freddie Mac to use one dollar limit to
ascertain what rate threshold to apply in determining whether a loan is
subject to the escrow requirements and a different limit to determine
whether they may sell loans to Freddie Mac. The same burden would apply
for creditors that sell loans to Fannie Mae, which is subject to the
same maximum principal obligation limits. Considering adjustments under
both FHLMCA Section 305(a)(2) and other applicable federal law would
facilitate compliance by eliminating that burden.
[[Page 11322]]
For the reasons discussed above, and pursuant to its authority
under TILA Section 105(a), the final rule provides that FHFA's
adjustments to the general maximum principal obligation stated in
FHLMCA Section 305(a)(2) which are made pursuant to other applicable
federal law shall be considered in determining whether a loan is a
``jumbo'' loan subject to Sec. 226.35(b)(3)(v). See comment
35(b)(3)(v)-1.
VI. Effective Date of Final Rule
The Board is changing the escrow requirement's coverage threshold
to implement the statutory amendment made by the Dodd-Frank Act, as
discussed above. The amendment relieves mortgage creditors of
compliance with the escrow requirement for certain ``jumbo'' loans.
When relief is granted from Regulation Z's escrow requirement, the
affected loans could become subject to any state or local laws that
prohibit mandatory escrow accounts. As a result, some creditors might
need time to make the system changes necessary to comply with state or
local laws. Accordingly, the Board sought comment on the amount of time
necessary for creditors to implement the change in their systems and
procedures.
Almost all commenters that discussed the implementation period
stated that the Board should allow creditors to immediately use the
higher APR threshold for classification of a ``jumbo loan'' as a
higher-priced mortgage loan. One banking trade association stated that
creditors easily can adjust their systems to stop escrowing for such
loans. Most of the commenters that addressed the effective date stated
that compliance with the higher threshold should be optional until
final rules are issued to implement other escrow-related requirements
under the Dodd-Frank Act. Those commenters stated that creditors would
prefer to adjust their training and systems to implement all escrow-
related statutory and regulatory requirements at one time. Some of
those commenters stated that, at a minimum, compliance should be
optional for a period of time; the recommended periods ranged between
six months and one year. An industry trade association and a bank
stated that the effective date for the final rule should be delayed
until other escrow-related requirements are implemented. The industry
trade association suggested, in the alternative, at least a six-month
delay. The industry trade association also stated that creditors should
not have to adjust their systems to comply with state or local laws
prohibiting mandatory escrow accounts and again subsequently to comply
with Board regulations.
The Dodd-Frank Act does not provide an effective date specifically
for rules implementing TILA Section 129D(b)(3)(B). The Riegle Community
Development and Regulatory Improvement Act of 1994 requires that agency
regulations that impose additional reporting, disclosure, and other
requirements on insured depository institutions take effect on the
first day of a calendar quarter following publication in final form. 12
U.S.C. 4802(b). Consistent with the Riegle Community Development Act,
this final rule is effective on April 1, 2011, for covered loans for
which an application is received by a creditor on or after that date.
See comment 1(d)(5)-1.iii. The Board believes that this time period
will afford creditors sufficient time to adjust their systems to
eliminate escrow accounts for covered loans to comply with any
applicable state or local laws that prohibit requiring an escrow
account or imposing other escrow requirements.
Under this final rule, creditors can choose to continue to escrow
for ``jumbo'' loans with an APR below the new threshold (subject to
applicable state or local laws). This final rule does not require
termination of any existing escrow account.
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
final rule under the authority delegated to the Board by the Office of
Management and Budget (OMB). The rule contains no collections of
information under the PRA. See 44 U.S. C. 3502(3). Accordingly, there
is no paperwork burden associated with the rule.
VIII. Final Regulatory Flexibility Analysis
In accordance with Section 4 of the Regulatory Flexibility Act
(RFA), 5 U.S.C. 604, the Board is publishing a final regulatory
flexibility analysis for the amendments to Regulation Z. The RFA
generally requires an agency to assess the impact a rule is expected to
have on small entities. The RFA requires an agency either to provide a
final regulatory flexibility analysis with a final rule or certify that
the final rule will not have a significant economic impact on a
substantial number of small entities. Under standards the Small
Business Administration (SBA) sets, the threshold for an entity to be
considered ``small'' is $175 million or less in assets for banks and
other depository institutions and $7 million or less in revenues for
non-bank mortgage lenders.\6\
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\6\ 13 CFR 121.201.
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A. Statement of the Need for, and Objectives of, the Final 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. 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 Board adopted the requirement to establish an escrow
account for higher-priced mortgage loans under 2008 HOEPA Final Rule
pursuant to this mandate.
The Dodd-Frank Act amended TILA to increase the threshold for
coverage of the escrow requirement, for certain loans ineligible for
purchase by Freddie Mac because their original principal obligation is
too high (``jumbo'' loans), as discussed above in the SUPPLEMENTARY
INFORMATION. This final rule implements that change by amending
Regulation Z. These amendments are made in furtherance of the Board's
responsibility to prescribe regulations to carry out the purposes of
TILA. The legal basis for the final rule is in Section 105(a) of TILA.
15 U.S.C. 1604(a).
B. Summary of Significant Issues Raised by Comments in Response to the
Initial Regulatory Flexibility Analysis
In accordance with Section 3(a) of the RFA, 5 U.S.C. 603(a), the
Board prepared an initial regulatory flexibility analysis (IRFA) in
connection with the proposed rule. The IRFA stated that the Board
believed the proposed rule would not have a significant economic effect
on a substantial number of small entities. The Board requested comment
on the IRFA and on any costs, compliance requirements, or changes in
operating procedures arising from the application of the proposed rule
to small businesses.
[[Page 11323]]
No commenter specifically addressed the Board's IRFA, but several
commenters stated that compliance with recent statutory and regulatory
changes to requirements for mortgage lending, including amendments to
TILA and Regulation Z, is burdensome in the aggregate. Most commenters
that discussed the effective date stated that creditors should be able
to use the higher annual percentage rate threshold immediately, to
provide relief in connection with ``jumbo'' loans that would be subject
to the higher threshold for the escrow requirement. Those commenters
generally recommended, however, that compliance with the final rule be
optional until the Board implements other escrow-related requirements
under the Dodd-Frank Act. An industry trade association and a bank
opposed an immediate effective date for the final rule. Both commenters
that recommended allowing creditors to use the higher threshold
immediately and commenters that recommended delaying the effective date
of the rule suggested that, at a minimum, the Board make compliance
optional for a period of time. Recommended periods ranged from 6 months
to one year.
As discussed above in Part VI of the SUPPLEMENTARY INFORMATION, the
Board believes that the effective date of April 1, 2011, provides
sufficient time for creditors to adjust their training and systems to
apply the higher APR threshold for ``jumbo'' loans. The rule is
effective on that date for loans where the creditor receives an
application on or after April 1, 2011. Escrow accounts typically are
established when the loan is consummated some time after the
application is processed and approved. Further, creditors can choose to
continue to escrow for ``jumbo'' loans with an APR below the new
threshold, subject to applicable state or local laws prohibiting
mandatory escrow or imposing other escrow requirements. If a creditor
elects not to apply the higher APR threshold to such loans, it is
likely that few or no training or systems changes will be necessary.
C. Description and Estimate of Small Entities to Which the Final Rule
Applies
The final rule applies to all institutions and entities that engage
in closed-end lending secured by a consumer's principal dwelling. TILA
and Regulation Z have broad applicability to individuals and businesses
that originate even small numbers of home-secured loans. See Sec.
226.1(c)(1). Using data from Reports of Condition and Income (Call
Reports) of depository institutions and certain subsidiaries of banks
and bank holding companies and data reported under the Home Mortgage
Disclosure Act (HMDA), the Board can estimate the approximate number of
small entities that would be subject to the rules. For the majority of
HMDA respondents that are not depository institutions, however, exact
revenue information is not available.
Based on the best information available, the Board makes the
following estimate of small entities that are affected by this final
rule: According to September 2010 Call Report data, approximately 8,669
small depository institutions would be subject to the rule.
Approximately 15,627 depository institutions in the United States filed
Call Report data, approximately 10,993 of which had total domestic
assets of $175 million or less and thus were considered small entities
for purposes of the RFA. Of the 3,788 banks, 507 thrifts, 6,632 credit
unions, and 66 branches of foreign banks that filed Call Report data
and were considered small entities, 3,667 banks, 479 thrifts, 4,520
credit unions, and 3 branches of foreign banks, totaling 8,669
institutions, extended mortgage credit. For purposes of this Call
Report analysis, thrifts include savings banks, savings and loan
entities, co-operative banks and industrial banks. Further, 1,303 non-
depository institutions (independent mortgage companies, subsidiaries
of a depository institution, or affiliates of a bank holding company)
filed HMDA reports in 2010 for 2009 lending activities. Based on the
small volume of lending activity reported by these institutions, most
are likely to be small entities.
D. Reporting, Recordkeeping, and Other Compliance Requirements
The changes to compliance requirements that the final rule makes
are described in the SUPPLEMENTARY INFORMATION. The effect of the
revisions to Regulation Z on small entities is minimal because the
revisions bring about burden relief; certain mortgage loans that
otherwise would be subject to the escrow account requirement in Sec.
226.35(b)(3) are relieved of that requirement. To take advantage of
that relief, some small entities will need to modify their home-secured
credit origination processes once to implement the revised coverage
test. The precise costs to small entities of updating their systems 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 originate mortgage loans and
test them for ``higher-priced mortgage loan'' coverage.
E. Steps Taken To Minimize the Economic Impact on Small Entities
The final rule implements a specific numerical adjustment to an
annual percentage rate (APR) threshold mandated by Section 1461 the
Dodd-Frank Act for ``jumbo'' loans, which limits the Board's
flexibility to establish alternative APR thresholds. The higher APR
threshold may be used in connection with a ``jumbo'' loan, that is, a
loan with an original principal obligation that exceeds the maximum
principal obligation for loans eligible for purchase by Freddie Mac. As
discussed above in Part V of the SUPPLEMENTARY INFORMATION, the Board
believes that, under the Dodd-Frank Act, loans are ``jumbo'' loans for
purposes of TILA Section 129D if they are ``jumbo'' loans ineligible
for purchase by Freddie Mac because their original principal obligation
is too high. Some commenters recommended that the Board construe
Section 1461 of the Dodd-Frank Act narrowly to consider only the
general maximum principal obligation for loans eligible for purchase by
Freddie Mac, despite the fact that the maximum principal obligation is
higher in certain high-cost areas.
The Board is not adopting that suggested alternative. As discussed
in greater detail in Part V of the SUPPLEMENTARY INFORMATION, the Board
believes that the Dodd-Frank Act requires consideration of adjustments
to the general maximum principal obligation made by the Federal Housing
Finance Agency (FHFA) pursuant to Section 305(a)(2) of the Federal Home
Loan Mortgage Corporation Act (FHLMCA). Further, the Board believes
that it is necessary to consider additional adjustments FHFA makes
pursuant to other applicable federal law to effectuate the purposes of
and facilitate compliance with TILA, as discussed above.
List of Subjects in 12 CFR Part 226
Advertising, Consumer protection, Federal Reserve System,
Mortgages, Reporting and recordkeeping requirements, Truth in lending.
Authority and Issuance
For the reasons set forth in the preamble, the Board amends
Regulation Z, 12 CFR part 226, as set forth below:
PART 226--TRUTH IN LENDING (REGULATION Z)
0
1. The authority citation for part 226 is revised 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,
[[Page 11324]]
123 Stat. 1734; Pub. L. 111-203, 124 Stat. 1376.
Subpart E--Special Rules for Certain Home Mortgage Transactions
0
2. Section 226.35 is amended by revising paragraph (a)(1) and adding
paragraph (b)(3)(v) 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,
except as provided in paragraph (b)(3)(v) of this section, a higher-
priced mortgage loan is a consumer credit transaction secured by the
consumer's principal dwelling with an annual percentage rate 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.
* * * * *
(b) * * *
(3) * * *
(v) ``Jumbo'' loans. For purposes of this Sec. 226.35(b)(3), for a
transaction with a principal obligation at consummation that exceeds
the limit in effect as of the date the transaction's interest rate is
set for the maximum principal obligation eligible for purchase by
Freddie Mac, the coverage threshold set forth in paragraph (a)(1) of
this section for loans secured by a first lien on a dwelling shall be
2.5 or more percentage points greater than the applicable average prime
offer rate.
* * * * *
0
3. In Supplement I to Part 226:
0
A. Under Section 226.1--Authority, Purpose, Coverage, Organization,
Enforcement and Liability, new paragraph 1(d)(5)-1.iii is added.
0
B. Under Section 226.35--Prohibited Acts or Practices in Connection
With Higher-Priced Mortgage Loans, 35(b) Rules for higher-priced
mortgage loans, 35(b)(3) Escrows, new heading 35(b)(3)(v) ``Jumbo''
loans and new paragraphs 1 and 2 are added.
Supplement I to Part 226--Official Staff Interpretations
* * * * *
Subpart A--General
Section 226.1--Authority, Purpose, Coverage, Organization,
Enforcement and Liability
Paragraph 1(d)(5).
1. Effective dates.
i. * * *
ii. * * *
iii. The final rule revising escrow requirements under Sec.
226.35(b)(3) published on March 2, 2011 applies to certain closed-
end extensions of consumer credit secured by the consumer's
principal dwelling. See Sec. 226.35(a). Covered transactions for
which an application is received by a creditor on or after April 1,
2011 are subject to Sec. 226.35(b)(3), as revised.
* * * * *
Subpart E--Special Rules for Certain Home Mortgage Transactions
* * * * *
Section 226.35--Prohibited Acts or Practices in Connection With
Higher-Priced Mortgage Loans
* * * * *
35(b) Rules for higher-priced mortgage loans.
* * * * *
35(b)(3) Escrows.
* * * * *
35(b)(3)(v) ``Jumbo'' loans.
1. Special threshold for ``jumbo'' loans. For purposes of the
escrow requirement in Sec. 226.35(b)(3) only, the coverage
threshold stated in Sec. 226.35(a)(1) for first-lien loans (1.5 or
more percentage points greater than the average prime offer rate)
does not apply to a loan with a principal obligation that exceeds
the limit in effect as of the date the loan's rate is set for the
maximum principal obligation eligible for purchase by Freddie Mac
(``jumbo'' loans). The Federal Housing Finance Agency (FHFA)
establishes and adjusts the maximum principal obligation pursuant to
12 U.S.C. 1454(a)(2) and other provisions of federal law.
Adjustments to the maximum principal obligation made by FHFA apply
in determining whether a mortgage loan is a ``jumbo'' loan to which
the separate coverage threshold in Sec. 226.35(b)(3)(v) applies.
2. Escrow requirements only. Under Sec. 226.35(b)(3)(v), for
``jumbo'' loans, the annual percentage rate threshold is 2.5 or more
percentage points greater than the average prime offer rate. This
threshold applies solely in determining whether a ``jumbo'' loan is
subject to the escrow requirement of Sec. 226.35(b)(3). The
determination of whether ``jumbo'' first-lien loans are subject to
the other protections in Sec. 226.35, such as the ability to repay
requirements under Sec. 226.35(b)(1) and the restrictions on
prepayment penalties under Sec. 226.35(b)(2), is based on the 1.5
percentage point threshold stated in Sec. 226.35(a)(1).
* * * * *
By order of the Board of Governors of the Federal Reserve
System, February 23, 2011.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 2011-4384 Filed 3-1-11; 8:45 am]
BILLING CODE 6210-01-P