TILA: Preamble

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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1026

[Docket No. CFPB-2012-0033]

RIN 3170-AA14

2012 Truth in Lending Act (Regulation Z) Mortgage Servicing

Agency: Bureau of Consumer Financial Protection.

Action: Proposed rule with request for public comment.

Summary: The Bureau of Consumer Financial Protection (the Bureau or CFPB) is proposing to amend Regulation Z, which implements the Truth in Lending Act (TILA), and the official interpretation of the regulation. The proposed amendments implement the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act or DFA) provisions regarding mortgage loan servicing. Specifically, this proposal implements Dodd Frank Act sections addressing initial rate adjustment notices for adjustable-rate mortgages (ARMs), periodic statements for residential mortgage loans, and prompt crediting of mortgage payments and response to requests for payoff amounts. The proposed revisions also amend current rules governing the scope, timing, content, and format of current disclosures to consumers occasioned by the interest rate adjustments of their variable-rate transactions.

Published elsewhere in today’s Federal Register, the Bureau proposes companion regulations regarding mortgage servicing through amendments to Regulation X, which implements the Real Estate Settlement Procedures Act (RESPA).

Dates: Comments must be received on or before October 9, 2012, except that comments on the Paperwork Reduction Act analysis in part IX of the Federal Register notice must be received on or before November 16, 2012.

Addresses: You may submit comments identified by Docket No. CFPB-2012-0033 or RIN 3170-AA14, by any of the following methods:

  • Electronic: http://www.regulations.gov. Follow the instructions for submitting comments.
  • Mail/Hand Delivery/Courier: Monica Jackson, Office of the Executive Secretary, Bureau of Consumer Financial Protection, 1700 G Street, NW, Washington, DC 20552

Instructions: All submissions must include the agency name and docket number or Regulatory Information Number (RIN) for this rulemaking. In general, all comments received will be posted without change to http://www.regulations.gov. In addition, comments will be available for public inspection and copying at 1700 G Street, NW, Washington, DC 20552 on official business days between the hours of 10 a.m. and 5 p.m. Eastern Time. You can make an appointment to inspect the documents by telephoning (202) 435-7275.

All comments, including attachments and other supporting materials, will become part of the public record and subject to public disclosure. Sensitive personal information, such as account numbers or social security numbers, should not be included. Comments will not be edited to remove any identifying or contact information.

e-Rulemaking Initiative: The Bureau has also partnered with the Cornell e-Rulemaking Initiative (CeRI) on a pilot project, Regulation Room, to use different web technologies and approaches to enhance public understanding and participation in Bureau rulemakings and to evaluate the advantages and disadvantages of these techniques. The TILA and RESPA proposed rulemakings on mortgage servicing are the subject of the project. The Bureau has undertaken this project to increase effective public involvement in the rulemaking process and strongly encourages all parties interested in this rulemaking to visit the Regulation Room website, http://www.archive.regulationroom.org, to learn about the Bureau’s proposed mortgage servicing rules and the rulemaking process, to discuss the issues in the rules with other persons and groups, and to participate in drafting a summary of that discussion that CeRI will submit to the Bureau.

Note that Regulation Room is sponsored by CeRI, and is not an official United States Government website. Participating in the discussion on that site will not result in individual formal comments that will be included in the Bureau’s rulemaking record. If you would like to add a formal comment, please do so through the means identified above. The Bureau anticipates that CeRI will submit to the Bureau’s rulemaking docket a summary of the discussion that occurs on the Regulation Room site and that participants will have a chance to review a draft and suggest changes before the summary is submitted. For questions about this project, please contact Whitney Patross, Attorney, Office of Regulations, at (202) 435-7700.

FOR FURTHER INFORMATION CONTACT: Regulation Z (TILA): Whitney Patross, Attorney and Marta Tanenhaus, Senior Counsel at (202) 435-7700; Office of Regulations; Division of Research, Markets, and Regulations; Bureau of Consumer Financial Protection; 1700 G Street, NW; Washington, DC 20552.
Regulation X (RESPA): Jane Gao, Mitchell E. Hochberg, and Michael Scherzer, Counsels at (202) 435-7700; Office of Regulations; Division of Research, Markets, and Regulations; Bureau of Consumer Financial Protection; 1700 G Street, NW; Washington, DC 20552.

Table of Contents

I. Overview

A. Background
B. Scope of coverage
C. Summary
D. Small servicers
E. Effective date

II. Background

A. Overview of the Mortgage Servicing Market and Market Failures
B. Mortgage Servicing Consumer Protection Regulation before the Recent Crisis
C. The National Mortgage Settlement and Other Regulatory Actions
D. The Statutory Requirements and Additional Proposals

III. Summary of Statute and Rulemaking Process

A. Overview of the Statute
B. Outreach and Consumer Testing
C. Other Dodd-Frank Act Mortgage Related Rulemakings

IV. Discussion of Major Proposed Revisions

A. Current and Proposed Interest Rate Adjustment Disclosures
B. Proposed Rule Regarding Prompt Crediting of Mortgage Payments and Response to Requests for Payoff Amounts
C. Proposed Rule Regarding Periodic Statements

V. Legal Authority

VI.Section-by-Section Analysis

A. Regulation Z

Section 1026.17 General Disclosure Requirements

17(a)Form of Disclosures

17(a)(1)

17(b) Time of Disclosures

17(c) Basis of Disclosures and Use of Estimates

17(c)(1)

Section 1026.18 Content of Disclosures

18(f) Variable Rate

18(f)-1

Section 1026.19 Certain Mortgage and Variable-Rate Transactions

19(b) Certain Variable Rate Transactions

19(b)-4 Other Variable-Rate Regulations

19(b)-5.i.C Certain Mortgage and Variable-Rate Transactions

19(b)(2)(xi)-1 Adjustment Notices

Section 1026.20 Subsequent Disclosure Requirements

20(c) Rate Adjustments

20(c)(1) Coverage of Rate Adjustment Disclosures

20(c)(1)(i) In General
20(c)(1)(ii) Exceptions

20(c)(2) Timing and Content of Rate Adjustment Disclosures

20(c)(2)(i) Statement Regarding Changes to Interest Rate and Payment
20(c)(2)(ii) Table with Current and New Interest Rates and Payments
20(c)(2)(iii) Explanation of How the Interest Rate is Determined
20(c)(2)(iv) Rate Limits and Unapplied Carryover Interest
20(c)(2)(v) Explanation of How the New Payment is Determined
20(c)(2)(vi) Interest-Only and Negative-Amortization Stmt & Pmt
20(c)(2)(vii) Prepayment Penalty

20(c)(3) Format of Disclosures

20(c)(3)(i) All Disclosures in Tabular Form
20(c)(3)(ii) Format of Interest Rate and Payment Table

20(d) Initial Rate Adjustments

20(d)(1) Coverage of the Initial Rate Adjustment Disclosures

20(d)(1)(i) In General
20(d)(1)(ii) Exceptions

20(d)(2) Content of Initial Rate Adjustment Disclosures

20(d)(2)(i) Date of the Disclosure
20(d)(2)(ii) Statement Regarding Change to Interest Rate and Payment
20(d)(2)(iii) Table with Current and New Interest Rates and Payments
20(d)(2)(iv) Explanation of How the Interest Rate is Determined
20(d)(2)(v) Rate Limits
20(d)(2)(vi) Explanation of How the New Payment is Determined
20(d)(2)(vii) Interest-Only and Negative-Amortization Stmt & Pmt
20(d)(2)(viii) List of Alternatives
20(d)(2)(ix) Prepayment Penalty
20(d)(2)(x) Telephone Number of Creditor, Assignee, or Servicer
20(d)(2)(xi) Contact Information for Government Agencies and Counseling Agencies or Programs

20(d)(3) Format of Initial Rate Adjustment Disclosures

20(d)(3)(i) All Disclosures in Tabular Form, Except the Date
20(d)(3)(ii) Format of Date of Disclosure
20(d)(3)(iii) Format of Interest Rate and Payment Table

Section 1026.36 Prohibited Acts or Practices in Connection with Credit Secured by a Dwelling

36(c)Servicing Practices

36(c)(1)(i) Full Contractual Payments
36(c)(1)(ii) Partial Payments
36(c)(1)(iii) Non-conforming payments
36(c)(2) Prohibition on Pyramiding of Late Fees
36(c)(3) Payoff Statements

Section 1026.41 Periodic Statements for Mortgage Loans

41(a) In general

41(b) Timing of the Periodic Statement

41(c) Form of the Periodic Statement

41(d) Content and Layout of the Periodic Statement

41(d)(1) Amount Due
41(d)(2) Explanation of Amount Due
41(d)(3) Past Payment Breakdown
41(d)(4) Transaction Activity
41(d)(5) Messages
41(d)(6) Contact information
41(d)(7) Account Information
41(d)(8) Delinquency Notice

41(e) Exemptions

41(e)(1) Reverse Mortgages
41(e)(2) Time Shares
41(e)(3) Coupon Book Exemption
41(e)(4) Small Servicer Exemption

Appendix H to Part 1026

Appendix H-4(D) to Part 1026

Appendices G and H – Open-End and Closed-End Model Forms and Clauses

Appendix H – Closed Model Forms and Clauses-7(i)

SUPPLEMENTARY INFORMATION:

I. Overview

A. Background:

The recent financial crisis exposed pervasive consumer protection problems across major segments of the mortgage servicing industry. As millions of borrowers fell behind on their loans, many servicers failed to provide the level of service necessary to serve the needs of those borrowers. Many servicers simply had not made the investments in resources and infrastructure necessary to service large numbers of delinquent loans. Existing weaknesses in servicer practices, including inadequate recordkeeping and document management and lack of oversight of service providers, made it harder to sort out borrower problems to achieve optimal results. In addition, many servicers took short cuts that made things even worse. As one review of fourteen major servicers found, companies “emphasize[d] speed and cost efficiency over quality and accuracy” in their foreclosure processes.[1]

The Dodd-Frank Act (Public Law 111-203, July 21, 2010) adopts several new servicing protections.[2] The Bureau has the authority to promulgate regulations to implement the new servicing protections. These changes will significantly improve disclosures to make it easier for consumers to monitor their mortgage loans and servicers’ activities. The changes also address critical servicer practices, including error resolution, prompt crediting of payments, and “force-placing” insurance where borrowers have allowed their hazard insurance policies to lapse.

The Dodd-Frank Act also gives the Bureau discretionary authority to develop additional servicing rules. The Bureau proposes to use this authority to adopt requirements relating to reasonable information management policies and procedures, early intervention with delinquent borrowers, continuity of contact, and procedures for evaluating and responding to loss mitigation applications when the servicer makes loss mitigation options available in the ordinary course of business. These proposals address fundamental problems that underlie many consumer complaints and recent regulatory and enforcement actions. The Bureau believes these changes will reduce avoidable foreclosures and improve general customer service. The proposals cover nine major topics, as summarized below.

The Bureau’s proposal is split into two parts because Congress imposed some requirements under TILA and some under RESPA.[3] This proposed rule would amend Regulation Z, which implements TILA, to implement provisions concerning adjustable-rate mortgage (ARM) disclosures, payoff statements, and payment crediting under sections 1418, 1420, and 1464 of the Dodd-Frank Act and to harmonize similar existing requirements.

B. Scope of Coverage.

The proposed rules generally apply to closed-end mortgage loans, with certain exceptions. Under the proposed amendments to Regulation X, open-end lines of credit and certain other loans, such as construction loans and business-purpose loans, are excluded. Under the proposed amendments to Regulation Z, the periodic statement and ARMs disclosure provisions apply only to closed-end mortgage loans, but the prompt crediting and payoff statement provisions apply both to open-end and closed-end mortgage loans. In addition, reverse mortgages and timeshares are excluded from the periodic statement requirement, and certain construction loans are excluded from the ARM disclosure requirements. As discussed below, the Bureau is seeking comment on whether to exempt small servicers from certain requirements or modify certain requirements for small servicers.

C. Summary.

The proposals cover nine major topics, summarized below. More details can be found in the proposed rules, which are split into two notices issued under TILA and RESPA, respectively.

1. Periodic billing statements. The Dodd-Frank Act generally mandates that servicers of closed-end residential mortgage loans (other than reverse mortgages) must send a periodic statement for each billing cycle. These statements must meet the timing, form, and content requirements provided for in the rule. The proposal contains sample forms that servicers could use. The periodic statement requirement generally would not apply for fixed-rate loans if the servicer provides a coupon book, so long as the coupon book contains certain information specified in the rule and certain other information is made available to the consumer. The proposal also includes an exception for small servicers that service 1,000 or fewer mortgage loans and service only mortgage loans that they originated or own.

2. Adjustable-rate mortgage interest-rate adjustment notices. Servicers would have to provide a consumer whose mortgage has an adjustable rate with a notice 60 to 120 days before an adjustment which causes the payment to change. The servicer would also have to provide an earlier notice 210 to 240 days prior to the first rate adjustment. This first notice may contain an estimate of the rate and payment change. Other than this initial notice, servicers would no longer be required to provide an annual notice if a rate adjustment does not result in an increase in the monthly payment. The proposal contains model and sample forms that servicers could use.

3. Prompt payment crediting and payoff payments. As required by the Dodd-Frank Act, servicers must promptly credit payments from borrowers, generally on the day of receipt. If a servicer receives a payment that is less than a full contractual payment, the payment may be held in a suspense account. When the amount in the suspense account covers a full installment of principal, interest, and escrow (if applicable), the proposal would require the servicer to apply the funds to the oldest outstanding payment owed. A servicer also would be required to send an accurate payoff balance to a consumer no later than seven business days after receipt of a written request from the borrower for such information.

4. Force-placed insurance. As required by the Dodd-Frank Act, servicers would not be permitted to charge a borrower for force-placed insurance coverage unless the servicer has a reasonable basis to believe the borrower has failed to maintain hazard insurance and has provided required notices. One notice to the borrower would be required at least 45 days before charging for forced-place insurance coverage, and a second notice would be required no earlier than 30 days after the first notice. The proposal contains model forms that servicers could use. If a borrower provides proof of hazard insurance coverage, then the servicer would be required to cancel any force-placed insurance policy and refund any premiums paid for periods in which the borrower’s policy was in place. In addition, if a servicer makes payments for hazard insurance from a borrower’s escrow account, a servicer would be required to continue those payments rather than force-placing a separate policy, even if there is insufficient money in the escrow account. The rule would also provide that charges related to forced place insurance (other than those subject to State regulation as the business of insurance or authorized by federal law for flood insurance) must relate to a service that was actually performed. Additionally, such charges would have to bear a reasonable relationship to the servicer’s cost of providing the service.

5. Error resolution and information requests. Pursuant to the Dodd-Frank Act, servicers would be required to meet certain procedural requirements for responding to information requests or complaints of errors. The proposal defines specific types of claims which constitute an error, such as a claim that the servicer misapplied a payment or assessed an improper fee. A borrower could assert an error either orally or in writing. Servicers could designate a specific phone number and address for borrowers to use. Servicers would be required to acknowledge the request or complaint within five days. Servicers would have to correct or respond to the borrower with the results of the investigation, generally within 30 to 45 days. Further, servicers generally would be required to acknowledge borrower requests for information and either provide the information or explain why the information is not available within a similar amount of time. A servicer would not be required to delay a scheduled foreclosure sale to consider a notice of error unless the error relates to the servicer’s improperly proceeding with a foreclosure sale during a borrower’s evaluation for alternatives to foreclosure.

6. Information management policies and procedures. Servicers would be required to establish reasonable information management policies and procedures. The reasonableness of a servicer’s policies and procedures would take into account the servicer’s size, scope, and nature of its operations. A servicer’s policies and procedures would satisfy the rule if the servicer regularly achieves the document retention and servicing file requirements, as well as certain objectives specified in the rule. Examples of such objectives include providing accurate and timely information to borrowers and the courts or enabling servicer personnel to have prompt access to documents and information submitted in connection with loss mitigation applications. In addition, a servicer must retain records relating to each mortgage until one year after the mortgage is discharged or servicing is transferred and must create a mortgage servicing file for each loan containing certain specified documents and information.

7. Early intervention with delinquent borrowers. Servicers would be required to make good faith efforts to notify delinquent borrowers of loss mitigation options. If a borrower is 30 days late, the proposal would require servicers to make a good faith effort to notify the borrower orally and to let the borrower know that loss mitigations options may be available. If the borrower is 40 days late, the servicer would be required to provide the borrower with a written notice with certain specific information, including examples of loss mitigation options available, if applicable, and information on how to obtain more information about loss mitigation options. The notice would also provide information to the borrower about the foreclosure process. The rule contains model language servicers could use for these notices.

8. Continuity of contact with delinquent borrowers. Servicers would be required to provide delinquent borrowers with access to personnel to assist them with loss mitigation options where applicable. The proposal would require servicers to assign dedicated contact personnel for a borrower no later than five days after providing the early intervention notice. Servicers would be required to establish reasonable policies and procedures designed to ensure that the servicer personnel perform certain specified functions where applicable, such as access the borrower’s records and provide the borrower with information about how and when to apply for a loss mitigation option and about the status of the application.

9. Loss mitigation procedures. Servicers that offer loss mitigation options to borrowers would be required to implement procedures to ensure that complete loss mitigation applications are reasonably evaluated before proceeding with a scheduled foreclosure sale. The proposal would require servicers to exercise reasonable diligence to secure information or documents required to make an incomplete loss mitigation application complete. In certain circumstances, this could include notifying the borrower within five days of receiving an incomplete application. Within 30 days of receiving a borrower’s complete application, the servicer would be required to evaluate the borrower for all available options, and, if the denial pertains to a requested loan modification, notify the borrower of the reasons for the servicer’s decision, and provide the borrower with at least a 14-day period within which to appeal the decision. The proposal would require that appeals be decided within 30 days by different personnel than those responsible for the initial decision. A servicer that receives a complete application for a loss mitigation option could not proceed with a foreclosure sale unless (i) the servicer had denied the borrower’s application and the time for any appeal had expired; (ii) the servicer had offered a loss mitigation option which the borrower declined or failed to accept within 14 days of the offer; or (iii) the borrower failed to comply with the terms of a loss mitigation agreement. The proposal would require that deadlines for submitting an application for a loss mitigation option be no earlier than 90 days before a scheduled foreclosure sale.

D. Small Servicers.

As discussed below, the Bureau convened a Small Business Regulatory Enforcement Fairness Act (SBREFA) panel to assess the impact of the possible rules on small servicers and to help the Bureau determine to what extent it may be appropriate to consider adjusting these standards for small servicers, to the extent permitted by law. Informed by this process, this proposal contains an exemption from the periodic statement requirement for certain small servicers. The Bureau seeks comment on whether other exemptions might be appropriate for small servicers.

E. Effective Date.

As discussed below, the Bureau is seeking comment on when this final rule should be effective. Because the final rule will provide important benefits to consumers, the Bureau seeks to make it effective as soon as possible. However, the Bureau understands that the final rules will require servicers to make revisions to their software and to retrain their staff. In addition, some entities will be required to implement other Dodd-Frank Act provisions, which are subject to separate rulemaking deadlines under the statute and will have separate effective dates. Therefore, the Bureau is seeking comment on how much time industry needs to make these changes.
II. Background

A. Overview of the Mortgage Servicing Market and Market Failures

The mortgage market is the single largest market for consumer financial products and services in the United States, with approximately $10.3 trillion in loans outstanding.[4] Mortgage servicers play a vital role within the broader market by undertaking the day-to-day management of mortgage loans on behalf of lenders who hold the loans in their portfolios or (where a loan has been securitized) investors who are entitled to the loan proceeds.[5] Over 60% of mortgage loans are serviced by mortgage servicers for investors.

Servicers’ duties typically include billing borrowers for amounts due, collecting and allocating payments, maintaining and disbursing funds from escrow accounts, reporting to creditors or investors, and pursuing collection and loss mitigation activities (including foreclosures and loan modifications) with respect to delinquent borrowers. Indeed, without dedicated companies to perform these activities, it is questionable whether a secondary market for mortgage-backed securities would exist in this country.[6]

Several aspects of the mortgage servicing business make it uniquely challenging for consumer protection purposes. Given the nature of their activities, servicers can have a direct and profound impact on borrowers. However, industry compensation practices and the structure of the mortgage servicing industry create wide variations in servicers’ incentives to provide effective customer service to borrowers. Also, because borrowers cannot choose their own servicers, it is particularly difficult for them to protect themselves from shoddy service or harmful practices.

Mortgage servicing is performed by banks, thrifts, credit unions, and non-bank servicers under a variety of business models. In some cases, creditors service mortgage loans that they originate or purchase and hold in portfolio. Other creditors sell the ownership of the underlying mortgage loan, but retain the mortgage servicing rights in order to retain the relationship with the borrower, as well as the servicing fee and other ancillary income. In still other cases, servicers have no role at all in origination or loan ownership, but rather purchase mortgage servicing rights on securitized loans or are hired to service a portfolio lender’s loans.[7]

These different servicing structures can create difficulties for borrowers if the servicer makes mistakes, fails to invest sufficient resources in its servicing operations, or does not properly service the borrower’s loan. Although the mortgage servicing industry has numerous participants, the industry is highly concentrated, with the five largest servicers servicing approximately 55% percent of outstanding mortgage loans in this country.[8] Small servicers generally operate in discrete segments of the market, for example, by specializing in servicing delinquent loans, or by servicing loans that they originate.[9]

Contracts between the servicer and the mortgage loan owner specify the rights and responsibilities of each party. In the context of securitized loans, the contracts may require the servicer to balance the competing interests of different classes of investors when borrowers become delinquent. Certain provisions in servicing contracts may limit the servicer’s ability to offer certain types of loan modifications to borrowers. Such contracts also may limit the circumstances under which investors can transfer servicing rights to a different servicer.

Compensation structures vary somewhat for loans held in portfolio and securitized loans,[10] but have tended to make pure mortgage servicing (where the servicer has no role in origination) a high-volume, low-margin business in which servicers have little incentive to invest in customer service. A servicer will expect to recoup its investment in purchasing mortgage servicing rights and earn a profit through a net servicing fee (which is expressed as a constant rate assessed on unpaid mortgage balances),[11] fees assessed on borrowers, interest float on payment accounts between receipt and disbursement, and cross-marketing other products and services to borrowers. Under this business model, servicers act primarily as payment collectors and processors, and provide minimal customer service to ensure profitability. Servicers also have an incentive to look for opportunities to impose fees on borrowers to enhance revenues and are generally not subject to market discipline because consumers have no opportunity to switch providers. Additionally, servicers may have financial incentives to foreclose rather than engage in loss mitigation.[12]

These attributes of the servicing market created problems for certain borrowers even prior to the national mortgage crisis. For example, borrowers experienced problems with mortgage servicers even during regional mortgage market downturns that preceded the mortgage crisis.[13] Borrowers were subjected to improper fees that servicers had no reasonable basis to impose on borrowers, improper force-placed insurance practices, and improper foreclosure and bankruptcy practices.[14]

When the mortgage crisis erupted, many servicers were ill-equipped to handle the high volumes of delinquent mortgages, loan modification requests, and foreclosures they were required to process. These servicers lacked the infrastructure, trained staff, controls, and procedures needed to manage effectively the flood of delinquent mortgages they were forced to handle.[15]

Consumer harm has manifested in many different areas, and major servicers have entered into significant settlement agreements with Federal and State governmental authorities. For example, in April 2011, the Office of the Comptroller of the Currency (OCC) and the Federal Reserve Board (the Board) undertook formal enforcement actions against several major servicers for unsafe and unsound residential mortgage loan servicing practices.[17] These enforcement actions generally focused on practices relating to (1) filing of foreclosure documents without, for example, proper affidavits or notarizations; (2) failing to always ensure that loan documents were properly endorsed or assigned and, if necessary, in the possession of the appropriate party at the appropriate time; (3) failing to devote sufficient financial, staffing, and managerial resources to ensure proper administration of foreclosure processes; (4) failing to devote adequate oversight, internal controls, policies and procedures, compliance risk management, internal audit, third party management, and training to foreclosure processes; and (5) failing to sufficiently oversee outside counsel and other third-party providers handling foreclosure-related services.[18] Congress has held significant detailed hearings on the issue of servicer “robo-signing” of foreclosure related documentation.[19]

Servicers have also misled or failed to communicate with borrowers, lost or mishandled borrower-provided documents supporting loan modification requests, and generally provided inadequate service to delinquent borrowers. These problems became pervasive in broad segments of the mortgage servicing industry and had profound impacts on borrowers, particularly delinquent borrowers.[23]

The Bureau further understands from mortgage investors that there is a pervasive belief that servicers are making discretionary decisions based on the best interests of the servicer rather than to achieve results that will benefit owners or assignees of mortgages loans. When servicers hold a second lien that is behind a first lien owned by a different owner or assignee, one study has found a lower likelihood of liquidation and modification, and a higher likelihood of inaction by a servicer.[24] Specifically, “liquidation and modification of securitized first mortgages are 60% [to] 70% less likely respectively and no action is 13% more likely when the servicer of that securitized first mortgage holds on its portfolio the second lien attached to the first mortgage.”[25] These failures to take actions that may benefit both consumers and owners or assignees of first lien mortgage loans harm consumers.

The mortgage servicing industry, however, is not monolithic. Some servicers provide high levels of customer service. Some of these servicers may be compensated by investors in a way that incentivizes them to provide high levels of customer service in order to optimize investor outcomes. Other servicers provide high levels of customer service because they rely on providing other products and services to consumers and thus have an interest in preserving their reputations and relationships with their consumers. For example, as discussed further below, small servicers that the Bureau consulted as part of a process required under SBREFA described their businesses as requiring a “high touch” model of customer service both to ensure loan performance and maintain a strong reputation in their local communities.[26]

B. Mortgage Servicing Consumer Protection Regulation before the Recent Crisis

Prior to the adoption of the Dodd-Frank Act, the mortgage servicing industry was subject to limited Federal consumer financial protection regulation. RESPA set forth basic protections with respect to mortgage servicing that were implemented by the U.S. Department of Housing and Urban Development (HUD). These included required disclosures at application concerning whether the lender intended to service the mortgage loan and disclosures upon an actual transfer of servicing rights.[27] RESPA further imposed substantive and disclosure requirements for escrow account management and required servicers to respond to “qualified written requests” – written error resolution or information requests relating to a restricted definition of the “servicing” of the borrower’s mortgage loan.[28]

TILA set forth requirements on creditors that were implemented by servicers, including disclosures regarding interest rate adjustments on adjustable rate mortgage loans. Regulation Z, which implements TILA, was amended by the Board to include certain limited requirements directly on servicers, such as requirements to timely credit payments, provide payoff balances and prohibit pyramiding of late fees.[29] Servicers also had some obligations under other Federal laws, including, for example, the Servicemembers Civil Relief Act.[30]

Although TILA and RESPA did not impose many requirements on servicers, servicers were still required to navigate overlapping requirements governing their servicing responsibilities. In addition to Federal law, servicers were required to consider the impact of State and even local regulation on mortgage servicing. Servicers also had to comply with investor requirements to the extent they serviced loans owned or guaranteed by various types of entities. These include (1) servicing guidelines required by Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), together known as the government-sponsored enterprises (GSEs), as well as servicing guidelines required by the Government National Mortgage Association (Ginnie Mae); (2) government insured program guidelines issued by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and the Rural Housing Service; (3) contractual agreements with investors (such as pooling and servicing agreements and subservicing contracts); and (4) bank or institution policies. All those requirements remain in effect today and going forward.

C. The National Mortgage Settlement and Other Regulatory Actions

In response to the unprecedented mortgage crisis and pervasive problems in mortgage servicing, including the systemic violation of State foreclosure laws by many of the largest servicers, State and Federal regulators have engaged in a number of individual servicing related enforcement and regulatory actions over the last few years and have begun discussions about comprehensive national standards.

For example, 49 State attorneys general,[31] joined by numerous Federal agencies including the Bureau, entered into a National Mortgage Settlement (National Mortgage Settlement) with the nation’s five largest servicers in February 2012.[32] The National Mortgage Settlement applies to loans held in portfolio and serviced by the five largest servicers. Loans owned by GSEs, private investors, or smaller servicers are not covered by the settlement.

Exhibit A to each of the settlements is a Settlement Term Sheet, which sets forth standards that each of the five largest servicers must follow to comply with the terms of the settlement.[33] The settlement standards contained in the Settlement Term Sheet are sub-divided into the following eight categories: (1) foreclosure and bankruptcy information and documentation; (2) third-party provider oversight; (3) bankruptcy; (4) loss mitigation; (5) protections for military personnel; (6) restrictions on servicing fees; (7) force-placed insurance; and (8) general servicer duties and prohibitions.

In addition to the settlement, other Federal regulatory agencies have issued guidance on mortgage servicing and loan modifications,[34] conducted coordinated reviews of the nation’s largest servicers,[35] and taken enforcement actions against individual companies.[36] The Bureau and other Federal agencies have also engaged since spring 2011 in informal discussions about the potential development of national mortgage servicing standards through regulations and guidance.

The Bureau’s proposed rules under Regulation Z and X represent another important step towards establishing uniform minimum national standards. When adopted in final form, the Bureau’s rules will apply to all mortgage servicers, whether depository institutions or non-depository institutions, and to all segments of the mortgage market, regardless of the ownership of the loan. The proposals focus both on implementing the specific mortgage servicing requirements of the Dodd-Frank Act and on addressing broader systemic problems that the Bureau believes are critical to ensure that the mortgage servicing market functions to serve consumer needs. To that end, the proposed TILA and RESPA mortgage servicing rules incorporate elements from four categories of the National Mortgage Settlement—(1) foreclosure and bankruptcy information and documentation, (4) loss mitigation, (6) restrictions on servicing fees, and (7) force-placed insurance. In addition, the proposed requirement to maintain reasonable information management policies and procedures addresses oversight of service providers, which impacts category (2) of the settlement.

The Bureau continues to consider whether to incorporate other settlement standards into rules or guidance, either alone or in conjunction with other Federal regulatory agencies; certain requests for comment in this proposal reflect these considerations. The Bureau is also continuing ongoing discussions with other regulators to ensure appropriate coordination of rulemaking and other initiatives relating to mortgage servicing issues.

D. The Statutory Requirements and Additional Proposals

The Dodd-Frank Act mandates several protections for homeowners in the servicing of their loans. The Act requires new disclosures, specifically periodic statements (unless coupon books are provided in certain circumstances), notices prior to the reset of adjustable-rate mortgages, and force-placed insurance notices. These disclosures are designed to provide consumers with comprehensive and comprehensible information when they need it and in a form they can use, so they can better manage their obligations and avoid unnecessary problems.

The Dodd-Frank Act also imposes new requirements on servicers to respond in a timely way to borrowers who assert that their servicer made an error. The statute also requires servicers to respond in a timely way to borrower requests for information.

The Dodd-Frank Act contains requirements relating to the prompt crediting of payments, so that consumers are not wrongly penalized with late fees or other fees because servicers did not credit their payments quickly. The statute also requires servicers to provide timely responses to consumer requests for payoff amounts, so consumers can get this information when they need it, such as when refinancing.

The Bureau is proposing additional standards to improve the way servicers treat all borrowers, including delinquent borrowers. Some servicers have made it very difficult for delinquent borrowers to explore and take advantage of potential alternatives to foreclosure. For example, servicers have frequently neglected to reach out or respond to such borrowers to discuss alternatives to foreclosure, lost or misplaced the documents of borrowers who have sought modifications or other relief, failed to keep track of borrower communications, and forced borrowers who have invested substantial time communicating with an employee of the servicer to repeat the process with a different employee.[37]

To address these concerns, the Bureau is proposing new servicing standards in four areas. First, servicers would have to establish and maintain reasonable information management policies and procedures. These policies and procedures would have to be reasonably designed to achieve certain objectives and address certain obligations, including accessing and providing accurate information, evaluating borrowers for loss mitigation options, facilitating oversight of, and compliance by, service providers, and facilitating servicing transfers.

Second, servicers would have to intervene early with delinquent borrowers to provide them with information about, and encourage them to explore, available alternatives to foreclosure.

Third, servicers would have to provide delinquent borrowers with a point of contact that provides continuity in the borrowers’ dealings with the servicer. At such point of contact, staff must have access to complete records about that borrower, including records of prior communications with the borrower, and be able to assist the borrower in pursuing loss mitigation options.

Fourth, servicers that offer loss mitigation options in the ordinary course of business would be required to follow certain procedures to ensure that borrowers’ completed loss mitigation applications are evaluated in a timely manner, that borrowers are notified of the results, and that borrowers have a right to appeal the denial of a loan modification option. Servicers would also be required to provide borrowers who submit incomplete loss mitigation applications with timely notice about the additional documents or information needed to make a loss mitigation application complete.

The Bureau recognizes that a one-size-fits-all approach may not be optimal with regard to either the mandated or additional requirements. As discussed below, the Bureau seeks comment on to what extent it may be appropriate to adjust these standards for small servicers.

III. Summary of Statute and Rulemaking Process

A. Overview of the Statute

The Dodd-Frank Act imposes certain new requirements related to mortgage servicing. Some of these new requirements are amendments to TILA addressed in this proposal and others are amendments to RESPA, addressed in the 2012 RESPA Servicing Proposal.

TILA amendments. There are three new mortgage servicing requirements under TILA. First, for closed-end credit transactions secured by a consumer’s principal residence, section 1418 of the Dodd-Frank Act adds a new section 128A to TILA. TILA section 128A states that, for hybrid ARMs with a fixed interest rate for an introductory period that adjusts or resets to a variable interest rate at the end of such period, a notice must be provided six months prior to the initial adjustment of the interest rate for closed-end credit transactions secured by a consumer’s principal residence. Section 1418 of the Dodd-Frank Act permits the Bureau to extend this requirement to ARMs that are not hybrid ARMs.

Second, section 1420 of the Dodd-Frank Act, which adds section 128(f) to TILA, requires the creditor, assignee, or servicer of any residential mortgage loan to transmit to the borrower, for each billing cycle, a periodic statement that sets forth certain specified information in a conspicuous and prominent manner. The statute also gives the Bureau the authority to require additional content to be included in the periodic statement. The statute provides an exception to the periodic statement requirement for fixed-rate loans where the borrower is given a coupon book containing substantially the same information as the statement.

Third, section 1464 of the Dodd-Frank Act adds sections 129F and 129G to TILA, which generally codify existing Regulation Z requirements for the prompt crediting of mortgage payments received by servicers in connection with consumer credit transactions secured by a consumer’s dwelling. The statute also generally codifies the Regulation Z requirement on accurate and timely responses to borrower requests for payoff amounts.

RESPA amendments. Section 1463 of the Dodd-Frank Act imposes a number of new servicing related requirements under RESPA that broadly relate to: force-placed insurance and error resolution/responses to requests for information. First, the statute prohibits a servicer from obtaining force-placed hazard insurance, unless there is a reasonable basis to believe the borrower has failed to comply with the loan contract’s requirement to maintain property insurance. A servicer may not impose any charge on any borrower for force-placed insurance with respect to any property secured by a federally related mortgage, unless the servicer sends, by first-class mail, two written notices to the borrower, at least 30 days apart. The notices must remind borrowers of their obligation to maintain hazard insurance on the property, alert borrowers to the servicer’s lack of evidence of insurance coverage, tell borrowers what they must do to demonstrate that they have coverage, and state that the servicer may obtain coverage at the borrower’s expense if the borrower fails to provide evidence of coverage. Servicers must terminate force-placed insurance coverage and refund to borrowers any premiums charged during any period when the borrower had private insurance coverage. The statute also provides that all charges imposed on the borrower related to force-placed insurance, apart from charges subject to State regulation as the business of insurance, must be bona fide and reasonable.

Second, the statute prohibits certain acts and practices by servicers of federally related mortgages with regard to resolving errors and responding to requests for information. Specifically, the statute prohibits servicers of federally related mortgages from charging fees for responding to valid qualified written requests. The statute also provides that a servicer of a federally related mortgage must not fail to take timely action to respond to a borrower’s requests to correct errors relating to: allocation of payments, final balances for purposes of paying off the loan, avoiding foreclosure, or other standard servicer duties.

Finally, the statue requires a servicer of a federally related mortgage to respond within ten business days to a request from a borrower to provide the identity, address, and other relevant contact information about the owner or assignee of the loan. The statue also reduces the amount of time that servicers of federally related mortgages have to correct errors and respond to inquiries generally, as well as refund escrow accounts upon payoff.[38]

In addition, the statute provides that a servicer of a federally related mortgage must “comply with any other obligation found by the Consumer Financial Protection Bureau, by regulation, to be appropriate to carry out the consumer protection purposes of this Act.”[39] This provision gives the Bureau broad authority to adopt additional regulations to govern the conduct of servicers of federally related mortgage loans. In light of the systemic problems in the mortgage servicing industry, the Bureau is proposing to exercise this authority to require servicers of federally related mortgages to: establish reasonable information management policies and procedures; undertake early intervention with delinquent borrowers; provide delinquent borrowers with continuity of contact with staff equipped to assist them; and require servicers that offer loss mitigation options in the ordinary course of business to follow certain procedures when evaluating loss mitigation applications.

The statute also requires a creditor or servicer to send accurate and timely responses to borrower requests for payoff amounts for home loans.

The statutory provisions with enumerated mortgage servicing requirements become effective on January 21, 2013, unless final rules are issued on or before that date.

B. Outreach and Consumer Testing

The Bureau has conducted extensive outreach in developing the mortgage servicing proposals. Bureau staff met with mortgage servicers, force-placed insurance carriers, industry trade associations, consumer advocates, other Federal regulatory agencies, and other interested parties to discuss various aspects of the statute and the servicing industry.

In preparing this proposed rule, the Bureau solicited input from small servicers through a Small Business Review Panel (SBREFA Panel) with the Chief Counsel for Advocacy of the Small Business Administration (SBA) and the Administrator of the Office of Information and Regulatory Affairs within the Office of Management and Budget (OMB).[40] The Small Business Review Panel’s findings and recommendations are contained in the Final Report of the Small Business Review Panel on CFPB’s Proposals Under Consideration for Mortgage Servicing Rulemaking (SBREFA Final Report).[41]

The Bureau also engaged in other meetings and roundtables with a variety of other stakeholders to gather factual information about the servicing industry and to discuss various elements of the Bureau’s proposals as they were being developed. As discussed above and in connection with section 1022 of the Dodd-Frank Act below, the Bureau has also consulted with relevant Federal regulators both regarding the Bureau’s specific proposals and the need for and potential contents of national mortgage servicing standards in general. As it considers public comment and works to develop final rules on mortgage servicing, the Bureau will continue to seek input from all interested parties.

In addition, the Bureau engaged ICF Macro (Macro), a research and consulting firm that specializes in designing disclosures and consumer testing, to conduct one-on-one cognitive interviews regarding disclosures connected with mortgage servicing. During the first quarter of 2012, the Bureau and Macro worked closely to develop and test disclosures that would satisfy the requirements of the Dodd-Frank Act and provide information to consumers in a manner that would be understandable and useful. These disclosures related to the ARM notices, the force-placed insurance notices, and the periodic statements. Macro conducted three rounds of one-on-one cognitive interviews with a total of 31 participants in the Baltimore, Maryland metro area (Towson, Maryland), Memphis, Tennessee, and Los Angeles, California. Participants were all consumers who held a mortgage loan and represented a range of ages and education levels. Efforts were made to recruit a significant number of participants who had trouble making mortgage payments in the last two years. During the interviews, participants were shown disclosure forms for periodic statements, ARM interest rate adjustment notices for the new disclosures required by Dodd-Frank Act section 1418, and force-placed insurance notices. Participants were asked specific questions to test their understanding of the information presented in each of the disclosures, how easily they could find various pieces of information presented in each of the disclosures, as well as to learn about how they would use the information presented in each of the disclosures. The disclosures were revised after each round of testing. Specific findings from the consumer testing are discussed in detail throughout the SUPPLEMENTARY INFORMATION where relevant.[42]

C. Other Dodd-Frank Act Mortgage-Related Rulemakings

Including this proposal, the Bureau currently is engaged in seven rulemakings relating to mortgage credit to implement requirements of the Dodd-Frank Act:

  • TILA-RESPA Integration: On July 9, 2012, the Bureau released proposed rules and forms combining the TILA mortgage loan disclosures with the Good Faith Estimate (GFE) and settlement statement required under RESPA, pursuant to DFA section 1032(f) as well as sections 4(a) of RESPA and 105(b) of TILA, as amended by DFA sections 1098 and 1100A, respectively. 12 U.S.C. 2603(a); 15 U.S.C. 1604(b) (the 2012 TILA-RESPA Proposal).[43]
  • HOEPA: On July 9, 2012, the Bureau released proposed rules to implement Dodd-Frank Act requirements expanding protections for “high-cost” mortgage loans under HOEPA, pursuant to TILA sections 103(bb) and 129, as amended by DFA sections 1431 through 1433. 15 U.S.C. 1602(bb) and 1639.[44] Such loans have requirements on servicers related to payoff statements, late fees, prepayment penalties, and fees for loan modifications or deferrals.
  • Loan Originator Compensation: The Bureau is in the process of developing a proposal to implement provisions of the Dodd-Frank Act requiring certain creditors and mortgage loan originators to meet duty of care qualifications and prohibiting mortgage loan originators, creditors, and the affiliates of both from receiving compensation in various forms (including based on the terms of the transaction) and from sources other than the consumer, with specified exceptions, pursuant to TILA section 129B as established by DFA sections 1402 through 1405. 15 U.S.C. 1639b.
  • Appraisals: The Bureau, jointly with Federal prudential regulators and other Federal agencies, is in the process of developing a proposal to implement Dodd-Frank Act requirements concerning appraisals for higher-risk mortgages, appraisal management companies, and automated valuation models, pursuant to TILA section 129H as established by DFA section 1471, 15 U.S.C. 1639h, and sections 1124 and 1125 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) as established by Dodd-Frank Act sections 1473(f), 12 U.S.C. 3353, and 1473(q), 12 U.S.C. 3354, respectively. In addition, the Bureau is developing rules to implement section 701(e) of the Equal Credit Opportunity Act (ECOA), as amended by DFA section 1474, to require that creditors provide applicants with a free copy of written appraisals and valuations developed in connection with applications for loans secured by a first lien on a dwelling. 15 U.S.C. 1691(e).
  • Ability to Repay: The Bureau is in the process of finalizing a proposal issued by the Board to implement provisions of the Dodd-Frank Act requiring creditors to determine that a consumer can repay a mortgage loan and establishing standards for compliance, such as by making a “qualified mortgage,” pursuant to TILA section 129C as established by Dodd-Frank Act sections 1411 and 1412 (ATR Rulemaking). 15 U.S.C. 1639c.
  • Escrows: The Bureau is in the process of finalizing a proposal issued by the Board to implement provisions of the Dodd-Frank Act requiring certain escrow account disclosures and exempting from the higher-priced mortgage loan escrow requirement loans made by certain small creditors, among other provisions, pursuant to TILA section 129D as established by Dodd-Frank Act sections 1461 and 1462. 15 U.S.C. 1639d.

With the exception of the requirements being implemented in the 2012 TILA-RESPA Proposal, the Dodd-Frank Act requirements referenced above generally will take effect on January 21, 2013, unless final rules implementing those requirements are issued on or before that date and provide for a different effective date. To provide an orderly, coordinated, and efficient comment process, the Bureau is generally setting the deadlines for comments on this and other proposed mortgage rules based on the date the proposal is issued, instead of the date this notice is published in the Federal Register. Therefore, the Bureau is providing 60 days for comment on those proposals, which will ensure that the Bureau receives comments with sufficient time remaining to issue final rules by January 21, 2013. Because the precise date this notice will be published cannot be predicted in advance, setting the deadlines based on the date of issuance will allow interested parties that intend to comment on multiple proposals to plan accordingly.

The Bureau regards the foregoing rulemakings as components of a larger undertaking; many of them intersect with one or more of the others. Accordingly, the Bureau is coordinating carefully the development of the proposals and final rules identified above. Each rulemaking will adopt new regulatory provisions to implement the various Dodd-Frank Act mandates described above. In addition, each of them may include other provisions the Bureau considers necessary or appropriate to ensure that the overall undertaking is accomplished efficiently and that it ultimately yields a regulatory scheme for mortgage credit that achieves the statutory purposes set forth by Congress, while avoiding unnecessary burdens on industry.

Thus, many of the rulemakings listed above involve issues that extend across two or more rulemakings. In this context, each rulemaking may raise concerns that might appear unaddressed if that rulemaking were viewed in isolation. For efficiency’s sake, however, the Bureau is publishing and soliciting comment on a proposed approach to certain issues raised by two or more of its mortgage rulemakings in whichever rulemaking is most appropriate, in the Bureau’s judgment, for addressing each specific issue. Accordingly, the Bureau urges the public to review this and the other mortgage proposals identified above, including those previously published by the Board, together. Such a review will ensure a more complete understanding of the Bureau’s overall approach and will foster more comprehensive and informed public comment on the Bureau’s several proposals, including provisions that may have some relation to more than one rulemaking but are being proposed for comment in only one of them.

D. Small Servicers.

The small entity representatives (SERs) who provided feedback to the SBREFA panel generally emphasized that their business models required a “high touch” approach to customer service and that they did not engage in many of the practices that contributed to the mortgage market process. The SERs indicated that they take a proactive approach to providing consumer information, resolving errors and working with delinquent borrowers to find alternatives to foreclosure. Nevertheless, they indicated that some elements of the proposals under consideration were not consistent with their current business practices and expressed concern about the need to begin providing extensive documentation to prove compliance with the proposed standards. The SERs urged the Bureau to adopt standards that would allow small servicers to stay in the market and provide choices to consumers with the new compliance burdens.[45] The SERs were particularly concerned about the costs and burdens of complying with the periodic statement requirements, as well as certain aspects of the process for resolving errors and responding to inquiries.[46]

Informed by this process, the Bureau is proposing to exempt certain small servicers from the periodic statement requirement. The Bureau is also proposing that certain requirements, such as the requirement to maintain reasonable information management policies and procedures under Regulation X, should be applied in light of the scale of the servicer’s operations as well as other contextual factors. The Bureau does not believe that these provisions, described more fully below in the section-by-section analysis of the applicable proposal, would impair consumer protection. The Bureau is also seeking comment more broadly on whether other exemptions or adjustments for small servicers would be warranted to reduce regulatory burden while appropriately balancing consumer protections.

E. Request for Comment on Effective Date.

The Bureau specifically requests comment on the appropriate effective date for each of the servicing-related rules contained in this proposal and the 2012 RESPA Servicing Proposal. As discussed above, the Dodd-Frank Act servicing requirements take effect automatically on January 21, 2013, unless final rules are issued on or before that date.[47] Where rules are required to be issued, the Dodd-Frank Act permits the Bureau to provide up to 12 months for implementation. For all other rules, the implementation period is left to the discretion of the Bureau.

Given the significant consumer benefits offered by the proposals and the challenges faced by delinquent borrowers in dealing with their servicers, the Bureau generally believes that the final rules should be made effective as soon as possible. However, the Bureau understands that various elements of the final rules would require servicers to adopt or revise existing software to generate compliant disclosures, retrain staff, assess and revise policies and procedures, and/or take other implementation measures. The Bureau therefore seeks detailed comment on the nature and length of implementation process for each individual servicing rule and in light of interactions between the rules. The Bureau is particularly interested in analyzing the impacts on both consumers and servicers of a staggered implementation sequence as compared to imposing a single date by which all rules must be implemented.

The Bureau also notes that some companies may also need to implement other new requirements under other parts of the Dodd-Frank Act, as described above. The Bureau believes based on conversations and analysis to date that there is more overlap and interaction among the various proposals relating to mortgage origination than there is between the servicing proposals and the origination proposals. However, the Bureau seeks comment specifically on this issue and on whether the general cumulative burden on entities that are subject to both sets of rules will complicate implementation.

Finally, the Bureau seeks comment on any particular implementation challenges faced by small servicers, and on whether an extended implementation period would be appropriate or useful. For instance, to the extent that small servicers rely heavily on outside software vendors, the Bureau seeks comment on whether a delayed effective date would provide significant relief if the vendors will have to develop software solutions for larger servicers on a shorter timeline anyway. The Bureau also seeks comment on the impacts of delayed implementation on consumers and on other market participants.

IV. Discussion of Major Proposed Revisions

The proposed amendments to Regulation Z implement sections 1418 (initial ARM interest rate adjustment notice), 1420 (periodic statements) and 1464 (prompt crediting and provision of payoff statements) of the Dodd-Frank Act, which in turn amend TILA. The amendment also proposes to revise current Regulation Z ARM disclosure rules for consistency with DFA section 1418. The proposed revision eliminates the ARM interest rate adjustment notice required at least once each year during which an interest rate adjustment is implemented without resulting in a corresponding payment change.
A. Current and Proposed Interest Rate Adjustment Disclosures

To implement DFA section 1418, the Bureau is proposing to revise § 1026.20(d) to require that creditors, assignees, or servicers provide notices to consumers six to seven months prior to the first time the interest rate of their adjustable-rate mortgages adjusts. In contrast to this one-time disclosure, Regulation Z currently requires notice to consumers regarding each adjustment of their adjustable-rate mortgages.

Under current rule § 1026.20(c), creditors must provide consumers with a notice of interest rate adjustment for variable-rate transactions subject to § 1026.19(b) at least 25, but no more than 120, calendar days before a payment at a new level is due. For the reasons discussed below, the Bureau is proposing in § 1026.20(c), among other things, to change the minimum time for providing advance notice to consumers from 25 days to 60 days before payment at a new level is due. The maximum time for advance notice would remain the same: 120 days prior to the due date of the first payment at a new level.

Current § 1026.20(c) also requires creditors to provide consumers with an adjustment notice at least once each year during which an interest rate adjustment is implemented without resulting in a corresponding payment change. The Bureau is proposing to eliminate this provision. As explained in more detail below in the section-by-section analysis, the Bureau believes that certain Dodd-Frank Act amendments to TILA and the Bureau’s proposed amendments that would implement those provisions provide consumers with much of the information contained in the annual notice, thereby greatly minimizing its value for consumers.

In the interest of harmonizing the two proposed ARM disclosures, the coverage, content, and format of proposed § 1026.20(c) and (d) closely track one another and incorporate most of the content currently required by § 1026.20(c).

Historic context of § 1026.20(c) rate adjustment disclosures. The Board adopted the rule that is current § 1026.20(c) in 1987, as part of a larger revision of Regulation Z.[48] In 2009, the Board proposed to revise regulations governing ARM disclosures as part of a larger revision of closed-end provisions in Regulation Z (2009 Closed-End Proposal). In that proposal, the Board said that, in 1987, it set the minimum time for providing notice of a rate adjustment at 25 days before payment at new level is due in order to track the rules of the OCC and to provide creditors with flexibility in giving adjustment notices for a variety of ARMs.[49] It also noted that, as of 2009, neither the OCC nor any other Federal financial institution supervisory agency had any comprehensive disclosure requirements for ARMs.[50]

Since 1987, the popularity of ARMs has increased, especially during the period from 2002 to 2007.[51] Beginning in 2007, ARM growth began to slow as consumers experienced difficulty repaying such loans and concerns grew about the risk of payment shock that ARMs pose.[52] According to Freddie Mac, “[i]n June 2004, ARMs hit a peak share of 40% of the home-purchase market but by early 2009, that share had fallen to just 3%, according to the Federal Housing Finance Agency.”[53] Generally, ARMs are financing just over 10% of new home-purchase loans but are expected to rise to a 14% share of that market in 2012. [54]

For many consumers, the current era of declining interest rates has reduced the incidence of the significant payment increases that can accompany ARM interest rate adjustments. Anecdotal evidence from mortgage servicers with which the Bureau has conducted outreach supports this conclusion. To the extent interest rates rise in the future, ARM interest rate adjustments may result in significant payment increases for many consumers. The popularity of adjustable-rate mortgages, which provide the opportunity for reduced interest rates, also may increase along with the advent of higher interest rates.

Regardless of current market conditions, ARMs can pose a risk of payment shock. Therefore, it is critical that consumers receive advance notice of ARM payment changes so that, if their rates increase, they can prepare to make higher mortgage payments or pursue alternative plans, such as seeking to refinance their loans.

Timing of current and proposed ARM regulations. DFA section 1418 requires that interest rate adjustment disclosures be provided to consumers six to seven months before the interest rate adjusts for the first time (which is equivalent to 210 to 240 days before payment at a new level is due). Generally, this much advance notice will require disclosure of an estimated new interest rate and payment instead of exact amounts. This is because ARM contracts generally require an index value published closer to the adjustment date to calculate the adjusted interest rate and new payment. Nevertheless, the consumer would be put on notice of upcoming changes and would have ample time to refinance or pursue other alternatives if the estimate indicates a potential increase in payments that the consumer cannot afford.

Current § 1026.20(c) requires notice of rate adjustments resulting in a corresponding payment change at least 25 days prior to when payment at a new level is due. This notice, unlike the one required under DFA section 1418, provides the actual, not estimated, new interest rate and payment. Twenty-five days likely does not provide sufficient time for consumers to refinance, pursue other alternatives, or adjust their finances to make higher payments. Research conducted for the years 2004 through 2007 also suggested that a requirement to provide ARM adjustment disclosures 60, rather than 25, days before payment at a new level is due more closely reflects the time needed for consumers to refinance a loan.[55] In the current market, the nation’s biggest mortgage lenders take an average of more than 70 days to complete a refinance.[56]

For these reasons, proposed § 1026.20(c) revises the time frame for providing the ARM adjustment notice from the current 25 to 120 days to 60 to 120 days before payment at a new level is due. Under the proposed rule, consumers will know the actual amount of their new interest rate and payment at least 60 days before the new payment is due. Most existing ARMs will be able to comply with this proposed timing. The Bureau proposes grandfathering existing ARMs that contractually will not be able to comply with the new timing, i.e., those with look-back periods of less than 45 days. See section-by-section analysis for proposed § 1026.20(c) for a full discussion of timing and look-back periods.

Content of current and proposed ARM regulations. The Bureau is generally proposing to retain the content required by current § 1026.20(c). Proposed § 1026.20(c) would require additional information such as a statement that the consumer’s interest rate is scheduled to adjust, the adjustment may change the mortgage payment, the time period the current interest rate has been in effect, and the dates of the future rate adjustments; the date when the new payment is due after the adjustment; any interest rate or payment limits; any unapplied carryover interest and the earliest date it could be applied; additional amortization information for negatively-amortizing and interest-only loans; and the amount and expiration date of any prepayment penalty. Much of this additional content was proposed by the Board’s 2009 Closed-End Proposal to amend Regulation Z’s payment change interest rate adjustment disclosures.[57]

The initial interest rate adjustment notices proposed by § 1026.20(d) include much of the same information listed above for proposed § 1026.20(c). The content of the two proposed notices in § 1026.20(c) and (d) closely track one another in order to promote consistency and simplify compliance. However, proposed § 1026.20(c), which applies to the ongoing disclosures at each interest rate adjustment that results in a corresponding payment change, would not require some of the disclosures mandated for the initial interest rate adjustment notices by DFA section 1418. These disclosures include a list of alternatives consumers may pursue, including refinancing, renegotiation of loan terms, payment forbearance, and pre-foreclosure sales; contact information for the appropriate State housing finance agency; and information on how to access a list of government-certified counseling agencies and programs. The Bureau believes it is not necessary to provide this information in § 1026.20(c) notices because much of it will be provided to consumers through other mortgage servicing measures implemented by the Dodd-Frank Act. For example, new TILA section 128(f), which would be implemented by proposed rule § 1026.41 for periodic statements, each billing cycle would provide information on how to contact the appropriate State housing finance authority and how to access a list of government-certified counseling agencies and programs. Also, the early intervention provisions of the 2012 RESPA Servicing Proposal would require this same information as well as examples of alternatives consumers may want to consider. Finally, consumers will have received this information pursuant to § 1026.20(d) the first time their adjustable-rate mortgages adjust.

The model forms proposed for § 1026.20(c) and (d) closely track one another and disclose virtually the same information, except for the additional information proposed for § 1026.20(d), as discussed above, and the reference to estimates in the proposed § 1026.20(d) notices. The Bureau believes that harmonizing the two proposed rules regarding ARM interest rate adjustment disclosures would ease the burden of compliance for creditors, assignees, and servicers while providing consumers with consistent information in similar notices.

The Bureau is proposing model and sample forms[58] for both § 1026.20(c) and (d). The Bureau worked with Macro to design and test the forms for § 1026.20(d), but did not specifically test § 1026.20(c) notices. See Part II.B above. Because of the similarity in the model forms for both proposed rules, the results of the testing of § 1026.20(d) forms is relevant for proposed § 1026.20(c) as well. Thus, throughout the section-by-section analysis for § 1026.20(c), the Bureau refers to the testing results for § 1026.20(d) where the information and concepts tested are identical in the model forms for both proposed § 1026.20(c) and (d).

B. Proposed Rule Regarding Prompt Crediting of Mortgage Payments and Response to Requests for Payoff Amounts

DFA section 1464(a) codifies the existing Regulation Z requirements in § 1026.36(c)(1)(i) on prompt crediting of payments. The proposed modifications to § 1026.36(c) would clarify the handling of partial payments. The proposal would limit application of the current prompt crediting provision, existing § 1026.36(c)(1)(i), to full contractual payments (as opposed to all payments), and add a new provision, § 1026.36(c)(1)(ii), to address the handing of partial payments (anything less than a full contractual payment).

DFA section 1464(b) generally codifies the existing Regulation Z requirement in § 1026.36(c)(3) to provide payoff statements, with modifications relating to the scope and timing of the requirement, and the need for the request to be written. Proposed modifications to § 1026.36(c) reflect these changes.

As part of implementing these changes, the Bureau is proposing a reorganization of the requirements in § 1026.36(c).

C. Proposed Rule Regarding Periodic Statements

DFA section 1420 establishes new TILA section 128(f), requiring periodic statements for residential mortgage loans to be provided each billing cycle. The statute requires that a creditor, assignee, or servicer disclose certain information in the periodic statement, along with “such other information as the Bureau may prescribe in regulations.”[59] The statute requires the Bureau to develop and prescribe a standard form for this disclosure, taking into account that the required statements may be transmitted in writing or electronically.[60] The statute also provides an exemption to the periodic statement requirement for fixed-rate loans where the creditor, assignee, or servicer provides the obligor with a coupon book which provides substantially the same information as the periodic statement.[61]

Proposed § 1026.41 contains the periodic statement requirement. Paragraph (a) establishes the general requirement for creditors, assignees, or servicers to provide a periodic statement. Paragraphs (b) – (d) establish requirements for the timing, form, content, and layout of the statement. Paragraph (e) sets forth exemptions from the periodic statement requirement.

The periodic statement is designed to serve a variety of purposes, including informing consumers of their payment obligations, providing the consumer with information about their mortgage in an easily readable and understandable format, creating a record of the transaction to aid in error detection and resolution, and providing information to certain delinquent borrowers.

The Bureau is proposing sample forms in accordance with TILA section 129(f)(2). The Bureau examined several forms used today by various servicers, considered how these forms met the needs of consumers, and identified changes that would benefit consumers. As discussed above in part II.B, the Bureau worked with Macro to design and test sample forms.

The proposed periodic statement is designed to provide information to consumers in a format they can easily understand and use. As such, the proposed regulation would require certain related pieces of information to be grouped together. The proposed formatting requirements of the periodic statement are discussed in detail in the section-by-section analysis for proposed § 1026.41(d).

The proposed periodic statement is also designed to provide additional information to consumers in several potentially confusing scenarios: partial payments, payment-option loans, and delinquency. First, the handling of partial payments would be clarified on the periodic statement, both on the transaction activity line and in the past payment breakdown. Additionally, if funds are held in a suspense or unapplied funds account, the proposed rule would require a message on what must be done to release the funds. Second, payments for payment-option loans would be clarified by listing the options in the Amount Due section, and providing details about each of the options in the Explanation of Amount Due section. Finally, delinquent consumers would receive information in several places on the periodic statement. The overdue amount would be stated in the Explanation of Amount Due section, and any fees would be listed in the Transaction Activity section. The breakdown of past payments will help the consumer understand how past payments were applied, which can be confusing. Additionally, consumers who are more than 45 days delinquent will have a delinquency information included in the periodic statement providing specific information about their loan. These requirements are discussed in greater detail in the section-by-section analysis on proposed § 1026.41 below.

Finally, the proposal contains several exemptions from the periodic statement requirement. One exemption is for fixed-rate loans using coupon books that meet certain requirements, as set forth in TILA 128(f)(3). Another exemption clarifies that timeshares are not subject to the periodic statement requirement as per the definition of “residential mortgage loan.”[62] The Bureau is also proposing exemptions for reverse mortgages and certain small servicers.

V. Legal Authority

The Bureau is issuing this proposed rule pursuant to its authority under TILA and the Dodd-Frank Act. Section 1061 of the Dodd-Frank Act transferred to the Bureau the “consumer financial protection functions” previously vested in certain other Federal agencies, including the Board. The term “consumer financial protection function” is defined to include “all authority to prescribe rules or issue orders or guidelines pursuant to any Federal consumer financial law, including performing appropriate functions to promulgate and review such rules, orders, and guidelines.”[63] TILA, Title X of the Dodd-Frank Act, and certain subtitles and provisions of Title XIV of the Dodd Frank Act, are Federal consumer financial laws.[64] Accordingly, the Bureau has authority to issue regulations pursuant to TILA, Title X, and the enumerated subtitles and provisions of Tile XIV, including to implement the additions and amendments to TILA’s mortgage servicing requirements made by Title XIV of the Dodd-Frank Act.

Sections 1418, 1420 and 1464 of the Dodd-Frank Act create new requirements under TILA in new sections 128A, 128(f), and 129F and 129G, respectively. Section 1418 of the Dodd-Frank Act amends Regulation Z to require that certain disclosures be provided to consumers with hybrid adjustable-rate mortgages secured by the consumer’s principal residence the first time the interest resets or adjusts. Additionally, the savings clause in TILA section 128A(c) allows the Bureau to require this notice for adjustable-rate mortgage loans that are not hybrid adjustable-rate loans. DFA section 1420 requires that a periodic statement be provided to consumers for each billing cycle of a consumer’s closed-end mortgage secured by a dwelling, except for fixed-rate loans with coupon books containing substantially the same information. The statute requires a list of specific information that must be included in the periodic statement. Additionally, pursuant to TILA section 128(f)(1)(H), the periodic statement must also include such information as the Bureau may require in regulations. DFA section 1464 generally requires the prompt crediting of mortgage payments in connection with consumer credit transactions secured by a consumer’s principal dwelling and an accurate timely response to requests for payoff amounts for home loans. In addition to proposing rules to implement these TILA provisions of the Dodd-Frank Act, the Bureau proposes amending current TILA interest rate adjustment disclosures required by § 1026.20(c) as proposed § 1026.20(c).

The proposed rule also relies on the rulemaking and exception authorities specifically granted to the Bureau by TILA and the Dodd-Frank Act, including the authorities discussed below:

The Truth in Lending Act

TILA section 105(a). As amended by the Dodd-Frank Act, TILA section 105(a),

15 U.S.C. 1604(a), directs the Bureau to prescribe regulations to carry out the purposes of TILA, and provides that such regulations may contain additional requirements, classifications, differentiations, or other provisions, and may provide for such adjustments and exceptions for all or any class of transactions, that the Bureau judges are necessary or proper to effectuate the purposes of TILA, to prevent circumvention or evasion thereof, or to facilitate compliance. The purposes of TILA are “to assure a meaningful disclosure of credit terms so that the consumers will be able to compare more readily the various credit terms available and avoid the uninformed use of credit” and to protect consumers against inaccurate and unfair credit billing practices. TILA section 102(a); 15 U.S.C. 1601(a).

Historically, TILA section 105(a) has served as a broad source of authority for rules that promote the informed use of credit and avoid unfair credit billing practices through required disclosures and substantive regulation of certain practices. Dodd-Frank Act section 1100A additionally clarifies the Bureau’s TILA section 105(a) authority by amending that section to provide express authority to prescribe regulations that contain “additional requirements” that the Bureau finds are necessary or proper to effectuate the purposes of TILA, to prevent circumvention or evasion thereof, or to facilitate compliance. This amendment clarified that the Bureau has the authority to exercise TILA section 105(a) to prescribe requirements beyond those specifically listed in the statute that meet the standards outlined in section 105(a). The Dodd-Frank Act also clarified the Bureau’s rulemaking authority over certain high-cost mortgages pursuant to section 105(a). As amended by the Dodd-Frank Act, TILA section 105(a) authority to make adjustments and exceptions to the requirements of TILA applies to all transactions subject to TILA, except with respect to the provisions of TILA section 129[65] that apply to the high-cost mortgages referred to in TILA section 103(bb), 15 U.S.C. 1602(bb).

For the reasons discussed in this notice, the Bureau is proposing regulations to carry out TILA’s purposes and is proposing such additional requirements, adjustments, and exceptions as, in the Bureau’s judgment, are necessary and proper to carry out the purposes of TILA, prevent circumvention or evasion thereof, or to facilitate compliance. In developing these aspects of the proposal pursuant to its authority under TILA section 105(a), the Bureau has considered the purposes of TILA, including ensuring meaningful disclosures, helping consumers avoid the uninformed use of credit, and protecting consumers against inaccurate and unfair credit billing practices. See TILA section 102(a); 15 U.S.C. 1601(a).

TILA section 105(f). Section 105(f) of TILA, 15 U.S.C. 1604(f), authorizes the Bureau to exempt from all or part of TILA any class of transactions if the Bureau determines that TILA coverage does not provide a meaningful benefit to consumers in the form of useful information or protection. In exercising this authority, the Bureau must consider the factors identified in section 105(f) of TILA and publish its rationale at the time it proposes an exemption for public comment. Specifically, the Bureau must consider:

(a) The amount of the loan and whether the disclosures, right of rescission, and other provisions provide a benefit to the consumers who are parties to such transactions, as determined by the Bureau;

(b) The extent to which the requirements of this subchapter complicate, hinder, or make more expensive the credit process for the class of transactions;

(c) The status of the borrower, including—

(1) Any related financial arrangements of the borrower, as determined by the Bureau;

(2) The financial sophistication of the borrower relative to the type of transaction; and

(3) The importance to the borrower of the credit, related supporting property, and coverage under this subchapter, as determined by the Bureau;

(d) Whether the loan is secured by the principal residence of the consumer; and

(e) Whether the goal of consumer protection would be undermined by such an exemption.

For the reasons discussed in this notice, the Bureau is proposing to exempt certain transactions from the requirements of TILA pursuant to its authority under TILA section 105(f). In developing this proposal under TILA section 105(f), the Bureau has considered the relevant factors and determined that the proposed exemptions may be appropriate.

The Dodd-Frank Act

Dodd-Frank Act section 1022(b). Section 1022(b)(1) of the Dodd-Frank Act authorizes the Bureau to prescribe rules “as may be necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws, and to prevent evasions thereof[.]” 12 U.S.C. 5512(b)(1). Section 1022(b)(2) of the Dodd-Frank Act prescribes certain standards for rulemaking that the Bureau must follow in exercising its authority under section 1022(b)(1). 12 U.S.C. 5512(b)(2). As discussed above, TILA is a Federal consumer financial law. Accordingly, the Bureau proposes to exercise its authority under DFA section 1022(b) to prescribe rules under TILA that carry out the purposes and prevent evasion of those laws.

Dodd-Frank Act section 1032. Section 1032(a) of the Dodd-Frank Act governs disclosures and provides that the Bureau “may prescribe rules to ensure that the features of any consumer financial product or service, both initially and over the term of the product or service, are fully, accurately, and effectively disclosed to consumers in a manner that permits consumers to understand the costs, benefits, and risks associated with the product or service, in light of the facts and circumstances.” 12 U.S.C. 5532(a). The authority granted to the Bureau in DFA section 1032(a) is broad, and empowers the Bureau to prescribe rules regarding the disclosure of the “features” of consumer financial products and services generally. Accordingly, the Bureau may prescribe rules containing disclosure requirements even if other Federal consumer financial laws do not specifically require disclosure of such features.

Dodd-Frank Act section 1032(c) provides that, in prescribing rules pursuant to DFA section 1032, the Bureau “shall consider available evidence about consumer awareness, understanding of, and responses to disclosures or communications about the risks, costs, and benefits of consumer financial products or services.” 12 U.S.C. 5532(c). Accordingly, in developing proposed rules under Dodd-Frank Act section 1032(a) for this proposal, the Bureau has considered available studies, reports, and other evidence about consumer awareness, understanding of, and responses to disclosures or communications about the risks, costs, and benefits of consumer financial products or services. For the reasons discussed in this notice, the Bureau is proposing portions of this rule pursuant to its authority under Dodd-Frank Act section 1032(a).

In addition, DFA section 1032(b)(1) provides that “any final rule prescribed by the Bureau under this [section 1032] requiring disclosures may include a model form that may be used at the option of the covered person for provision of the required disclosures.” 12 U.S.C. 5532(b)(1). Any model form issued pursuant to that authority shall contain a clear and conspicuous disclosure that, at a minimum, uses plain language that is comprehensible to consumers, using a clear format and design, such as readable type font, and succinctly explains the information that must be communicated to the consumer. DFA section 1032(b)(2);

12 U.S.C. 5532(b)(2). As discussed in the section-by-section analysis for proposed §§ 1026.20(d) and 1026.41, the Bureau is proposing model forms for ARM interest rate adjustment notices and periodic statements. As discussed in this notice, the Bureau is proposing these model forms pursuant to its authority under DFA section 1032(b)(1) .

Dodd-Frank Act section 1405(b). Section 1405(b) of the Dodd-Frank Act provides that, “[n]otwithstanding any other provision of [title 14 of the Dodd-Frank Act], in order to improve consumer awareness and understanding of transactions involving residential mortgage loans through the use of disclosures, the Bureau may, by rule, exempt from or modify disclosure requirements, in whole or in part, for any class of residential mortgage loans if the Bureau determines that such exemption or modification is in the interest of consumers and in the public interest.” 15 U.S.C. 1601 note. Section 1401 of the Dodd-Frank Act, which amends TILA section 103(cc), 15 U.S.C. 1602(cc), generally defines residential mortgage loan as any consumer credit transaction that is secured by a mortgage on a dwelling or on residential real property that includes a dwelling other than an open-end credit plan or an extension of credit secured by a consumer’s interest in a timeshare plan. Notably, the authority granted by section 1405(b) applies to “disclosure requirements” generally, and is not limited to a specific statute or statutes. Accordingly, DFA section 1405(b) is a broad source of authority to modify the disclosure requirements of TILA.

In developing proposed rules for residential mortgage loans under Dodd-Frank Act section 1405(b) for this proposal, the Bureau has considered the purposes of improving consumer awareness and understanding of transactions involving residential mortgage loans through the use of disclosures, and the interests of consumers and the public. For the reasons discussed in this notice, the Bureau is proposing portions of this rule pursuant to its authority under Dodd-Frank Act section 1405(b).

See the section-by-section analysis for each proposed section for further elaboration on legal authority.

VI. Section-by-Section Analysis

A. Regulation Z

Section 1026.17 General Disclosure Requirements

17(a) Form of Disclosures

17(a)(1)

Section 1026.17(a)(1) contains form requirements generally applicable to disclosures under subpart C. The Bureau proposes to make certain modifications to these requirements as applicable to the ARM interest rate adjustment payment change notices under proposed § 1026.20(c) and the initial ARM interest rate adjustment notices under proposed § 1026.20(d).

Section 1026.17(a) requires, among other things, that certain disclosures contain only information directly related to that disclosure. Current § 1026.20(c) is not included in the list of disclosures subject to this requirement. Further, commentary to § 1026.17(a)(1) states that the disclosures required by current § 1026.20(c) are not subject to the general segregation requirements under § 1026.17(a)(1).

The payment change notice proposed by § 1026.20(c) is intended to inform consumers of upcoming changes to their interest rate and mortgage payments and to give them time to explore alternatives. The Bureau does not believe that the form requirements applicable to current § 1026.20(c) notices are sufficient to highlight and emphasize important information consumers need to make decisions about their adjustable-rate mortgages. Presenting information to consumers separate from other information enhances consumers’ awareness of the material. Therefore, the Bureau proposes to amend § 1026.17(a)(1) and comment 17(a)(1)-2.ii to add proposed § 1026.20(c) to the enumerated disclosures required to contain only information directly related to the disclosure and to require that proposed § 1026.20(c) disclosures be grouped together and segregated from everything else.

Other § 1026.17(a)(1) requirements, such as that disclosures be clear and conspicuous, in writing, and provided electronically subject to compliance with Electronic Signatures in Global and National Commerce Act (E-Sign Act)(15 U.S.C. 7001 et seq.), would continue to apply to § 1026.20(c).

TILA section 128A provides that the initial ARM interest rate adjustment notices, which the Bureau proposes to implement in proposed § 1026.20(d), be “separate and distinct from all other correspondence to the consumer.” Accordingly, the Bureau proposes to revise § 1026.17(a), to make clear that the proposed § 1026.20(d) disclosures are not subject to the general segregation requirement under that section but rather, pursuant to proposed § 1026.20(d), are required to be separate and distinct from all other correspondence. See comment 20(d) for further discussion of the separate and distinct requirement. Other requirements of § 1026.17(a), such as that disclosures be clear and conspicuous, in writing, and provided electronically subject to compliance with the E-Sign Act, would apply to the proposed § 1026.20(d) disclosures.

The proposed application of § 1026.17(a)(1), as modified, to proposed § 1026.20(c) and (d) is authorized, in part, under TILA section 122, which requires that disclosures under TILA be clear and conspicuous, in accordance with regulations of the Bureau. The requirements are further authorized under TILA section 105(a) because the Bureau believes that the proposed form requirements are necessary and proper to effectuate the purposes of TILA to assure a meaningful disclosure of credit terms, avoid the uninformed use of credit, and protect consumers against inaccurate and unfair credit billing practices by ensuring that consumers understand the content of the proposed ARM notices. Moreover, as discussed below, the disclosures proposed under § 1026.20(c) are authorized, among other provisions, under TILA section 128(f)(2), which authorizes the Bureau to develop and prescribe a standard form for the disclosures required under TILA section 128(f).

As to proposed § 1026.20(d) disclosures, DFA section 1418, TILA section 128A(b) specifically provides that the disclosures shall be in writing, separate and distinct from all other correspondence. In addition, the Bureau believes, consistent with DFA section 1032(a), that the proposed application of § 1026.17(a)(1), as modified, to § 1026.20(d) will ensure that the features of ARM loans are effectively disclosed to consumers in a manner that allows consumers to understand the information disclosed. The Bureau further believes, consistent with DFA section 1405(a), that it is proper to modify DFA section 1418 to apply the form requirements in proposed § 1026.17(a)(1) to improve consumer awareness and understanding of ARM adjustments.

17(b) Time of Disclosures

The Bureau is proposing to revise § 1026.17(b) to add proposed § 1026.20(d) to the list of variable-rate disclosure provisions with special timing requirements. This proposed amendment would alert creditors, assignees, and servicers that, as with proposed § 1026.20(c) payment adjustment notices, there are timing requirements particular to the proposed § 1026.20(d) initial interest rate adjustment notices.

17(c) Basis of Disclosures and Use of Estimates

17(c)(1)

Section 1026.17(c)(1) requires disclosures to reflect the terms of the legal obligation between the parties. Current comment 17(c)(1)-1 provides that, under this requirement, disclosures generally must reflect the credit terms to which the parties are legally bound as of the outset of the transaction, but that in the case of disclosures required under § 1026.20(c), the disclosures shall reflect the credit terms to which the parties are legally bound when the disclosures are provided. The Bureau proposes revising comment 17(c)(1)-1 to make clear that the disclosures required under proposed § 1026.20(d), like those under proposed § 1026.20(c), shall reflect the credit terms to which the parties are legally bound when the disclosures are provided, rather than at the outset of the transaction.

Section 1026.18 Content of Disclosures

18(f) Variable Rate

18(f)-1

Current comment 18(f)-1 clarifies that creditors electing to substitute § 1026.19(b) disclosures for § 1026.18(f)(1) disclosures, as permitted by § 1026.18(f)(1) and (3), may, but need not, also provide disclosures required by current § 1026.20(c). Under current § 1026.20(c), disclosures are permissive in such cases because the § 1026.19(b) substitution is only permitted for variable-rate transactions not secured by the consumer’s principal dwelling or variable-rate transactions secured by the consumers’ principal dwelling, but with a term of one year or less. These transactions are not covered by current § 1026.20(c). Thus, current comment 18(f)-1 does not alter the legal requirements applicable to creditors. The clarification was, however, helpful because current § 1026.20(c) cross-references § 1026.19(b) and applies to transactions covered by § 1026.19(b).

The Bureau proposes to delete this reference to § 1026.20(c) from the comment because it is no longer helpful since neither proposed § 1026.20(c) nor (d) cross-references § 1026.19(b) and those proposed provisions define their scope of coverage without reference to § 1026.19(b). Moreover, proposed § 1026.20(c) or (d) apply to some ARMs with terms of one year or less such that applying the current comment would create an unwarranted exception to the requirement to provide ARM notices to consumers with those types of ARMs. For these reasons, the Bureau proposes to delete the reference to § 1026.20(c) in comment 18(f)-1.

Section 1026.19 Certain Mortgage and Variable-Rate Transactions

19(b) Certain Variable Rate Transactions

19(b)-4 Other Variable-Rate Regulations

The Bureau proposes revising comment 19(b)-4 to delete reference to current § 1026.20(c) and (d). Current comment 19(b)-4 explains that transactions in which the creditor is required to comply with and has complied with the disclosure requirements of the variable-rate regulations of other Federal agencies are exempt from the requirements of § 1026.20(c) by virtue of current § 1026.20(d). Consistent with the proposed deletion of current § 1026.20(d), the Bureau proposes revising comment 19(b)-4 to delete reference to current § 1026.20(c) and (d).

19(b)-5.i.C Certain Mortgage and Variable-Rate Transactions

The Bureau proposes revising comment 19(b)-5.i.C to cross-reference other commentary that makes clear that proposed § 1026.20(c) and (d) do not apply to “price-level-adjusted mortgages” that have a fixed-rate of interest but provide for periodic adjustments to payments and the loan balance to reflect changes in an index measuring prices or inflation.

19(b)(2)(xi)-1 Adjustment Notices

Pursuant to current § 1026.19(b)(2)(xi), disclosures regarding the type of information that will be provided in notices of interest rate adjustments and the timing of such notices must be provided to consumers applying for variable-rate transactions secured by the consumer’s principal dwelling with a term greater than one year. Current comment 19(b)(2)(xi)-1 clarifies that these disclosures include information regarding the content and timing of disclosures consumers will receive pursuant to current § 1026.20(c). The Bureau proposes adding reference to proposed § 1026.20(d) to the comment, since those disclosures would be provided to consumers under the Bureau’s proposed rule. The proposed comment also makes conforming changes to the text suggested for describing the ARM notices to reflect the timing and content of the disclosures proposed by § 1026.20(c) and (d).

Section 1026.20 Subsequent Disclosure Requirements

20(c) Rate Adjustments

Current § 1026.20(c) requires that disclosures be provided to consumers with variable-rate mortgages each time an adjustment results in a corresponding payment change and at least once each year during which an interest rate adjustment is implemented without a corresponding payment change.

The current rule does not differentiate between the content required for the annual notice and the notices required each time the interest rate adjustment results in a corresponding payment change. Current § 1026.20(c) requires that adjustment notices disclose the following: (1) the current and prior interest rates for the loan; (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; and (5) the payment, if different from the payment due after adjustment, that would be required to fully amortize the loan at the new interest rate over the remainder of the loan term.

The Bureau proposes two major changes to § 1026.20(c). First, the Bureau proposes eliminating the annual notice sent each year during which an interest rate adjustment is implemented without a corresponding payment change. As explained in more detail below, the Bureau believes that Dodd-Frank Act amendments to TILA, and the Bureau’s proposed amendments to Regulation Z that would implement those provisions, would provide consumers with much of the information contained in the annual notice thereby greatly minimizing the need for its protections. Second, the proposal updates current § 1026.20(c) by adding disclosures that the Bureau believes will enhance protections for consumers with ARMs. The proposed revisions to § 1026.20(c) also harmonize with the requirements the Bureau is proposing for the initial ARM interest rate adjustment notice under § 1026.20(d), thereby promoting consistency between the Regulation Z ARM provisions.

Elimination of annual disclosure. First, proposed § 1026.20(c) eliminates the annual notice requirement under the current rule. The Bureau believes that consumers who receive the current annual notice, such as consumers with ARMs with payment caps, would receive much of the same information in the periodic statement under proposed § 1026.41, discussed below. The proposed periodic statement would provide consumers with comprehensive information about their mortgages each billing cycle. The periodic statement would include some of the same key information provided to consumers under the current § 1026.20(c) annual notice, such as the current interest rate and the date after which that rate would adjust. It also would provide other information that may be useful to consumers who would receive the § 1026.20(c) annual ARM notice, including the existence and amount of any prepayment penalty; allocation of the consumer’s payment by principal, interest, and escrow; the amount of the outstanding principal; contact information for the State housing finance authority; and information to access a list of Federally-certified housing counselors.

In light of the amount, type, and frequency of the information the Bureau proposes to provide in the periodic statement to consumers with ARMs that are subject to the current § 1026.20(c) annual ARM interest rate notice, the Bureau proposes to eliminate the requirement for the annual notice as duplicative and as potentially contributing to information overload that could deflect consumer attention away from the information such consumers would receive in other required disclosures. The Bureau solicits comments on the need, value, or use of retaining the annual notice required under current § 1026.20(c) for consumers whose ARM interest rates adjust during the course of a year without resulting in corresponding payment changes.

The Bureau proposes to delete comments 20(c)(1)-1 and 20(c)(4)-1 which, among other things, address the content of the § 1026.20(c) annual notice the Bureau is proposing to eliminate. Current comment 20(c)(1)-1 also explains, among other things, the meaning of the terms “current” and “prior” rates and that in disclosing all other rates that applied during the period between notices, the creditor may disclose a range of the highest and lowest rates during that year period. Current comment 20(c)(4)-1, among other things, defines the term loan “balance” and explains that a “contractual effect” of a rate adjustment includes disclosure of any change in the term or maturity of the loan if the change resulted from the rate adjustment. The Bureau also proposes deletion of these current comments as they relate to the recurring disclosures that would be required by proposed § 1026.20(c) for interest rate adjustments resulting in a corresponding payment change. The Bureau proposes to replace these comments with the new commentary discussed below.

Amendment of payment change disclosure. Second, proposed § 1026.20(c) would amend existing § 1026.20(c) as it relates to interest rate adjustments that result in a corresponding payment change. The proposal retains much of the content required in the current notice and also would require disclosure of additional information that the Bureau believes would help consumers better understand and manage their adjustable-rate mortgages. The proposed revisions to current § 1026.20(c) harmonize with the initial ARM interest rate adjustment notice proposed by § 1026.20(d). The Bureau believes that promoting consistency between the ARM disclosure provisions of § 1026.20(c) and (d) would reduce compliance burdens on industry and minimize consumer confusion.

Creditors, assignees, and servicers. The Bureau also proposes to amend § 1026.20(c) to provide that it applies to creditors, assignees, and servicers. Current § 1026.20(c) applies to creditors and existing comment 20(c)-1 clarifies that the requirements of § 1026.20(c) also apply to subsequent holders, i.e., assignees. The Bureau’s proposal provides that § 1026.20(c) would apply to servicers, as well as to creditors and assignees. Proposed comment 20(c)-1 clarifies that a creditor, assignee, or servicer that no longer owns the mortgage loan or the mortgage servicing rights is not subject to the requirements of § 1026.20(c).

As discussed below, proposed § 1026.20(c) is authorized under, among other authorities, TILA section 128(f), which applies to creditors, assignees, and servicers. The proposal is consistent with proposed § 1026.20(d) such that both proposed § 1026.20(c) and (d) would apply to creditors, assignees and servicers.

The Bureau believes that applying § 1026.20(c) to creditors and assignees, but not servicers, would compromise consumers’ recourse in the case of a violation of § 1026.20(c). Many creditors and assignees do not service the loans they own and instead sell the mortgage servicing rights to a third party. The servicer is the party with which consumers have contact on an ongoing basis regarding their mortgages. Consumers send their payments to the servicer and communicate with the servicer regarding any questions or problems with their mortgage that may arise. Where the owner and the servicer are different entities, consumers may not know the identity of the owner and may not even realize that the servicer is not the owner of their mortgage. Moreover, it can be difficult for consumers to ascertain the identity of the creditor or assignee, even though servicers would be required to identify the owner of a mortgage under rules proposed pursuant to DFA section 1463. Thus, in the case of a violation of proposed § 1026.20(c), consumers should be able to seek relief against the servicer as the primary party from whom they receive service and with whom they maintain communication regarding their mortgages. See below, section 20(d), for a discussion of application of proposed § 1026.20(d) initial ARM interest rate adjustment notices to assignees. The same rationale applies to proposed § 1026.20(c) ARM payment adjustment notices.

Proposed comment 20(c)-1 explains that any provision of subpart C that applies to the disclosures required by § 1026.20(c) also applies to creditors, assignees, and servicers. This is the case even where the other provisions of subpart C refer only to creditors. For the reasons discussed above, the Bureau proposes that the requirements of other regulations that apply to the § 1026.20(c) ARM payment adjustment notices apply to servicers as well as to creditors and assignees.

The proposal also would delete current comment 20(c)-1, which, among other things, refers to subsequent holders, in favor of consistent usage of the term assignee in proposed § 1026.20(c) and (d). It would also delete comment 20(c)-3 as duplicative of the § 1026.17(c)(1) requirement that the disclosures reflect the terms of the parties’ legal obligations.

Conversions. Proposed § 1026.20(c) also applies to ARMs converting to fixed-rate mortgages when the adjustment to the interest rate results in a corresponding payment change. Providing this notice would alert consumers to their new interest rate and payment following conversion from an ARM to a fixed-rate mortgage. Proposed comment 20(c)-2 explains that, in the case of an open-end account converting to a closed-end adjustable-rate mortgage, § 1026.20(c) disclosures are not required until the implementation of the first interest rate adjustment that results in a corresponding payment change post-conversion. Under the proposed rule, this conversion is analogous to consummation. Thus, like other ARMs subject to the requirements of proposed § 1026.20(c), disclosures for these types of converted ARMs would not be required until the first interest rate adjustment following the conversion which results in a corresponding payment change. The proposed rule is consistent with existing commentary and proposed § 1026.20(d) regarding conversions. See current comment 20(c)-1.

Authority. The Bureau proposes to amend § 1026.20(c) pursuant to its authority under TILA section 105(a). For the reasons discussed in the section-by-section analysis for each of the proposed amendments to § 1026.20(c), the Bureau believes that the proposed amendments are necessary and proper to effectuate the purposes of TILA to assure a meaningful disclosure of credit terms, avoid the uninformed use of credit, and protect consumers against inaccurate and unfair credit billing practices. Proposed § 1026.20(c) also is authorized under TILA section 128(f), which requires that certain information enumerated in the statute be provided to consumers every billing cycle in a periodic statement and also confers on the Bureau the authority to require periodic disclosure of “[s]uch other information as the Bureau may prescribe in regulations.” Proposed § 1026.20(c) is further authorized under DFA section 1405(b), which permits the Bureau to modify disclosure requirements where such modification is in the interest of consumers and the public.

Although TILA section 128(f) authorizes the Bureau to require that the content for the § 1026.20(c) ARM notices be included in the periodic statement, the Bureau believes, for the reasons set forth above and below, that consumers would be better served if this information was provided as a separate disclosure. Under proposed § 1026.17(a), the proposed § 1026.20(c) ARM payment adjustment notice would have to be provided separate and distinct from the periodic statement. The disclosures required by proposed § 1026.20(c), however, may be provided to consumers together with the periodic statement, depending on the mode of delivery, in the same envelope or as an additional attachment to the e-mail. The Bureau also believes that the interest of consumers and the public interest would be better served by receiving the § 1026.20(c) ARM notice, within the time frame discussed below, each time the ARM interest rate adjusts resulting in a corresponding payment change, rather than with each billing cycle.

20(c)(1) Coverage of Rate Adjustment Disclosures

20(c)(1)(i) In General

Proposed § 1026.20(c)(1) defines an adjustable-rate mortgage, for purposes of § 1026.20(c), as a closed-end consumer credit transaction secured by the consumer’s principal dwelling in which the annual percentage rate may increase after consummation. Current § 1026.20(c) requires disclosures only for adjustments to the interest rate in variable-rate transactions subject to § 1026.19(b), which is limited to loans secured by the consumer’s principal dwelling with a term of greater than one year. The Bureau proposes deleting the cross-reference to § 1026.19(b), thereby expanding the scope of proposed § 1026.20(c) to include loans with terms of one year or less. Proposed § 1026.20(c)(1)(i) would replace current § 1026.20(c) and comment 20(c)-1 with regard to which loans are subject to the interest rate adjustment disclosures.

There is one type of short-term ARM that the Bureau proposes to except from the requirements of § 1026.20(c): construction loans with terms of one year or less. See section 20(c)(1)(ii) below for a full discussion of this proposed exception for construction ARMs with terms of one year or less. The Bureau solicits comment on whether there are other ARMs with terms of less than one year and whether the proposed 60-day minimum notice period is appropriate for such loans. See section 20(c)(2) below for a full discussion of the timing proposed for § 1026.20(c). If the 60-day period is not appropriate, the Bureau solicits comment on what period would be appropriate that would also provide consumers with sufficient notice of a payment change. This proposal regarding coverage is consistent with the statutory requirements of TILA section 128A and proposed § 1026.20(d) in that those provisions generally apply to all ARMs, regardless of term length. Thus, the proposal to expand § 1026.20(c) to ARMs with terms of one year or less would harmonize the coverage of the two types of ARM adjustment notices, thereby ensuring that both § 1026.20(d) notices and § 1026.20(c) notices, when required, are provided to the same consumers.

The Bureau proposes using the terms “adjustable-rate mortgage” or “ARM” to replace the term “variable-rate transaction” in current § 1026.20(c). Proposed comment 20(c)(1)(i)-1 clarifies that the term “variable-rate transaction,” as used in § 1026.19(b) and elsewhere in Regulation Z, is synonymous with the term “adjustable-rate mortgage” or “ARM”, except where specifically distinguished. The Bureau proposes this revision because “adjustable-rate mortgage” or “ARM” are the terms commonly used for mortgages covered by current and proposed § 1026.20(c).

Proposed comment 20(c)(1)(i)-1 also clarifies that the requirements of § 1026.20(c)(1)(i) are not limited to transactions financing the initial acquisition of the consumer’s principal dwelling, but also would apply to other closed-end ARM transactions secured by the consumer’s principal dwelling, consistent with current comment 19(b)-1 and current § 1026.20(c).

20(c)(1)(ii) Exceptions

Proposed § 1026.20(c)(1)(ii) sets forth two exceptions to the disclosure requirements of § 1026.20(c). These exceptions apply to: (1) construction loans with terms of one year or less; and (2) the first adjustment to an ARM if the first payment at the adjusted level is due within 210 days after consummation and the actual, not estimated, new interest rate was disclosed at consummation, in the initial ARM interest rate adjustment notice that would be required by proposed § 1026.20(d). Proposed comments 20(c)(1)(ii)-1 and -2 provide further explanation. Proposed § 1026.20(d) also would except the same construction loans.

As discussed in more detail below in connection with the notice required for an initial ARM interest rate adjustment under § 1026.20(d), the Bureau also considered, but decided against, permitting or requiring small creditors, assignees, and servicers to include in the periodic statement the information required for the first payment change notice under proposed § 1026.20(c). The Bureau also considered this option with regard to all notices that small entities would be required to provide to consumers under proposed § 1026.20(c). As discussed further below, the Bureau solicits comments from small entities — and from creditors, assignees, and servicers in general — as to whether small entities or all creditors, assignees, and servicers should be permitted or required to provide the information required in the first payment change notices under proposed § 1026.20(c) in the periodic statement instead of as a separate ARM notice and whether this should be done for all § 1026.20(c) notices.

Regarding the first exception the Bureau proposes, construction loans generally have short terms of six months to one year and are subject to frequent interest rate adjustments, usually monthly or quarterly. The construction period usually involves several disbursements of funds at times and in amounts that are unknown at the beginning of that period. The consumer generally pays only accrued interest until construction is completed. The creditor, assignee, or servicer, in addition to disbursing payments in stages, closely monitors the progress of construction. Generally, at the completion of the construction, the construction loan is converted into permanent financing in which the loan amount is amortized just as in a standard mortgage transaction. See comment 17(c)(6)-2 for additional information on construction loans.

The frequent interest rate adjustments, multiple disbursements of funds, short loan term, and on-going communication between the creditor, assignee, or servicer and consumer, distinguish construction loans from other ARMs. These loans are meant to function as bridge financing until construction is completed and permanent financing can be put in place. Consumers with construction ARM loans are not at risk of payment shock like other ARMs where interest rates change less frequently. Moreover, given the frequency of interest rate adjustments on construction loans, creditors, assignees, or servicers would have difficulty complying with the proposed requirement to provide the notice to consumers 60 to 120 days before payment at a new level is due for each adjustment resulting in a corresponding payment change. For these reasons, providing notices under § 1026.20(c) for these loans would not provide a meaningful benefit to the consumer nor improve consumers’ awareness and understanding of their construction loans with terms of one year or less. Proposed comment 20(c)(1)(i)-1 applies the standards in comment 19(b)-1 for determining the term of a construction loan.

The second exception, for the first adjustment to an ARM causing a payment change if the first payment at the adjusted level is due within 210 days after consummation, would apply only if the exact interest rate, not an estimate, is disclosed at consummation. For ARMs adjusting within six months of consummation, i.e., 210 days before the first payment is due at the new level, the disclosures proposed by § 1026.20(d) must be provided at consummation. The recency of consummation obviates the need for the § 1026.20(c) notice in this circumstance because consumers would have been apprised of the upcoming adjustment and payment change just months prior to its occurrence and their mortgages would be so new as to not require the alerts in the notice regarding pursuing alternatives. Thus, providing § 1026.20(c) disclosures in these circumstances would be duplicative, not contribute to consumer awareness and understanding, and not provide a meaningful benefit to consumers.

Proposed comment 20(c)(1)(ii)-3 discusses other loans to which the proposed rule does not apply. Proposed comment 20(c)(1)(ii)-3 is consistent with proposed comment 20(d)(1)(ii)-2 with regard to the loans which are not subject to the proposed ARM disclosure rules. Certain Regulation Z provisions treat some of these loans as variable-rate transactions, even if they are structured as fixed-rate transactions. The proposed comment clarifies that, for purposes of § 1026.20(c), the following loans, if fixed-rate transactions, are not ARMs and therefore not subject to ARM notices pursuant to § 1026.20(c): shared-equity or shared-appreciation mortgages; price-level adjusted or other indexed mortgages that have a fixed rate of interest but provide for periodic adjustments to payments and the loan balance to reflect changes in an index measuring prices or inflation; graduated-payment mortgages or step-rate transactions; renewable balloon-payment instruments; and preferred-rate loans. The particular features of these types of loans may trigger interest rate or payment changes over the term of the loan or at the time the consumer pays off the final balance. However, these changes are based on factors other than a change in the value of an index or a formula. Because the enumerated loans are not ARMs they are not covered by proposed § 1026.20(c) and require no disclosures under this section.

Proposed and current § 1026.20(c) are generally consistent with regard to the ARMs to which they do not apply. The principal difference is that current § 1026.20(c) does apply to renewable balloon-payment instruments and preferred-rate loans, even if they are structured as fixed-rate transactions while proposed § 1026.20(c) would not apply to such loans. See § 1026.19(b) and comment 19(b)-5.i.A and B. Also, as discussed above, current § 1026.20(c) does not apply to loans with terms of one year or less. This category includes construction loans, which are excepted from coverage under proposed § 1026.20(c). Logically, the Bureau’s proposed exception for initial § 1026.20(c) ARM adjustments if the first payment at the adjusted level is due within 210 days of consummation is inapplicable to the current rule since proposed § 1026.20(d) is not yet implemented to replace the current § 1026.20(c) disclosures provided at consummation.

Like proposed comment 20(c)(1)(ii)-3, current comment 20(c)-2 clarifies that § 1026.20(c) does not apply to shared-equity or shared-appreciation mortgages or to price-level adjusted or other such indexed mortgages. The current rule cross-references § 1026.19(b) and applies to all variable-rate transactions covered by that rule. Comment 19(b)-4 explains that graduated-payment mortgages and step-rate transactions without variable-rate features are not subject to § 1026.19(b). Therefore, like the proposed rule, such loans are not subject to current § 1026.20(c).

The current rule does not mention renewable balloon-payment instruments and preferred-rate loans, but current § 1026.20(c) applies to these loan products through the rule’s cross-reference to § 1026.19(b) and therefore to comment 19(b)-5.i.A and B. As discussed above, these loans are not adjustable-rate mortgages and the Bureau does not believe that it is appropriate to require the disclosures in proposed § 1026.20(c) for such loans. The particular features of these types of loans may trigger interest rate or payment changes over the term of the loan or at the time the consumer pays off the final balance. However, these changes are based on factors other than a change in the value of an index or a formula. For example, whether or when the interest rate will adjust for a preferred-rate loan with a fixed interest rate is likely not knowable to the creditor, assignee, or servicer 60 to 120 days in advance of the due date for the first payment at a new level after the adjustment. This is because the loss of the preferred rate is based on factors other than a formula or change in the value of an index agreed to at consummation. Like the Bureau’s proposed rule, the Board also proposed to remove renewable balloon-payment instruments and preferred-rate loans from coverage under § 1026.20(c) in its 2009 Closed-End Proposal.[66]

20(c)(2) Timing and Content of Rate Adjustment Disclosures

Proposed § 1026.20(c)(2) would require that ARM disclosures be provided to consumers 60 to 120 days before payment at a new level is due. Under current § 1026.20(c), notices must be provided to consumers 25 to 120 days before payment at a new level is due. Thus, the proposed rule would increase the minimum advance notice to consumers from 25 to 60 days before a new payment amount is due. There are two circumstances under which the rule proposes a different time frame, which are discussed below. Proposed comment 20(c)(2)-1 would replace current comment 20(c)-1 regarding timing.

Current and proposed § 1026.20(c) disclosures provide consumers with their actual new interest rate and payment. The disclosures proposed by § 1026.20(d) likely would provide estimates of these amounts. The longer time frame proposed by the rule is intended to give consumers adequate time to refinance or take other actions based on these exact amounts, if they are not able to make higher payments. The current minimum time of 25 days does not give consumers sufficient time to pursue meaningful alternatives such as refinancing, home sale, loan modification, forbearance, or deed in lieu of foreclosure. In the current market, “it now takes the nation’s biggest mortgage lenders an average of more than 70 days to complete a refinance.[67] Even if consumers elect not to refinance or pursue other alternatives, the proposed rule would give them more time to adjust their finances to the actual amount of an increase in their mortgage payments.

The Bureau believes that for most adjustable-rate mortgages, the proposed 60-day minimum time frame would provide sufficient time for creditors, assignees, and servicers to comply with the proposed rule. Through outreach to servicers of adjustable-rate mortgages it appears that, for most ARMs, servicers know the index value from which the new interest rate and payment are calculated at least 45 days before the date of the interest rate adjustment. Because interest generally is paid one month in arrears, this mean that, for most ARMs, servicers know the index value approximately 75 days before the due date of the first new payment, depending on the number of days in the month during which interest begins accruing at the new rate.

Creditors, assignees, and servicers generally refer to the date the adjusted interest rate goes into effect as the “change date.” The “look-back period” is the number of days prior to the change date on which the index value will be selected which serves as the basis for the new interest rate and payment. In general, interest rate change dates occur on the first of the month to correspond with payment due dates. Thus, the due date for the new payment generally falls on the first of the month following the change date.

Based on outreach conducted by the Bureau, it appears that small servicers often send out the payment change notices required by § 1026.20(c) on the same day the index value is selected. In that case, for a loan with a 45-day look-back period, the notice is ready 45 days before the change date and, with an approximately 30-day billing cycle between the change date and the date payment at the new level is due, the interest rate adjustment notice can be provided to the consumer approximately 75 days before the new payment is due. Under these circumstances, the servicer could comfortably comply with a rule requiring that notice be provided to consumers 60 days before the payment at a new level is due.

On the other hand, many large creditors, assignees, or servicers conduct what is referred to as a “verification period” before sending out the notices required by § 1026.20(c). This verification period generally takes anywhere from three to ten days and involves confirming the index rate and other quality control measures to insure the notices are correct.[68] In these cases, for a loan with a 45-day look-back period, the payment change notices can be provided between approximately 42 and 35 days prior to the change date, which is either 70 to 73 or 63 to 66 days before the new payment is due, depending on the verification period used and the length of the billing cycle. Under these circumstances, payment change notices could be provided to consumers within the 60-day period, even assuming a verification period of up to thirteen days. For loans with the shortest verification period of three days, the payment change notice could be provided to consumers within 70 days prior to payment due at a new level.

In sum, it appears that for most ARMs, creditors, assignees, or servicers could comply with the 60-day time period proposed by the Bureau. The Bureau solicits comment about this proposed timing of the § 1026.20(c) notice.

Some ARMs have look-back periods shorter than 45 days. For example, ARMs backed by the FHA and VA often have look-back periods of 15 or 30 days. For some ARMs, the calculation date is the first business day of the month that precedes the effective date of the interest rate change. Since the first day of that month may not fall on a business day, the look-back period may be less than 30 days, excluding any verification period.

In two circumstances, the Bureau is proposing a different time period from the proposed 60 to 120 days. The Bureau proposes that existing ARMs with look-back periods of less than 45 days that were originated before a specified date provide the notices required under this proposed rule within 25 to 120 days before payment at a new level is due. The Bureau proposes that the specified date be July 21, 2013. The Bureau understands that the creditors, assignees, or servicers of such loans would not be able to comply with the 60- to 120-day time frame proposed in § 1026.20(c). Although this time frame would shorten the advance notice provided to some consumers, the Bureau is proposing to grandfather these ARMs in order to prevent altering existing contractual agreements regarding the look-back period. Thus, going forward, ARMs must be structured to permit compliance with the proposed 60- to 120-day time frame. The Bureau solicits comment on whether it should grandfather existing ARMs with look-back periods of less than 45 days. The Bureau also seeks comment on whether July 21, 2013 is an appropriate time frame for grandfathering existing ARMs with look-back periods of less than 45 days or if another time period would be more appropriate and why. If not, the Bureau seeks comment on what would be an appropriate time frame for the expiration of the grandfathering period. The Bureau also solicits comments on whether other adjustable-rate mortgages should be allowed to continue with a 25- to 120- day period.

The Bureau also proposes to alter the timing requirements for ARMs that adjust for the first time within 60 days of consummation where the actual, not estimated, new interest rate was not disclosed at consummation. (If the actual interest rate was disclosed at consummation, such loans would be excepted from the rule pursuant to proposed § 1026.20(c)(1)(ii)). The creditors, assignees, or servicers of such loans would not be able to comply with the proposed 60-day time frame. For such loans, the disclosures proposed by § 1026.20(c) must be provided to consumers as soon as practicable, but not less than 25 days before a payment at a new level is due.

The Bureau solicits comment about the feasibility of applying the proposed 60-day period to ARMs that have look-back period of less than 45 days. The Bureau solicits comments about whether a look-back period of 45 days or longer is feasible going forward for loans that currently use shorter look-back periods and, if not, why not. The Bureau solicits comments on the extent, if any, to which the relative length of the look-back period may affect the interest rate risk for the creditor, assignee, or servicer.

For all ARMs, the Bureau solicits comments on the operational changes that would be required to provide § 1026.20(c) notices at least 60 days before payment at a new level is due. Comment is requested on any factors that would hinder compliance with this time frames. In light of technological and other advances since the promulgation of current § 1026.20(c) in 1987, the Bureau also solicits comment on whether, and if so why, lengthy verification periods are necessary and on the feasibility of reducing the length of these verification periods.

20(c)(2)(i) Statement Regarding Changes to Interest Rate and Payment

For interest rate adjustments resulting in corresponding payment changes, proposed § 1026.20(c)(2)(i)(A) would inform consumers that, under the terms of their adjustable-rate mortgage, the specific period in which their interest rate stayed the same will end on a certain date and that their interest rate and mortgage payment will change on that date. This disclosure is similar to the pre-consummation disclosures provided to consumers pursuant to current § 1026.19(b)(2)(i) and § 1026.37(i) as recently proposed by the 2012 TILA-RESPA Proposal.

Under proposed § 1026.20(c)(2)(i)(B), the creditor, assignee, or servicer must include in the disclosure the date of the impending and future interest rate adjustments. Proposed § 1026.20(c)(2)(i)(C) would require disclosure of any other changes to the loan taking place on the same day of the rate adjustment, such as changes in amortization caused by the expiration of interest-only or payment-option features.

The first ARM model form tested did not contain the proposed statement informing consumers of impending and future changes to their interest rate and the basis for these changes. Although participants understood that their interest rate was adjusting and this would affect their payment, they did not understand that these changes would occur periodically subject to the terms of their mortgage contract. Inclusion of this statement in the second round of testing successfully resolved this confusion. All but one consumer tested in round two and three of testing understood that, under the scenario presented to them, their interest rate would change annually.[69]

20(c)(2)(ii) Table with Current and New Interest Rates and Payments

Proposed § 1026.20(c)(2)(ii) would require disclosure of the following information in the form of a table: (A) the current and new interest rates; (B) the current and new periodic payment amounts and the date the first new payment is due; and (C) for interest-only or negatively- amortizing payments, the amount of the current and new payment allocated to interest, principal, and property taxes and mortgage-related insurance, as applicable. The information in this table would appear within the larger table containing all the required disclosures.

This table would follow the same order as, and have headings and format substantially similar to, those in the table in Forms H-4(D)(1) and (2) in Appendix H of subpart C. The Bureau learned through consumer testing that, when presented with information in a logical order, consumers more easily grasped the complex concepts contained in the proposed § 1026.20(c) notice. For example, the form begins by informing consumers of the basic purpose of the notice: their interest rate is going to adjust, when it will adjust, and the adjustment will change their mortgage payment. This introduction is immediately followed by a visual illustration of this information in the form of a table comparing consumers’ current and new interest rates. Based on consumer testing, the Bureau believes that consumer understanding is enhanced by presenting the information in a simple manner, grouped together by concept, and in a specific order that allows consumers the opportunity to build upon knowledge gained. For these reasons, the Bureau proposes that creditors, assignees, or servicers disclose the information in the table as set forth in Forms H-4(D)(1) and (2) in Appendix H.

Proposed § 1026.20(c)(2)(ii) replaces current § 1026.20(c)(1) and (4), but retains the obligation to disclose the current and new interest rates and the amount of the new payment. Proposed § 1026.20(c)(2)(ii)(A) also would require disclosure of the date when the consumer must start paying the new payment and proposed comment § 1026.20(c)(2)(ii)(A)-1 clarifies that the new interest rate must be the actual rate, not an estimate. Proposed rule § 1026.20(c)(2)(ii) also replaces the language “prior” and “current” in the current rule with the terms “current” and “new,” respectively, and deletes comment 20(c)(2)-1 which, among other things, uses the terms “prior” and “current.” This change is designed to make clear that “current” means the interest rate and payment in effect prior to the interest rate adjustment and “new” means the interest rate and payment resulting from the interest rate adjustment.

Proposed comment 20(c)(2)(ii)(A)-1 defines the term “current” interest rate as the one in effect on the date of the disclosure. This more succinct definition replaces the lengthy definition of “prior interest rates” in current comment 20(c)(1) as the interest rate disclosed in the last notice, as well as all other interest rates applied to the transaction in the period since the last notice, or, if there had been no prior adjustment notice, the interest rate applicable at consummation and all other interest rates applied to the transaction in the period since consummation.

In all rounds of testing, consumers were presented with model forms with tables depicting a scenario in which the interest rate and payment would increase as a result of the adjustment. All participants in all rounds of testing understood that their interest rate and payment were going to increase and when these changes would occur.[70]

Current ARM notices are not required to show the allocation of payments among principal, interest, and escrow accounts for any ARM. The Bureau proposes including this information in the table for interest-only and negatively-amortizing ARMs. The Bureau believes this information would help consumers better understand the risk of these products by demonstrating that their payments would not reduce the principal. The Bureau also believes providing the payment allocation would help consumers understand the effect of the interest rate adjustment, especially in the case of a change in the ARM’s features coinciding with the interest rate adjustment, such as the expiration of an interest-only or payment-option feature. Since payment allocation may change over time, the proposed rule would require disclosure of the expected payment allocation for the first payment period during which the adjusted interest rate would apply.

The allocation of payment disclosure was tested in the third round of testing. The rate adjustment notice tested showed the following scenario: the first adjustment of a 3/1 hybrid ARM — an ARM with a fixed interest rate for three years followed by annual interest rate adjustments — with interest-only payments for the first three years. On the date of the adjustment, the interest-only feature would expire and the ARM would become amortizing. Only about half of participants understood that their payments were changing from interest-only to amortizing. Participants generally understood the concept of allocation of payments but were confused by the table in the notice that broke out principal and interest for the current payment, but combined the two for the new amount. As a result, this table was revised so that separate amounts for principal and interest were shown for all payments. [71]

The Bureau recognizes that certain Dodd-Frank Act amendments to TILA will restrict origination of non-amortizing and negatively-amortizing loans. For example, TILA section 129C and the 2011 ATR (Ability to Repay) Proposal which would implement that provision, generally require creditors to determine that a consumer can repay a mortgage loan and include a requirement that these determinations assume a fully-amortizing loan. Thus, this law and regulation, when finalized, will restrict the origination of risky mortgages such as interest-only and negatively-amortizing ARMs.

Other Dodd-Frank amendments to TILA, such as the proposed periodic statement provisions discussed below, will provide payment allocation information to consumers for each billing cycle. Thus, consumers who currently have interest-only or negatively-amortizing loans or may obtain such loans in the future will receive information about the interest-only or negatively-amortizing features of their loans through the payment allocation information in the periodic statement. Also, as noted above, consumer testing showed that participants were confused by the allocation table. Since the Bureau was not able to test a revised version of the model form to see if it rectified the confusion caused by the allocation table or if the concepts of interest-only and negatively-amortizing ARMs themselves are the source of the confusion, the Bureau is uncertain of the value of disclosing this information to consumers in the ARM interest rate adjustment notice. In view of these changes to the law and the outcome of consumer testing, the Bureau solicits comments on whether to include allocation information for interest-only and negatively-amortizing ARMs in the table proposed above.

20(c)(2)(iii) Explanation of How the Interest Rate is Determined

Proposed § 1026.20(c)(2)(iii) would require the ARM disclosures to explain how the interest rate is determined. Consumer testing revealed that consumers generally have difficulty understanding the relationship of the index, margin, and interest rate.[72] Therefore, the Bureau is proposing a relatively brief and simple explanation that the new interest rate is calculated by taking the published index rate and adding a certain number of percentage points, called the “margin.” Proposed § 1026.20(c)(2)(iii) would also require disclosure of the specific amount of the margin.

The proposed explanation of how the consumer’s new interest rate is determined, such as adjustment of the index by the addition of a margin, mirrors the pre-consummation disclosure required around the time of application by current § 1026.19(b)(2)(iii) and TILA section 128A requirements for initial interest rate disclosures. It also parallels the pre-consummation disclosure of the index and margin proposed in the 2012 TILA-RESPA Proposal. Proposed § 1026.20(c) also would require disclosure of the name and published source of the index or formula, as required in other disclosures by § 1026.19(b)(2)(ii) and TILA section 128A.

The proposed rule would replace the current § 1026.20(c)(2) required disclosure of the index values upon which the “current” and “prior” interest rates are based. The Bureau believes that providing consumers with index values is less valuable than providing them with their actual interest rates. Current comment 20(c)(2)-1, which addresses the requirement to disclose current and prior interest rate, would also be deleted.

Consumer testing indicated that the explanation helped consumers better understand the relationship between interest rate, index, and margin. It also helped dispel the notion held by many consumers in the initial rounds of testing that lenders subjectively determined their new interest rate at each adjustment.[73] The Bureau believes that its proposed rule and forms strike an appropriate balance between providing consumers with key information necessary to understand the basic interest rate adjustment of their adjustable-rate mortgages without overloading consumers with complex and confusing technical information.

20(c)(2)(iv) Rate Limits and Unapplied Carryover Interest

Proposed § 1026.20(c)(2)(iv) would require the disclosure of any limits on the interest rate or payment increases at each adjustment and over the life of the loan. It also would require disclosure of the extent to which the creditor has foregone any increase in the interest rate due to a limit, called unapplied carryover interest. Disclosure of rate limits is not required by the current rule. The Bureau believes that knowing the limitations of their ARM rates and payments would help consumers understand the consequences of interest rate adjustments and weigh the relative benefits of pursuing alternatives. For example, if an adjustment causes a significant increase in the consumer’s payment, knowing how much more the interest rate or payment could increase could help inform a consumer’s decision on whether or not to seek alternative financing.

Both proposed § 1026.20(c)(2)(iv) and current § 1026.20(c)(3) require disclosure of any foregone interest rate increase. Unlike the current rule, the proposed rule would require an explanation in the ARM payment change notice that the additional interest was not applied due to a rate limit and provide the earliest date such foregone interest may be applied.

Proposed comment 20(c)(2)(iv)-1 regarding unapplied interest closely parallels, and would replace, current comment 20(c)(3)-1. The proposed comment explains that disclosure of foregone interest would apply only to transactions permitting interest rate carryover. It further explains that the amount of the interest increase foregone is the amount that, subject to rate caps, can be added to future interest rate adjustments to increase, or offset decreases in, the rate determined according to the index or formula.

Consumers had difficulty understanding the concept of interest rate carryover when it was introduced during the third round of testing. This difficulty may have been due to the simultaneous introduction of other complex notions, such as interest-only or negatively-amortizing features and the allocation of interest, principal, and escrow payments for such loans. In response, the Bureau has simplified the explanation of carryover interest.[74]

The Bureau recognizes that the disclosure of rate limits and unapplied carryover interest provide information that may help consumers better understand their ARMs. However, the Bureau is considering whether the help this information may provide outweighs its distraction from other more key information. Also, as explained above, consumers had difficulty understanding the concept of carryover interest and the Bureau does not want this difficulty to diminish the effectiveness of the proposed § 1026.20(c) disclosures. The Bureau solicits comment on whether to include rate limits and unapplied carryover interest in the proposed § 1026.20(c) disclosures.

20(c)(2)(v) Explanation of How the New Payment is Determined

Proposed § 1026.20(c)(2)(v) would require ARM disclosures to explain how the new payment is determined, including (A) the index or formula, (B) any adjustment to the index or formula, such as by addition of the margin or application of previously foregone interest, (C) the loan balance, and (D) the length of the remaining loan term. This explanation is consistent with the disclosures provided at the time of application pursuant to § 1026.19(b)(2)(iii). It is also consistent with the TILA section 128A requirement to disclose the assumptions upon which the new payment is based, which the Bureau proposes to implement in proposed § 1026.20(d), and thus promotes consistency among Regulation Z ARM disclosures.

The current rule, as explained in comment 20(c)(4)-1, which the proposed rule would delete, requires disclosure of the contractual effects of the adjustment. This includes the payment due after the adjustment is made and whether the payment has been adjusted. The proposed rule would require disclosure of this information as well as the name of the index and any specific adjustment to the index, such as the addition of a margin or an adjustment due to carryover interest. Proposed comment 20(c)(2)(v)(B)-1 explains that a disclosure regarding the application of previously foregone interest is required only for transactions permitting interest rate carryover. The proposed comment further explains that foregone interest is any percentage added or carried over to the interest rate because a rate cap prevented the increase at an earlier adjustment. As discussed above, the Bureau found that this explanation helped consumers better understand how the index or formula and margin determine their new payment and dispelled the notion held by many consumers in the initial rounds of testing that the lender subjectively determined their new interest rate, and thus the new payment, at each adjustment.

The proposal would require disclosure of both the loan balance and the remaining loan term expected on the date of the interest rate adjustment. The current rule requires disclosure of the loan balance but not the remaining loan term. The date on which the balance is taken differs slightly in proposed § 1026.20(c) from the current rule. Current comment 20(c)(4)-1 explains that the balance disclosed is the one that serves as the basis for calculating the new adjusted payment while the Bureau proposes disclosure of a more current balance, i.e., the one expected on the date of the adjustment. Both the proposed rule and the current rule, as explained in current comment 20(c)(4)-1, provide for disclosure of any change in the term or maturity of the loan caused by the adjustment.

Disclosure of the four key assumptions upon which the new payment is based provides a succinct overview of how the interest rate adjustment works. It also demonstrates that factors other than the index can increase consumers’ interest rates and payments. Disclosures of these factors would provide consumers with a snapshot of the current status of their adjustable-rate mortgages and with basic information to help them make decisions about keeping their current loan or shopping for alternatives.

Current comment 20(c)(4)-1 requires disclosure of certain information related to loans that are not fully amortizing. Disclosure of similar information is proposed in § 1026.20(c)(2)(vi), discussed below.

20(c)(2)(vi) Interest-Only and Negative-Amortization Statement and Payment

Proposed § 1026.20(c)(2)(vi) would require § 1026.20(c) notices to include a statement regarding the allocation of payments to principal and interest for interest-only or negatively- amortizing loans. If negative amortization occurs as a result of the interest rate adjustment, the proposed rule would require disclosure of the payment necessary to fully amortize such loans at the new interest rate over the remainder of the loan term. As explained in proposed comment 20(c)(2)(vi)-1, for interest-only loans, the statement would inform the consumer that the new payment covers all of the interest but none of the principal owed and, therefore, will not reduce the loan balance. For negatively-amortizing ARMs, the statement would inform the consumer that the new payment covers only part of the interest and none of the principal, and therefore the unpaid interest will add to the balance or increase the term of the loan. The current rule, clarified by current comment 20(c)(5)-1, requires disclosure of the payment necessary to fully amortize loans that become negatively-amortizing as a result of the adjustment but does not require the statement regarding amortization. Proposed § 1026.20(c)(2)(vi) and proposed comments 20(c)(2)(vi)-1 and 20(c)(2)(vi)-2 would replace the current rule and current comment 20(c)(5)-1.

Both current § 1026.20(c) and the Board’s 2009 Closed-End Proposal to revise § 1026.20(c) include, for ARMs that become negatively amortizing as a result of the interest rate adjustment, disclosure of the payment necessary to fully amortize those loans at the new interest rate over the remainder of the loan term. However, the Bureau believes there are countervailing considerations regarding whether to include this information in proposed § 1026.20(c).

The Bureau recognizes that certain Dodd-Frank Act amendments to TILA will restrict origination of non-amortizing and negatively-amortizing loans. For example, TILA section 129C and the 2011 ATR Proposal that would implement that provision, generally require creditors to determine that a consumer can repay a mortgage loan and include a requirement that these determinations assume a fully-amortizing loan. Thus, this law and regulation, when finalized, will restrict the origination of risky mortgages such as interest-only and negatively-amortizing ARMs.

Other Dodd-Frank amendments to TILA, such as the periodic statement proposed by § 1026.41, will include information about non-amortizing and negatively-amortizing loans in each billing cycle, such as an allocation of payments. Thus, consumers who currently have interest-only and negatively-amortizing ARMs or may obtain such loans in the future will receive certain information about the interest-only or negatively-amortizing features of their loans in another disclosure, although this will not include the payment required to fully amortize negatively-amortizing loans. Disclosure of the payment necessary to fully amortize negatively-amortizing loans was not consumer tested but testing of the table showing the payment allocation of interest-only and negatively-amortizing ARMs indicated that consumers were confused by the concept of amortization. Thus, the Bureau is weighing the value of disclosing specific information regarding amortization, such as the payment needed to fully amortize negatively-amortizing ARMs. In view of these changes to the law and the outcome of consumer testing, the Bureau solicits comments on whether to include the payment required to amortize ARMs that became negatively amortizing as a result of an interest rate adjustment.

20(c)(2)(vii) Prepayment Penalty

Proposed § 1026.20(c)(2)(vii) would require disclosure of the circumstances under which any prepayment penalty may be imposed, such as selling or refinancing the principal residence, the time period during which such penalty would apply, and the maximum dollar amount of the penalty. The current rule does not have this requirement. The proposed rule cross-references the definition of prepayment penalty in subpart E, § 1026.41(d)(7)(iv), in the proposed rule for periodic statements.

Interest rate adjustments may cause payment shock or require consumers to pay their mortgage at a rate they may no longer be able to afford, prompting them to consider alternatives such as refinancing. In order to fully understand the implications of such actions, the Bureau believes that consumers should know whether prepayment penalties may apply. Such information should include the maximum penalty in dollars that may apply and the time period during which the penalty may be imposed. The dollar amount of the penalty, as opposed to a percentage, is more meaningful to consumers.

The Bureau also proposes disclosure of any prepayment penalty in § 1026.20(d) ARM rate adjustment notices and in the periodic statements proposed by § 1026.41. Consumer testing of the periodic statement included a scenario in which a prepayment penalty applied. Most participants understood that a prepayment penalty applied if they paid off the balance of their loan early, but some participants were unclear whether it applied to the sale of the home, refinancing, or other alternative actions consumers could pursue in lieu of maintaining their adjustable-rate mortgages.[75] For this reason, the Bureau proposes to clarify the circumstances under which a prepayment penalty would apply. The proposed forms would alert consumers that a prepayment penalty may apply if they pay off their loan, refinance, or sell their home before the stated date.

The Bureau recognizes that Dodd-Frank Act amendments to TILA, such as 129C and the 2011 ATR Proposal that would implement that provision, would significantly restrict a lender’s ability to impose prepayment penalties. Other Dodd-Frank amendments to TILA, such as the proposed periodic statement, would provide consumers with information about their prepayment penalties for each billing cycle. Thus, consumers who currently have ARMs with prepayment penalty provisions or may obtain such loans in the future would generally receive information about them at frequent intervals in another disclosure. In view of these changes to the law, the Bureau solicits comments on whether to include information regarding prepayment penalties in proposed § 1026.20(c).

20(c)(3) Format of Disclosures

As discussed above, the Bureau proposes to make § 1026.20(c) subject to certain of the § 1026.17(a)(1) form requirement to which § 1026.20(c) disclosures are currently not subject. These requirements include grouping the disclosures together, segregating them from everything else, and prohibiting inclusion of any information not directly related to the § 1026.20(c) disclosures.[76] As discussed above in connection with Section 17(a)(1), this revises the current rule but the Bureau believes the revision is necessary to effectively highlight information for consumers about changes to their ARM interest rates and payments.

20(c)(3)(i) All Disclosures in Tabular Form

Proposed § 1026.20(c)(3)(i) would require that the ARM adjustment disclosures be provided in the form of a table and in the same order as, and with headings and format substantially similar to, Forms H-4(D)(1) and (2) in Appendix H to subpart C for interest rate adjustments resulting in a corresponding payment change.

The proposed ARM adjustment notice contains complex concepts challenging for consumers to understand. For example, consumer testing revealed that participants generally had difficulty understanding the relationship among index, margin, and interest rate.[77] They also had difficulty with the concepts of amortization and interest rate carryover.[78] As a starting point, the Bureau looked at the model forms developed by the Board for its 2009 Closed-End Proposal to amend §1026.20(c). The Bureau then conducted its own consumer testing.

The Bureau’s testing showed that consumers can more readily understand these concepts when the information is presented to them in a simple manner and in the groupings contained in the model forms. The Bureau also observed that consumers more readily understood the concepts when they were presented in a logical order, with one concept presented as a foundation to understanding other concepts. For example, the form begins by informing consumers of the purpose of the notice: that their interest rate is going to adjust, when it will adjust, and that the adjustment will change their mortgage payment. This introduction is immediately followed by a table visually showing consumers’ current and new interest rates. In another example, the proposed notice informs consumers about their index rate and margin before explaining how the new payment is calculated based on those factors, as well as other factors such as the loan balance and remaining loan term.

Based on consumer testing, the Bureau believes that consumer understanding is enhanced by presenting the information in a simple manner, grouped together by concept, and in a specific order that allows consumers the opportunity to build upon knowledge gained. For these reasons, the Bureau proposes that creditors, assignees, or servicers disclose the information required by proposed § 1026.20(c) with headings, content, and format substantially similar to Forms H-4(D)(1) and (2) in Appendix H to this part.

Over the course of consumer testing, participant comprehension improved with each successive iteration of the model form. As a result, the Bureau believes that displaying the information in tabular form focuses consumer attention and lends to greater understanding. Similarly, the Bureau found that the particular content and order of the information, as well as the specific headings and format used, presented the information in a way that consumers both could understand and from which they could benefit.

20(c)(3)(ii) Format of Interest Rate and Payment Table

Proposed § 1026.20(c)(3)(ii) would require tabular format for ARM payment change notices of: the current and new interest rates, the current and new payments, and the date the first new payment is due. For interest-only and negatively-amortizing ARMs, the table would also include the allocation of payments. This table would be located within the table proposed by § 1026.20(c)(3)(i). This table is substantially similar to the one tested by the Board for its 2009 Closed-End Proposal to revise § 1026.20(c). The proposal would require the table to follow the same order as, and have headings, content, and format substantially similar to, Forms H-4(D)(1) and (2) in Appendix H of subpart C.

Disclosing the current interest rate and payment in the same table allows consumers to readily compare those rates with the adjusted rate and new payment. Consumer testing revealed that nearly all participants were readily able to identify the table and understand the content.[79] The new interest rate and payment and date the first new payment is due is key information the consumer must know in order to commence payment at the new rate. For these reasons, the Bureau proposes locating this information prominently in the disclosure.

20(d) Initial Rate Adjustments

Elimination of current § 1026.20(d). Current § 1026.20(d) permits creditors to substitute information provided in accordance with variable-rate subsequent disclosure regulations of other Federal agencies for the disclosures required by § 1026.20(c). In the 2009 Closed-End Proposal, the Board proposed amending the regulation that is now § 1026.20, including deleting the provision that is current § 1026.20(d). The Board stated that, as of August 2009, there were “[n]o comprehensive disclosure requirements for variable-rate mortgage transactions . . . in effect under the regulations of the other Federal financial institution supervisory agencies.”[80] The Board explained that when it originally adopted the provision in 1987, as footnote 45c of § 226.20(c) of Regulation Z,[81] the regulations of other financial institution supervisory agencies — namely the OCC, the Federal Home Loan Bank Board (the FHLBB), and HUD — contained subsequent disclosure requirements for ARMs.[82]

The Bureau proposes deleting the current content of § 1026.20(d) because it is not aware of any other Federal financial institution supervisory agency rules requiring comprehensive disclosure requirements for ARMs. The Bureau solicits comment on whether there is any reason to retain this provision. The Bureau solicits comments, for example, on whether this proposed regulatory change would have implications for rights under the Alternative Mortgage Transaction Parity Act. For the reasons discussed above with respect to proposed § 1026.20(c), the Bureau proposes this deletion pursuant to its authority under TILA sections 105(a) and 128(f)(1)(H) and DFA section 1405(b).

New initial ARM interest rate adjustment disclosures. In the section that would be left vacant by the proposed deletion of § 1026.20(d), the Bureau proposes to implement the initial ARM adjustment notice mandated by TILA section 128A. Proposed § 1026.20(d) would require disclosure to consumers with certain adjustable-rate mortgages, approximately six months prior to the initial interest rate adjustment, of key information about the upcoming adjustment, including the new rate and payment and options for pursuing alternatives to their adjustable-rate mortgage. This initial ARM adjustment notice would harmonize with the ARM payment change notice that would be required under the proposed revisions to § 1026.20(c). The Bureau believes that promoting consistency between the ARM disclosure provisions of proposed § 1026.20(c) and (d) would reduce compliance burdens on industry and minimize consumer confusion.

Form of delivery. As required under TILA section 128A(b), proposed § 1026.20(d) would require that the initial ARM interest rate adjustment notices be provided to consumers in writing, separate and distinct from all other correspondence. Proposed comment 20(d)-2 explains that to satisfy this requirement, the notices must be mailed or delivered separately from any other material. For example, in the case of mailing the disclosure, there should be no material in the envelope other than the initial interest rate adjustment notice. In the case of emailing the disclosure, the only attachment should be the initial interest rate adjustment notice. This requirement contrasts with proposed § 1026.20(c), which would be subject to the less stringent segregation requirements of § 1026.17(a)(1), as amended by the Bureau’s proposal. The proposed comment further explains that the notices proposed by § 1026.20(d) may be provided to consumers in electronic form with consumer consent, pursuant to the requirements of § 1026.17(a)(1). The Bureau solicits comments on whether consumer protection would be compromised by providing § 1026.20(d) notices on a separate piece of paper but in the same envelope or as email correspondence with other messages from the creditor, assignee, or servicer.

Creditors, assignees, and servicers. Proposed § 1026.20(d) applies to creditors, assignees, and servicers. Proposed comment 20(d)-1 clarifies that a creditor, assignee, or servicer that no longer owns the mortgage loan or the mortgage servicing rights is not subject to the requirements of § 1026.20(c). This proposed language tracks, in part, the requirements of TILA section 128Athat creditors and servicers must provide the initial ARM interest rate adjustment notices, but adds assignees to the list of covered persons. The Bureau believes that holding creditors, but not assignees, liable under the regulation would result in inconsistent levels of consumer protection and an unlevel playing field for owners of mortgages.

It is a common practice for creditors to sell many or all of the loans they originate rather than hold them in portfolio. If the creditor were to sell the ARM, the consumer would have no recourse against the subsequent holder for violations of § 1026.20(d) if assignees were not made subject to § 1026.20(d). Shielding assignees from liability under the proposed rule would have particularly deleterious effects on consumers seeking relief against a servicer to whom an assignee sold the ARM’s mortgage servicing rights, if that servicer had insufficient resources to satisfy a judgment the consumer may obtain for violations of § 1026.20(d). Consumers who happen to have ARMs sold by the original creditor to a subsequent holder would have less protection under the regulation than consumers with ARMs that are retained in portfolio by the creditor originating the loan. It also would create an unfair advantage for assignees. The Bureau believes that the protections afforded under proposed § 1026.20(d) should not be determined by the happenstance of loan ownership or favor one sector of the mortgage market over another. For these reasons, the Bureau proposes to make assignees, along with creditors and servicers, subject to the requirements § 1026.20(d).

Proposed comment 20(d)-1 explains that any provision of subpart C that applies to the disclosures required by § 1026.20(d) also applies to creditors, assignees, and servicers. This is the case even where the other provisions of subpart C refer only to creditors. For the reasons discussed above, the Bureau proposes that the requirements of other regulations that apply to the § 1026.20(d) initial ARM interest rate adjustment notices apply to assignees as well as to creditors and servicers.

The extension of the requirement to assignees is authorized under TILA section 105(a) because, for the reasons discussed above, it is necessary and proper to effectuate the purposes of TILA, including to assure a meaningful disclosure of credit terms and protect the consumer against unfair credit billing practices, and to prevent circumvention or evasion of TILA. The Bureau also proposes to use its authority under DFA section 1405(b) to extend the applicability of the initial ARM adjustment notices under TILA section 128A to assignees. As discussed above, this extension would serve the interest of consumers and the public interest. Application of proposed § 1026.20(d) to assignees is consistent with current § 1026.20(c) commentary applying that disclosure requirement to subsequent holders. Application of proposed § 1026.20(d) to creditors, assignees, and servicers also promotes consistency with proposed § 1026.20(c) and the periodic statement proposed by § 1026.41, which also apply to creditors, assignees, and servicers.

Timing. Proposed § 1026.20(d) generally follows the statutory requirement in TILA section 128A that the initial interest rate adjustment notice must be provided to consumers during the one-month period that ends six months before the date on which the interest rate in effect during the introductory period ends. Thus, the disclosure must be provided six to seven months before the initial interest rate adjustment. The § 1026.20(d) disclosures are designed to avoid payment shock so as to put consumers on notice of upcoming changes to their adjustable-rate mortgages that may result in higher payments. The six to seven month advance notice allows sufficient time for consumers to consider their alternatives if the notice discloses an increase in payment that they cannot afford. One alternative consumers might consider is refinancing their home. In the current market, “it now takes the nation’s biggest mortgage lenders an average of more than 70 days to complete a refinance . . . . ”[83]

In the interest of consistency within Regulation Z, proposed § 1026.20(d) ties its timing requirement to the date the first payment at a new level is due rather than the date of the interest rate adjustment. This is consistent with the time frame for both current and proposed § 1026.20(c). Since interest generally is paid in arrears, for most ARMs, this adds another approximately 30 days to the time frame for delivery of the disclosures. Thus, the notices proposed by § 1026.20(d) must be provided to consumers seven to eight months in advance of payment at the adjusted rate. Measured in days, the initial interest rate adjustment disclosures are due at least 210, but not more than 240, days before the first payment at the adjusted level is due. By tying the timing of the disclosure to the date payment at a new level is due and calculating it in days rather than months, proposed § 1026.20(d) is more precise, since months can vary in length, and maintains consistency with the timing requirements of proposed § 1026.20(c).

Pursuant to TILA section 128A, for ARMs adjusting for the first time within six months after consummation, the proposed § 1026.20(d) initial interest rate adjustment notices must be provided at consummation. The proposed rule states that when this occurs, the disclosure must be provided 210 days before the first date payment at a new level is due. The proposed rule ties the timing of this requirement to days rather than months, thereby ensuring both internal consistency and consistency with § 1026.20(c).

Proposed comment 20(d)-2 explains that the timing requirements exclude any grace period. It also explains that the date the first payment at the adjusted level is due is the same as the due date of the first payment calculated using the adjusted interest rate.

SBREFA. The small entity representatives (SERs) that advised the SBREFA panel on the mortgage servicing rules under consideration by the Bureau expressed doubt as to the value of the § 1026.20(d) notices because providing the notices so many months in advance of the interest rate adjustment would require disclosure of an estimated, rather than the actual, interest rate and payment due.[84] Several SERS expressed concern that the estimates would confuse consumers. They also noted that, in addition to the requirement to provide initial interest rate adjustment notices under § 1026.20(d), servicers would remain obliged to also provide a later notice in the case of a payment change, pursuant to § 1026.20(c), for the initial rate adjustments in order to apprise consumers of the actual amount of their interest rate and payment resulting from the adjustment. They expressed concerns about the one-time development costs and on-going costs associated with providing both the initial ARM adjustment notices and the recurring notices under § 1026.20(c).[85]

Consistent with this recommendation, after conclusion of the SBREFA process, the Bureau conducted further policy analysis of a possible exemption for small creditors, assignees, and servicers. After additional consideration, however, the Bureau decided to propose that notices under both § 1026.20(c) and § 1026.20(d) be provided. The Bureau believes that the two notices serve related but distinct purposes, such that eliminating the § 1026.20(c) notice could harm consumers. In particular, the § 1026.20(d) notice is designed to provide consumers with very early warning that their rates are about to change, so that consumers can begin exploring other options. If the consumer chooses not to do so or has not completed that process, a notice closer to the adjustment date that reflects the actual rather than estimated change in payment is still valuable to the consumer as both a second warning and budgeting tool. While the ARM interest rate adjustment information proposed for the first payment change notice required by proposed § 1026.20(c) could be provided in the periodic statement that would be provided to consumers under proposed § 1026.41, discussed below, rather than as a standalone notice under § 1026.20(c), the Bureau notes that that might require greater programming complexity in connection with the periodic statements. In addition, the Bureau is proposing to exempt certain small servicers from the periodic statement requirement.

The Bureau also believes that the amount of burden reduction for servicers from an exemption from providing a § 1026.20(c) notice in connection with an initial interest rate adjustment would be extremely minimal, given that servicers would have to maintain systems to generate § 1026.20(c) notices for each subsequent interest rate adjustment resulting in a corresponding payment change. Thus, excepting small servicers from providing the first § 1026.20(c) notice would not provide a significant reduction in burden.

The Bureau also considered whether to except small servicers, creditors, and assignees from the initial ARM interest rate notice required by § 1026.20(d). The SERs expressed concern that consumers would be confused by receiving estimates, rather than their actual new interest rate and payment, in the § 1026.20(d) notice.[86] However, the Bureau believes the best approach to address this concern is to clarify the contents of the notice, rather than eliminate it entirely. Congress has made a specific policy judgment that an early notice has value to consumers. Creating an exemption for small creditors, assignees, and servicers would deprive certain consumers of the benefits that Congress intended, specifically advance notice seven to eight months before payment at a new level is due after the initial interest rate adjustment to allow consumers time to weigh the potential impacts of a rate change and to explore alternative actions. An exception would also deprive certain consumers of the information provided in the § 1026.20(d) notice about alternatives and how to contact their State housing finance authority and access a list of government-certified counseling agencies and programs.

On balance, the Bureau does not believe that the § 1026.20(d) notice imposes a significant burden on small entities because it is a one-time notice. Moreover, the notice is designed to be consistent with the § 1026.20(c) notice in order to, among other things, reduce the burden on industry. For these reasons, the Bureau proposes generally to require all creditors, assignees, and servicers to provide the ARM interest rate adjustment notices required by proposed § 1026.20(c) and (d). However, the Bureau seeks comment on the issues raised by the two sets of disclosures, particularly whether the burden imposed on small entities by the requirements of § 1026.20(d) outweighs the consumer protection benefits afforded by the early notice of the initial ARM interest rate adjustment.

The Bureau also solicits comment on whether small servicers (or creditors, assignees, and servicers in general) that provide a periodic statement to a consumer with an ARM should be permitted or required to provide the information required by § 1026.20(c), for an initial interest rate adjustment for which a notice under § 1026.20(d) is required, in a periodic statement provided to consumers 60 to 120 days before payment at a new level is due. The Bureau further solicits comment on whether to permit or require all § 1026.20(c) notices required by the proposed rule to be incorporated into periodic statements in lieu of providing a separate notice.

Conversions. Proposed comment 20(d)-3 explains that in the case of an open-end account converting to a closed-end adjustable-rate mortgage, § 1026.20(d) disclosures are not required until the implementation of the initial interest rate adjustment post-conversion. Under the proposed rule, the conversion is analogous to consummation. Thus, like other ARMs subject to the requirements of proposed § 1026.20(d), disclosures for these converted ARMs would not be required until the first interest rate adjustment following the conversion. This proposal is consistent with the § 1026.20(c) proposal for open-end accounts converting to closed-end adjustable-rate mortgages.

20(d)(1) Coverage of the Initial Rate Adjustment Disclosures

20(d)(1)(i) In General

Proposed § 1026.20(d)(1)(i) defines an adjustable-rate mortgage or ARM as a closed-end consumer credit transaction secured by the consumer’s principal dwelling in which the annual percentage rate may increase after consummation. The proposed rule uses the wording from the definitions of “adjustable-rate” and “variable-rate” mortgage in subpart C of Regulation Z. It does this to promote consistency within the regulation. Proposed comment 20(d)(1)(i)-1 explains that the definition of ARM means variable-rate mortgage as that term is used elsewhere in subpart C of Regulation Z, except as provided in proposed comment 20(d)(1)(ii)-2.

Applicability to closed-end transactions. The Bureau believes that TILA section 128A and the implementing disclosures in proposed 1026.20(d) primarily benefit consumers with closed-end adjustable-rate mortgages. In contrast, open-end credit transactions secured by a consumer’s dwelling (home equity plans) with adjustable-rate features are subject to distinct disclosure requirements under TILA and subpart B of Regulation Z that substitute for the proposed § 1026.20(c) and (d) disclosures. Therefore, as discussed below, the Bureau proposes to use its authority under TILA section 105(a) and (f) to exempt adjustable-rate home equity plans from the requirements of proposed § 1026.20(d).

Section 127A of TILA and § 1026.40(b) and (d) of Regulation Z require the disclosure of specific information about home equity plans at the time an application is provided to the consumer. These disclosures include specific information about variable or adjustable-rate plans, including, among other things, the fact that the plan has a variable or adjustable-rate feature, the index used in making adjustments and a source of information about the index, an explanation of how the index is adjusted such as by the addition of a margin, and information about frequency of and limitations to changes to the applicable rate, payment amount, and index. See § 1026.40(d)(12). The required account opening disclosures for home equity plans also must include information about any variable or adjustable-rate feature, including the circumstances under which rates may increase, limitations on the increase, and the effect of any increase. See § 1026.6(a)(1)(ii) and (3)(vii).

Thus, Regulation Z already contains a comprehensive scheme for disclosing to consumers the variable or adjustable-rate features of home equity plans. The Bureau believes that requiring servicers to provide information about the index and an explanation of how the interest rate and payment would be determined, as required by TILA section 128A and proposed by § 1026.20(d), in connection with home equity plans would be inconsistent with, and largely duplicative of, the current disclosure regime and would be confusing and unhelpful for consumers. Moreover, unlike closed-end adjustable-rate mortgages, consumers with home equity plans generally may draw from the adjustable-rate feature on the account at any time. Thus, providing the good faith estimate of the amount of the monthly payment that would apply after the interest rate adjustment, as required by TILA section 128A and proposed by § 1026.20(d), would not be useful because the estimate would be based on the outstanding loan balance at the time the notice is given, which would change after the notice is given anytime the consumer withdraws funds. Finally, the alerts to consumers required by TILA section 128A and proposed by §1026.20(d) would not provide a benefit to consumers with home equity plans with adjustable-rate features. Generally, introductory periods for adjustable-rate features on home equity plans tend to last less than six months. The Bureau believes it is unlikely consumers would consider pursuing alternatives so close in time to opening their home equity plans.

Two other factors also support the Bureau’s use of the TILA section 105(a) exemption authority to exclude home equity plans from the requirements of proposed § 1026.20(d). First, use of the term “consummation” in TILA section 128A supports the application of proposed §1026.20(d) only to closed-end transactions. Regulation Z generally requires disclosures for closed-end credit transactions to be provided “before consummation of the transaction.” By contrast, Regulation Z generally requires account opening disclosures for open-end credit transactions to be provided “before the first transaction is made under the plan.” See § 1026.17(b) and § 1026.5(b)(1)(i). Because Regulation Z uses the term “consummation” in connection with closed-end credit transactions, use of the word “consummation” in DFA section 1418 supports the Bureau’s proposed exemption for open-end home equity plans from the requirements of §1026.20(d). Second, DFA section 1418 is codified in TILA section 128A. The adjacent and similarly numbered provision, TILA section 128, is entitled and applies only to “Consumer Credit not under Open End Credit Plans.” Congress’s placement of the new ARM disclosure requirement in a segment of TILA that applies only to closed-end credit transactions further supports the Bureau’s decision to exempt open-end credit transactions, in this case variable or adjustable-rate home equity plans, from the requirements of that section.

For the reasons discussed above, exempting home equity plans from the requirements of §1026.20(d) is necessary and proper under TILA section 105(a) to further the consumer protection purposes of TILA and facilitate compliance. As discussed above, the Bureau believes that the information contained in the notice proposed by § 1026.20(d) would not be meaningful to consumers with home equity plans that have adjustable-rate features and could lead to information overload and confusion for those consumers. The Bureau further proposes the exemption for open-end transactions pursuant to its authority under TILA section 105(f). As discussed above, because open-end transactions are subject to their own regulatory scheme, are not structured in such a way as to garner benefit from the disclosures proposed by §1026.20(d), and the placement of 128A in TILA indicates congressional intent to limit its coverage to closed-end transactions, the Bureau believes, in light of the factors in TILA section 105(f)(2), that requiring the proposed § 1026.20(d) notice for open-end accounts that have adjustable-rate features would not provide a meaningful benefit to consumers. Specifically, the Bureau considers that the exemption is proper irrespective of the amount of the loan or the status of the borrower (including related financial arrangements, financial sophistication, and the importance to the borrower of the loan). The Bureau further notes, in light of TILA section 105(f)(2)(D), that the requirements in § 1026.20(d) would only apply to loans secured by the consumer’s principal dwelling.

Savings Clause. Regarding other categories of loans to which proposed § 1026.20(d) would apply, the statute’s provisions apply to hybrid ARMs, which it defines as “consumer credit transaction[s] secured by the consumer’s principal residence with a fixed interest rate for an introductory period that adjusts or resets to a variable interest rate after such period.”[87] The statute, however, has a “savings clause,” that allows the Bureau to require the initial interest rate adjustment notice for loans that are not hybrid ARMs. The Bureau proposes to use this authority generally to extend the disclosure requirements of proposed § 1026.20(d) to ARMs that are not hybrid. The Bureau believes this approach is necessary because both hybrid ARMs and those that are not hybrid may subject consumers to the same payment shock that the advance notice of the first interest rate adjustment is designed to address. For example, both 3/1 hybrid ARMs, where the initial interest rate is fixed for three years and then adjusts every year after that, and 3/3 ARMs, where the initial interest rate adjusts after three years and then every three years after that, adjust for the first time after three years and present the same potential payment shock to consumers holding either mortgage. The same is true for 5/1 hybrid ARMs and 5/5 ARMs, 7/1 hybrid ARMs and 7/7 ARMs, 10/1 hybrid ARMs and 10/10 ARMs, etc. In sum, conventional ARMs and hybrid ARMs can have the same initial periods without an interest rate adjustment and thus, the same potential jump in their interest rates at the time of the first interest rate adjustment.

Proposed comment 20(d)(1)(i)-1 clarifies that the initial ARM adjustment notice are not limited to transactions financing the initial acquisition of the consumer’s principal dwelling but also would apply to other closed-end ARM transactions secured by the consumer’s principal dwelling, consistent with current comment 19(b)-1 and proposed § 1026.20(c).

20(d)(1)(ii) Exceptions

Proposed § 1026.20(d)(1)(ii) excepts construction loans with terms of one year or less from the disclosure requirements of § 1026.20(d). Proposed § 1026.20(c) includes the same exception. Proposed comment 20(d)(1)(ii)-1 applies the standards in comment 19(b)-1 for determining the term of a construction loan.

Construction loans generally have short terms of six months to one year and are subject to frequent interest rate adjustments, usually monthly or quarterly. The construction period usually involves several disbursements of funds at times and in amounts that are unknown at the beginning of that period. The consumer generally pays only accrued interest until construction is completed. The creditor, assignee, or servicer, in addition to disbursing payments in stages, closely monitors the progress of construction. Generally, at the completion of the construction, the construction loan is converted into permanent financing in which the loan amount is amortized just as in a standard mortgage transaction. See comment 17(c)(6)-2 for additional information on construction loans.

The frequent interest rate adjustments, multiple disbursements of funds, the short loan term, and on-going communication between the creditor, assignee, or servicer and consumer distinguish construction loans from other ARMs. These loans are meant to function as bridge financing until construction is completed and permanent financing can be put in place. Consumers with construction ARM loans are not at risk of payment shock like other ARM where interest rates change less frequently. Moreover, given the frequency of interest rate adjustments on construction loans, creditors, assignees, or servicers would have difficulty complying with the proposed requirement to provide the notice to consumers 210 to 240 days before the first payment at the adjusted level is due. For these reasons, providing notices under § 1026.20(d) for these loans would not provide a meaningful benefit to the consumer nor improve consumers’ awareness and understanding of their construction loans with terms of less than one year.

Authority. Accordingly, the Bureau proposes to use its authority under TILA section 105(a) to except construction loans with terms of one year or less from the requirements of proposed § 1026.20(d). As explained above, the disclosure requirements of § 1026.20(d) would be confusing and difficult to comply with in the context of a short-term construction loan. Thus, exempting such loans is necessary and proper under TILA section 105(a) to further the consumer protection purposes of TILA and facilitate compliance. The Bureau further proposes the exemption for construction loans pursuant to its authority under TILA section 105(f). For the reasons discussed above, the Bureau believes, in light of the factors in TILA section 105(f)(2), that requiring the § 1026.20(d) notice for construction loans with terms of one year or less would not provide a meaningful benefit to consumers. Specifically, the Bureau considers that the exemption is proper irrespective of the amount of the loan or the status of the borrower (including related financial arrangements, financial sophistication, and the importance to the borrower of the loan). The Bureau further notes, in light of TILA section 105(f)(2)(D), that the requirements in § 1026.20(d) would only apply to loans secured by the consumer’s principal dwelling.

The Bureau solicits comment on whether there are other ARMs with terms of less than one year, and whether such ARMs should be excepted from the requirements of § 1026.20(d). If the time period of the advance notice for consumers required by § 1026.20(d) is not appropriate for these short-term ARMs, the Bureau solicits comment on what period would be appropriate that would also provide consumers with sufficient notice of the estimated initial adjusted interest rate and any new payment.

Proposed comment 20(d)(1)(ii)-2 discusses other loans to which the proposed rule does not apply. Proposed comment 20(d)(1)(ii)-2 is consistent with proposed comment 20(c)(1)(ii)-3 with regard to the loans which are not subject to the proposed ARM disclosure rules. Certain Regulation Z provisions treat some of these loans as variable-rate transactions, even if they are structured as fixed-rate transactions. The proposed comment clarifies that, for purposes of proposed § 1026.20(d), the following loans, if fixed-rate transactions, are not ARMs and therefore are not subject to ARM notices pursuant to § 1026.20(d): shared-equity or shared-appreciation mortgages; price-level adjusted or other indexed mortgages that have a fixed rate of interest but provide for periodic adjustments to payments and the loan balance to reflect changes in an index measuring prices or inflation; graduated-payment mortgages or step-rate transactions; renewable balloon-payment instruments; and preferred-rate loans. The particular features of these types of loans may trigger interest rate or payment changes over the term of the loan or at the time the consumer pays off the final balance. However, these changes are based on factors other than a change in the value of an index or a formula. For example, whether or when the interest rate will adjust for the first time for a preferred-rate loan with a fixed interest rate is likely not knowable six to seven months in advance of the adjustment. This is because the loss of the preferred rate is based on factors other than a formula or change in the value of an index agreed to at consummation. Because the enumerated loans are not ARMs they are not covered by TILA section 128A or proposed § 1026.20(d) and require no disclosures under this rule.

20(d)(2) Content of Initial Rate Adjustment Disclosures

Statutorily-required content. TILA section 128A requires that the following content be included in the § 1026.20(d) initial rate adjustment notice: (1) any index or formula used in adjusting or resetting the interest rate and a source of information about the index or formula; (2) an explanation of how the new rate and payment would be determined, including how the index may be adjusted, such as by the addition of a margin; (3) a good faith estimate, based on accepted industry standards, of the amount of the resulting monthly payment after the adjustment or reset and the assumptions on which the estimate is based; (4) a list of alternatives that the consumers may pursue, including refinancing, renegotiation of loan terms, payment forbearance, and pre-foreclosure sales, and descriptions of actions the consumer must take to pursue these alternatives; (5) contact information for HUD- or State housing agency- approved housing counselors or programs reasonably available; and (6) contact information for the State housing finance authority for the State where the consumer resides.

The Bureau interprets the explanation of how the interest rate and payments will be determined set forth in (2) above to require disclosure of any adjustment to the index, for example, the amount of any margin and an explanation of what a margin is; the loan balance; the length of the remaining term of the loan; and any change in the term or maturity of the loan caused by the interest rate adjustment.

The Bureau interprets the good faith estimate, required under (3) above, to require disclosure, when available, of the exact amount of the new monthly payment after the interest rate adjustment. As discussed below, the Bureau believes that in most cases the lengthy advance notice required by proposed § 1026.20(d) will necessitate disclosure in the initial ARM interest rate adjustment notices of estimates of the new interest rate and payment, rather than exact amounts. The Bureau believes, however, that a good faith estimate would require disclosure of the exact amount of the new monthly payment, if known, rather than an estimate. The Bureau interprets the assumptions on which the good faith estimate is based to require disclosure, among other things, of the current interest rate and payment, as well as the amount of the new interest rate after the adjustment, if known, or an estimate if the exact amount of the new interest rate is not known. As with the new payment amount, the Bureau believes that generally only an estimate of the new interest rate will be available at the time the notice is provided, but interprets the statute to require disclosure of the exact amount of the new interest rate, if this amount is available. Even if this content were not contemplated under the statute, the Bureau believes it would be appropriate to use its adjustment authority to require disclosure of such information for the reasons discussed below.

Additional content. In addition to the content explicitly required under the statute, the Bureau proposes, as discussed in more detail below, to require the ARM initial interest rate notices to include the date of the disclosures; the telephone number of the creditor, assignee, or servicer; statements specifying that the consumer’s interest rate is scheduled to adjust pursuant to the terms of the loan, that the adjustment may effect a change in the mortgage payment, the specific time period the current interest rate has been in effect, the dates of the upcoming and future interest rate adjustments, and any other changes to loan terms, features, or options taking effect on the same date as the interest rate adjustment; the due date of the first payment after the adjustment; for interest-only or negatively-amortizing payments, the amount of the current and new payment allocated to principal, interest, and taxes and insurance in escrow, as applicable; a statement regarding payment allocation for interest-only and negatively-amortizing loans, including the payment required to fully amortize an ARM that becomes negatively-amortizing as a result of the interest rate adjustment; any interest rate or payment limits and any foregone interest; if the new interest rate or new payment provided is an estimate, a statement that another disclosure containing the actual new interest rate and payment will be provided within a specified time period — if the actual interest rate adjustment results in a corresponding payment change; and the amount and expiration date of any prepayment penalty and the circumstances under which such penalty might apply.

The proposed additional content, including the content that the Bureau interprets to be required under the statute, is authorized under TILA section 105(a). As further discussed below, the proposed additional content is necessary and proper to assure that consumers understand the consequences of the upcoming ARM rate adjustments and have sufficient time to adjust their behavior accordingly, thereby avoiding the uninformed use of credit and protecting consumers against inaccurate and unfair credit billing practices. The proposed additional content is further authorized under DFA section 1032 by assuring that the key features of consumers’ adjustable-rate mortgage, over the term of the ARM, are “fully, accurately, and effectively disclosed to consumers in a manner that permits consumers to understand [its] costs, benefits, and risks.” The proposed additional information better informs consumers of the implications of interest- rate adjustments before they happen and thus enables them to weigh their options going forward. For the same reasons, the Bureau believes, consistent with DFA section 1405(b), that the proposed additional content would improve consumer awareness and understanding of their residential ARM loans and is thus in the interest of consumers and the public interest. The proposed additional content is also consistent with TILA section 128A(b) itself, which provides a non-exclusive list of required content, thereby statutorily contemplating additional content.

Good faith estimate. As noted above, TILA section 128A provides that the § 1026.20(d) interest rate adjustment disclosures should include “[a] good faith estimate, based on accepted industry standards . . . of the amount of the monthly payment that will apply after the date of the adjustment or reset, and the assumptions on which the estimate is based.” ARM contracts generally provide that the calculation of the new interest rate and payment be based on an index value published closer to the date of the interest rate adjustment than those available during the time frame within which creditors, assignees, and servicers must provide the initial ARM interest rate adjustments pursuant to § 1026.20(d). See 20(c)(2) above for a full discussion of the time frame generally required for ascertaining the index rate used to calculate the adjusted interest rate and new payment. Thus, it is unlikely creditors, assignees, and servicers will be able to disclose the actual new interest rate and payment in the initial ARM interest rate notices. For this reason, consistent with the language of the statute regarding estimates, proposed § 1026.20(d)(2) provides that if the new interest rate or any other calculation using the new interest rate is not known as of the date of the disclosure, use of an estimate, labeled as such, is permissible. The Bureau interprets the statutory good faith standard to require disclosure of the actual amounts if they are available at the time the creditor, assignee, or servicer provides the initial ARM interest rate adjustment notices to consumers pursuant to the time frame required by proposed § 1026.20(d). Since the notice is designed to alert consumers to upcoming changes to their mortgage and to provide consumers with the time needed to take ameliorative actions should the new interest rate and payment be too high, providing the actual new payment would benefit consumers. Across all rounds of consumer testing, most participants shown notices containing estimates of the new rate and payment understood that these amounts were estimates that could change before payment at a new level was due.[88]

To implement the requirements of TILA section 128A that the good faith estimate of the new payment be based on accepted industry standards, proposed § 1026.20(d) would require that any estimate be calculated using the index figure disclosed in the source of information described in proposed § 1026.20(d)(2)(iii)(A) within fifteen business days prior to the date of the disclosure. Linking the date of the notice to the date of the index value used to estimate the new interest rate and payment would prevent consumer confusion as to the recency of the index value. As discussed above under Section 20(c)(2), the fifteen-day period allows creditors, assignees, and servicers sufficient time to calculate the estimates and perform any necessary quality control measures before providing the § 1026.20(d) notices to consumers.

20(d)(2)(i) Date of the Disclosure

Proposed § 1026.20(d)(2)(i) would require that the initial ARM adjustment notice include the date of the disclosure. In order to group together all data regarding the ARM, proposed § 1026.20(d)(3)(ii) would require that the date appear outside of and above the table described in proposed § 1026.20(d)(3)(i).

Proposed comment 20(d)(2)(i)-1 explains that the date would be the date the creditor, assignee, or servicer generates the notice. It also must be within fifteen business days after publication of the index level used to calculate the adjusted interest rate and new payment, if it is an estimate and not the actual adjusted interest rate and new payment.[89] Because the disclosures must be provided to consumers so far in advance, the Bureau expects estimates will be used in most cases. Tying the date of the disclosure to the date of the index level should prevent consumer confusion as to the recency of the index value upon which the estimated interest rate and new payment are based.

20(d)(2)(ii) Statement Regarding Change to Interest Rate and Payment

Proposed § 1026.20(d)(2)(ii)(A) would require the initial ARM interest rate adjustment notices to include a statement alerting consumers that, under the terms of their adjustable-rate mortgage, the specific period in which their interest rate stayed the same will end on a certain date, that their interest rate may change on that date, and that any change in their interest rate may result in a change to their mortgage payment. This information is similar to the information required to be disclosed in the pre-consummation disclosures provided to consumers pursuant to current § 1026.19(b)(2)(i) and § 1026.37(i), recently proposed in the 2012 TILA-RESPA Proposal. Proposed comment 20(d)(2)(ii)(A)-1 clarifies that the current interest rate is the one in effect on the date of the disclosure.

Proposed § 1026.20(d)(2)(ii)(B) would require the proposed initial ARM interest rate adjustment notices to include the dates of the impending and future interest rate adjustments and inform consumers that these changes are dictated by the terms of their adjustable-rate mortgages. Proposed § 1026.20(d)(2)(ii)(C) also would require the § 1026.20(d) disclosures to inform consumers of any other loan changes taking place on the same day as the adjustment, such as changes in amortization caused by the expiration of interest-only or payment-option features.

The first ARM model form tested did not contain the statement required by proposed § 1026.20(d)(2)(ii) informing consumers of impending and future changes to their interest rate and the basis for these changes. Although participants understood that their interest rate was adjusting and their payment might change as a result, they did not understand that these changes would occur periodically subject to the terms of their mortgage contract. Inclusion of this statement in the second round of testing successfully resolved this confusion. All but one consumer tested in rounds two and three of testing understood that, under the scenario presented to them, their interest rate would change on an annual basis.[90]

20(d)(2)(iii) Table with Current and New Interest Rates and Payments

Proposed § 1026.20(d)(2)(iii) would require disclosure of the following information in the form of a table: (A) the current and new interest rates; (B) the current and new periodic payment amounts and the date the first new payment is due; and (C) for interest-only or negatively-amortizing payments, the amount of the current and estimated new payment allocated to interest, principal, and property taxes and mortgage-related insurance, as applicable. The information in this table would appear within the larger table containing the other required disclosures, except for the date of the disclosure.

This table would follow the same order as, and have headings and format substantially similar to, those in the table in Forms H-4(D)(3) and (4) in Appendix H of subpart C. The Bureau learned through consumer testing that, when presented with information in a logical order, consumers more easily grasped the complex concepts contained in the proposed § 1026.20(d) notice. For example, the form begins by informing consumers of the basic purpose of the notice: their interest rate is going to adjust, when it will adjust, and the adjustment will change their mortgage payment. This introduction is immediately followed by a visual illustration of this information in the form of a table comparing the consumers’ current and new interest rates. Based on consumer testing, the Bureau believes that consumer understanding is enhanced by presenting the information in a simple manner, grouped together by concept, and in a specific order that allows consumers the opportunity to build upon knowledge gained. For these reasons, the Bureau proposes that creditors, assignees, or servicers disclose the information in the table as set forth in Forms H-4(D)(3) and (4) in Appendix H.

In all rounds of testing, consumers were presented with model forms with tables depicting a scenario in which the interest rate and payment would increase as a result of the adjustment. All participants in all rounds of testing understood that their interest rate and payment were going to increase and when these changes would occur.[91]

The Bureau proposes including allocation information in the table for interest-only and negatively-amortizing ARMs. The Bureau believes this information would help consumers better understand the risk of these products by demonstrating that their payments would not reduce the loan principal. The Bureau also believes providing the payment allocation would help consumers understand the effect of the interest rate adjustment, especially in the case of a change in the ARM’s features coinciding with the interest rate adjustment, such as the expiration of an interest-only or payment-option feature. Since payment allocation may change over time, the proposed rule would require disclosure of the expected payment allocation for the first payment period during which the adjusted interest rate will apply.

The allocation of payment disclosure was tested in the third round of testing. The notice tested showed the scenario of a 3/1 hybrid ARM with interest-only payments for the first three years of the loan adjusting for the first time. On the date of the adjustment, the interest-only feature would expire and the ARM would become amortizing. Only about half of participants understood that their payments would be changing from interest-only to amortizing. Participants generally understood the concept of allocation of payments but were confused by the table in the notice that broke out principal and interest for the current payment, but combined the two for the new amount. As a result, this table was revised so that separate amounts for principal and interest were shown for all payments.[92]

The Bureau recognizes that certain Dodd-Frank Act amendments to TILA will restrict origination of non-amortizing and negatively-amortizing loans. For example, TILA section 129C and the 2011 ATR Proposal that would implement that provision, generally require creditors to determine that a consumer can repay a mortgage loan and include a requirement that these determinations assume a fully-amortizing loan. Thus, this law and regulation, when finalized, will restrict the origination of risky mortgages such as interest-only and negatively-amortizing ARMs.

Other Dodd-Frank amendments to TILA, such as the proposed periodic statement provisions discussed below, will provide payment allocation information to consumers for each billing cycle. Thus, consumers who currently have interest-only or negatively-amortizing loans or may obtain such loans in the future will receive information about the interest-only or negatively-amortizing features of their loans through the payment allocation information in the periodic statement. Also, as noted above, consumer testing showed that participants were confused by the allocation table. Since the Bureau was not able to test a revised version of the form to see if it rectified the confusion caused by the allocation table or if the concepts of non-amortizing and negatively-amortizing ARMs themselves are the source of the confusion, the Bureau questions the value of disclosing this information to consumers in the ARM interest rate adjustment notice. In view of these changes to the law and the outcome of consumer testing, the Bureau solicits comments on whether to include allocation information for interest-only and negatively-amortizing ARMs in the table proposed above.

20(d)(2)(iv) Explanation of How the Interest Rate is Determined

TILA section 128A mandates that the initial interest rate adjustment notices include any index or formula used in making adjustments to or resetting the interest rate, and a source of information about the index or formula. Accordingly, proposed § 1026.20(d)(2)(iv)(A) would require disclosure of the name and published source of the index or formula. This disclosure requirement is consistent with the pre-consummation disclosure requirements of current rule § 1026.19(b)(2)(iii). Proposed § 1026.37(i), part of the 2012 TILA-RESPA Proposal, likewise would require disclosure of the index name prior to consummation.

TILA section 128A also mandates that the initial interest rate disclosures include an explanation of how the new interest rate and payment would be determined, including an explanation of how the index was adjusted, such as by the addition of a margin. Proposed § 1026.20(d)(2)(iv) would require § 1026.20(d) notices to include an explanation of how the new interest rate is determined. This disclosure requirement is consistent with the pre-consummation disclosure requirements of current rule § 1026.19(b)(2)(iii). The 2012 TILA-RESPA Proposal’s proposed 1026.37(i) likewise would require disclosure prior to consummation of the amount of the margin expressed as a percentage.

Consumer testing revealed that consumers generally have difficulty understanding the relationship of the index, margin, and interest rate.[93] Therefore, the Bureau is proposing a relatively brief and simple explanation that the new interest rate is calculated by taking the published index rate and adding a certain number of percentage points, called the “margin.” Proposed § 1026.20(d)(2)(iii) also includes the specific amount of the margin.

Consumer testing indicated that the explanation helped consumers better understand the relationship between the interest rate, index, and margin. It also helped dispel the notion held by many of the consumers in the initial rounds of testing that the lender subjectively determined their new interest rate at each adjustment.[94] The Bureau believes that its proposed rule and forms strike an appropriate balance between providing consumers with key information necessary to understand the basic interest rate adjustment of their adjustable-rate mortgages without overloading consumers with complex and confusing technical information.

20(d)(2)(v) Rate Limits

Proposed rule § 1026.20(d)(2)(v) would require the disclosure of any limits on the interest rate or payment increases at each adjustment and over the life of the loan. The Bureau believes that knowing the limitations of their ARM rates and payments would help consumers understand the consequences of each interest rate adjustment and weigh the relative benefits of the alternatives that would be required to be disclosed under proposed § 1026.20(d)(2)(viii). For example, if an adjustment might cause a significant increase in the consumer’s payment, knowing how much more the interest rate or payment could increase could help inform a consumer’s decision on whether or not to seek alternative financing.

Proposed § 1026.20(d)(2)(v) also requires disclosure of the extent to which the creditor, assignee, or servicer has foregone any increase in the interest rate. If there is foregone interest, it would require disclosure that the additional interest was not applied due to a rate limit and include the earliest date such foregone interest may be applied. Proposed comment 20(d)(2)(iv)- 1 explains that disclosure of foregone interest would apply only to transactions permitting interest rate carryover. It further explains that the amount of increase foregone at the initial adjustment is the amount that, subject to rate caps, can be added to future interest rate adjustments to increase, or offset decreases in, the rate determined according to the index or formula.

Consumers had difficulty understanding the concept of interest rate carryover when it was introduced during the third round of testing. This difficulty may have been due to the simultaneous introduction of other complex notions, such as interest-only or negatively-amortizing features and the allocation of interest, principal, and escrow payments for such loans. In response, the Bureau has simplified the explanation of carryover interest.[95]

The Bureau recognizes that the disclosure of rate limits and unapplied carryover interest provide information that may help consumers better understand their ARMs. However, the Bureau is considering whether the help this information would provide outweighs its distraction from other more key information. Also, as explained above, consumers had difficulty understanding the concept of carryover interest and the Bureau is concerned this difficulty might diminish the effectiveness of the proposed § 1026.20(d) disclosures. The Bureau solicits comment on whether to include rate limits and unapplied carryover interest in the proposed § 1026.20(d) disclosures.

20(d)(2)(vi) Explanation of How the New Payment is Determined

TILA section 128A mandates that the initial interest rate notices include an explanation of how the new interest rate and payment would be determined, including an explanation of how the index was adjusted, such as by the addition of a margin. Proposed § 1026.20(d)(2)(vi) would implement this statutory provision by requiring the content discussed below. This proposed disclosure is consistent with the disclosures required at the time of application pursuant to current§ 1026.19(b)(2)(iii). It is also consistent with content required under proposed § 1026.20(c) and thus promotes consistency in Regulation Z ARM disclosures.

The disclosure required under proposed § 1026.20(d)(2)(vi) explains that the new payment is based on (A) the index or formula, (B) any adjustment to the index or formula, such as by addition of the margin, (C) the loan balance, (D) the length of the remaining loan term, and, (E) if the new interest rate or new payment provided is an estimate, a statement that another disclosure containing the actual new interest rate and new payment will be provided to the consumer 2 to 4 months prior to the date the first new payment is due, if the interest rate adjustment causes a corresponding change in payment, pursuant to § 1026.20(c).

The proposal would require disclosure of both the loan balance and the remaining loan term expected on the date of the interest rate adjustment. The proposed rule also would require disclosure of any change in the term or maturity of the loan caused by the adjustment.

As discussed in proposed § 1026.20(d)(2)(iv) above, the Bureau found that this explanation helped consumers better understand how the index or formula and margin determine their new payment and dispelled the notion held by many consumers in the initial rounds of testing that, at each adjustment, the lender subjectively determined their new interest rate, and thus the new payment. Disclosure of the four key assumptions upon which the new payment is based provides a succinct overview of how the interest rate adjustment works. It also demonstrates that factors other than the index can increase consumers’ interest rates and payments. Disclosures of these factors would provide consumers with a snapshot of the current status of their adjustable-rate mortgages and with basic information to help them make decisions about keeping their current loan or shopping for alternatives. If an estimated new interest rate and new payment is used, the statement that the consumer will receive another disclosure with the actual new interest rate and new payment, if the interest rate adjustment results in a corresponding payment change, notifies consumers that the creditor, assignee, or servicer will inform them of the actual rate and payment two to four months in advance of the date their first new payment is due.

20(d)(2)(vii) Interest-Only and Negative-Amortization Statement and Payment

Proposed § 1026.20(d)(2)(vii) would require § 1026.20(d) notices to include a statement regarding the allocation of payments to principal and interest for interest-only or negatively- amortizing loans. If negative amortization occurs as a result of the interest rate adjustment, the proposed rule would require disclosure of the payment necessary to fully amortize such loans at the new interest rate over the remainder of the loan term. As explained in proposed comment 20(d)(2)(vii)-1, for interest-only loans, the statement would inform the consumer that the new payment covers all of the interest but none of the principal owed and, therefore, will not reduce the loan balance. For negatively-amortizing ARMs, the statement would inform the consumer that the new payment covers only part of the interest and none of the principal, and therefore the unpaid interest will add to the balance or increase the term of the loan.

Both current § 1026.20(c) and the Board’s 2009 Closed-End Proposal to revise § 1026.20(c) include, for ARMs that become negatively amortizing as a result of the interest rate adjustment, disclosure of the payment necessary to fully amortize loans at the new interest rate over the remainder of the loan term. However, the Bureau believes there are countervailing considerations regarding whether to include this information in proposed § 1026.20(d).

The Bureau recognizes that certain Dodd-Frank Act amendments to TILA will restrict origination of non-amortizing and negatively-amortizing loans. For example, TILA section 129C and the 2011 ATR Proposal that would implement that provision, generally require creditors to determine that a consumer can repay a mortgage loan and include a requirement that these determinations assume a fully-amortizing loan. Thus, this law and regulation, when finalized, will restrict the origination of risky mortgages such as interest-only and negatively-amortizing ARMs.

Other Dodd-Frank Act amendments to TILA, such as the periodic statement proposed by § 1026.41, will include information about non-amortizing and negatively-amortizing loans in each billing cycle, such as an allocation of payments. Thus, consumers who currently have interest-only and negatively-amortizing ARMs or may obtain such loans in the future will receive certain information about the interest-only or negatively-amortizing features of their loans in another disclosure, although this will not include the payment required to fully amortize negatively-amortizing loans. The payment necessary to fully amortize these loans was not consumer tested but testing of the table showing the payment allocation of interest-only and negatively-amortizing ARMs indicated that consumers were confused by this concept. Thus, the Bureau is weighing the value of disclosing specific information regarding amortization, such as the payment needed to fully amortize negatively-amortizing ARMs. In view of these changes to the law and the outcome of consumer testing, the Bureau solicits comments on whether to include the payment required to amortize ARMs that became negatively amortizing as a result of an interest rate adjustment.

20(d)(2)(viii) List of Alternatives

TILA section 128A mandates that the initial interest rate adjustment notices include a list of alternatives consumers may pursue before adjustment or reset and descriptions of the actions consumers must take to pursue these alternatives. These alternatives include refinancing, renegotiation of loan terms, payment forbearance, and pre-foreclosure sales. Proposed § 1026.20(d)(2)(viii) would require disclosure in § 1026.20(d) initial ARM interest rate notices of the four alternatives set forth in the statute. The Bureau proposes to use simpler, commonly used terms in the model forms to describe the alternatives when possible.

The proposed model forms present the list as possibilities for consumers seeking alternatives to the upcoming changes to their interest rate and payment. The proposed forms also explain that most of the alternatives are subject to approval by the lender. All participants tested in the first and second round of testing were able to identify the list of alternatives.[96]

The list of alternatives generally and concisely describes the actions consumers must take to pursue these alternatives, such as contacting their lender or another lender. Another action consumers may take to pursue these alternatives is contacting government organizations. Proposed § 1026.20(d)(2)(xi) would require disclosure in the initial ARM interest rate adjustment notice of information on how to contact such agencies, including the contact information for the State housing finance authority for the State in which the consumer resides and the website and telephone number to access the most current list of homeownership counselors or counseling organizations either made available by the Bureau or maintained by HUD. The Bureau proposes to require disclosure of this concise list of alternatives in lieu of a more detailed account of actions consumers may take in order to maximize the effectiveness of the disclosure without weighing it down with information that may not add significant value.

20(d)(ix) Prepayment Penalty

Proposed § 1026.20(c)(d)(ix) would require disclosure of the circumstances under which any prepayment penalty may be imposed, such as selling or refinancing the principal dwelling, the time period during which such penalty would apply, and the maximum dollar amount of the penalty. The proposed rule cross-references the definition of prepayment penalty in subpart E under § 1026.41(d)(7)(iv) in the proposed rule for periodic statements.

Interest rate adjustments may cause payment shock or require consumers to pay their mortgage at a rate they may no longer be able to afford, prompting them to consider alternatives such as refinancing. In order to fully understand the implications of such actions, the Bureau believes that consumers should know whether prepayment penalties may apply. Such information should include the maximum penalty (in dollars) that may apply and the time period during which the penalty may be imposed. The dollar amount of the penalty, as opposed to a percentage, is more meaningful to consumers.

The Bureau also proposes disclosure of any prepayment penalty in § 1026.20(c) ARM payment change notices and the periodic statements proposed by § 1026.41. Consumer testing of the periodic statement included a scenario in which a prepayment penalty applied. Most participants understood that a prepayment penalty applied if they paid off the balance of their loan early, but some participants were unclear whether it applied to the sale of the home, refinancing, or other alternative actions consumers could pursue in lieu of maintaining their adjustable-rate mortgages.[97] For this reason, the Bureau proposes to clarify the circumstances under which a prepayment penalty would apply. The proposed forms alert consumers that a prepayment penalty may apply if they pay off their loan, refinance, or sell their home before the stated date.

The Bureau recognizes that Dodd-Frank Act amendments to TILA, such as 129C and the 2011 ATR Proposal proposing to implement that provision, would significantly restrict a lender’s ability to impose prepayment penalties. Other Dodd-Frank amendments to TILA, such as the proposed periodic statement, would provide consumers with information about their prepayment penalty for each billing cycle. Thus, consumers who currently have ARMs with prepayment penalty provisions or may obtain such loans in the future would generally receive information about them at frequent intervals in another disclosure. In view of these changes to the law, the Bureau solicits comments on whether to include information regarding prepayment penalties in proposed § 1026.20(d).

20(d)(2)(x) Telephone Number of Creditor, Assignee, or Servicer

Proposed § 1026.20(d)(2)(x) would require disclosure of the telephone number of the creditor, assignee, or servicer for consumers to call if they anticipate having problems paying the new payment.

20(d)(2)(xi) Contact Information for Government Agencies and Counseling Agencies or Programs

TILA section 128A mandates that the initial interest rate adjustment notices include the name, mailing and internet address, and telephone number of the State housing finance authority (as defined in § 1301 of FIRREA) for the State in which the consumer resides. Proposed § 1026.20(d)(2)(xi) would implement this statutory mandate by requiring inclusion of this information in the § 1026.20(d) initial interest rate adjustment notice. Two other mortgage servicing rulemakings proposed by the Bureau, the periodic statement, see below, and the early intervention for delinquent borrowers in the 2012 RESPA Servicing Proposal, also would require contact information for the State housing finance authority. However, those proposals would require the contact information for the State in which the property is located rather than in which the consumer resides, since the scope of those proposed rules is not limited to a consumer’s principal dwelling. This is consistent with the proposed ARM rule since the consumer’s principal dwelling should be located in the State in which the property is located. The Bureau seeks comment on how to address any compliance difficulties posed by this inconsistency.

TILA section 128A also mandates that the initial interest rate adjustment notices include the names, mailing and internet addresses, and telephone numbers of counseling agencies or programs reasonably available to the consumer that have been certified or approved and made publicly available by HUD or a State housing finance authority.

On July 9, 2012, the Bureau released proposed rules to implement other Dodd-Frank Act requirements expanding protections for “high-cost” mortgage loans under HOEPA, including a requirement that borrowers receive housing counseling (2012 HOEPA Proposal).[98] The 2012 HOEPA proposal also proposed to implement other homeownership-counseling-related requirements that are not amendments to HOEPA, including a proposed amendment to Regulation X that lenders provide a list of five homeownership counselors or counseling organizations to applicants for a federally related mortgage loan.[99]

The Bureau has taken an alternative approach with regard to the initial ARM interest rate adjustment notice and proposes to use its exception authority to require creditors, assignees, and servicers simply to provide the website address to access either the Bureau list or the HUD list of homeownership counseling agencies and programs,[100] instead of requiring contact information for a list of specific counseling agencies or programs. The Bureau believes that this approach appropriately balances consumer and industry interests based on the following considerations:

The ARM notice required by proposed § 1026.20(d) has limited space and contains a significant amount of important technical information about the consumer’s loan. Including too much information could overwhelm consumers and minimize the value of the other information contained in the notice. Also, not all consumers would benefit from the counselor information, although it would provide an important benefit for those consumers who face financial difficulties if their initial interest rate adjustment may cause their mortgage payments to significantly increase. Finally, importing updated information from the Bureau or HUD website would involve more programming burden than simply listing one of the agencies’ websites.

Providing consumers with the website address for either the Bureau or HUD list of homeownership counseling agencies and programs would streamline the disclosure and present clear and concise information for the consumer to use. However, directing consumers to the actual list would allow them to choose a conveniently located program or agency and to locate other programs or agencies if those contacted initially could not help the consumer at that time. The Bureau seeks comment on whether this proposal strikes an appropriate balance, and on the benefits and burdens to both consumers and industry of requiring that a list of several individual housing counselors be included in the initial ARM interest rate adjustment notice.

Authority. The Bureau proposes to use its authority under TILA sections 105(a) and (f) and DFA section 1405(b) to exempt creditors, assignees, and servicers from the requirement in TILA section 128A to include in the initial ARM interest rate adjustment notice contact information for specific government-certified counseling agencies or programs reasonably available to the consumer, and its authority under TILA section 105(a) and DFA section 1405(b) to instead require that the initial ARM interest rate adjustment notice contain information that directs consumers to the Bureau list or HUD list of homeownership counselors or counseling agencies. For the reasons discussed above, the Bureau believes that the proposed exception and addition is necessary and proper under TILA section 105(a) both to effectuate the purposes of TILA — to promote the informed use of credit and protect consumers against inaccurate and unfair credit billing practices — and to facilitate compliance. Moreover, the Bureau believes, in light of the factors in TILA section 105(f), that disclosure of the government-certified counseling agencies or programs reasonably available to the consumer specified in TILA section 128A would not provide a meaningful benefit to consumers. Specifically, the Bureau considers that the exemption is proper irrespective of the amount of the loan and the status of the borrower (including related financial arrangements, financial sophistication, and the importance to the borrower of the loan). The Bureau further notes, in light of TILA section 105(f)(2)(D), that the requirements in § 1026.20(d) would only apply to loans secured by the consumer’s principal dwelling. Moreover, in the estimation of the Bureau, the proposed exemption would simplify the initial ARM adjustment notice and improve the housing counselor information provided to the consumer, thus furthering the consumer protection purposes of TILA. In addition, consistent with section 1405(b) of the Dodd-Frank Act, the Bureau believes that the proposed modification of the requirements in TILA section 128A would improve consumer awareness and understanding and is in the interest of consumers and in the public interest.

20(d)(3) Format of Initial Rate Adjustment Disclosures

As discussed above, the Bureau proposes to make proposed § 1026.20(d) subject to certain of the general form requirements of § 1026.17(a)(1), including requiring that the disclosure be clear and conspicuous, in writing, and in a form consumers can keep, and giving creditors, assignees, and servicers the option of providing the disclosures to consumers in electronic form, subject to compliance with consumer consent and other applicable provisions of the E-Sign Act. However, as discussed above, because § 1026.20(d) disclosures are subject to the statutory requirement that they must be provided separate and distinct from all other correspondence, the Bureau proposes to amend § 1026.17(a) to provide that the general segregation and grouping requirements in that provision would not apply to § 1026.20(d).

Authority. In addition, as described below, § 1026.20(d)(3) proposes additional form requirements for initial ARM adjustment notices. For the reasons described below, these requirements are authorized under TILA section 105(a) and DFA sections 1032(a) and 1405(b). As discussed in the section-by-section analysis for each of the proposed sections of § 1026.20(d)(3), the Bureau believes, consistent with TILA section 105(a), that the proposed formatting requirements are necessary and proper to effectuate the purposes of TILA to assure a meaningful disclosure of credit terms, to avoid the uninformed use of credit, and to protect consumers against inaccurate and unfair credit billing practices. Further the Bureau believes, consistent with DFA section 1032(a), that the proposed formatting requirements ensure that the features of the ARM loans covered by proposed § 1026.20(d) are fully, accurately, and effectively disclosed to consumers in a manner that permits them to understand the costs, benefits, and risks associated with such loans, in light of their individual facts and circumstances. Moreover, consistent with DFA section 1405(b), the Bureau believes that modification of the provision in TILA section 128A to require the proposed format discussed below would improve consumer awareness and understanding of residential mortgage loans transactions involving ARMs, and is thus in the interest of consumers and in the public interest.

20(d)(3)(i) All Disclosures in Tabular Form, Except the Date

Proposed § 1026.20(d)(3)(i) would require that, except for the date of the notice, the initial ARM adjustment disclosures be provided in the form of a table and in the same order as, and with headings and format substantially similar to, Forms H-4(D)(3) and (4) in Appendix H to subpart C for initial interest rate adjustments.

The proposed ARM adjustment notice contains complex concepts challenging for consumers to understand. For example, consumer testing revealed that participants generally had difficulty understanding the relationship among index, margin, and interest rate.[101] They also had difficulty with the concepts of amortization and interest rate carryover.[102] As a starting point, the Bureau looked at the model forms developed by the Board for its 2009 Closed-End Proposal to amend § 1026.20(c). The Bureau then conducted its own consumer testing.

The Bureau’s testing showed that consumers can more readily understand these concepts when the information is presented to them in a simple manner and in the groupings contained in the model forms. The Bureau also observed that consumers more readily understood the concepts when they were presented in a logical order, with one concept presented as a foundation to understanding other concepts. For example, the form begins by informing consumers of the purpose of the form: that their interest rate is going to adjust, when it will adjust, and that the adjustment may change their mortgage payment. This introduction is immediately followed by a table visually showing the consumers’ current and estimated new interest rates. In another example, the proposed notice informs consumers about their index rate and margin before explaining how the new payment is calculated based on those factors as well as other factors such as the loan balance and remaining loan term.

Based on consumer testing, the Bureau believes that consumer understanding is enhanced by presenting the information in a simple manner, grouped together by concept, and in a specific order that allows consumers the opportunity to build upon knowledge gained. For these reasons, the Bureau proposes that creditors, assignees, or servicers disclose the information required by proposed § 1026.20(d) with headings, content, and format substantially similar to Forms H-4(D)(3) and (4) in Appendix H to this part.

Over the course of consumer testing, participant comprehension improved with each successive iteration of the model form. As a result, the Bureau believes that displaying the information in tabular form focuses consumer attention and lends to greater understanding. Similarly, the Bureau found that the particular content and order of the information, as well as the specific headings and format used, presented the information in a way that consumers both could understand and from which they could benefit.

20(d)(3)(ii) Format of Date of Disclosure

Proposed § 1026.20(d)(3)(ii) would require that the date of the disclosure appear outside of and above the table required by proposed § 1026.20(d)(3)(i). As discussed above with respect to paragraph 20(d)(2)(i), the date would be segregated since it is not information specific to the consumer’s adjustable-rate mortgage.

20(d)(3)(iii) Format of Interest Rate and Payment Table

Proposed § 1026.20(d)(3)(iii) would require tabular format for initial ARM interest rate adjustment notices for interest rates, payments, and the allocation of payments for loans that are interest-only or are negatively amortizing. This table would be located within the table proposed by § 1026.20(d)(3)(i). This table is substantially similar to the one tested by the Board for its 2009 Closed-End Proposal to revise § 1026.20(c). The proposal would require the table to follow the same order as, and have headings and format substantially similar to, Forms H-4(D)(3) and (4) in Appendix H of subpart C.

Disclosing the current interest rate and payment in the same table allows consumers to readily compare them with the estimated or actual adjusted rate and new payment. Consumer testing revealed that nearly all participants were readily able to identify and understood the table and its contents.[103] The estimated or actual new interest rate and payment and date the first new payment is due is key information the consumer must know in order to commence payment at the new rate. For these reasons, the Bureau proposes locating this information prominently in the disclosure.

Section 1026.36 Prohibited Acts or Practices in Connection with Credit Secured by a Dwelling

36(c) Servicing Practices

Existing § 1026.36(c) provides requirements for servicers in connection with a consumer credit transaction secured by a consumer’s principal dwelling. Essentially, such servicers must promptly credit payments, must not “pyramid” late fees, and must provide payoff statements at the consumer’s request. The Dodd-Frank Act essentially codifies the § 1026.36(c) provisions on prompt crediting and payoff statements with minor changes, as discussed below. The Bureau is amending Regulation Z both to implement the new statutory requirements, and to address the related issue of the handling of partial payments. Currently, Regulation Z addresses prompt crediting in § 1026.36(c)(1)(i). The Bureau is proposing limiting the scope of existing § 1026.36(c)(1)(i) to full contractual payments, and addressing partial payments (anything less than a full contractual payment) in proposed § 1026.36(c)(1)(ii), as discussed below. The Bureau proposes to retain the substantive requirements on non-conforming payments currently in § 1026.36(c)(2), but to move them to paragraph (c)(1)(iii). Likewise, the Bureau does not propose to change the Regulation Z provision addressing “pyramiding” of late fees currently in § 1026.36(c)(1)(ii), but only to move the provision to new paragraph (c)(3). Finally, the Bureau is proposing four substantive changes to the provisions on payoff statements, currently located in § 1026.36(c)(1)(iii), as well as to move these provisions to proposed paragraph 36(c)(3).

The Bureau believes these changes to Regulation Z are best implemented by restructuring paragraph (c) and simplifying some of the language. This restructuring generally is not intended to make any substantive changes. All substantive changes to the paragraph (c) are discussed below.

36(c)(1)(i) Full Contractual Payments

DFA section 1464(a) established TILA section 129F, which codifies existing Regulation Z § 1026.36(c)(1)(i) with regard to prompt crediting of mortgage loan payments. The statute and the existing regulation both provide generally that “no servicer shall fail to credit a payment to the consumer’s loan account as of the date of receipt, except when a delay in crediting does not result in any charge to the consumer or in the reporting of negative information to a consumer reporting agency.” Proposed new paragraph (c)(1)(i) generally restates existing (c)(1)(i) with the only change that the existing regulation applies to all payments, while proposed (c)(1)(i) would be limited to full contractual payments. The Bureau is proposing to establish new § 1026.36(c)(1)(ii) to clarify servicers’ obligations when they receive a partial payment (anything less than a full contractual payment), as discussed below.

As discussed above, proposed § 1026.36(c)(i) generally tracks the Dodd-Frank Act and current regulation, but changes the reference to “a payment” to “a full contractual payment” and makes minor modifications to reflect the proposed restructuring of the regulation. The proposed regulation text provides that a full contractual payment covers principal, interest, and escrow (if applicable), but not late fees. The Bureau engaged in outreach and found that many servicers already apply payments that cover principal, interest, and escrow (if applicable) without deducting late fees. This ensures that consumers get the full benefit of having made a payment. The Bureau seeks comment as to whether late fees should also be included in the definition of a full contractual payment.

36(c)(1)(ii) Partial Payments

Current Regulation Z does not define what constitutes a “payment” for purposes of the crediting requirement, but leaves that question to be determined by the contractual documents and other applicable law. Specifically, current comment 36(c)(1)(i)-2 refers to “the legal obligation between the consumer and the creditor” as determined by “applicable state or other law” to determine whether a partial payment is a “payment” under the payment crediting provisions. Outreach to consumer and industry stakeholders revealed that partial payments are currently handled in a variety of ways. Some lenders do not accept partial payments, some lenders apply partial payments, and some lenders send partial payments to a suspense or unapplied funds account. Currently there is no Federal regulation that governs such accounts. The Bureau is proposing to address partial payments in new § 1026.36(c)(1)(ii).

Proposed § 1026.36(c)(1)(ii) provides specific rules regarding the handling of partial payments and suspense accounts. New paragraph (c)(1)(ii) would require, consistent with the proposed periodic statement requirements in § 1026.41 discussed below, that if a servicer holds a partial payment, meaning any payment less than a full contractual payment, in a suspense or unapplied funds account, the servicer must disclose on the periodic statement the amount of funds held in such account. The servicer must also disclose when such funds will be applied to the outstanding payments due on the account. This proposed requirement is authorized under TILA section 129(f), which requires creditors, assignees, and servicers to send statements for each billing cycle including “[s]uch other information as the Bureau may prescribe in regulations.”

Additionally, proposed § 1026.36(c)(1)(ii) provides that if a servicer holds a partial payment in a suspense or unapplied funds account, once there are sufficient funds in the account to cover a full contractual payment, the servicer must apply those funds to the oldest outstanding payment due. The proposed requirement that the funds be applied to the oldest outstanding payment would advance the date of delinquency by one billing cycle, and thus benefit the consumer. For example, suppose a previously current consumer must make a $1,000 monthly payment, and the consumer paid $500 on January 1st and $500 on February 1st. When the second $500 payment is made, a full contractual payment of $1,000 (assuming late fees are not included in the definition of full contractual payment) is in the suspense account and must be applied to the January payment. Thus, this consumer would only be one month delinquent at the end of February. The Bureau interprets the language in TILA section 129F(a), that servicers must “credit” payments as of the date of receipt, except when a delay in crediting does not result in “any charge” to the consumer to authorize the proposed requirement that partial payments held in suspense accounts be credited to the oldest outstanding payment when a full contractual payment accumulates. Crediting the funds to a payment that was not the most delinquent would result in a charge to the consumer by extending the duration of the delinquency. To the extent not required under TILA section 129F(a), the Bureau believes this proposed requirement regarding crediting of funds is authorized under TILA section 105(a). As explained above, the Bureau believes the requirement is necessary and proper to effectuate the purpose of TILA to protect consumers against inaccurate and unfair credit billing practices by ensuring that funds held in a suspense account are promptly applied to the oldest outstanding payment when sufficient funds accumulate in such an account to cover a full contractual payment.

Proposed comment 36(c)(1)(ii)-1 describes the servicer’s options upon receipt of a partial payment, including: crediting the payment on receipt, returning the payment, or holding the payment in a suspense or unapplied funds account.

The proposed regulation would leave servicers significant flexibility in the handling of partial payments in accordance with contractual terms and other applicable law, for instance by rejecting the payment, crediting it immediately, or holding it in a suspense account. However, the proposed rule would also ensure greater consistency in the handling of suspense accounts by requiring, consistent with proposed § 1026.41, that servicers disclose on the periodic statement that the funds are being held in such accounts and, once sufficient funds accumulate to cover a full contractual payment, that the servicer apply the funds to the oldest outstanding payment owed by the consumer. If sufficient funds accumulate to cover more than one full contractual payment, these funds would be applied to the next oldest outstanding payment. Partial payment amounts would be treated as described above.

The Bureau believes this proposed approach would clarify servicers’ obligations in processing both full contractual payment and partial payments, as well as ensure all payments are properly applied. The proposed disclosures would help consumers understand that their payments are being held in a suspense account rather than having been applied, and when those partial payments would be applied. Additionally, requiring application to the oldest outstanding payment when a full payment accumulates will provide protection to consumers, as well as reduce the outstanding principal balance on certain consumer loans.

Finally, the Bureau seeks comment on if this approach is the proper way to address suspense accounts, and specifically, whether there should be time requirements on returning partial payments. If a servicer chooses not to accept a partial payment, must that payment be returned within a specific amount of time, and if so, how long should that time be? Additionally, the SBREFA Panel recommended the Bureau consider if additional flexibility can be provided in the proposed rule for small servicers, to the extent their current practices differ from the proposal and provide appropriate consumer protections.[104] The Bureau seeks comment on whether the proposed rule differs from existing small servicer practices, and if so, how additional flexibility can be provided while still providing appropriate consumer protection.

36(c)(1)(iii) Non-conforming payments

TILA section 129F(b) further provides that “[i]f a servicer specifies in writing requirements for the consumer to follow in making payments, but accepts a payment that does not conform to the requirements, the servicer shall credit the payment as of 5 days after receipt.” This provision codifies the treatment of non-conforming payments in current § 1026.36(c)(2). The Bureau is not making any substantive changes to this provision, as the current rule is clear and provides protection for consumers, but the Bureau proposes to redesignate the section as new § 1026.36(c)(1)(iii).

The Bureau notes that payments held in a suspense or unapplied funds account, as addressed in proposed § 1026.36(c)(1)(ii) discussed above, would not be considered to have been “accepted” by the servicer. Thus, under the Bureau’s proposal, partial payments retained in suspense or unapplied funds accounts are treated as payments that have not been accepted subject to § 1026.36(c)(1)(ii), as opposed to non-conforming payments that have been accepted subject to proposed § 1026.36(c)(1)(iii), which must be credited within five days of receipt.

36(c)(2) Prohibition on Pyramiding of Late Fees

The Bureau is not proposing any substantive changes to existing 36(c)(1)(ii), prohibiting the pyramiding of late fees. However the Bureau proposes redesignating this as new paragraph 36(c)(2).

36(c)(3) Payoff Statements

DFA section 1464(b) established TILA section 129G, which requires that a creditor or servicer send an accurate payoff balance amount to the consumer within a reasonable time, but in no case more than seven business days, after the receipt of a written request for such balance from or on behalf of the consumer. This provision generally codifies existing § 1026.36(c)(1)(iii) of Regulation Z regarding provision of payoff statements with four substantive changes. First, while existing Regulation Z only applied the requirements to servicers, the statute applies the requirements to both servicers and creditors. Second, the statute applies the prompt response requirement to “home loans,” rather than consumer credit transactions secured by the consumer’s principal dwelling. Third, the statute limits the reasonable time for responding to not more than seven business days; by contrast, existing comment 36(c)(1)(iii)-1 generally creates a five business day safe harbor for responding, but notes that it might be reasonable to take longer to respond in certain circumstances. Fourth, the statute requires a prompt response only to written requests for payoff amounts, while the existing regulation requires a prompt response to all such requests. Due to the reorganization of paragraph (c), the proposed provisions on payoff statements will be located in paragraph (c)(3).

Covered persons. Existing § 1026.36(c)(1)(iii) applies to servicers. TILA section 129G, as established by DFA section 1464(b), applies the payoff statement requirement to creditors and servicers. For the reasons discussed in the section-by-section analysis of § 1026.20(d) above, the Bureau interprets this to mean the payoff statement provision applies to creditors, assignees, and servicers as applicable. Proposed comment 36(c)(3)-1 clarifies that a creditor who no longer owns the mortgage loan or the mortgage servicing rights is not “applicable” and therefore not subject to the payoff statement requirements. The Bureau notes that the other subparts of paragraph (c) continue to be limited to servicers.

Scope. Existing § 1026.36(c)(1)(iii) is limited to consumer credit transactions secured by principal dwellings. The Bureau is proposing to expand the scope of the provision to consumer credit transactions secured by all dwellings. TILA section 129G, as established by DFA section 1464(b), applies the payoff statement requirement to “home loans,” a term not used elsewhere in TILA. The Bureau interprets this term to expand the scope of the requirement from consumer credit transaction secured by principal dwellings to consumer credit transactions secured by any dwelling. Thus, the proposed regulation applies to consumer credit transactions (both open- and closed-end), secured by a dwelling, not just a principal dwelling. The Bureau notes that the other subparts of paragraph (c) continue to be limited to consumer credit transactions secured by a consumer’s principal dwelling.

Seven business days. Existing § 1026.36(c)(1)(iii) requires the payoff statement to be sent within a reasonable amount of time, and comment 36(c)(1)(iii)-1 clarifies that a reasonable time is “within 5 business days under most circumstances.” New TILA section 129G provides that a reasonable time may not be more than seven business days after the receipt of the request. Proposed § 1026.36(c)(3) reflects this change. Because of this change, the Bureau proposes removing existing comment 36(c)(1)(iii)-1.

Written requests. Existing § 1026.36(c)(1)(iii) requires the payoff statement to be sent after a request is received from the consumer. New TILA section 129G limits the requirement to provide a prompt response to “written requests” for payoff statements. Thus proposed new paragraph (c)(3) would require payoff statements to be provided after receipt of a written request. Related comment (c)(3)-3 (renumbered from (c)(1)(iii)-3)), which provides examples of reasonable requirements the servicer may establish for payoff requests, is also updated to reflect this change.

The SBREFA Panel recommended the Bureau consider if additional flexibility can be provided in the proposed rule for small servicers, to the extend their current practices differ from the proposal and provide appropriate consumer protections.[105] The Bureau seeks comment on whether the proposed rule differs from existing small servicer practices, and if so, how additional flexibility can be provided while still providing appropriate consumer protection.

Section 1026.41 Periodic Statements for Mortgage Loans

Proposed § 1026.41 would establish the periodic statement requirement for residential mortgage loans. This section implements TILA section 128(f) as established by DFA section 1420. The statute requires the periodic statement to disclose seven items of information (the amount of the principal obligation, current interest rate and reset date if applicable, information on prepayment penalties and late fees, contact information for the servicer, and housing counselor information), as well as such other information as the Bureau may prescribe in regulations.[106] The Bureau believes the periodic statement would provide the greatest value to consumers by also providing information regarding upcoming payment obligations and the application of past payments; a list of recent transaction activity; additional account information; and delinquency information. Thus, the Bureau proposes pursuant to TILA section 129(f)(1)(H) that each periodic statement also include this additional information.

TILA section 128(f) applies the requirement to provide a periodic statement to creditors, assignees, and servicers of residential mortgage loans. To increase readability, proposed § 1026.41 uses the term “servicer” to describe the entities covered by the proposed requirement, and defines servicer to mean creditors, assignees, or servicers for the purposes of § 1026.41. This terminology is also used in the section-by-section analysis for proposed § 1026.41. The statute applies the periodic statement to “the creditor, assignee, or servicer.” Comment 41(a)-3 clarifies that only one periodic statement must be sent to the consumer each billing cycle, while the creditor, assignee and servicer are subject to the periodic statement requirement, they may decide among themselves who will sent the statement. Comment 41(a)-4 clarifies that a creditor who no longer owns the mortgage loan or the mortgage servicing rights is not “applicable” and therefore not subject to the requirements. The Bureau interpretation of the statute would not apply the on-going periodic statement requirements to an entity that originated the loan, but has sold both the loan and the servicing rights and no longer has any connection to the loan.

As proposed, the periodic statement carefully balances the need to provide consumers with sufficient information against the risk of overwhelming consumers with too much information. The proposed requirements are designed to make the statement easy to read, whether provided in a paper form or electronically. The Bureau believes that imposing a requirement that information be grouped would present the information in a logical format, while allowing servicers flexibility in customizing the statement. Thus, the proposed regulations discussed below would require the following groupings of information:

  • The Amount Due: The most prominent disclosure on the statement would be the amount due. The due date of the payment due and information on the late fee is also included in this grouping.
  • Explanation of Amount Due: This grouping would include a breakdown of the amount due, showing allocation to principal, interest, and escrow. This grouping would also provide the total sum of any fees or charges imposed, and any amount of past due payment.
  • Past Payment Breakdown: This grouping would include a breakdown of how previous payments were applied.
  • Transaction Activity: This grouping would be a list of any activity that credits or debits the outstanding account balance, for example, charges imposed or payments received.

The periodic statement would also include the following information:

  • Certain messages as required at certain times (for example, information on funds held in a suspense or unapplied funds account).
  • Contact information for the servicer.
  • Account information as required by the statute, including the amount of the principal obligation, current interest rate, and when it might change (if applicable), information on prepayment penalties (if applicable) and late fees, contact information for the servicer, and housing counselor information.
  • Finally, additional delinquency information would be required when a consumer is more than 45 days delinquent on his or her loan. Each of these disclosures is discussed below.

Additionally, the proposed regulation sets forth requirements regarding the timing and form of the periodic statement and establishes exemptions to the requirement to provide a periodic statement.

41(a) In general

Proposed § 1026.41(a) states the general requirement that, for a closed-end consumer credit transaction secured by a dwelling, a creditor, assignee, or servicer must transmit to the consumer for each billing cycle a periodic statement meeting the timing, form, and content requirements of § 1026.41, unless an exemption applies. As discussed below, the proposed requirements and exemptions are authorized under TILA sections 128(f), and 105(a) and (f), and DFA sections 1032(a) and 1405(b).

As discussed above, the periodic statement is intended to serve a variety of purposes, including informing consumers of their payment obligations, providing information about the mortgage loan, creating a record of transactions that increase or decrease the outstanding balance, providing the information needed to identify and assert errors, and providing information when borrowers are delinquent. To meet these goals, paragraphs (b), (c), and (d) respectively, propose the requirements for the timing, form, content, and layout of the periodic statement. Paragraph (e) proposes exemptions from the proposed periodic statement requirement.

Entities covered. TILA section 128(f) imposes the periodic statement requirement on creditors, assignees, and servicers. Proposed § 1026.41(a) would implement this provision by specifying that the duty to transmit periodic statements applies to the servicer, defined to mean creditor, assignee, or servicer. The consumer is only required to receive one periodic statement each billing cycle, but creditors, assignees, and servicers would all be responsible for ensuring that the consumer receives a periodic statement that meets the requirements of § 1026.41.

Scope. Under TILA section 128(f), the periodic statement requirement applies to residential mortgage loans. The term “residential mortgage loan” is generally defined in TILA section 103(cc)(5) to mean any consumer credit transaction that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling or on residential real property that includes a dwelling, other than a consumer credit transaction under an open-end credit plan. Consistent with this definition, proposed paragraph (a) would apply the periodic statement requirement to “any closed-end consumer credit transaction secured by a dwelling.” This language implements the substantive scope of the statute; no substantive change is intended.

Transmit to the consumer. Proposed § 1026.41(a) would require the servicer to transmit the periodic statement to the consumer. The term “transmit” is used in the statute. Use of this term would indicate that the servicer must do more than simply make the statement available; the statement would be required to be sent to the consumer. Paper statements mailed to the consumer would meet this requirement. As discussed below with respect to proposed § 1026.41(c), if the servicer is using an electronic method of distribution, a servicer may send the consumer an email indicating that the statement is available, rather than attaching the statement itself, to account for information security concerns.

Proposed comment 41(a)-1 clarifies that joint obligors need not receive separate statements; a single statement addressed to both of them would satisfy the periodic statement requirement.

Billing cycles. Proposed § 1026.41(a) would require a periodic statement to be sent each “billing cycle.” The billing cycle corresponds to the frequency of payments, as established by the legal obligation of the consumer as determined by the mortgage note and any subsequent modifications to that obligation. Thus, if a loan requires the consumer to make monthly payments, that consumer will have a monthly billing cycle. Likewise, if a consumer makes quarterly payments, that consumer will have a quarterly billing cycle.

Based on industry outreach, the Bureau has learned of other alternatives to monthly billing cycles. Some loans may be timed to accommodate consumers employed in seasonal industries (for example, a loan may have 10 payments over the course of a year). For such loans the billing cycle may not align with the calendar months. Another non-monthly payment arrangement may occur when payments are made every other week, or other similar less-then-monthly periods. For example, servicers and consumers may arrange a bi-weekly payment program to align mortgage payments with the consumer’s paychecks. Such billing cycles may be arrangements with the servicer that do not modify the legal obligation of the consumer. In such cases, a periodic statement may, but is not required to, reflect this modified payment cycle.

The Bureau realizes that a requirement to provide statements every other week may be costly for servicers and unhelpful to consumers. In addition, such a short cycle may cause problems with information on the statement being outdated. Thus, paragraph (a) allows that if a loan has a billing cycle shorter than a period of 31 days (for example, a bi-weekly billing cycle), a periodic statement covering an entire month may be used. Related proposed comment 41(a)–2 clarifies how such a single statement would aggregate information from multiple billing cycles.

Authority. Proposed paragraph (a) implements new TILA section 128(f)(1) requiring that a creditor, assignee, or servicer, with respect to any closed-end consumer credit transaction secured by a dwelling must transmit a periodic statement to the consumer. In addition, the Bureau proposes in paragraph (a) to use its authority under TILA section 105(a) and (f) and DFA section 1405(b) to exempt creditors, assignees, and servicers of residential mortgage loans from the requirement in TILA section 128(f)(1)(G) to transmit periodic statement each billing cycle when the billing cycle is less than a month, and to instead permit servicers to provide an aggregated periodic statement covering an entire month. For the reasons discussed above, the Bureau believes that the proposed exception is necessary and proper under TILA section 105(a) both to effectuate the purposes of TILA — to promote the informed use of credit and protect consumers against inaccurate and unfair credit billing practices — and to facilitate compliance. Moreover, the Bureau believes, in light of the factors in TILA section 105(f), that sending periodic statements more than once a month would not provide a meaningful benefit to consumers. Specifically, the Bureau considers that the exemption is proper irrespective of the amount of the loan, the status of the borrower (including related financial arrangements, financial sophistication, and the importance to the borrower of the loan), or whether the loan is secured by the principal residence of the consumer. Further, in the estimation of the Bureau, consistent with DFA section 1405(b), the proposed exemption will prevent the consumer confusion that might result from receiving multiple periodic statements in close sequence, thus furthering the consumer protection purposes of the statute.

Paragraph (b) interprets the statutory requirement that a periodic statement must be provided for each billing cycle by requiring the periodic statement be delivered or placed in the mail within a reasonably prompt time after the close of the grace period of the previous billing cycle.

Paragraph (c) invokes authority under TILA sections 105(a), 122, and 128(f)(2) to require that the disclosures must be made clearly and conspicuously in writing, or electronically if the consumer agrees, and in a form the consumer may keep. The Bureau also interprets the statute to mandate certain of these form requirements.

As discussed in more detail below, the Bureau generally proposes to impose the periodic statement requirement pursuant to its authority under TILA sections 128(f) and 105(a), and DFA sections 1032(a) and 1405(b).

41(b) Timing of the Periodic Statement

Proposed § 1026.41(b) provides that the periodic statement must be sent within a reasonably prompt time after the close of the grace period of the previous billing cycle. Proposed comment 41(b)-1 provides that four days after the close of any grace period would be considered reasonably prompt.

For the first payment on the mortgage loan, proposed paragraph (b) would require that the first periodic statement be sent no later than 10 days before this first payment is due. This adjustment is necessary because there is no previous billing cycle from which to time the sending of the first statement.

The periodic statement serves the dual purposes of giving an accounting of payments received since the pervious periodic statement, and reminding the consumer about the upcoming payment. To achieve these dual purposes, the periodic statement must arrive after the last payment was received and before the next payment is due, which can be a relatively narrow window. If a payment is due on the first of the month, grace periods may give the consumer as late as the 15th of the month to make that payment. Thus, if a statement is sent before the 15th of the month, that statement may not reflect the consumer’s most recent payment, or any late charge imposed due to a late payment. However, if a statement is sent at the close of the month, that statement may not arrive before the next payment is due on the first day of the next month. Allowing a few days for processing and mailing of statements creates a tight timeframe. The Bureau seeks comment on whether the proposed regulation appropriately addresses this timeframe. Additionally, the Bureau seeks comment on whether it is operationally difficult to have the first statement delivered or placed in the mail 10 days before the first payment is due.

The Bureau interprets the requirement in TILA section 128(f) that periodic statements be sent for “each billing cycle” to authorize the timing requirements proposed in § 1026.41(b). In addition, the proposed timing requirements are authorized under TILA section 105(a), and DFA sections 1032(a) and 1405(b). For the reasons noted above, the Bureau believes, consistent with TILA section 105(a), that the proposed requirements are necessary and proper to effectuate the purposes of TILA to assure a meaningful disclosure of credit terms and protect consumers against inaccurate and unfair credit billing practices by assuring that consumers receive the periodic statement at a time that is useful to them. In addition, consistent with DFA section 1032(a), the Bureau believes that the proposed timing requirements help ensure that the features of consumers’ residential mortgage loans, both initially and over the term of the loan, are effectively disclosed to consumers in a manner that permits them to understand the costs, benefits, and risks associated with the loan. Moreover, consistent with DFA section 1405(b), the Bureau believes that the proposed timing requirements would improve consumer awareness and understanding of their residential mortgage loans by assuring that consumers receive the periodic statements at a meaningful time, after their last payment is made and before their next payment is due, and that proposed requirements are thus in the interest of consumers.

41(c) Form of the Periodic Statement

Proposed § 1026.41(c) provides that the periodic statement disclosures required by section § 1026.41 must be made clearly and conspicuously in writing, or electronically, if the consumer agrees, and in a form the consumer may keep. TILA section 128(f)(1) specifies that periodic statements must be “conspicuous and prominent,” and TILA section 128(f)(2) requires the Bureau to develop and prescribe a standard form to be transmitted in writing or electronically. The Bureau proposes to implement these provisions, in part through the form requirements set forth in proposed § 1026.41(c) and the related forms provided in Appendix H-28. In addition, the proposed form requirements are authorized under TILA section 122, which requires the disclosures under TILA be clear and conspicuous, TILA section 105(a) and DFA sections 1032(a) and 1405(b). As discussed below, the Bureau believes, consistent with TILA section 105(a), that the proposed form requirements are necessary and proper to effectuate the purposes of TILA to assure a meaningful disclosure of credit terms and protect the consumer against inaccurate and unfair credit billing practices by assuring that the periodic statement sent to consumers is in a form that they can understand. In addition, consistent with DFA section 1032(a), the Bureau believes that the proposed form requirements help ensure that the features of consumers’ residential mortgage loans, both initially and over the term of the loan, are effectively disclosed to consumers in a manner that permits them to understand the costs, benefits, and risks associated with the loan. Moreover, consistent with DFA section 1405(b), the Bureau believes that the proposed form requirements would improve consumer awareness and understanding of their residential mortgage loans by assuring that the periodic statements sent to consumers are in a useable form that is easy to understand and that the form requirements are thus in the interest of consumers and the public interest.

Clear and conspicuous. TILA section 122 requires that disclosures under TILA be clear and conspicuous. Existing § 1026.31(b) generally implements this requirement with respect to disclosures required by subpart E, where new § 1026.41 will be located. Section 1026.31(b) applies only to creditors, however. Thus, to make this requirement applicable to servicers (defined to include creditors and assignees), proposed paragraph 41(c) would require, consistent with TILA section 122 and existing § 1026.31(b), that the periodic statement be clear and conspicuous. Proposed comment 41(c)-1 clarifies the clear and conspicuous standard, stating that it generally requires that disclosures be in a reasonably understandable form, and explains that other information may be included on the statement, so long as that other information does not overwhelm or obscure the required disclosures. Thus, information that is traditionally found on their periodic statements, but not proposed as required by this regulation, such as the servicer’s logo, information on payment methods, or additional information on escrow accounts, may continue to be included on periodic statements.

Additional information. Proposed comment 41(c)-2 states that nothing in this subpart prohibits a servicer from including additional information or combining disclosures required by other laws with the disclosures required by § 1026.41, unless such prohibition is expressly set forth in § 1026.41 or the applicable law. For example, the grouping requirements discussed below may not be overridden by additional information in the statement.

Based on industry outreach, the Bureau understands that some institutions provide a combined statement for mortgage loans and other financial products. For example if a consumer has both a checking account and a mortgage with a credit union, the consumer may receive a single combined statement. The Bureau seeks comment on how servicers would actually combine statements. In particular, the Bureau notes that difficulties may arise when different disclosures have different timing requirements, and when multiple disclosures have requirements that information be presented on the first page of the statement. For example, if both mortgage loan disclosures and credit card disclosures are required to be on the first page of a statement, how would these statements be combined?

Electronic distribution. TILA section 128(f)(2) provides that periodic statements “may be transmitted in writing or electronically.” Consistent with this provision, proposed § 1026.41(c) would allow statements to be provided electronically, if the consumer agrees. As discussed above, the requirement to transmit a periodic statement to the consumer may be met by sending the consumer an e-mail notification that the statement is available, rather than e-mailing the statement itself in light of information security concerns. This paragraph would require only affirmative consent by the consumer to receive statements, not compliance with E-Sign verification procedures. The Bureau does not believe E-Sign consent is required by the statute. E-Sign is designed to provide an electronic alternative to required writings. The statute, however, requires only periodic “statements” as opposed to “writings” to be transmitted to consumers. Additionally, the statute contemplates electronic statements, as TILA section 129(f)(2) provides that the Bureau shall prescribe a standard form, taking into account that the statements required may be transmitted in writing or electronically. Thus, the Bureau believes that Congress did not intend to require E-Sign verification procedures. The Bureau seeks comment as to whether additional requirements should be placed on when a consumer consents to receiving electronic statements. For example, must consent be obtained or confirmed electronically in a manner that demonstrates that the consumer is able to access information electronically? The Bureau also seeks comment on whether consumers who already receive electronic statements should be deemed as having consented to receive statements electronically. Additionally, the Bureau seeks comment on whether consumers who have auto-debit set up to deduct payments from their bank account should be deemed as having consented to receive statements electronically.

Retainability. Proposed § 1026.41(c) would require the disclosure be provided in a form the consumer may keep. Paper statements sent by mail or provided in person, would satisfy this requirement. If electronic statements are used, they must be in a form which the consumer can print or download.

Sample forms. Proposed § 1026.41(c) also states that sample forms are provided in Appendix H-28, and that appropriate use of these forms will be deemed to comply with the section. The sample forms were developed through consumer testing as discussed in part III.B above, and are intended to give guidance regarding compliance with proposed § 1026.41. However, they are not required forms, and any arrangements of the information that meet the requirements of proposed § 1026.41 would be considered in compliance with the section. The sample forms also contain additional information (for example, a tear-off coupon on the bottom) that is not required to be on the form, but is included to give context to the sample. These proposed regulations and sample forms were crafted to give servicers flexibility in designing their periodic statements. The Bureau proposes these sample forms pursuant to its authority, inter alia, under TILA section 128(f)(2).

41(d) Content and Layout of the Periodic Statement

Proposed § 1026.41(d) contains content and layout requirements that implement, in part, TILA section 128(f), and is additionally authorized under TILA section 105(a) and DFA sections 1302(a) and 1405(b).

The content required by paragraph (d) is authorized under TILA section 128(f)(1). Such content is authorized as follows:

  • Statutorily-required content: TILA sections 128(f)(1)(a) through (g) requires the inclusion of certain items of information in the periodic statement. The proposed regulation generally implement these provisions by requiring the content set forth in § 1026.41(d)(1)(ii), (6) and (7), and the description of late fees in § 1026.41(d)(4).
  • Additional content: TILA section 128(f)(1)(H) requires inclusion in periodic statements of such other information as the Bureau may prescribe by regulation. The remainder of the content of the periodic statement is proposed under this authority.

The grouping and other form requirements of the layout in paragraph (d) implement, in part, the requirement under TILA section 128(f)(1) that the content of the periodic statement be presented in a conspicuous and prominent manner, and under TILA section 128(f)(2) for the Bureau to develop and prescribe a standard form for the periodic statement disclosure. In addition, as discussed above with respect to the form requirements under § 1026.41(c) and for the reasons explained below, the proposed grouping and form requirements under § 1026.41(d) are authorized under TILA section 105(a) and DFA sections 1032(a) and 1405(b).

The periodic statement is designed to provide the consumer with information in an easy-to-read format. The goal of the proposed grouping and form requirements is to highlight key information – the amount due – and organize information so the statement would not be overwhelming to the consumer. The commentary to paragraph (d), discussed below, reflects these goals.

Exemptions and adjustments: TILA section 128(f)(1)(G) requires the periodic statement to include the names, addresses and other contact information for government-certified counseling agencies or programs reasonably available to the consumer. For the reasons discussed below, the Bureau proposes to use its authority under TILA section 105(a) and (f) to exempt servicers from having to include this information in periodic statements to and to instead require the periodic statement to include contact information for the State housing finance authority for the State in which the property is located and information to access the HUD list or Bureau list of homeownership counselors or counseling organizations. This adjustment is additionally authorized under DFA section 1405(b).

Close proximity. Proposed § 1026.41(d) would require specific disclosures be grouped together and presented in close proximity. Information is grouped together to aid the consumer in understanding relatively complex information about their mortgage. The General Design Principles discussed in the Macro final report (Macro Report) include grouping together related concepts and figures because consumers are likely to find it easier to absorb and make sense of financial forms if the information is grouped in a logical way.[107]

Proposed comment 41(d)-1 clarifies that close proximity requires items to be grouped together and set off from the other groupings of items. This can be accomplished, for example, by including lines or boxes on the statement, or by including white space between the groupings. Items required to be in close proximity should not have any intervening text between them. The close proximity standard is found in other parts of Regulation Z, including §§ 1026.24(b) and 1026.48. In both provisions, the commentary interprets close proximity to require the information to be located immediately next to or directly above or below, without any intervening text or graphical displays.[108]

Information not applicable. Proposed comment 41(d)–2 provides that information that is not applicable to the loan may be omitted from a periodic statement. For example, if a loan does not have a prepayment penalty, the periodic statement may omit the prepayment penalty disclosure.

Terminology. Proposed comment 41(d)-3 provides that the periodic statement may use terminology other than that found on the sample forms so long as the new terminology is commonly understood. This gives servicers the flexibility to use regional terminology or commonly used terms with which consumers are familiar. For example, during consumer testing in California, participants were confused by the use of the term “escrow.” One participant explained that in California, the term “escrow” refers to an account set up to hold funds until a homebuyer closes on the house. This participant said he was more familiar with the term “impound account” to refer to the account holding funds for taxes and insurance.[109] In this example, use of the term “impound account” to refer to the escrow account for taxes and insurance would be permitted for periodic statements provided to consumers in California.

41(d)(1) Amount Due

Proposed § 1026.41(d)(1) would require the periodic statement to provide information on the amount due, the payment due date, and the amount of any fee that would be assessed for a late payment, as well as the date on which that fee would be imposed if payment is not received. This information would have to be grouped together and located at the top of the first page of the statement. The amount due would have to be more prominent than any information on the page. This is consistent with the general principle of designing disclosures to highlight the most important information for consumers to make it easy for them to find.[110] A primary purpose of the periodic statement is to alert the consumer to upcoming payment obligations. The Bureau interprets TILA section 129(f)(E), which requires the periodic statement to include a description of any late payment fees, to require disclosure of the amount of any fees that would be assessed for late payments as well as the date the fee would be imposed if the payment has not been received, as well as other information regarding late fees discussed below. Although information concerning the amount due and the payment due date is not enumerated in the statute, the Bureau believes that this is the information the consumer is most likely to need. Because of the importance of this information, it is placed in the prominent position of the top of the first page, and the total amount must be the most prominent item on the page. In consumer testing, all participants were able to identify the amount due on the sample periodic statement presented to them.[111]

If the consumer has a payment-option loan, each of the payment options must be displayed with the amount due information. An example of such a statement is included in proposed Appendix H-28(C).

41(d)(2) Explanation of Amount Due

Proposed § 1026.41(d)(2) would require periodic statements to include an explanation of the amount due, providing the monthly payment amount, including the allocation of that payment to principal, interest and escrow (if applicable). Additionally, the statement would have to provide the total fees or charges incurred since the last statement, and any amount past-due (which would include both over-due payments and over-due fees). This information would have to be grouped together in close proximity and located on the first page of the statement.

The Explanation of Amount Due is intended to give consumers a snapshot of why they are being asked to pay the amount due. At a glance, consumers would be able to see their payment amount; how much is allocated to principal, interest and escrow (if applicable); and the total fees or other charges incurred since the last statement; and any post-due amounts. In this section, the fees incurred since the last statement would be shown in aggregate; a breakdown of the individual fees would be provided in the Transaction Activity section, discussed below. Additionally, this section would show the total of past due payments and fees from previous billing cycles. In the first round of consumer testing, Macro tested the form to see if participants were able to understand what charges constituted the total amount due. The sample form used in testing showed a late payment fee. After looking at the Explanation of Amount Due, all participants understood the amount due included a regular monthly payment and a late fee.[112] This indicates that the Explanation of Amount Due helps consumers understand the amount they need to pay.

If the consumer has a payment-option loan, a breakdown of each of the payment options would be required in the Explanation of Amount Due. Additionally, the Explanation of Amount Due would require inclusion of information about how each of the payment options will affect the outstanding loan balance. A form with such a box was tested during consumer testing. All but one of the participants were able to understand the effects the different payment options would have on their loan balance – that the loan balance would decrease, stay the same (for interest-only payments) or increase.[113] A sample form is provided in Appendix H-28(C).

41(d)(3) Past Payment Breakdown

Proposed paragraph (d)(3) would require periodic statements to include a snapshot of how past payments have been applied. Proposed § 1026.41(d)(3)(i) would require the periodic statement to include both the total of all payments received since the last statement and a breakdown of how those payments were applied to principal, interest, escrow, fees, and charges, and any partial payment or suspense account (if applicable). Proposed § 1026.41(d)(3)(ii) would require the total of all payments received since the beginning of the calendar year and a breakdown of how those payments were applied to principal, interest, escrow, fees, and charges, as well as the amount currently held in any partial payment or suspense account (if applicable). This information would have to be grouped together in close proximity, and located on the first page of the statement.

The past payment breakdown disclosure serves several purposes on the periodic statement, including creating a record of payment application, providing the consumer information needed to assert any errors, and providing information about the mortgage expenses.

The breakdown in paragraph (d)(3)(i), showing all payments made since the last statement, would allow the consumer to confirm that his or her payments was properly applied. If the payments were not properly applied, the breakdown would provide the consumers the information needed to assert an error. Although testing participants had some confusion about partial payments as discussed below, they were able to identify how their payments had been applied based on the past payment breakdown information included on the sample statement.[114]

Both the breakdown since the last billing cycle and the breakdown of the year-to-date play an important role in educating the consumer. The payments since the last statement inform consumers of how much their outstanding principal has decreased, while the year-to-date information educates consumers on the costs of their mortgage loan. Consumer testing revealed that consumers may be surprised by how much of their payment is going to interest or fees as opposed to principal. Aggregated over the year-to-date can bring this expense to a consumers’ attention, and motivate them to possibly change behaviors that are generating significant expenses. For example, consumers who habitually submit their payment a few days late may correct this behavior if they realize it is costing them hundreds of dollars a year. The breakdown of all payments made in the current calendar year to date is of particular importance in educating consumers about their loans, especially since there is no other mandated year-end summary of all payments received and their application. The past payment breakdown, of both the payments since the last statement, and payments for the year to date, provides the consumer with important information that is not currently required to be disclosed.

Partial Payments. Proposed comment 41(d)(3)-1 provides guidance on how partial payments that have been sent to a suspense account should be reflected in the past payments breakdown section of the periodic statement. The proposed comment provides illustrative examples of how partial payments sent to a suspense account should be listed as unapplied funds since the last statement and year to date. Consumer testing revealed that consumers have very little understanding about how partial payments are handled.[115] As discussed in part IV.C above, the periodic statement is designed to help consumers understand how partial payments are processed. The past payment breakdown is useful in communicating information about partial payments and suspense accounts to consumers.

41(d)(4) Transaction Activity

Proposed § 1026.41(d)(4) would require the periodic statement to include a Transaction Activity section that lists any activity since the last statement that credits or debits the outstanding account balance. For each transaction, the statement would include the date of the transaction, a description of the transaction, and the amount of the transaction. This information must be grouped together, but may be provided anywhere on the statement.

Proposed comment 41(d)(4)-1 clarifies that transaction activity includes any activity that credits or debits the outstanding loan balance. For example, proposed comment 41(d)(4)-1 states that transaction activity would include, without limitation, payments received and applied, payments received and sent to a suspense account, and the imposition of any fee or charge. Thus, the Transaction Activity section would provide a list of all charges and payments, covering the time from the last statement until the current statement is printed. This disclosure would allow the consumer to understand what charges are being imposed and provide further detail regarding the aggregated numbers found in the “Explanation of Amount Due” section. The Transaction Activity section would provide a record of the account since the last statement, allowing the consumer to review for errors, ensure payments were received, and understand any and all costs. If a servicer receives a partial payment and decides to return the payment to the consumer, such a payment would not need to be included as a line item in the Transaction Activity section, because this activity would neither credit nor debit the outstanding account balance. The Bureau seeks comment on whether the periodic statement should be required to include a message under paragraph (d)(5) when a partial payment is returned to the consumer.

Late fee description. Proposed comment 41(d)(4)–2 clarifies that the description of any late fee charge in the transaction activity section includes the date of the late fee, the amount of the late fee, and the fact that a late fee was imposed. The Bureau interprets TILA section 129(f)(E), which requires that the periodic statement include “a description” of any late payment fees, to require disclosure of this information, as well as information regarding late fees discussed above.

Suspense accounts. Proposed comment 41(d)(4)–3 clarifies that if a partial payment is sent to a suspense account, the fact of the transfer should be reflected in the transaction description (for example, a partial payment entry in the transaction activity might read: “Partial payment sent to suspense account”), the funds sent to the suspense account should be reflected in the unapplied funds section of the past payment breakdown, and an explanation of what must be done to release the funds should be provided in the messages section. The messages section, discussed below, should include an explanation of what the consumer must do to release the funds from the suspense account.

41(d)(5) Messages

Proposed § 1026.41(d)(5) would require a message on the front of the statement if a partial payment of funds is being held in a suspense account regarding what must be done for the funds to be applied.

The Bureau seeks comment on what, if any, additional messages should be required. In particular, the Bureau seeks comment on whether there should be a required disclosure where the consumer has a negatively-amortizing or interest-only loan. Additionally, the Bureau seeks comment on whether there should be a required disclosure on private mortgage insurance and when it may be eliminated. Finally, the Bureau seeks comment as to if more than one message is required, and if so, should these be grouped together and should these messages be required to be on the first page of the statement?

41(d)(6) Contact information

Proposed § 1026.41(d)(6) would require that the periodic statement contain contact information specifying where a consumer may obtain information regarding the mortgage. Proposed comment 41(d)(6)-2 clarifies that this contact information must be the same as the contact information for asserting errors or requesting information. The Bureau seeks comment on whether consumers are likely to contact the servicer for information other than errors or inquiries, which would necessitate a different number being included on the periodic statement. Proposed § 1026.41(d)(6) provides that the contact information provided must include a toll-free telephone number. Proposed comment 41(d)(6)–1 clarifies that the servicer may provide additional information, such as a web address, at its option. Proposed § 1026.41(d)(6) does not require that that the contact information be set off in a separate section, but simply that it be included on the front page of the statement. This proposed requirement would allow servicers to include this information with their company name and logo at the top of the page or elsewhere on the statement.

41(d)(7) Account Information

Proposed § 1026.41(d)(7) would require that the following information about the mortgage, as required by the statute, be included on the statement: the amount of principal obligation, the current interest rate in effect for the loan, the date on which the interest rate may next reset or adjust, the amount of any prepayment penalty, and information on housing counselors. This information may be included anywhere on the statement. This information may, but need not be, grouped together. While the sample form has this information on the first page, the servicer is not required to include this information on the first page.

Prepayment penalty. Proposed § 1026.41(d)(7)(iv) defines a prepayment penalty as “a charge imposed for paying all or part of a transaction’s principal before the date on which the principal is due.” This definition is further clarified in the proposed commentary. Proposed comment 41(d)(7)(iv)–1 gives the following examples of prepayment penalties: (1) a charge determined by treating the loan balance as outstanding for a period of time after prepayment in full and applying the interest rate to such “balance,” even if the charge results from interest accrual amortization used for other payments in the transaction under the terms of the loan contract; (2) a fee, such as an origination or other loan closing cost, that is waived by the creditor on the condition that the consumer does not prepay the loan; (3) a minimum finance charge in a simple interest transaction; and (4) computing a refund of unearned interest by a method that is less favorable to the consumer than the actuarial method, as defined by section 933(d) of the Housing and Community Development Act of 1992, 15 U.S.C. 1615(d). Proposed comment 41(d)(7)(iv)-1.i further clarifies that “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 and states, for example, that “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 any grace period). The proposed comment also provides an example where a prepayment penalty of $1,000 is imposed because a full month’s interest of $3,000 is charged even though only $2,000 in interest was accrued in the month during which the consumer prepaid.

Proposed comment 41(d)(7)(iv)-2 clarifies that a prepayment penalty does not include: (1) fees imposed for preparing and providing documents when a loan is paid in full, if the fees are imposed whether or not the loan is prepaid, such as a loan payoff statement, a reconveyance document, or another document releasing the creditor’s security interest in the dwelling that secures the loan; or (2) loan guarantee fees.

The definition of prepayment penalty in proposed § 1026.41(d)(7)(iv) and comments 41(d)(7)(iv)-1 and -2 substantially incorporate the definitions of and guidance on prepayment penalties from other rulemakings addressing mortgages and, as necessary, reconciles their differences. For example, the Bureau is proposing to incorporate the language from the Board’s 2009 Closed-End Proposal but omitted in the Board’s 2011 ATR Proposal listing a minimum finance charge as an example of a prepayment penalty and stating that loan guarantee fees are not prepayment penalties, because similar language is found in longstanding Regulation Z commentary. Based on the differing approaches taken by the Board in its recent mortgage proposals, however, the Bureau seeks comment on whether a minimum finance charge should be listed as an example of a prepayment penalty and whether loan guarantee fees should be excluded from the definition of the term prepayment penalty.

The Bureau expects to coordinate the definition of the term prepayment penalty in proposed § 1026.41(d)(7)(iv) with the definitions in other pending rulemakings relating to mortgages.

The Bureau seeks comment on the feasibility of disclosing the amount of any prepayment penalty, as the amount of the penalty could depend on the timing or amount of prepayment, and if a preferable alternative would be to disclose the maximum amount of a prepayment penalty. Alternatively, the Bureau seeks comment on whether a better alternative would be for the periodic statement to disclose the existence of a prepayment penalty in place of the amount.

Housing counselors. Proposed § 1026.41(d)(7)(v) would require the periodic statement to include contact information for the State housing finance authority for the State in which the property is located, and information to access either the either the Bureau list or the HUD list of homeownership counselors or counseling organizations.

TILA section 128(f)(1)(G) requires the periodic statement to include the names, addresses, telephone numbers and internet addresses of counseling agencies or programs reasonably available to the consumer that have been certified or approved and made publically available by the Secretary of Housing and Urban Development or a State housing finance authority.

On July 9, 2012, the Bureau released the 2012 HOEPA Proposal to implement other Dodd-Frank Act provisions, including the requirement to provide a list of housing counselors in connection with the application process for mortgage loans.[116] In connection with those requirements, the Bureau proposed to require creditors to provide a list of five homeownership counselors or counseling organizations to applicants for various categories of mortgage loans. The Bureau also indicated that it is expecting to develop a website portal that would allow lenders to type in the loan applicant’s zip code to generate the requisite list, which could then be printed for distribution to the loan applicant. This will allow creditors to access lists of the housing counselors with a minimum amount of effort.[117]

In connection with the periodic statement requirement, however, the Bureau is proposing to use its exception authority to require servicers simply to list where consumers can find a list of counselors, rather than to reproduce a list of counselors in each billing cycle. The Bureau believes that this approach appropriately balances consumer and servicer interests based on several considerations.

First, the Bureau is concerned about information overload for consumers. The periodic statement contains a significant amount of information already. While consumers who are deciding whether to take out a mortgage loan in the first instance may greatly benefit from consultation with a housing counselor, that likelihood is greatly reduced with regard to consumers receiving regular periodic statements on existing loans.

Second, the burden on servicers to import the list of counselors into a periodic statement document or to attach a list with each billing cycle is significantly higher than with regard to a single provision of the list. Space on the periodic statements is limited, and importing updated information from the CFPB website each cycle would involve more programming burden than simply listing the two agencies’ websites in the first instance.

To address these concerns, the proposal would require that the periodic statements include the contact information to access the State housing finance authority for the State in which the property is located, and the website and telephone number to access either the Bureau list or the HUD list of homeownership counselors or counseling organizations.[118] Directing consumers to this information would allow them to choose a program or agency conveniently located for them, and would allow the consumer to locate other programs or agencies if those contacted initially could not help the consumer at that time. The Bureau seeks comment on whether this proposal strikes an appropriate balance, and on the benefits and burdens to both borrowers and servicers of requiring that a list of several individual housing counselors be included in or with the periodic statement.

Because housing counselor information may not be relevant to consumers who are current and not facing any problems, the proposal does not require this information to be on the front of the statement. The Bureau seeks comment if this information should be required to be located on the front of this statement. In a related requirement, when the delinquency information is provided, the proposed regulations would require that the delinquency information contain a reference to this housing counselor information. This would ensures that the housing counselor information would be brought to the attention of delinquent consumers. These provisions are discussed further below.

The Bureau expects to coordinate the housing counselor information requirement in proposed § 1026.41(d)(7)(v) with the definitions in other pending rulemakings concerning mortgage loans that address housing counselors. The Bureau believes that, to the extent consistent with consumer protection objectives, adopting a consistent approach to providing housing counselor information across its various pending rulemakings will facilitate compliance. The Bureau notes that other housing counselor requirements (for example, the ARMs initial interest rate adjustment notification) require the contact information for the State housing finance authority for the State in which the consumer resides (as opposed to the State in which the property is located). While the Bureau expects the State in which the property is located will most often be the State where the consumer resides, under certain circumstances (a vacation home), these may be different States. Additionally, the Bureau notes that a difference in regulation requirements for different disclosures may increase compliance costs for servicers. The Bureau seeks comment on which State housing finance authority’s contact information should be required on the periodic statement.

The Bureau proposes to use its authority under TILA section 105(a) and (f) and DFA section 1405(b) to exempt creditors, assignees, and servicers of residential mortgage loans from the requirement in TILA section 128(f)(1)(G) to include in periodic statements contact information for government-certified counseling agencies or programs reasonably available to the consumer, and to instead require that periodic statements disclose the State housing finance authority for the State in which the property is located and information to access either the Bureau list or HUD list of homeownership counselors or organizations. For the reasons discussed above, the Bureau believes that the proposed exception and addition is necessary and proper under TILA section 105(a) both to effectuate the purposes of TILA — to promote the informed use of credit and protect consumers against inaccurate and unfair credit billing practices — and to facilitate compliance. Moreover, the Bureau believes, in light of the factors in TILA section 105(f), that disclosure of the information specified in TILA section 128(f)(1)(G) would not provide a meaningful benefit to consumers. Specifically, the Bureau considers that the exemption is proper irrespective of the amount of the loan, the status of the borrower (including related financial arrangements, financial sophistication, and the importance to the borrower of the loan), or whether the loan is secured by the principal residence of the consumer. Further, in the estimation of the Bureau, the proposed exemption will simplify the periodic statement, and improve the housing counselor information provided to the consumer, thus furthering the consumer protection purposes of the statute. In addition, consistent with DFA section 1405(b), the Bureau believes that the proposed modification of the requirements in TILA section 128(f)(1)(G) will improve consumer awareness and understanding and is in the interest of consumers and in the public interest.

41(d)(8) Delinquency Notice

Proposed § 1026.41(d)(8) would require that if the consumer is more than 45 days delinquent, the servicer must include on the periodic statement certain delinquency information grouped together.. The accounting of mortgage payments is confusing at best, and becomes significantly more complicated in a delinquency scenario. The combination of fees, partial payments being sent to suspense accounts, and application of payments to oldest outstanding payments due can quickly lead to confusion. Additionally, consumers in delinquency are often facing stress due to the situation that left them unable to make their mortgage payments. The proposed early intervention rules would require servicers to disclose information about loss mitigation or loan modification, but this information would not be customized to individual consumers. The delinquency notice, discussed below, would provide information that is tailored to the specific consumer. This information would benefit the consumer in several ways. First, this notice would ensure that the consumer is aware of the delinquency as well as potential consequences. Second, this information would ensure that the consumer has the information about his or her loan. For example, certain loan modification programs are tied to specific timelines in delinquency. This information would ensure that consumers understand the timeline for their delinquency so they can benefit from early intervention information. Finally, the delinquency information would create a record of how payments were applied, which would both help consumers understand the amount due and give consumers the information needed to become aware of any errors so they can could use the appropriate error resolution procedures.

Delinquency date and risks. Proposed paragraph (d)(8)(i) would require the periodic statement to include the date on which the consumer became delinquent. Many timelines relevant to the loss mitigation and foreclosure processes are based on the number of days of delinquency. For example, under certain programs consumers may not be eligible for a loan modification unless they are at least 60 days delinquent. However consumers may not know the date on which he or she was first considered delinquent. This can be especially confusing in a scenario where the consumer is making partial payments. Proposed paragraph (d)(8)(ii) would require the periodic statement to include a statement reminding the consumer of potential risks of delinquency, for example, late fees may be assessed or, after a number of months, the consumer can be subject to foreclosure.

A recent account history. Proposed paragraph (d)(8)(iii) would require the periodic statement to include a recent account history as part of the delinquency information. The accounting associated with mortgage loan payments is complicated, and can be even more so in delinquency situations. The accrual of fees and the application of payments to past months can make it very difficult for consumers to understand the exact amount he or she owes on the loan, and how that total was calculated. Additionally, this complex accounting makes it very difficult for a consumer to identify errors in of payment allocations. Although some of this information would be available from previous periodic statements, the Bureau believes that providing a separate recent account history is warranted under the circumstances.

The Bureau believes that the recent account history would enable the consumer to understand how past payments were applied, provide the information needed to identify any errors, and provide the information necessary to make financial decisions. Proposed paragraph (d)(8)(iii) would require the account history to show the amount due for each billing cycle, or the date on which a payment for a billing cycle was considered fully paid. The date on which the payment was considered fully paid is included to help a consumer understand that a past payment that was previously delinquent has been considered paid. For example, suppose a delinquent consumer does not make a payment in January, but makes a regular payment in February. Without the account history, the consumer would not be able to verify that payments were properly applied. The account history is limited to the lesser of the past 6 months or the last time the account was current to avoid creating a long list that could overwhelm the rest of the periodic statement.

Notice of any loan modification programs. Proposed paragraph (d)(8)(iv) would require the periodic statement to include as part of the delinquency information in the periodic statement notice of any acceptance into a modification program, either trial or permanent, create a record of acceptance into the modification program.

Notice if the loan has been referred to foreclosure. Proposed paragraph (d)(8)(v) would require the periodic statement to include, as part of the delinquency information notice, that the loan has been referred to foreclosure, if applicable, to ensure that the consumer is aware of any pending foreclosure.

Total amount to bring the loan current. Proposed paragraph (d)(8)(vi) would require that the total amount needed to bring the loan current be included in the delinquency information to ensure that consumers knows how much money they must pay to bring the loan back to current status.

Housing counselor information reference. Proposed paragraph (d)(8)(vii) would require that the delinquency notice also contain a statement directing the consumer to the housing counselor information located on the statement, as proposed by paragraph (d)(7)(v). For example, if the housing counselor information is on the back of the statement, the delinquency information, on the front of the statement, would direct consumers to the back of the statement.

45 Days. The delinquency information is intended to assist consumers who have fallen behind on their mortgage payments. The proposal would not require provision of this information until the consumer is 45 days delinquent. The Bureau recognizes that not all delinquencies indicate troubled consumers; a single missed payment may be the result of other factors such as misdirected mail. Such consumers would likely be notified of a single missed payment by their servicer, and the lack of payment received would be reflected on the next periodic statement. These consumers would receive minimal additional benefit from the delinquency information, and, if this is a frequent occurrence, such consumers might become accustomed to ignoring the delinquency information. By contrast, two missed payments likely indicate a potentially more serious issue, unlike simply failing to remember to send in a payment on time. Thus, the delinquency information would be required at 45 days to ensure receipt of this information by a borrower who missed two consecutive payments.

41(e) Exemptions

41(e)(1) Reverse Mortgages

Proposed § 1026.41(e)(1) exempts reverse mortgages, as defined by § 1026.33(a), from the periodic statement requirement. The Bureau is proposing this exemption for reverse mortgages because the periodic statement requirement was designed for a traditional mortgage product. Information that would be relevant and useful on a reverse mortgage statement differs substantially from the information required on the periodic statement. Incorporating the unique aspects of a reverse mortgage into the periodic statement regulations would require massive alterations to the form and regulation. The Bureau believes that it is more appropriate to address consumer protections relating to reverse mortgages in a separate comprehensive rulemaking.

The Bureau proposes to use its authority under TILA sections 105(a) and (f) and DFA section 1405(b) to exempt reverse mortgages from the requirement in TILA section 128(f) to provide periodic statements. For the reasons discussed above, the Bureau believes the proposed exemption is necessary and proper under TILA section 105(a) both to effectuate the purposes of TILA, and to facilitate compliance.

Moreover, the Bureau believes, in light of the factors in TILA section 105(f), that disclosure of the information specified in TILA section 128(f)(1) would not provide a meaningful benefit to consumers of reverse mortgages. Specifically, the Bureau considers that the exemption is proper irrespective of the amount of the loan, the status of the borrower (including related financial arrangements, financial sophistication, and the importance to the borrower of the loan), or whether the loan is secured by the principal residence of the consumer. Further, in the estimation of the Bureau, the proposed exemption would further the consumer protection purposes of the statute by avoiding the consumer confusion that would result by applying the same disclosure requirements to reverse mortgages as other mortgages and leaving reverse mortgages to be addressed in a comprehensive reverse mortgage rulemaking.

In addition, consistent with DFA section 1405(b), the Bureau believes that the proposed modification of the requirements in TILA section 128(f) to exempt reverse mortgages would improve consumer awareness and understanding and is in the interest of consumers and in the public interest.

41(e)(2) Time Shares

Proposed § 1026.41(e)(2) would clarify that timeshares as defined by 11 U.S.C. 101 (53(D)) are exempt from the periodic statement requirement. TILA section 128(f) provides that the periodic statement requirement applies to residential mortgage loans. The definition of residential mortgage loans set forth in TILA section 103(cc)(5) specifies that timeshares do not fall under this definition.

41(e)(3) Coupon Book Exemption

Proposed § 1026.41(e)(3) would implement the statutory exemption for fixed-rate loans for which the servicer provides a coupon book containing substantially similar information as found in the periodic statement. The Bureau recognizes the value of the coupon book as striking a balance between ensuring consumers receive important information, and providing a low burden method for servicers to comply with the periodic statement requirements. As such, the Bureau seeks to effectuate the coupon book exemption. The nature of a coupon book (both its smaller size and static nature) creates difficulties in including substantially similar information as would be on a periodic statement. The main problem is the static nature of a coupon book. Because a coupon book may cover an entire year or more, it cannot include information that changes on a monthly basis. By contrast, a periodic statement can provide dynamic information that changes on a monthly basis. To address this problem, the Bureau is proposing to modify the coupon book exception permitted by TILA section 128(f)(3) to apply the exception where the coupon book contains certain static information and other dynamic information is made accessible to the consumer.

Proposed comment 41(e)(3)-1 defines “fixed-rate” by reference to § 1026.18(s)(7)(iii), which defines “fixed-rate mortgage” as a transaction secured by a dwelling that is not an adjustable-rate or a step-rate mortgage. Proposed comment 41(e)(3)-2 explains what a coupon book is.

The Bureau proposes to use its authority under TILA section 105(a) to give effect to the coupon book exemption in TILA section 128(f)(3). TILA section 128(f)(3) provides an exemption to the periodic statement for fixed-rate loans when a coupon book that contains substantially similar information to the periodic statement is provided. Using its authority under TILA section 128(f)(1)(H), the Bureau has added certain dynamic items to the periodic statement that would be infeasible to include in a coupon book. The Bureau is proposing to use its TILA 105(a) authority to permit use of a coupon book even where certain dynamic information is not included in the book so long as such information is made available via the inquiry process. The Bureau believes this proposed exemption is necessary and proper to facilitate compliance.

Information in the coupon book. Proposed paragraph (e)(3)(i) would require the following information to be included on each coupon within the book: the payment due date, the amount due, and the amount and date that any late fee will be incurred. In specifying the amount due on each coupon, servicers would assume that all prior payments have been paid in full.

Proposed paragraph (e)(3)(ii) would require the following information to be included in the coupon book itself, though it need not be on each coupon: the amount of the principal loan balance, the interest rate in effect for the loan, the date on which the interest rate may next change; the amount of any prepayment fee that may be charged, the contact information for the servicer, and housing counselor information. Each of these items is discussed above in the section-by-section analysis of proposed paragraph (d). The coupon book would also be required to disclose information on how the consumer may obtain the dynamic information discussed below. The information described above may, but is not required to be, included on each coupon. Instead, it may be included anywhere in the coupon book, including on the covers, or on filler pages, as explained by proposed comment 41(e)(3)-3.

Because the outstanding principal balance will typically change during the time period covered by the coupon book, proposed comment 41(e)(3)-4 clarifies that a coupon book need only include the outstanding principal balance at the beginning of that time period.

Information made available. As discussed above, due to the static nature of the coupon book, certain dynamic information that is required to be included on periodic statements cannot be included. To use the coupon book provision, the proposed rule would require that the dynamic information be made available upon the consumer’s request. The servicer could provide the information orally, or in writing, or electronically, if the consumer consents. Thus, proposed paragraph (e)(3)(iii) would require the following dynamic information be made available to the consumer upon request: the monthly payment amount, including a breakdown showing how much, if any, will be allocated to principal, interest, and any escrow account; the total of fees or charges imposed since the last payment period; any payment amount past due; the total of all payments received since the beginning of the payment period, including a breakdown of how much, if any, of those payments was applied to principal, interest, escrow, fees and charges, and any partial payment suspense accounts; the total of all payments received since the beginning of the calendar year, including a breakdown of how much, if any, of those payments was applied to principal, interest, escrow, fees and charges, and how much is currently in any partial payment or suspense account; and a list of all the transaction activity (as defined in proposed comment 41(d)(4)-1) that occurred since the payment period.

The Bureau seeks comment on whether requiring servicers to make this information available would impose significant burden or costs that exceed consumer benefits. In particular, the Bureau seeks comment on whether providing the past payment breakdown information would impose greater burden then benefits.

Delinquency information. Because of the importance of the delinquency information, proposed paragraph (e)(3)(iv) would require that to qualify for the coupon book exception, the delinquency information required by proposed § 1026.41(d)(8), discussed above,to be sent to the consumer in writing for each billing cycle for which the consumer is more than 45 days delinquent at the beginning of the billing cycle.

41(e)(4) Small Servicer Exemption

Proposed paragraph (e)(4) would exempt certain smaller servicers from the duty to provide periodic statements for certain loans. A small servicer would be defined as a servicer (i) who services 1,000 or fewer mortgage loans; and (ii) only services mortgage loans for which the servicer or an affiliate is the owner or assignee, or for which the servicer or an affiliate is the entity to whom the mortgage loan obligation was initially payable.

The Bureau has decided to propose this exemption after careful consideration of the benefits and burdens of the periodic statement requirement. As proposed, the Bureau believes that the periodic statement will be helpful to consumers because it will provide a well-integrated communication that not only contains information about upcoming payments due, but also information about loan status, fees charged, past payment crediting, and potential resources and other useful information for consumers who have fallen behind in their payments. The Bureau believes that providing a single-integrated document, in place of a number of other communications that contain fragments of this information can be more efficient for consumers and servicers alike. And in light of the historic problems that have been reported in parts of the servicing industry, the periodic statement could be a useful tool for consumers to monitor their servicers’ performance and identify any issues or errors as soon as they occur.

At the same time, the Bureau recognizes that the servicing industry is not monolithic. Producing a periodic statement with the elements proposed in § 1026.41 requires sophisticated programming to place individualized information on each borrower’s statement for each billing cycle. The Bureau recognizes that very small servicers would likely have to rely on outside vendors to develop or modify existing systems to produce statements in compliance with the rule. As discussed further below, the Bureau received detailed information from the SBREFA panel process confirming the technological and operational challenges faced by small servicers, as well as postage and other expenses that would be associated with providing periodic statements on an ongoing basis. Because small servicers maintain small portfolios, the SBREFA participants emphasized that they cannot spread fixed costs across a large number of loans the way that larger servicers can.

Where small servicers already have incentives to provide high levels of customer contact and information, the Bureau believes that the circumstances may warrant exempting those servicers from complying with the periodic statement requirement. In particular, small servicers that make loans in their local communities and then either hold their loans in portfolio or retain the servicing rights have incentives to maintain “high-touch” customer service models. Affirmative communications with consumers help such servicers (and their affiliates) to ensure loan performance, protect their reputations in their communities, and market other consumer financial products and services.[115] Because those servicers have a long-term relationship with the borrowers, their incentives with regard to charging fees and other servicing practices may be more aligned with borrower interests. These motivations to ensure a good relationship incentivize good customer service, including making information about upcoming payments, fees charged and payment history, and information for distressed borrowers easily available to consumers by other means

The Bureau believes, however, that both conditions are necessary to warrant a possible exemption from the periodic statement rule—that is, that an exemption may be appropriate only for servicers that service a relatively small number of loans and that originated the loans and either retained ownership or servicing rights. Larger servicers are likely to be much more reliant on and sophisticated users of computer technology in order to manage their operations efficiently. In such situations, implementation of the periodic statement requirement is likely to be somewhat easier to accomplish and perhaps even provide technological benefits for the servicers. Larger servicers also generally operate in a larger number of communities under circumstances in which the “high touch” model of customer service is not practicable. In light of this fact and the consumer benefits from integrated communications, the Bureau does not believe it would be appropriate to exempt all servicers who originate loans that they then hold in portfolio or with respect to which they retain servicing rights, without regard to size.

SBREFA Panel. The proposed exemption is consistent with feedback that the Bureau received from small entity representatives during the SBREFA panel process regarding the potentially significant burdens that would be imposed by a periodic statement requirement.

Participants explained that they already provided much of the information in the proposed periodic statement through alternative means, including correspondence, more limited periodic statements, coupon books, passbooks, and telephone conversations.[120] Even where SERs did not affirmatively provide particular items of information to borrowers, they stated that their companies would generally provide it on request. However, the participants emphasized repeatedly that consolidating all of the information into a single monthly dynamic statement would be difficult for small servicers.[121]

The SERs explained that due to their small size, they generally do not maintain in-house technological expertise and would generally use third-party vendors to develop periodic statements. Due to their small size, they believed they would have no control over these vendor costs.[122] Additionally, the small servicers have smaller portfolios over which to spread the fixed costs of producing periodic statements. Such servicers stated they are unable to gain cost efficiencies and cannot effectively spread the implementation costs of periodic statements across their loan portfolios. Finally, several SERs stated that simply mailing periodic statements could cost thousands of dollars per month beyond some of their current alternative communication channels, such as coupon books or passbooks.

Small Servicer Defined. The Bureau lacks the data necessary to precisely calibrate the amount of burden that would be imposed by the periodic statement requirement on servicers of different sizes. However, the Bureau believes that a threshold of 1,000 loans serviced may be an appropriate approximation to limit the proposed exemption to smaller servicers in the market. Assuming that, on average, most loans are refinanced about every five years, this threshold works out to an average of 200 originations per year. The Bureau estimates that a small servicer of this size would earn about $600,000 annually in servicing fee revenues.[123] The SERs estimated that the periodic statement burden could cost thousands of dollars each month.[124] For comparison, the Bureau notes that the top 100 mortgage servicers, as measured by size of unpaid principal balance serviced, (which together have approximately 82% of the mortgage servicing market share[125]) each service in excess of $3 billion of unpaid principal balance.

In addition to the 1,000 loan threshold, the exemption from the periodic statement would be limited to entities that exclusively service loans that they or an affiliate originated or was the entity to which the obligation was initially payable. A servicer must both exclusively service such loans and satisfy the 1000-loan threshold to qualify for the small servicer exemption. The exemption is limited to these servicers because of the incentive discussed above.

The proposed commentary clarifies the application of the small servicer definition. Proposed comment 41(e)(4)-1 states that loans obtained by a servicer or an affiliate in connection with a merger or acquisition are considered loans for which the servicer or an affiliate is the creditor to whom the mortgage loan is initially payable.

The proposed rule also states that in determining whether a small servicer services 1,000 mortgage loans or less, a servicer is evaluated based on its size as of January 1 for the remainder of the calendar year. A servicer that, together with its affiliates, crosses the threshold will have six months or until the beginning of the next calendar year, whichever is later, to begin providing periodic statements. Proposed comment 41(e)(4)-2 gives examples for calculating when a servicer who crosses the 1,000 loan threshold would need to begin sending periodic statements. The purpose of this provision is to permit a servicer that crosses the 1,000 loan threshold a period of time (the greater of either six months, or until the beginning of the next calendar year) to bring the servicer’s operations into compliance with the periodic statement provisions for which the servicer was previously exempt.

Proposed comments 41(e)(4)-3 clarifies when subservicers or servicers who do not own the loans they are servicing, do not qualify for the small servicer exemption, even if such servicers are below the 1,000 loan threshold.

Proposed comment 41(e)(4)-4 clarifies if a servicer subservices mortgage loans for a master servicer that does not meet the small servicer exemption, the subservicer cannot claim the benefit of the exemption, even if it services 1,000 or fewer loans. The Bureau believes that permitting an exemption in such circumstance could potentially exempt a larger master servicer from the obligation to provide periodic statements, even if it has master servicing responsibility for several thousand loans.

The Bureau seeks comment on all aspects of the proposed exemption, particularly whether the regulation should exempt small servicers[126], and, if so, whether the proposed scope and definition of a small servicer is appropriate. Specifically, should the test be the one proposed regarding origination, and is 1,000 or less the appropriate size threshold? The Bureau particularly requests data on implementation costs and the level of general activity by small servicers. The Bureau also seeks comment on whether it would be appropriate to exempt small servicers from other elements of the proposed servicing rules under TILA and RESPA.

Authority. The Bureau proposes to exercise its authority under TILA section 105(a) and (f), and DFA section 1405(b) to exempt small servicers from the periodic statement requirement under TILA section 128(f). For the reasons discussed above, the Bureau believes the proposed exemption is necessary and proper under TILA section 105(a) to facilitate compliance. As discussed above, it would be very expensive for small servicers to incur the initial costs of setting up a system to send periodic statements, as a result, such servicers may choose to exit the market. In addition, consistent with TILA section 105(f) and in light of the factors in that provision, the Bureau believes that requiring small servicers to comply with the periodic statement requirement specified in TILA section 128(f) would not provide a meaningful benefit to consumers in the form of useful information or protection. The Bureau believes that the business model of small servicers ensures their consumers already receive the necessary information, and that requiring them to provide periodic statements would impose significant costs and burden. Specifically, the Bureau believes that the exemption is proper without regard to the amount of the loan, the status of the borrower (including related financial arrangements, financial sophistication, and the importance to the borrower of the loan), or whether the loan is secured by the principal residence of the consumer. In addition, consistent with DFA section 1405(b), for the reasons discussed above, the Bureau believes that the proposed modification of the requirements in TILA section 128(f) to exempt small servicers would further the consumer protection purposes of TILA.

Appendix H to Part 1026

The Bureau proposes to exercise its authority under TILA section 105(c) to propose model and sample forms for § 1026.20(c) and (d).

Appendix H-4(D) to Part 1026

The Bureau proposes to exercise its authority under TILA section 105(c) to propose model and sample forms for § 1026.20(c) and (d).

Appendices G and H – Open-End and Closed-End Model Forms and Clauses

Proposed revisions to Appendices G and H-1 would add the appendix sections that would illustrate examples of the model forms and sample forms for the ARM disclosures proposed by § 1026.20(c) and (d) to the list of appendix sections illustrating examples of other model disclosures required by Regulation Z whose format or content may not be changed by creditors.

Appendix H – Closed Model Forms and Clauses-7(i)

Proposed revisions to Appendix H-7(i) would include § 1026.20(d), as well as § 1026.20(c), as the types of models illustrated in this appendix. The proposed revision also would add text so that the provision stated that the Appendix H-4(D) includes examples of the two types of model forms for adjustable-rate mortgages: § 1026.20(d) initial adjustment notices and § 1026.20(c) payment change notices for adjustments resulting in corresponding payment changes.

FOOTNOTES

[1] Federal Reserve System, Office of the Comptroller of the Currency, & Office of Thrift Supervision, Interagency Review of Foreclosure Policies and Practices, at 5 (Apr. 2011) (Interagency Foreclosure Report), available at http://www.occ.gov/news-issuances/news-releases/2011/nr-occ-2011-47a.pdf.

[2] See Dodd-Frank Act sections 1418, 1420, 1463, and 1464.

[3] Note that TILA and RESPA differ in their terminology. Consumers and creditors are the defined terms used in Regulation Z. Borrowers and lenders are the defined terms used in Regulation X.

[4] Inside Mortgage Finance, Outstanding 1-4 Family Mortgage Securities, Mortgage Market Statistical Annual (2012). For general background on the market and the recent mortgage crisis, see the 2012 TILA-RESPA Proposal available at http://www.consumerfinance.gov/knowbeforeyouowe/.

[5] As of the end of 2011, approximately 33% of outstanding mortgage loans were held in portfolio, 57% of mortgage loans were owned through mortgage-backed securities issued by government sponsored enterprises (GSEs), and 11% of loans were owned through private label mortgage-backed securities. Inside Mortgage Finance, Issue 2012:13, at 11 (March 30, 2012). A securitization results in the economic separation of the legal title to the mortgage loan and a beneficial interest in the mortgage loan obligation. In a securitization transaction, a securitization trust is the owner or assignee of a mortgage loan. An investor is a creditor of the trust and is entitled to cash flows that are derived from the proceeds of the mortgage loans. In general, certain investors (or an insurer entitled to act on behalf of the investors) may direct the trust to take action as the owner or assignee of the mortgage loans for the benefit of the investors or insurers. See, e.g., Adam Levitin & Tara Twomey, Mortgage Servicing, 28 Yale J. on Reg., 1, 11 (2011) (Levitin & Twomey).

[6] See, e.g., Levitin & Twomey at 11 (“All securitizations involved third-party servicers . . . [m]ortgage servicers provide the critical link between mortgage borrowers and the SPV and RMBS investors, and servicing arrangements are an indispensable part of securitization.”).

[7] See, e.g., Diane Thompson, Foreclosing Modifications: How Servicer Incentives Discourage Loan Modifications, 86 Wash. L. Rev. 755, 763 (2011) (Thompson), available at: http://digital.law.washington.edu/dspace-law/bitstream/handle/1773.1/1074/86WLR755.pdf.

[8] See, e.g, Top Mortgage Servicers in 2011 (Inside Mortg. Fin., Bethesda, Md.), Mar. 30, 2012, at 12. As of the end of the fourth quarter of 2011, the top 5 largest servicers serviced $5.66 trillion of mortgage loans. See id.

[9] See, e.g., Fitch Ratings, U.S. Residential and Small Balance Commercial Mortgage Servicer Rating Criteria, at 14-15 (Jan. 31, 2011), available at www.fitchratings.com.

[10]At securitization, the cash flow that was part of interest income is bifurcated between the loan and the mortgage servicing right (MSR). The MSR represents the present value of all the cash flows, both positive and negative, related to servicing a mortgage. Prime MSRs are largely created by the GSE minimum servicing fee rate, which is calculated as 25 basis points (bps) per annum. The servicing fee rate is typically paid to the servicer monthly and the monthly amount owed is calculated by multiplying the pro rata portion of the servicing fee rate by the stated principal balance of the mortgage loan at the payment due date. Accounting rules require that a capitalized asset be created if the “compensation” for servicing (including float/ancillary) exceeds “adequate compensation.” For loans held in portfolio, there is no bifurcation of the interest income from the loan. The owner of the loan simply negotiates pricing, terms, and standards with the servicer, which, at larger institutions, is typically a separate affiliate or subsidiary of the owner of the loans. PowerPoint Presentation, Keefe, Bruyette & Woods, Inc., KBW Mortgage Matters: Mortgage Servicing Primer, 3 (April 17, 2012).

[11] See, e.g., Thompson, 86 Wash. L. Rev. 755, 767.

[12] Why Servicers Foreclose When They Should Modify and Other Puzzles of Servicer Behavior, NCLC p.v (October 2009), (“Servicers, unlike investors or homeowners, do not generally lose money on foreclosure. Servicers may even make money on a foreclosure.”), Diane Thompson, The Need for National Mortgage Servicing Standards (May 12, 2011), at 15 (“…modification will also likely reduce future income, cost more in the present in staffing, and delay recovery of expenses. Moreover, the foreclosure process itself generates significant income for servicers.”)

[13]See Problems in Mortgage Servicing from Modification to Foreclosure: Hearings Before the Comm. on Banking, Housing and Urban Affairs, S. Hrg. 111-987, 111th Cong. 53-54 (2010) (statement of Thomas J. Miller, Iowa Attorney General) (Miller Testimony). See also, Kurt Eggert, Limiting Abuse and Opportunism by Mortgage Servicers 15:3 Housing Policy Debate (2004), available at http://ssrn.com/abstract=992095

[14]See Kurt Eggert, Limiting Abuse and Opportunism by Mortgage Servicers 15:3 Housing Policy Debate (2004), available at http://ssrn.com/abstract=992095 (collecting cases).

[15] See, e.g.,

[17] OCC Press Release, OCC Takes Enforcement Action Against Eight Servicers for Unsafe and Unsound Foreclosure Practices (April 13, 2011), available at http://www.occ.treas.gov/news-issuances/news-releases/2011/nr-occ-2011-47.html, and Federal Reserve Board Press Release, Federal Reserve Issues Enforcement Actions Related to Deficient Practices in Residential Mortgage Loan Servicing (April 13, 2011), available at http://www.federalreserve.gov/newsevents/press/enforcement/20110413a.htm, and accompanying documents. In addition to enforcement actions against major servicers, federal agencies have also undertaken formal enforcement actions against major service providers to mortgage servicers. See id.

[18] See id. None of the servicers admitted or denied the OCC’s or Federal Reserve Board’s findings.

[19] See, e.g., Problems in Mortgage Servicing from Modification to Foreclosure: Hearings Before the Comm. onOn Banking, Housing and Urban Affairs, S. Hrg. 111-987, 111th Cong. 53-54 (2010) (statement of Diane E. Thompson, NCLC) (Thompson Testimony).

[23] See U.S. Government Accountability Office, Troubled Asset Relief Program: Further Actions Needed to Fully and Equitably Implement Foreclosure Mitigation Actions, at 14-16 (June 2010); Miller Testimony at 54.

[24] Sumit Agarwal et. Al, Second Liens and the Holdup Problem in First Mortgage Renegotiation (December 2011), available at http://ssrn.com/abstract=2022501.

[25] Id.

[26] See U.S. Consumer Fin. Prot., Bureau, U.S. Office of Mgmt. & Budget, U.S. Small Bus. Admin., Small Business Review Panel, Final Report of the Small Business Review Panel on CFPB’s Proposals Under Consideration for Mortgage Servicing Rulemaking (June 11, 2012) (“SBREFA Final Report”), available at: http://www.consumerfinance.gov.

[27] See 12 U.S.C. 2605(a)-(e).

[28] See 12 U.S.C. 2605(e) and 2609.

[29] See 12 CFR 1026.36(c).

[30] See 50 U.S.C. App. 501 et seq.

[31] Oklahoma elected not to join the settlement.

[32] The National Mortgage Settlement is available at http://www.nationalmortgagesettlement.com/. The five servicers subject to the settlement are Bank of America, JP Morgan Chase, Wells Fargo, CitiMortgage, and Ally/GMAC.

[33] See http://www.nationalmortgagesettlement.com/.

[34] Office of the Comptroller of the Currency, Bulletin 2011-29 (June 30, 2011), available at: http://www.occ.gov/news-issuances/bulletins/2011/bulletin-2011-29.html; Letter from Edward J. DeMarco, Acting Director of FHFA, to Hon. Elijah E. Cummings, Ranking Member, Committee on Oversight and Government Reform, U.S. House of Representatives (Jan. 20, 2012), available at http://www.fhfa.gov/webfiles/23056/PrincipalForgivenessltr12312.pdf; Guidance, Home Affordable Modification Program, available at: https://www.hmpadmin.com/portal/programs/guidance.jsp. FHFA, Frequently Asked Questions—Servicing Alignment Initiative, available at: http://www.fhfa.gov/webfiles/21191/FAQs42811Final.pdf.

[35] See Interagency Foreclosure Report, a joint review of foreclosure processing of 14 federally regulated mortgage servicers during the fourth quarter of 2010 by the Federal Reserve System, Office of the Comptroller of the Currency, and Office of Thrift Supervision..

[36] See Interagency Foreclosure Report at 5; Federal Reserve Board, Press Release (May 24, 2012), available at: http://www.federalreserve.gov/newsevents/press/enforcement/20120524a.htm; Federal Reserve Board, Press Release (February 27, 2012), available at: http://www.federalreserve.gov/newsevents/press/enforcement/20120227a.htm; Office of the Comptroller of the Currency, News Release 2011-47 (April 13, 2011), available at: http://www.occ.gov/news-issuances/news-releases/2011/nr-occ-2011-47.html.

[37] See, e.g., Larry Cordell et al., The Incentives of Mortgage Servicers: Myths and Realities, at 9 (Federal Reserve Board, Working Paper No. 2008-46, Sept. 2008).

[38] Other changes in section 1463 of the Dodd-Frank Act relate to increases in penalties for violations. These provisions are not addressed in this rulemaking.

[39] 12 U.S.C. 2605(k)(1)(E).

[40] The Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) requires the Bureau to convene a Small Business Review Panel before proposing a rule that may have a substantial economic impact on a significant number of small entities. See Pub. L. 104-121, tit. II, 110 Stat. 847, 857 (1996) (as amended by Pub. L. 110-28, sec. 8302 (2007)).

[41] See SBREFA Final Report, supra note 22.

[42] ICF Macro International, Inc., Summary of Findings: Design and Testing of Mortgage Servicing Disclosures (Aug. 2012), available at: http://www.consumerfinance.gov/notice-and-comment/ (report on consumer testing submitted to the U.S. Consumer Fin. Prot. Bureau).

[43] Available at http://www.consumerfinance.gov/notice-and-comment/.

[44] Id

[45] SBREFA Final Report, supra note 22, at 16, 21.

[46] SBREFA Final Report, supra note 22, at 16-19, 21, and 23-24.

[47] Public Law 111-203, 124 Stat. 1376, section 1400(c) (2010).

[48] 52 FR 48665 (Dec. 24, 1987).

[49] 74 FR 43232, 43269 (Aug. 26, 2009) (citing 52 FR 48665, 48668 (Dec. 24, 1987)).

[50] Id. at 43272.

[51] Id. at 43269.

[52] Id.

[53] Press Release, Freddie Mac, Freddie Mac Releases 28th Annual ARM Survey Results (January 18, 2012), available at: http://freddiemac.mediaroom.com/index.php?s=12329&item=109996.

[54]Id.

[55] Robert B. Avery, Kenneth P. Brevoort, & Glenn B. Canner, The 2007 HMDA Data, 94 Fed. Reserve Bull. A107 (Dec. 23, 2008).

[56] Nick Timiraos & Ruth Simon, Borrowers Face Big Delays in Refinancing Mortgages, Wall St. J., May 9, 2012, at A1, available at:http://online.wsj.com/article/SB10001424052702303459004577364102737025584.html.

[57]74 FR 43232, 43269-73 (Aug. 26, 2009).

[58] The Bureau proposes four model forms for the ARM adjustment notices: two forms for the § 1026.20(c) ARM payment change notices, one labeled a model form and the other a sample form and two forms for the § 1026.20(d) ARM initial interest rate adjustment notices, one labeled a model form and the other a sample form. See Appendix H-4(D)(1)-(4).

[59] TILA section 128(f)(1)(H).

[60] TILA section 128(f)(2).

[61] TILA section 128(f)(3).

[62] TILA section 103(cc)(5).

[63] 12 U.S.C. 5581(a)(1).

[64]Dodd-Frank Act section 1002(14), 12 U.S.C. 5481(14) (defining “Federal consumer financial law” to include the “enumerated consumer laws” and the provisions of title X of the Dodd-Frank Act); Dodd-Frank Act section 1002(12), 12 U.S.C. 5481(12) (defining “enumerated consumer laws” to include TILA), Dodd-Frank section 1400(b), 15 U.S.C. 1601 note (defining “enumerated consumer laws” to certain subtitles and provisions of Title XIV).

[65] 15 U.S.C. 1639. TILA section 129 contains requirements for certain high-cost mortgages, established by the Home Ownership and Equity Protection Act (HOEPA), which are commonly called HOEPA loans.

[66] 74 FR 43232, 43264, 43387 (Aug. 26, 2009).

[67] Timiraos & Simon, supra note 52.

[68] No creditor, assignee, or servicer contacted by the Bureau used a system employing an automatic feed of information from the publisher of an index source. All data was entered and verified manually.

[69] Macro Report, supra note 38, at vii.

[70] Id.

[71] Id. at vii- viii. This revision to the allocation disclosure, which is identical in the proposed § 1026.20(c) and (d) notices, was made after the third round of testing of the § 1026.20(d) notice, and therefore was not tested with consumers.

[72] Id. at viii.

[73] Id.

[74] Id. at viii-ix.

[75] Id. at vi.

[76] Other § 1026.17(a)(1) form requirements that currently apply to § 1026.20(c) would continue to apply, such as the option of providing the disclosures to consumers in electronic form, subject to compliance with consumer consent and other applicable provisions of the E-Sign Act.

[77] Macro Report, supra note 38, at viii.

[78] Id. at viii-ix.

[79] Id. at vii.

[80] 74 FR 43232, 43272 (Aug. 26, 2009).

[81] Regulation Z was previously implemented by the Board at 12 CFR 226. In light of the general transfer of the Board’s rulemaking authority for TILA to the Bureau, the Bureau adopted an interim final rule recodifying the Board’s Regulation Z at 12 CRF 1026.

[82] 74 FR 43232, 43273 (citing 52 FR 48665, 48671 (Dec. 24, 1987)).

[83] Timiraos & Simon, supra note 52.

[84] See SBREFA Final Report, supra note 22, at 20-21, 29-30.

[85] Id.

[86] Id. at 21.

[87] TILA section 128A. For example, a 3/1 hybrid ARM has a three-year introductory period with a fixed interest rate, after which the interest rate adjusts annually. ARMs that are not hybrid, on the other hand, have no period with a fixed rate of interest. Such ARMs start out with a rate that adjusts at set intervals, such as 3/3 (adjusts every three years), 5/5 (adjusts every five years), etc.

[88] Macro Report, supra note 38, at viii.

[89] See proposed § 1026.20(d)(2).

[90] Macro Report, supra note 38, at vii.

[91] Id.

[92] Id. at vii-viii. This revision was made after the third round of testing, and therefore was not tested with consumers.

[93] Id. at viii.

[94] Id.

[95] Id. at viii-ix.

[96] Id. at viii.

[97] Id. at vi.

[98] See 2012 HOEPA Proposal, available at http://files.consumerfinance.gov/f/201207_cfpb_proposed-rule_high-cost-mortgage-protections.pdf, at 29-35.

[99] The list provided by the lender pursuant to the 2012 HOEPA Proposal would include only homeownership counselors or counseling organizations from either the most current list of homeownership counselors or counseling organizations made available by the Bureau for use by lenders, or the most current list maintained by HUD of homeownership counselors or counseling organizations certified by HUD, or otherwise approved by HUD. The 2012 HOEPA Proposal proposed that the list include five homeownership counselors or counseling organizations located in the zip code of the loan applicant’s current address, or, if there are not the requisite five counselors or counseling organizations in that zip code, then counselors or organizations within the zip code or zip codes closest to the loan applicant’s current address. To facilitate compliance with the proposed list requirement, the Bureau is expecting to develop a website portal that would allow lenders to type in the loan applicant’s zip code to generate the requisite list, which could then be printed for distribution to the loan applicant. See 2012 HOEPA Proposal at 31-32 (discussing proposed Regulation X § 1024.20(a)).

[100] At the time of publishing, the Bureau list was not yet available; the HUD list is available at http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm.

[101] Macro Report, supra note 38, at viii.

[102] Id. at viii-ix.

[103] Id. at vii.

[104] SBREFA Final Report, supra note 22, at 32.

[105] Id.

[106] TILA section 129(f)(1).

[107] Macro Report, supra note 38, at 4.

[108] See comments 24(b)-2 and 48-3 respectively.

[109] Macro Report, supra note 38, at 12.

[110] Id. at 4.

[111] See id. at 6.

[112] Id.

[113] Id. at 14.

[114] Id. at 9.

[115] Id. at 11.

[116] See 2012 HOEPA Proposal, available at http://files.consumerfinance.gov/f/201207_cfpb_proposed-rule_high-cost-mortgage-protections.pdf, at 29-35.

[117] The list provided by the lender pursuant to the 2012 HOEPA Proposal would include only homeownership counselors or counseling organizations from either the most current list of homeownership counselors or counseling organizations made available by the Bureau for use by lenders, or the most current list maintained by HUD of homeownership counselors or counseling organizations certified by HUD, or otherwise approved by HUD. See id. at 32-33.

[118] At the time of publishing, the Bureau list was not yet available and the HUD list is available at http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm.

[119] See Re-Thinking Loan Serving, Prime Alliance Loan Servicing, p. 8 (April 2010) available at: http://cuinsight.com/media/doc/WhitePaper_CaseStudy/wpcs_ReThinking_LoanServicing_May2010.pdf

[120] SBREFA Final Report, supra note 22, at 16-19.

[121] Id.

[122] Id. at 17.

[123] This estimate assumes that a servicer generates a net mortgage servicing fee rate of 35 basis points and that the average unpaid principal balance on the 1,000 loans is $175,000. The 35 basis points represents a blend of different mortgage servicing asset quality. Mortgage servicing fees for conventional servicing are generally 25 basis points; mortgage servicing fees for subprime mortgage loans or loans sold to trusts guaranteed by Ginnie Mae may vary between 40-50 basis points. Servicers are also able to generate ancillary income from sources other than the mortgage servicing fee, including additional fee revenue, such as late fees, and float on principal, interest and escrow payments, the composition of which may vary significantly among servicers. The Bureau believes that 35 basis points is a reasonable assumption in current market conditions. See, e.g., Newcastle Investment Corp., Form 10-Q, filed May 10, 2012, at 15-16, available at http://www.sec.gov/Archives/edgar/data/1175483/000138713112001455/nct-10q_033112.htm (last accessed June 13, 2012 (describing REIT investment in excess mortgage servicing rights (MSRs) from a portfolio of MSRs generating an initial weighted average total mortgage servicing fee amount of 35 basis points).

[124] SBREFA Final Report, supra note 22, at 19. (One SER estimated it could cost an additional $11,000 per month in on-going support, another SER estimated that a vendor might charge $1,000 – $2,000 per month in fees, a third SER estimated monthly costs of $2,200 based on a cost of $1 per statement).

[125] Inside Mortgage Finance, Issue 2012:13 (March 30, 2012) at 12.

[126] As discussed above, for the purposes of § 1026.41, the term “servicer” includes creditors, assignees and servicers.