TILA Regulatory Analysis - Home Mortgage Consumer Protection

In developing the proposed rule, the Bureau has considered potential benefits, costs, and impacts, and has consulted or offered to consult with the prudential regulators, HUD, the FHFA, and the Federal Trade Commission, including regarding consistency with any prudential, market, or systemic objectives administered by such agencies.[123] The Bureau also held discussions with or solicited feedback from the U.S. Department of Agriculture Rural Housing Service, the Farm Credit Administration, the FHA, and the VA regarding the potential impacts of the proposed rule on those entities’ loan programs.

In this rulemaking, the Bureau proposes to amend Regulation Z, which implements TILA, and the official commentary to the regulation, as part of its implementation of the Dodd-Frank Act amendments to TILA’s mortgage servicing rules. The proposed amendments to Regulation Z implement Dodd-Frank Act Sections 1418 (initial interest rate adjustment notice for ARMs), 1420 (periodic statement), and 1464 (prompt crediting of mortgage payments and response to requests for payoff amounts). The proposed rule would also revise certain existing regulatory requirements for disclosing rate and payment changes to adjustable-rate mortgages in current § 1026.20(c).

Elsewhere in today’s Federal Register, the Bureau is also publishing the 2012 RESPA Servicing Proposal that would implement section 1463 of the Dodd-Frank Act. The RESPA proposal addresses procedures for obtaining force-placed insurance; procedures for investigating and resolving alleged errors and responding to requests for information; reasonable information management policies and procedures; early intervention for delinquent borrowers; continuity of contact for delinquent borrowers; and loss-mitigation procedures.

As discussed in part II above, mortgage servicing has been marked by pervasive and profound consumer protection problems. As a result of these problems, Congress included in the Dodd-Frank Act the provisions described above, which specifically address mortgage servicing. The new protections in the rules proposed under TILA and RESPA would significantly improve the transparency of mortgage loans after origination, provide substantive protections to consumers, enhance consumers’ ability to obtain information from and dispute errors with servicers, and provide consumers, particularly distressed and delinquent consumers, with better customer service when dealing with servicers.

A. Provisions to be Analyzed

The analysis below considers the benefits, costs, and impacts of the following major proposed provisions:

New initial interest rate adjustment notices for most closed-end adjustable-rate mortgages.
Changes in the format, content, and timing of the Regulation Z § 1026.20(c) disclosure for most closed-end adjustable-rate mortgages.
New periodic statement disclosure for most closed-end mortgages.
Prompt crediting of payments for consumer credit transactions (both open- and closed-end) secured by the consumer’s principal dwelling and response to requests for payoff amounts from consumers with consumer credit transactions (both open- and closed-end) secured by a dwelling.

With respect to each major proposed provision, the analysis considers the benefits and costs to consumers and covered persons. The analysis also addresses certain alternative provisions that were considered by the Bureau in the development of the rule. The Bureau requests comments on the analysis of the potential benefits, costs and impacts of the proposal.

B. Baseline for Analysis

The amendments to TILA are self-effectuating, and the Dodd-Frank Act does not require the Bureau to adopt regulations to implement these amendments. Specifically, the proposed provisions regarding the new initial interest rate adjustment notice and the new periodic statement disclosure implement self-effectuating amendments to TILA. Thus, many costs and benefits of these proposed provisions would arise largely or entirely from the statute, not from the proposed rule. The proposed provisions would provide substantial benefits compared to allowing these TILA amendments to take effect alone, even without the proposed additional content and other features of the disclosures, by clarifying parts of the statute that are ambiguous. Greater clarity on these issues should reduce the compliance burdens on covered persons by reducing costs for attorneys and compliance officers as well as potential costs of over-compliance and unnecessary litigation. Moreover, the costs that these provisions would impose beyond those imposed by the statute itself are likely to be minimal.

DFA section 1022 permits the Bureau to consider the benefits, costs, and impacts of the proposed rule solely compared to the state of the world in which the statute takes effect without an implementing regulation. To provide the public better information about the benefits and costs of the statute, however, the Bureau has chosen to consider the benefits, costs, and impacts of the major provisions of the proposed rule against a pre-statutory baseline (i.e., to consider the benefits, costs, and impacts of the relevant provisions of the Dodd-Frank Act and the regulation combined).

The proposed provisions regarding prompt crediting of payments and response to requests for payoff amounts also implement self-effectuating amendments to TILA. These amendments to TILA, however, largely codify existing Regulation Z provisions in § 1026.36(c). Thus, the pre-statute and post-statute baselines are substantially the same. The proposed provisions would clarify servicer[124] duties that are ambiguous under the statute and existing regulations.

Finally, the proposed provisions regarding the § 1026.20(c) disclosure for adjustable-rate mortgages impose obligations on servicers[125] that are authorized, but not required, under TILA sections 105(a) and 128(f) and DFA section 1405(b). With respect to proposed § 1026.20(c), the Bureau has chosen to consider the benefits, costs, and impacts of the proposed provisions against the baseline provided by the current provisions of § 1026.20(c).

The Bureau has discretion in future rulemakings to choose the most appropriate baseline for that particular rulemaking.

C. Coverage of the Proposal

Each proposed provision covers certain consumer credit transactions secured by a dwelling, as described further in each section below.

D. Potential Benefits and Costs to Consumers and Covered Persons

1. New initial interest rate adjustment notice for adjustable-rate mortgages

Section 1418 of the Dodd-Frank Act requires servicers to provide a new disclosure to consumers who have hybrid ARMs. The disclosure concerns the initial interest rate adjustment and must be given either (a) between 6 and 7 months prior to such initial interest rate adjustment or (b) at consummation of the mortgage if the initial interest rate adjustment occurs during the first six months after consummation.

The Bureau proposes to implement this provision by requiring that the disclosure be given at least 210, but not more than 240, days before the first payment at the adjusted level is due. The Bureau, relying upon the savings clause in TILA section 128A(b), proposes to broaden the scope of the proposed rule to include ARMs that are not hybrid. The proposed disclosure would include the content required by the statute, except for providing contact information for housing counseling agencies and programs (where the proposed rule provides an alternative disclosure), and certain additional information. Finally, as explained above, the Bureau conducted three rounds of consumer testing. The disclosures were revised after each round of testing to improve their effectiveness with consumers.

Benefits to consumers. The information in the proposed interest rate adjustment notice would provide a number of benefits to consumers with closed-end adjustable-rate mortgages at the initial interest rate adjustment. These benefits may be broadly categorized as facilitating (a) the choice of an alternative to making the new payment, including refinancing; (b) the correction of any errors in the adjusted payment; (c) the budgeting of household resources; and (d) the accumulation of equity by certain consumers (i.e., those with interest-only or negatively-amortizing payments). Individual items in the disclosure may provide more than one of these benefits.

The proposed rule would require disclosure of the new interest rate and payment—the exact amount, where available, or an estimate, where exact amounts are unavailable. Disclosing an estimate of the interest rate and any new payment at least 210, but not more than 240, days before the first payment at the adjusted level is due would give consumers a significant amount of time in which to pursue alternatives to repaying the loan at the adjusted level. When interest rates are stable, the estimate is informative about the future mortgage payment, and consumers benefit from being able to plan future budgets or to address a problem with affordability, perhaps by refinancing. The estimate is less informative about the future mortgage payment when interest rates are volatile, but under any circumstances, an estimated payment that is well above the highest amount that the consumer can afford alerts the consumer to a potential problem and the need to gather additional information.

While some consumers with adjustable-rate mortgages may benefit from disclosure of any potential new interest rate and payment (or estimates of these amounts) well before payment is due, the benefits from this information are likely greatest when provided prior to the initial interest rate adjustment. Subsequent interest rate adjustments reflect the difference between two fully indexed interest rates (i.e., interest rates that are the sum of a benchmark rate and a margin). In contrast, the initial interest rate adjustment may reflect the difference between an interest rate that is below the fully indexed rate at the time of origination (a so-called “teaser” or “introductory” rate) and a rate that is fully indexed at the time of adjustment. For example, in 2005, the teaser rate on subprime ARMs with an initial fixed-rate period of two or three years was 3.5 percentage points below the fully indexed rate.[126] As a result, mortgages originated in that year faced a potentially large change in the interest rate and payment, or “payment shock,” at the first adjustment. Furthermore, consumers facing the initial interest rate adjustment may fail to anticipate even the possibility of a change in payment, since this is necessarily the first time since origination that the payment could change. Consumers facing payment shock or an unanticipated change in payment also benefit from having additional time to plan future budgets or to address a problem with affordability. Thus, consumers facing the initial interest rate adjustment may benefit from the proposed notice through both the information it provides regarding the potentially new interest rate and payment and the additional time it provides consumers to adapt.

A number of items on the proposed disclosure would help the consumer respond to problems with making the new payment. In addition to information on the amount of the new payment, the proposed disclosure lists alternatives to making the new payment and gives a brief explanation of each alternative. It explains the circumstances under which any prepayment penalty may be imposed and the maximum amount of the penalty. It provides information on rate limits that may affect future payment changes. It provides the telephone number of the creditor, assignee, or servicer to call if the consumer anticipates having problems making the new payment. Finally, it gives contact information for the State housing authority and information to access certain lists of homeownership counselors made available by Federal agencies. All of this information benefits a consumer who needs to find an alternative to making the new payment.

Certain items on the proposed disclosure may assist the consumer in detecting any errors in the computation of the new payment estimate. The proposed disclosure provides an explanation of how the new interest rate and payment are determined, including the index or formula used and any additional adjustment, such as a margin added to the index. It also states any limits on the increase in the interest rate or payment at each adjustment and over the life of the loan. This information may also facilitate consumers’ ability to compare their current mortgage against competing products and provide other benefits, but at the very least it assists consumers in verifying the accuracy of the new estimated payment.

Finally, certain items on the proposed disclosure may facilitate the accumulation of equity by consumers with interest-only or negatively-amortizing payments. For these consumers, the disclosure states the amount of both the current and the expected new payment allocated to principal, interest, and escrow, as applicable.[127] The disclosure also states that the new payment will not be allocated to pay loan principal. If negative amortization occurs as a result of the adjustment, the disclosure must state the payment required to fully amortize the loan at the new interest rate. The proposed disclosure alerts consumers with these types of loans to features that bear on equity accumulation, and it provides this information at a time when these consumers may be evaluating their mortgage terms and considering refinancing.

As discussed above, the Bureau is proposing formatting requirements for the initial interest rate adjustment notice. These requirements benefit consumers by facilitating consumer understanding of the information in the disclosures. Except for the date of the notice, the proposed rule requires that the disclosures must be provided in the form of a table and in the same order as, and with headings and format substantially similar to, certain forms provided with the proposed rule. The Bureau’s testing showed that consumers readily understood the information in the notice when the terms and calculations were presented in the groupings and logical order contained in the model forms. While there is no formula for producing the ideal disclosure, the proposed formatting requirements are generally informed by decades of consumer testing. The Bureau believes that disclosures that satisfy the proposed formatting requirements likely provide greater benefits to consumers than both the alternatives tested and disclosures that do not satisfy these requirements.[128]

Magnitude of the benefits to consumers. Research shows that consumers make important decisions about housing finance at the initial interest rate adjustment. Consumers often choose to prepay at the initial interest rate adjustment, and the greater the payment shock, the greater the likelihood of prepayment. These results hold for conventional ARMs originated in the 1990s as well as for subprime hybrid ARMs (2/28 and 3/27) originated in the 2000s.[129]

More controversial is the question of whether payment shock at the initial interest rate adjustment causes default. In general, data from the 2000s does not find a causal relationship between payment shock at the initial interest rate adjustment and default.[130] However, for consumers with certain hybrid ARMs originated in the 2000s, a substantial number experienced a payment shock of at least 5% at the initial interest rate adjustment, and some research finds that the default rate for these loans was three times higher than it would have been if the payment had not changed.[131]

Whether or not the proposed initial interest rate adjustment notice would reduce default under certain conditions, the disclosure may generally facilitate the important decisions about housing finance that consumers make at the initial interest rate adjustment. Extrapolating from FHFA data, the Bureau estimates that approximately 285,000 adjustable-rate mortgages will have an initial interest rate adjustment in each of the next three years. Few adjustable-rate mortgages in recent years have had teaser rates; however, consumers with these mortgages may benefit from shifting to a fixed-rate mortgage. If the new initial interest rate adjustment notice prompts just 1% of consumers who receive the notice to refinance and these consumers save $50 per month, the annual savings to consumers would be over $1.7 million.

The Bureau does not have the data necessary to fully quantify the benefits of the proposed initial interest rate adjustment notice to consumers. Certain consumers with adjustable-rate mortgages will be aware of the upcoming initial interest rate adjustment and the possibility of refinancing or (if there is a payment adjustment) considering alternatives to making a new payment, of needing to reallocate household resources in light of a new payment, of addressing an error in computing a new payment, and of reviewing the household balance sheet in light of an interest-only or negatively-amortizing loan. The Bureau is not aware of data with which it could fully quantify the value of the information in the disclosure to these consumers or determine the savings to them in time and other resources from not having to obtain this information from other sources. Furthermore, there are other consumers with adjustable-rate mortgages who may be uninformed or misinformed (or perhaps forgetful) about the upcoming initial interest rate adjustment, the possibility of an error in computing a potential new payment, or the financial implications of interest-only and negatively-amortizing loans on equity accumulation. The Bureau is not aware of data with which it could quantify the benefits to these consumers of becoming better informed about these features of their mortgages. However, the Bureau believes that the proposed initial interest rate adjustment notice may provide substantial benefits to these consumers.

Costs to consumers. As explained below in the discussion of costs to covered persons, the cost per disclosure would be about $2.60. This estimate takes into account both one-time costs (amortized over five years) and annual production and distribution costs.[132] Under conservative assumptions, in the illustration above, the benefits to consumers who receive the disclosure would be $6.

Given the small cost per disclosure, the Bureau believes that consumers would see at most a minimal increase in fees or charges. Servicers may in general attempt to shift a cost increase onto others and consumers may ultimately bear part of an increase that falls nominally on servicers. For the proposed initial interest rate adjustment notice, however, the costs to be shifted are small. Furthermore, even if servicers did attempt to shift the costs, it is not clear that consumers would bear them. Consider, for example, servicers who bid for servicing rights on mortgages originated by others. The additional costs associated with providing the initial rate adjustment notice may cause servicers to bid less aggressively for certain servicing rights. In this case, lenders or investors may bear some of the cost. Servicers may also attempt to obtain higher compensation for servicing from originators. Originators may respond by attempting to increase fees or charges at origination or by increasing the cost of credit. In this case consumers may bear some of the costs, but not necessarily all of them. The relative sensitivity of supply and demand in these inter-related markets would determine the proportion of the cost increase borne by different persons, including consumers.

The proposed rule limits how servicers may present the required information in the disclosure. Servicers would have to present the required information in a format substantially similar to the format of the proposed model forms. The Bureau recognizes the possibility that constraints on the way servicers present information to consumers may prohibit the use of more effective forms that servicers are using or may develop. The constraints would then impose a cost on consumers. The Bureau does not believe there are any such costs in this case. The Bureau is unaware of any efforts by servicers to develop an initial interest rate adjustment notice that meets the requirements of the Dodd-Frank Act and provides the benefits to consumers of the proposed model forms. The Bureau worked closely with Macro to develop the model disclosures, conducted three rounds of consumer testing, and revised the disclosure after testing.

During the SBREFA process, the Bureau received comments from some SERs that disclosing an estimate of the new monthly payment may confuse certain consumers. The Bureau believes that clearly stating on the form that the new monthly payment is an estimate and that consumers will receive a notice with the exact amounts two to four months prior to the date the first payment at the adjusted level is due (in cases where the interest rate adjustment results in a corresponding payment change) will mitigate consumer confusion on this point. The Bureau notes that section 1418 of the Dodd-Frank Act requires disclosure of a good faith estimate of the new monthly payment. In addition, servicers must provide an accurate statement of the new monthly payment in the notice if it is available; and if it is not available, then consumers will receive an accurate statement of the new monthly payment between 60 and 120 days before the first payment is due, if the interest rate adjustment causes a corresponding change in payment pursuant to the proposed § 1026.20(c) disclosure.

Benefits to covered persons. The timing and the content of the proposed initial interest rate adjustment notice may provide certain benefits to servicers. Servicers benefit when distressed consumers contact them well in advance of a possible increase in interest rate and payment, since early communication gives servicers and consumers more time to work together constructively. The proposed disclosure provides consumers with substantial advance notice about their potential future payment and alternatives. Distressed consumers with such notice may be more likely to contact their servicer well in advance of an increase in payment, work constructively with their servicer, and, if necessary, explore alternatives.

Costs to covered persons. The proposed initial interest rate adjustment notice will result in certain compliance costs to covered persons. Servicers (or their vendors) may need to adapt their software and compliance systems to produce the new form. The new proposed form would also provide to borrowers information that is not currently disclosed to them, including information that is specific to each loan. Servicers (or their vendors) may not have ready access to all of this additional loan-level information; for example, if some of this additional information is stored in a database that is not regularly accessed by systems that produce the current disclosures. The Bureau seeks information from servicers and vendors that provide services to servicers with respect to operations regarding the storage of loan-level information and the costs of providing the proposed new loan-level information to consumers.

Some of the information provided in the proposed initial interest rate adjustment notice is also provided in the proposed revisions to the § 1026.20(c) disclosure. The Bureau believes that harmonizing the two disclosures would mitigate the compliance burden for servicers and reduce the aggregate production costs to servicers.

Based on discussions with servicers and software vendors to date, the Bureau believes that servicers will for the most part use vendors for one-time software and IT upgrades and for ongoing production and distribution (i.e., mailing) of the disclosure. Servicers will also incur one-time costs to learn about the proposed rule, but those costs will be minimal. Furthermore, the Bureau believes that under existing mortgage servicing contracts, vendors would absorb the one-time software and IT costs and ongoing production costs of disclosures for large- and medium- sized servicers but pass along these costs to small servicers. All servicers would pay distribution costs.

Based on discussions with industry and extrapolating from FHFA data, the Bureau estimates the one-time cost of the proposed disclosure to be just over $3 million for 12,800 servicers. Amortizing this cost over five years and combining it with annual costs of $139,000 gives a total annual cost of $58 per servicer, or $2.60 per notice. The use of vendors substantially mitigates the costs of revising software and IT, as the efforts of a single vendor addresses the needs of a large number of servicers. The ongoing costs reflect the fact that there will be relatively few initial interest rate adjustments on adjustable-rate mortgages over the next few years.

For small servicers, the one-time cost of the proposed disclosure is $2.3 million. This also gives a total annual cost of about $58 per servicer. However, it is not possible to estimate the number of initial interest rate adjustment notices that small servicers will produce each year, since the Bureau is not aware of any reasonably obtainable data on the loan portfolios of small servicers. The Bureau believes that the number is small since the total number of mortgages serviced by small servicers is small and the notice is given only once to each ARM borrower. The Bureau seeks comment on these estimates and asks interested parties to provide data, research, and other information that may inform the further consideration of these costs.

The Bureau recognizes that certain financial benefits to consumers from the initial interest rate adjustment notice may have an associated financial cost to covered persons. Servicer compensation is not directly tied to the interest rate on a consumer’s mortgage, but rather to the unpaid principal balance. Thus, when a consumer refinances a mortgage at a lower interest rate, one servicer incurs a cost but another has a benefit. On the other hand, if a consumer refinances from an adjustable-rate mortgage to a fifteen year fixed-rate mortgage, then the consumer would pay off the unpaid principal balance more quickly and servicer income would fall. Servicers may also receive reduced fee income from delinquent borrowers (or investors) if the notice helps borrowers avoid delinquency. The Bureau believes that the proposed initial interest rate adjustment notice is likely to have a small effect on the costs to servicers through the channels just described, but the Bureau seeks data with which it may further consider these costs.

Finally, as discussed in part VI, the Bureau considered but decided not to except small servicers from the proposed initial interest rate adjustment notice. The Bureau is not proposing an exception for small servicers because an exception would deprive certain consumers of the seven to eight months advance notice before payment at a new level is due that is provided by the disclosure and the information about alternatives and how to contact various sources of assistance. Conversely, the Bureau believes that the benefit to small entities from an exception would be small. Vendors will spread the one-time software and IT costs of the notice over many small servicers and the annual costs will be small since the proposed notice is given just once to each consumer with an adjustable-rate mortgage. As discussed above, the Bureau believes that five annual payments of $58 by each small servicer will fully amortize the one-time cost of the proposed interest rate adjustment notice.

2. Changes in the format, content, and timing of the Regulation Z § 1026.20(c) disclosure for adjustable-rate mortgages

Under current § 1026.20(c), creditors must mail or deliver to consumers whose payments will change as a result of an interest rate adjustment 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. Creditors must also provide an annual disclosure to consumers whose interest rate, but not mortgage payment, changes during the year covered by the disclosure. The Bureau is proposing to eliminate the annual disclosure. Thus, the discussion below relates exclusively to the payment change disclosure required under § 1026.20(c).[133] The Bureau is proposing 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, with an accommodation for existing ARMs with look-back periods of less than 45 days.[134] 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. The coverage, content, and format of the revised § 1026.20(c) disclosure closely tracks the coverage, content, and format of the proposed initial interest rate adjustment disclosure.

Benefits to consumers. Regarding the change in timing, the Bureau does not believe that the current minimum of 25 days provides sufficient time for consumers to pursue meaningful alternatives such as refinancing, home sale, loan modification, forbearance, or deed in lieu of foreclosure. Nor does this minimum provide sufficient time for consumers to adjust household finances to cover new payments. The Board’s 2009 Closed-End Proposal stated that HMDA data for the years 2004 through 2007 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.

Regarding the proposed changes in the content of the § 1026.20(c) disclosure, the Bureau believes that it is helpful to consumers to receive similar notices for similar purposes. Thus, the Bureau believes there is some consumer benefit in harmonizing the § 1026.20(c) disclosure with the proposed initial interest rate adjustment disclosure. However, the two disclosures are triggered by different (although related) events and the benefit of the information to consumers is somewhat different.

Both the current and proposed § 1026.20(c) disclosure provide the current and upcoming interest rate and payment (not an estimate) and the date the first new payment is due. This information facilitates household budgeting and may alert the consumer to a potential problem with affordability.

Proposed § 1026.20(c) requires the disclosure to include an explanation of how the new interest rate and payment are determined, including the index or formula used, any margin added, and any previously foregone interest increase applied. The proposed disclosure also states any limits on the interest rate or payment increase at each adjustment and over the life of the loan. This information assists the consumer in detecting any errors in the computation of the new payment. In contrast, the current § 1026.20(c) disclosure provides the index value without any explanation and does not provide information about limits on interest rate or payment increases.

Information provided in the proposed § 1026.20(c) disclosure facilitates the evaluation of alternatives to paying the new amount due. For example, the proposed disclosure provides an explanation of the circumstances under which any prepayment penalty may be imposed and the maximum amount of the penalty, which highlights the direct cost of refinancing into a different loan. Also, disclosure of key features of the loan like the new allocation of payments for interest-only and negatively-amortizing ARMs, the rate limit per year and over the life of the loan, and warnings about interest-only payments and increases in the loan balance may also facilitate the comparison of the current loan with alternatives. Disclosures required by current § 1026.20(c) do not provide any of this information.

The proposed § 1026.20(c) disclosure provides the same information as the proposed initial interest rate adjustment notice regarding features of the mortgage that affect the accumulation of equity. The disclosure of the loan balance itself is useful for this purpose. For interest-only or negatively-amortizing loans, the disclosure states the amount of the new payment allocated to pay principal, interest, and taxes and insurance in escrow, as applicable, and that the new payment will not be allocated to pay loan principal. If negative amortization will occur due to the interest rate adjustment, the disclosure states the payment required to fully amortize the loan at the new interest rate. The proposed disclosure alerts consumers with these types of loans to features that bear on equity accumulation, and it provides this information at a time when these consumers may be evaluating their mortgage terms and considering refinancing. In contrast, the current § 1026.20(c) disclosures provide only the loan balance and information about the payment required to fully amortize the loan at the new interest rate if the interest rate adjustment caused the negative amortization.

As noted above, the Bureau recognizes that the benefit to consumers of information in a particular disclosure may be attenuated to the extent that the same information is available in other disclosures that are provided at the same (or nearly the same) time. However, some of the information on the proposed § 1026.20(c) disclosure that also appears on the proposed periodic statement disclosure is provided on the § 1026.20(c) disclosure in order to facilitate comparisons between the current and new payment before the new payment is due. Since the proposed § 1026.20(c) disclosure is provided only if the payment changes, the benefit to consumers from receiving the same information on both disclosures is likely greater than the benefit of receiving this information only on the periodic statement disclosure.[135]

Finally, the Bureau is proposing formatting requirements for the § 1026.20(c) disclosure similar to those for the initial interest rate adjustment notice. As discussed above, these requirements benefit consumers by facilitating consumer understanding of the information in the disclosures. The proposed rule provides that the disclosures must be provided in the form of a table and in the same order as, and with headings and format substantially similar to, certain forms provided with the proposed rule. The Bureau’s testing of the same information proposed for inclusion in § 1026.20(c) notice in the proposed § 1026.20(d) notice showed that consumers readily understood the information in the notice when the terms and calculations were presented in the logical order contained in the model forms. As discussed above, while there is no formula for producing the ideal disclosure, the Bureau believes that disclosures that satisfy the proposed formatting requirements likely provide greater benefits to consumers than both the alternatives tested and disclosures that do not satisfy these requirements.

Extrapolating from FHFA data, the Bureau estimates that approximately 650,000 adjustable-rate mortgages will adjust in each of the next three years. To illustrate the possible benefits of the proposed § 1026.20(c) disclosure, suppose that the proposed change in the timing of the disclosure from 25 days to 60 days before payment at a new level is due prompts certain consumers to refinance one month sooner. If the change in timing provides just 5% of consumers with ARMs a one-time benefit of $50, the annual savings to consumers would be over $1.6 million.

Costs to consumers. As explained further in the discussion of costs to covered persons, the proposed provisions would produce a minimal increase in costs, about 80 cents per disclosure. This estimate takes into account both one-time additional costs (amortized over five years) and additional annual production and distribution costs. Under conservative assumptions, in the illustration above, the benefit to consumers would be $2.50 per disclosure.

Given the small additional cost per disclosure, the Bureau believes that consumers would not see any increase in fees or charges. Servicers may in general attempt to shift a cost increase onto others and consumers may ultimately bear part of an increase that falls nominally on servicers. For the proposed § 1026.20(c) disclosure, however, the costs to be shifted are very small. Thus, the proposed disclosure is not likely to impose any cost increase on consumers.

As with the proposed initial interest rate adjustment notice, the proposed rule limits how servicers may present the required information in the proposed § 1026.20(c) disclosure. Servicers would have to present the required information in a format substantially similar to the format of the proposed model form. The Bureau recognizes the possibility that constraints on the way servicers present information to consumers may prohibit the use of more effective forms that servicers are using or may develop. The constraints would then impose a cost on consumers. The Bureau does not believe there are any such costs in this case. The Bureau is unaware of any efforts by servicers to develop a payment adjustment notice that meets the requirements of proposed § 1026.20(c) and provides the benefits to consumers of the proposed model forms.

As discussed above, some consumers have adjustable-rate mortgages with look-back periods shorter than 45 days. For example, FHA and VA ARMs often have look-back periods of 15 or 30 days. These ARMs contractually will not be able to comply with the proposal to require sending the § 1026.20(c) disclosure 60 to 120 days before payment at a new level is due. The Bureau is proposing grandfathering these existing ARMs. Going forward, however, ARMs must be structured to permit compliance with the proposed 60- to 120-day time frame.

Initial outreach suggests that the absence of adjustable-rate mortgages with short look-back periods will not reduce the mortgage options available to consumers. It is possible, however, that mortgages with short look-back periods may have certain cost advantages to servicers or investors in certain interest rate environments (e.g., when rates are rising quickly) and that competition may translate some of these advantages into benefits to consumers. In this case, the proposed 60- to 120-day time frame would impose a cost on consumers. The Bureau seeks comments on both the grandfathering provision and general requirement for compliance with the proposed time frame going forward.

Benefits to covered persons. The timing and content of the proposed § 1026.20(c) disclosure may provide certain benefits to servicers. Servicers benefit when distressed consumers contact them in advance of a possible increase in interest rate and payment, since early communication gives servicers and consumers more time to work together constructively. Changing the minimum time for providing advance notice to consumers from 25 days to 60 days before payment at a new level is due provides essential household budgeting information to consumers sooner. Distressed consumers may then contact their servicer sooner, and the servicer and the consumer would then have additional time to work together and if necessary to explore alternatives.

Costs to covered persons. The proposed modifications of the § 1026.20(c) disclosure will result in certain compliance costs to covered persons. Servicers (or their vendors) may need to adapt their software and compliance systems to produce the revised disclosure. The revised disclosure would also provide to borrowers information that is not currently disclosed to them, including information that is specific to each loan. Servicers (or their vendors) may not have ready access to all of this additional loan-level information; for example, if some of this additional information is stored in a database that is not regularly accessed by systems that produce the current disclosures. The Bureau solicits information about servicer and vendor operations regarding the storage of loan-level information and the costs of providing the proposed new loan-level information to consumers.

As discussed above, some of the information provided in the proposed revisions to the § 1026.20(c) disclosure is also provided in the proposed initial interest rate adjustment disclosure. The Bureau believes that harmonizing the two disclosures would mitigate the compliance burden for servicers and reduce the aggregate production costs to servicers.

Based on discussions with servicers and software vendors to date, the Bureau believes that, in general, servicers of all sizes will incur minimal one-time costs to learn about the proposed provision. They will for the most part use vendors for one-time software and IT upgrades and for producing and distributing (i.e., mailing) the disclosure. Under existing vendor contracts, large servicers will not be charged for the upgrades and production but may be charged for distribution. Smaller servicers may be charged for all these costs, but they service relatively few loans so in aggregate these costs are small.

Based on discussions with industry and extrapolating from FHFA data, the Bureau estimates one-time costs of just under $2 million for the 12,800 servicers overall. Amortizing this cost over five years and combining it with annual costs of $129,000 gives a total annual cost of $41 per servicer, or 80 cents per disclosure. For small servicers, the one-time cost is $1.65 million. This also gives a total additional annual cost of about bout $41 per servicer. The Bureau is not aware of any reasonably obtainable data on the loan portfolios of small servicers, so it is not possible to estimate the number of disclosure that small servicers would produce each year. The Bureau seeks comment on these estimates and asks interested parties to provide data, research, and other information that may inform the further consideration of these costs.

The Bureau recognizes that certain financial benefits to consumers from the revised § 1026.20(c) disclosure may have an associated financial cost to covered persons. The discussion of this point for the initial interest rate adjustment notice applies equally to the revised § 1026.20(c) disclosure.

Finally, as discussed above, the Bureau recognizes that there may be costs to covered persons from extending the minimum advance notice period to 60 days. Mortgages with short look-back periods may have certain cost advantages in certain interest rate environments (e.g., when rates are rising quickly). The Bureau seeks comments on both the grandfathering provision and general requirement for compliance with the proposed time frame going forward.

3. New periodic statement disclosure for certain mortgages

Section 1420 of the Dodd-Frank Act requires the creditor, assignee, or servicer of any residential mortgage loan to transmit to the consumer, for each billing cycle, a periodic statement that sets forth certain specified information in a clear and conspicuous manner. The statute also gives the Bureau the authority to require servicers[136] to include 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 consumer is given a coupon book containing substantially the same information as the statement.

The proposed rule would require the periodic statement to include the content listed in the statute, as applicable, as well as billing information, payment application information, and information that may be helpful to distressed or delinquent consumers. In accordance with the statute, the proposed rule provides a coupon book exemption for fixed-rate loans when the consumer is given a coupon book with certain of the information required by the periodic statement. The proposed rule also has exemptions for small servicers, reverse mortgages, and timeshares.

The proposed periodic statement disclosure would be provided to all consumers with a closed-end residential mortgage, unless one of the exemptions applies.

Benefits to consumers. The Bureau does not have representative information on the extent to which servicers currently provide consumers with coupon books, billing statements, or periodic statements that may comply with the proposed rule. Servicers do have an incentive to provide consumers with basic billing information. This includes the payment due date, amount of any late payment fee, amount due, and current interest rate. This information also appears on the proposed periodic statement. While this basic information provides benefits to consumers, those benefits are already provided for by current disclosures. The proposed periodic statement will also contain information that could appear on a coupon book that does provide additional benefits to consumers, for example, the housing counselor information.

There is other information that appears on billing statements and coupon books but is accurate only if the consumer always makes the scheduled payment on time and no other payment. This information is accurate because it follows a set formula. It includes the outstanding principal balance, total payments made since the beginning of the calendar year, and the breakdown of payments into principal, interest, and escrow. This information is not accurate, however, if the borrower makes an extra payment, provides a partial payment, or misses a payment entirely.

All of this aforementioned information appears on the proposed periodic statement. However, on the proposed periodic statement, the information would be accurate even if the consumer makes an extra payment, provides a partial payment, or misses a payment entirely. Consumers generally benefit from having accurate information about payments in order to monitor the servicer, assert errors if necessary, and track the accumulation of equity. However, delinquent consumers may especially benefit from tracking the effects of delinquency on equity so they can effectively determine how to allocate income and consider options for refinancing. For these consumers, the proposed periodic statement may provide large benefits relative to coupon books or billing statements that do not provide the aforementioned information.

Finally, there is information that simply cannot be provided on a coupon book or on a billing statement that provides the same information as a coupon book. This includes fees or charges imposed since the last periodic statement, partial payments, past due payments, and a wide range of delinquency information and information about loan modifications and foreclosure.

Consumers who are more than 45 days delinquent will have a delinquency notice included on the periodic statement (or provided to them if their servicer is using a coupon book) providing specific information about the delinquency of their loan. This is one way the servicer may catch the attention of the consumer. The messages section provides an additional route. The only message the proposed rule requires the servicer to provide concerns partial payments; however, the proposal also seeks comment on other messages that should be required. Consumers who make partial payments may benefit from knowing what they must do to have the funds in a suspense or unapplied funds account applied to the outstanding balance.

All of this information is useful to distressed or delinquent consumers who may need to assert an error and evaluate alternatives to paying the current mortgage. A consumer with past due amounts on a mortgage, car, and credit card would need information about the past due amounts and how the fees and charges accumulate in order to determine the most advantageous way of reducing total debt. The information generally benefits consumers who are managing a variety of debts and who want to know the least costly way of increasing their total debt or the most advantageous way of reducing their total debt.

The Bureau is proposing grouping requirements in the format of the periodic statement. The grouping requirement presents the information in a logical format and may facilitate consumer understanding of the information in the different components of the disclosure. The General Design Principles discussed in the Macro Final Report, discussed in the section-by-section analysis, 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. The Bureau also tested model periodic statement disclosures that satisfy the grouping requirements. As discussed above, while there is no formula for producing the ideal disclosure, the Bureau believes that disclosures that satisfy the grouping requirement are likely to provide greater benefits to consumers than disclosures that do not.

There are two main exceptions to the proposed periodic statement requirement. The first, provided by statute, is an exception for consumers with fixed-rate mortgages and coupon books that contain certain information. As discussed above, the fixed or formulaic information on coupon books will be accurate for consumers who make only scheduled payments. Consumers with fixed-rate mortgages never have to manage a changed payment amount. However, the Bureau does not have ready access to data on whether they are less likely to make additional payments, partial payments or miss a payment and may obtain substantially reduced benefits because of the exception.

The Bureau is also proposing an exception for small servicers. A small servicer would be defined as a servicer (i) who services 1,000 or fewer mortgage loans and (ii) that 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. Such small servicers will not have to provide the proposed periodic statement.

As discussed in the section-by-section analysis on § 1026.41(e)(4), the Bureau believes that servicers that meet both conditions generally provide consumers with ready access to the information on the proposed periodic statement, but possibly through other channels. Servicers that meet the first condition face either a reduction in the value of an asset on its portfolio or the loss of an investment in the relationship with the consumer which was established by originating if they provide poor servicing. Servicers that also service relatively few loans have an incentive to commit to a “high-touch” business model that offers highly responsive customer service. The Bureau believes that servicers that meet both conditions can and generally do provide their customers with ready access to comprehensive information about their payments, amounts due and other account information through a variety of channels. Thus, the Bureau believes that the proposed exemption would produce at most a minimal reduction in benefits to the customers of small servicers.

Using regulatory filings, the Bureau roughly estimates that approximately 49 million consumers would receive the proposed periodic statement disclosure (even taking into account the small servicer exception). To illustrate the possible benefits of the disclosure, suppose 10% save 15 minutes each year because the proposed disclosure provides them with information about their loan or payments that their billing statements or coupon books may not provide (e.g., a past payment breakdown) and they would spend 15 minutes obtaining this information, say by contacting their servicer by phone, mail or some other means. This is a savings of 1.225 million hours per year, or almost $21 million at the median wage of $17 per hour.

Benefits to covered persons. Providing the proposed content on a regular basis to consumers may reduce the frequency with which consumers contact the servicer for information and reduce the time servicers spend answering consumer questions. Servicers also benefit from reduced costs when they manage fewer partial payments and delinquencies and can resolve delinquencies sooner.

Costs to covered persons. The proposed periodic statement disclosure will result in certain compliance costs to servicers. Servicers (or their vendors) may need to adapt their software and compliance systems to produce the new disclosure. The new proposed disclosure would also provide to borrowers information that is not currently disclosed to them, including information that is specific to each loan. Servicers (or their vendors) may not have ready access to all of this additional loan-level information; for example, if some of this additional information is stored in a database that is not regularly accessed by systems that produce the current disclosures. The Bureau solicits information about servicer and vendor operations regarding the storage of loan-level information and the costs of providing the proposed new loan-level information to consumers.

The Bureau believes that, in general, servicers of all sizes will incur minimal one-time costs to learn about the proposed provision. Based on information provided by servicers and by software vendors, the Bureau believe that servicers will use vendors for one-time software and IT upgrades and for producing and distributing (i.e., mailing) the disclosure. Under existing vendor contracts, large servicers will not be charged for the upgrades and production but may be charged for distribution. Smaller servicers may be charged for all these costs, but they service relatively few loans so in aggregate these costs are small.

The Bureau is not aware of any reasonably obtainable data that would allow an accurate calculation of the additional annual cost from the proposed disclosure per servicer. This calculation would depend critically on the number of servicers not covered by the exception and the number of adjustable-rate mortgages with coupon books that these servicers currently service. A plausible illustration is that 2,013 servicers not covered by the exception begin providing 1 million consumers (i.e., those with coupon books and adjustable rate mortgages) twelve new disclosures per year at fifty cents per disclosure, for an average annual cost of $2,981 per servicer. This figure does not include the additional annual cost to these servicers of providing the information on the proposed periodic statement disclosure that is not currently provided on their existing billing statements. The Bureau welcomes comment on this estimate and asks interested parties to provide data, research, and other information that may inform the further consideration of the costs of the proposed periodic statement disclosure.

The small servicer exemption in proposed § 1026.41(e)(4) would benefit small servicers by providing an alternative, and potentially less expensive, means of compliance with the periodic statement requirement. The SBREFA panel stated that a periodic statement requirement would impose significant burdens on small servicers. The panel explained that while much of the information in the proposed periodic statement was already being provided through alternative means and most of the information is available on request, consolidating this information into a single monthly dynamic statement is difficult for small servicers.

The SERs expressed that due to their small size, they would not be able to have in-house expertise and would generally use third-party vendors to develop periodic statements. Due to their small size, they believe they would have no control over these vendor costs. Additionally, the small servicers have a smaller portfolio 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, even the costs of mailing monthly statements could be significant to the extent that small servicers currently use alternative information methods (such as coupon books for adjustable-rate mortgages, or passbooks).

For small servicers, the cost savings from the proposed exception equals the costs not incurred to begin providing periodic statements or to improve existing disclosures to consumers who would be required to receive the periodic statement under the proposal. The only consumers who need not receive the proposed disclosure are those with fixed-rate mortgages and coupon books. The Bureau believes that this is a relatively small fraction of the loans held on portfolio or sold with servicing retained by servicers with less than 1,000 loans. Thus, small servicers would have to increase the content of existing disclosures or begin providing the periodic statement disclosure to almost all of their consumers. However, many of these consumers receive billing statements, so there would not be additional distribution costs from the proposed disclosure, and the exception does not mitigate costs that would not be incurred.

There is no reasonably available data with which the Bureau can accurately estimate the number of these consumers or the mix of new disclosures and improved disclosures. However, based on regulatory data, the Bureau believes that approximately 10,800 small servicers service 2.3 million mortgages. Based on discussions with industry, the Bureau believes that each periodic statement would cost a range of 20 – 50 cents to provide. Thus, a reasonable estimate of the cost savings for small servicers from the proposed exception is $6 million – $14 million. The Bureau seeks data and other information with which it may further consider the question of the cost savings from the proposed small servicer exception.

4. Prompt crediting of payments and response to requests for payoff amounts

DFA section 1464(a) codifies existing Regulation Z § 1026.36(c)(1)(i) on prompt crediting. The Bureau is proposing an additional requirement for the handling of partial payments (i.e., payments that are not full contractual payments). Under the proposal, if servicers hold partial payments in a suspense account, once the amount in the account equals a full contractual payment, the servicer must credit the payment to the most delinquent outstanding payment. The Bureau proposes to define a full contractual payment as a payment covering principal, interest and escrow (if applicable). A proposed alternative to the definition would include late fees.

DFA section 1464(b) requires that a creditor or servicer of a home loan send an accurate payoff balance 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 generally codifies existing Regulation Z § 1026.36(c)(1)(iii) on payoff statements.

Benefits and costs to consumers. The proposed provision on prompt crediting generally ensures that consumers benefit from every effort that they make to pay their mortgage debt. The proposed provision helps consumers manage and reduce default by clarifying the rules servicers must follow when processing partial payments.

As the statute largely codifies an existing regulation, the benefits and costs to consumers from a pre-statute baseline are small. However, the existing regulation does not specifically address the handling of partial payments. As discussed above, the proposed regulation would leave servicers significant flexibility in the handling of partial payments but would also ensure greater consistency in the handling of suspense accounts. 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 the their processing of their payments. 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. The Bureau requests comment on the benefits and costs to consumers of including late fees in the definition of a full contractual payment. Not including late fees in the definition of a full contractual payment would require servicers to credit a payment that covered principal, interest and escrow even if late fees were outstanding. Consumers who made such a payment would benefit from having that payment credited. While some servicers currently follow this practice, other servicers who hold such payments in suspense accounts until the fees are paid would be required to change their practices.

Benefits and costs to covered persons. As the statute largely codifies an existing regulation, the benefits and costs to covered persons from a pre-statute baseline are small. The proposed provision on prompt crediting may cause certain covered persons with different crediting practices to forfeit some fee income or float income, but the Bureau has no data with which to determine whether this is the case. The Bureau requests comment on the benefits and costs to covered persons of including late fees in the definition of a full contractual payment.

E. Potential Specific Impacts of the Proposed Rule

1. Depository Institutions and Credit Unions with $10 Billion or Less in Total Assets, As Described in § 1026

Overall, the impact of the rule on depository institutions and credit unions depends on a number of factors, including the institutions’ current software and compliance systems and the current practices of third-party service providers. Based on discussions with industry, the Bureau believes that larger depositories and credit unions will incur only minimal costs from this rulemaking.

The initial interest rate adjustment notice is a new disclosure, but the Bureau believes that the larger depository institutions and credit unions (of those with $10 billion or less in total assets) use third-party vendors who will, under current contracts, absorb the information collection and data processing costs. The Bureau believes that vendors do not absorb the costs of mailing disclosures, and based on discussions with industry the Bureau understands that 70-80% of consumers have not elected to receive disclosures electronically. Relatively few adjustable-rate mortgages have been originated in recent years, however, and so the number that will adjust for the first time in the near term will be small.

The costs to the larger depositories and credit unions (of those with $10 billion or less in total assets) from the proposed changes to the two other proposed disclosures will also be minimal. The Bureau expects that the information collection and data processing costs of the periodic statement disclosure and the proposed changes in the § 1026.20(c) disclosure will largely be absorbed by third-party vendors. The Bureau believes that the mailing costs of the periodic statement disclosure are likely to be the same as those for billing statements that it would replace. The proposed provision on periodic statements would require consumers who use a coupon book for payments on an adjustable-rate mortgage to receive a periodic statement, but the number of such consumers is small. The mailing costs of the proposed § 1026.20(c) disclosure would be the same as the mailing costs of the current disclosure.

The Bureau believes that smaller depositories and credit unions may incur some additional costs from this rulemaking. Smaller depositories also use third-party vendors, but the Bureau believes that contracts with these vendors may allow them to pass along the information collection and data processing costs to the servicers. Even for smaller depository servicers, however, the additional costs from the two proposed disclosures for adjustable-rate mortgage are likely to be small. There will be few initial interest rate adjustments in the near term, and servicers currently are required to send the § 1026.20(c) disclosure. Thus, most new costs will come from the one-time and ongoing costs of providing the periodic statement disclosure. As discussed above, the Bureau is proposing to exempt certain small servicers from the periodic statement disclosure requirement if they service fewer than 1,000 loans and either hold the loans in portfolio or originated them. Using Call Report data, the Bureau concludes that almost all servicers with under $175 million in assets would qualify for this exemption, as would many servicers with greater assets. However, the Bureau will examine this question further and requests data and additional information on the small servicers who would qualify for the proposed exemption.

Based on discussions with industry, the Bureau believes that the vast majority of depositories and credit unions, of any size, are already in compliance with the proposed provisions for prompt crediting of payments and response to requests for payoff amounts.

2. Impact of the Proposed Provisions on Consumers in Rural Areas

Consumers in rural areas may experience benefits from the proposed rule that are different in certain respects from the benefits experienced by consumers in general. Consumers in rural areas may be more likely to obtain mortgages from small local banks and credit unions that either service the loans in portfolio or sell the loans and retain the servicing rights. These servicers may already provide most of the benefits to consumers that the proposed rule is designed to provide, including the benefits to consumers with adjustable-rate mortgages. On the other hand, it is also possible that a lack of alternatives for consumers in some rural areas regarding lenders who also service mortgages may cause the proposed rule to provide rural consumers with greater benefits than the rule may provide to other consumers.

The Bureau will further consider the impact of the proposed rule on consumers in rural areas. The Bureau therefore asks interested parties to provide data, research results and other factual information on the impact of the proposed rule on consumers in rural areas.

F. Additional Analysis Being Considered and Request for Information

The Bureau will further consider the benefits, costs, and impacts of the proposed provisions and additional proposed modifications before finalizing the proposal. As noted below, there are a number of areas where additional information would allow the Bureau to better estimate the benefits and costs of this proposal.

In addition, the Bureau asks interested parties to provide general information, data, and research results on:

How consumers might respond to the information proposed for inclusion in the new initial interest rate adjustment disclosure, the additional information proposed for inclusion in the revised Regulation Z § 1026.20(c) disclosure, and the information proposed for inclusion in the new periodic statement disclosures;
The coverage and format of these proposed disclosures;
The benefits to consumers from the disclosures listed above; and
The potential impact on servicers and on the functioning of the servicing market from the disclosures listed above and the prompt crediting requirement.

The Bureau also requests specific information on the costs to covered persons of complying with the proposal, such as revising compliance software and systems.

To supplement the information discussed in this preamble and any information that the Bureau may receive from commenters, the Bureau is currently working to gather additional data that may be relevant to this and other mortgage-related rulemakings. These data may include additional data from the National Mortgage License System (NMLS) and the NMLS Mortgage Call Report, loan file extracts from various lenders, and data from the pilot phases of the National Mortgage Database. The Bureau expects that each of these datasets will be confidential. This section now describes each dataset in turn.

First, as the sole system supporting licensure/registration of mortgage companies for 53 regulatory agencies for states and territories and mortgage loan originators under the SAFE Act, NMLS contains basic identifying information for non-depository mortgage loan origination companies. Firms that hold a State license or State registration through NMLS are required to complete either a standard or expanded Mortgage Call Report (MCR). The Standard MCR includes data on each firm’s residential mortgage loan activity including applications, closed loans, individual mortgage loan originator (MLO) activity, line of credit, and other data repurchase information by State. It also includes financial information at the company level. The expanded report collects more detailed information in each of these areas for those firms that sell to Fannie Mae or Freddie Mac.[137] To date, the Bureau has received basic data on the firms in the NMLS and de-identified data and tabulations of data from the MCR. These data were used, along with HMDA data, to help estimate the number and characteristics of non-depository institutions active in various mortgage activities. In the near future, the Bureau may receive additional data on loan activity and financial information from the NMLS including loan activity and financial information for identified lenders. The Bureau anticipates that these data will provide additional information about the number, size, type, and level of activity for non-depository lenders engaging in various mortgage origination and servicing activities. As such, it supplements the Bureau’s current data for non-depository institutions reported in HMDA and the data already received from NMLS. For example, these new data will include information about the number and size of closed-end first and second loans originated, fees earned from origination activity, levels of servicing, revenue estimates for each firm, and other information. The Bureau may compile some simple counts and tabulations and conduct some basic statistical modeling to better model the levels of various activities at various types of firms. In particular, the information from the NMLS and the MCR may help the Bureau refine its estimates of benefits, costs, and impacts for each of the revisions to the RESPA Good Faith Estimate and settlement statement forms, changes to the HOEPA thresholds, changes to requirements for appraisals, updates to loan originator compensation rules, proposed new servicing requirements, and the new ability to repay standards.

Second, the Bureau is working to obtain a random selection of loan-level data from several lenders. The Bureau intends to request loan file data from lenders of various sizes and geographic locations to construct a representative dataset. In particular, the Bureau will request a random sample of RESPA GFE and RESPA settlement statement forms from loan files for closed-end loans. These forms include data on some or all loan characteristics including settlement charges, origination charges, appraisal fees, flood certifications, mortgage insurance premiums, homeowner’s insurance, title charges, balloon payments, prepayment penalties, origination charges, and credit charges or points. Through conversations with industry, the Bureau believes that such loan files exist in standard electronic formats allowing for the creation of a representative sample for analysis. The Bureau may use these data to further measure the impacts of certain proposed changes. Calculations of various categories of settlement and origination charges may help the Bureau calculate the various impacts of proposed changes to the definition of finance charge and other aspects of the proposal, including proposed changes in the number and characteristics of loans that exceed the HOEPA thresholds, loans that would meet the high rate or high risk definitions mandating additional consumer protections, and loans that meet the points and fees thresholds contained in the ability to repay provisions of the Dodd-Frank Act.

Third, the Bureau may also use data from the pilot phases of the National Mortgage Database (NMDB) to refine its proposals and/or its assessments of the benefits, costs, and impacts of these proposals. The NMDB is a comprehensive database, currently under development, of loan-level information on first lien single-family mortgages. It is designed to be a nationally representative sample (1%) and contains data derived from credit reporting agency data and other administrative sources along with data from surveys of mortgage borrowers. The first two pilot phases, conducted over the past two years, vetted the data development process, successfully pretested the survey component and produced a prototype dataset. The initial pilot phases validated that sampled credit repository data are both accurate and comprehensive and that the survey component yields a representative sample and a sufficient response rate. A third pilot is currently being conducted with the survey being mailed to holders of 5,000 newly originated mortgages sampled from the prototype NMDB. Based on the 2011 pilot, a response rate of 50% or higher is expected. These survey data will be combined with the credit repository information of non-respondents, and then de-identified. Credit repository data will be used to minimize non-response bias, and attempts will be made to impute missing values. The data from the third pilot will not be made public. However, to the extent possible, the data may be analyzed to assist the Bureau in its regulatory activities and these analyses will be made publicly available.

The survey data from the pilots may be used by the Bureau to analyze consumers’ shopping behavior regarding mortgages. For instance, the Bureau may calculate the number of consumers who use brokers, the number of lenders contacted by borrowers, how often and with what patterns potential borrowers switch lenders, and other behaviors. Questions may also assess borrowers’ understanding of their loan terms and the various charges involved with origination. Tabulations of the survey data for various populations and simple regression techniques may be used to help the Bureau with its analysis.

The Bureau requests commenters to submit data and to provide suggestions for additional data to assess the issues discussed above and other potential benefits, costs, and impacts of the proposed rule. The Bureau also requests comment on the use of the data described above.

VIII. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA), as amended by SBREFA, requires each agency to consider the potential impact of its regulations on small entities, including small businesses, small governmental units, and small not-for-profit organizations. 5 U.S.C. 601 et seq. The RFA generally requires an agency to conduct an initial regulatory flexibility analysis (IRFA) and a final regulatory flexibility analysis (FRFA) of any rule subject to notice-and-comment rulemaking requirements, unless the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. 5 U.S.C. 603, 604. The Bureau also is subject to certain additional procedures under the RFA involving the convening of a panel to consult with small business representatives prior to proposing a rule for which an IRFA is required. 5 U.S.C. 609.

The Bureau has not certified that the proposed rule would not have a significant economic impact on a substantial number of small entities within the meaning of the RFA. Accordingly, the Bureau convened and chaired a SBREFA Panel to consider the impact of the proposed rule on small entities that would be subject to that rule and to obtain feedback from representatives of such small entities. The SBREFA Panel for this rulemaking is discussed below in part VIII.A.

The Bureau is publishing an IRFA. Among other things, the IRFA estimates the number of small entities that will be subject to the proposed rule and describes the impact of that rule on those entities. The IRFA for this rulemaking is set forth below in part VIII.B.

A. Small Business Review Panel

Under section 609(b) of the RFA, as amended by SBREFA and the Dodd-Frank Act, the Bureau seeks, prior to conducting the IRFA, information from representatives of small entities that may potentially be affected by its proposed rules to assess the potential impacts of that rule on such small entities. 5 U.S.C. 609(b). Section 609(b) sets forth a series of procedural steps with regard to obtaining this information. The Bureau first notifies the Chief Counsel for Advocacy (Chief Counsel) of the SBA and provides the Chief Counsel with information on the potential impacts of the proposed rule on small entities and the types of small entities that might be affected. 5 U.S.C. 609(b)(1). Not later than 15 days after receipt of the formal notification and other information described in section 609(b)(1) of the RFA, the Chief Counsel then identifies the SERs, the individuals representative of affected small entities for the purpose of obtaining advice and recommendations from those individuals about the potential impacts of the proposed rule. 5 U.S.C. 609(b)(2). The Bureau convenes a SBREFA Panel for such rule consisting wholly of full- time Federal employees of the office within the Bureau responsible for carrying out the proposed rule, the Office of Information and Regulatory Affairs (OIRA) within the OMB, and the Chief Counsel. 5 U.S.C. 609(b)(3). The SBREFA Panel reviews any material the Bureau has prepared in connection with the SBREFA process and collects the advice and recommendations of each individual small entity representative identified by the Bureau after consultation with the Chief Counsel on issues related to sections 603(b)(3) through (b)(5) and 603(c) of the RFA.[138] 5 U.S.C. 609(b)(4). Not later than 60 days after the date the Bureau convenes the SBREFA Panel, the panel reports on the comments of the SERs and its findings as to the issues on which the SBREFA Panel consulted with the SERs, and the report is made public as part of the rulemaking record. 5 U.S.C. 609(b)(5). Where appropriate, the Bureau modifies the rule or the IRFA in light of the foregoing process. 5 U.S.C. 609(b)(6).

On April 9, 2012, the Bureau provided the Chief Counsel with the formal notification and other information required under section 609(b)(1) of the RFA. To obtain feedback from small entity representatives to inform the SBREFA Panel pursuant to sections 609(b)(2) and 609(b)(4) of the RFA, the Bureau, in consultation with the Chief Counsel, identified five categories of small entities that may be subject to the proposed rule for purposes of the IRFA: commercial banks/savings institutions, credit unions, non-depositories engaged primarily in lending funds with real estate as collateral (included in NAICS 522292), non-depositories primarily engaged in loan servicing (included in NAICS 522390), and certain non-profit organizations. Section 3 of the IRFA, in part VIII.B.3, below, describes in greater detail the Bureau’s analysis of the number and types of entities that may be affected by the proposed rule. Having identified the categories of small entities that may be subject to the proposed rule for purposes of an IRFA, the Bureau then, in consultation with the Chief Counsel, selected 16 small entity representatives to participate in the SBREFA process. As described in chapter 7 of the SBREFA Final Report, described below, the SERs selected by the Bureau in consultation with the Chief Counsel included representatives from each of the categories identified by the Bureau and comprised a 7. Loss Mitigation7. Loss Mitigationdiverse group of individuals with regard to geography and type of locality (i.e., rural, urban, suburban, or metropolitan areas).

On April 10, 2012, the Bureau convened the SBREFA Panel pursuant to section 609(b)(3) of the RFA. Afterwards, to collect the advice and recommendations of the SERs under section 609(b)(4) of the RFA, the SBREFA Panel held an outreach meeting/teleconference with the small entity representatives on April 24, 2012. To help the small entity representatives prepare for the outreach meeting beforehand, the SBREFA Panel circulated briefing materials prepared in connection with section 609(b)(4) of the RFA that summarized the proposals under consideration at that time, posed discussion issues, and provided information about the SBREFA process generally.[139] All 16 small entity representatives participated in the outreach meeting either in person or by telephone. The SBREFA Panel also provided the small entity representatives with an opportunity to submit written feedback until May 1, 2012. In response, the SBREFA Panel received written feedback from five of the representatives.[140]

On June 11, 2012, the SBREFA Panel submitted to the Director of the Bureau, Richard Cordray, a written SBREFA Final Report that includes the following: background information on the proposals under consideration at the time; information on the types of small entities that would be subject to those proposals and on the small entity representatives who were selected to advise the SBREFA Panel; a summary of the SBREFA Panel’s outreach to obtain the advice and recommendations of those small entity representatives; a discussion of the comments and recommendations of the small entity representatives; and a discussion of the SBREFA Panel findings, focusing on the statutory elements required under section 603 of the RFA. 5 U.S.C. 609(b)(5).[141]

In preparing this proposed rule and the IRFA, the Bureau has carefully considered the feedback from the small entity representatives participating in the SBREFA process and the findings and recommendations in the SBREFA Final Report. The section-by-section analysis of the proposed rule in part VI, above, and the IRFA discuss this feedback and the specific findings and recommendations of the SBREFA Panel, as applicable. The SBREFA process provided the SBREFA Panel and the Bureau with an opportunity to identify and explore opportunities to minimize the burden of the rule on small entities while achieving the rule’s purposes. It is important to note, however, that the SBREFA Panel prepared the SBREFA Final Report at a preliminary stage of the proposal’s development and that the SBREFA Final Report—in particular, the SBREFA Panel’s findings and recommendations—should be considered in that light. Also, any options identified in the SBREFA Final Report for reducing the proposed rule’s regulatory impact on small entities were expressly subject to further consideration, analysis, and data collection by the Bureau to ensure that the options identified were practicable, enforceable, and consistent with TILA, the Dodd-Frank Act, and their statutory purposes. The proposed rule and the IRFA reflect further consideration, analysis, and data collection by the Bureau.

B. Initial Regulatory Flexibility Analysis

Under RFA section 603(a), an IRFA “shall describe the impact of the proposed rule on small entities.” 5 U.S.C. 603(a). Section 603(b) of the RFA sets forth the required elements of the IRFA. Section 603(b)(1) requires the IRFA to contain a description of the reasons why action by the agency is being considered. 5 U.S.C. 603(b)(1). Section 603(b)(2) requires a succinct statement of the objectives of, and the legal basis for, the proposed rule. 5 U.S.C. 603(b)(2). The IRFA further must contain a description of and, where feasible, provision of an estimate of the number of small entities to which the proposed rule will apply. 5 U.S.C. 603(b)(3). Section 603(b)(4) requires a description of the projected reporting, recordkeeping, and other compliance requirements of the proposed rule, including an estimate of the classes of small entities that will be subject to the requirement and the types of professional skills necessary for the preparation of the report or record. 5 U.S.C. 603(b)(4). In addition, the Bureau must identify, to the extent practicable, all relevant Federal rules which may duplicate, overlap, or conflict with the proposed rule. 5 U.S.C. 603(b)(5). The Bureau, further, must describe any significant alternatives to the proposed rule which accomplish the stated objectives of applicable statutes and which minimize any significant economic impact of the proposed rule on small entities. 5 U.S.C. 603(b)(6). Finally, as amended by the Dodd-Frank Act, RFA section 603(d) requires that the IRFA include a description of any projected increase in the cost of credit for small entities, a description of any significant alternatives to the proposed rule which accomplish the stated objectives of applicable statutes and which minimize any increase in the cost of credit for small entities (if such an increase in the cost of credit is projected), and a description of the advice and recommendations of representatives of small entities relating to the cost of credit issues. 5 U.S.C. 603(d)(1); DFA section 1100G(d)(1).

1. Description of the Reasons Why Agency Action Is Being Considered

As discussed in the Overview, part I above, mortgage servicing has been marked by pervasive and profound consumer protection problems. As a result of these problems, Congress included a number of provisions in the Dodd-Frank Act specifically to address mortgage servicing. These provisions are DFA sections 1418 (initial rate adjustment notice for adjustable-rate mortgages (ARMs)), 1420 (periodic statement), 1463 (amending RESPA), and 1464 (prompt crediting of mortgage payments and response to requests for payoff amounts). The Bureau also proposes to amend current rule § 1026.20(c) to harmonize with DFA section 1418, although not required by statute.

The Dodd-Frank Act and TILA authorize the Bureau to adopt implementing regulations for the statutory provisions provided by DFA sections 1418, 1420, and 1464. The Bureau is using this authority to propose regulations in order to provide servicers with clarity about their statutory obligations under these three provisions. The Bureau is also proposing to adjust servicers’ statutory obligations, including the obligations of small servicers, in certain circumstances. The Bureau is taking this action in order to ease burden when doing so would not sacrifice adequate protection of consumers.

Elsewhere in today’s Federal Register, the Bureau is publishing a proposed rule issued under RESPA that would implement DFA section 1463, the 2012 RESPA Servicing Proposal, which addresses procedures for obtaining force-placed insurance; procedures for investigating and resolving alleged errors and responding to requests for information; reasonable information management policies and procedures; early intervention for delinquent borrowers; and continuity of contact for delinquent borrowers.

The new statutory requirements take effect automatically on January 21, 2013, as written in the statute, unless final rules are issued prior to that date. The Dodd-Frank Act provides the Bureau with limited authority to extend the effective date of statutory requirements when adopting implementing regulations. The Bureau will consider the time servicers need to come into compliance in determining the effective date.

The Bureau’s proposed rules under Regulation Z and X represent another important step towards establishing uniform minimum national standards. As discussed in part II above, other Federal regulatory agencies have issued guidance on mortgage servicing and loan modifications and taken enforcement actions against mortgage servicers (including that National Mortgage Settlement, discussed in part II.C above).

These varied regulatory responses are understandable when viewed as a response to an unprecedented mortgage crisis and significant problems in the servicing of mortgage loans. Ultimately, however, both borrowers and mortgage servicers will be better served by having uniform national standards that govern mortgage servicing. When adopted in final form, the Bureau’s rules will generally 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.

2. Succinct Statement of the Objectives of, and Legal Basis for, the Proposed Rule

DFA section 1418 requires servicers to provide a new disclosure to consumers who have hybrid ARMs. The disclosure concerns the initial interest rate adjustment and must be given either (a) between six and seven months prior to such initial interest rate adjustment or (b) at consummation of the mortgage if the initial interest rate adjustment occurs during the first six months after consummation. The Bureau proposes implementing TILA section 128A(b) by broadening the scope of the proposed rule generally to adjustable-rate mortgages, not just hybrid ARMs.

The proposed new ARM disclosure for the initial interest rate adjustment provides the content listed in the statute and certain additional information. The disclosure provides, among other things, information about the terms of the loan, a description of the way the new rate and upcoming payment would be determined, a good faith estimate of the upcoming payment, and information that may be especially useful to distressed and delinquent borrowers. The proposed revisions to the Regulation Z § 1026.20(c) disclosure would harmonize the timeframe and content requirements with those of the new ARM disclosure.

The Bureau believes that the current era of declining interest rates has reduced the payment shock that can result from ARM interest rate adjustments. If interest rates increase quickly, however, then payment shock may also increase. Furthermore, the popularity of adjustable-rate mortgages, which provide the opportunity for reduced interest rates during an introductory period, likely would increase along with the advent of higher interest rates.

The proposed rule is intended to mitigate the consequences of payment shock by ensuring that consumers have sufficient time to identify and execute the best course of action. As explained above, the proposed rule would implement DFA section 1418 requirements for the initial ARM interest rate adjustment notice, which generally will be provided to consumers between six and seven months prior to the initial interest rate adjustment. The Bureau also proposes to revise the timeframe of the Regulation Z § 1026.20(c) disclosure for rate adjustments that result in an accompanying payment change, from the current 25 to 120 days before payment at a new level is due to, 60 to 120 days before payment at a new level is due.

DFA section 1420 generally requires the creditor, assignee, or servicer of a residential mortgage loan to transmit to the borrower, for each billing cycle, a periodic statement that sets forth certain specified information in a clear and conspicuous 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 consumer is given a coupon book containing substantially the same information as the statement.

The proposed periodic statement disclosure would require the periodic statement to include the content listed in the statute, as well as additional loan information, billing information, and information that may be helpful to distressed or delinquent borrowers. In accordance with the statute, the proposed rule has a coupon book exemption for fixed-rate loans when the borrower is given a coupon with certain information required by the periodic statement and information to access other information included in the periodic statement. The proposed rule also has exemptions for certain small servicers, reverse mortgages, and timeshares.

The proposed periodic statement is designed to serve a variety of purposes. These purposes include informing consumers of their payment obligation, providing consumers with information about their mortgage in an easily read and understood format, creating a record of the transaction to aid in error detection and resolution, and providing information to distressed or delinquent borrowers.

The Bureau understands that most borrowers will need only some of the information in the disclosure on a regular basis. However, distressed and delinquent borrowers will likely need more information. The proposed periodic statement disclosure was subjected to three rounds of consumer testing and refinement to identify the content and format that best promote consumer understanding.

DFA section 1464 generally codifies requirements for the prompt crediting of mortgage payments received by servicers in connection with consumer credit transactions secured by a consumer’s principal dwelling. The statute also generally codifies the requirement to provide an accurate and timely response to a borrower request for payoff amounts for home loans.

The proposed rule would require that once funds in a suspense account equal a full contractual payment that the servicer must credit the payment to the most delinquent outstanding payment. The proposed rule also would require a servicer to send an accurate payoff balance, 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.

The objective of the prompt crediting requirement is to ensure that consumers benefit from every effort that they make to pay their mortgage debt. However, the Bureau understands that requiring immediate crediting of partial payments might induce some servicers to return partial payments. The Bureau believes that this outcome would not serve the interests of consumers who have demonstrated that they are trying to pay their mortgage debt.

The objective of the payoff statement provision is to ensure that consumers can obtain this basic information about their mortgage debt in a timely way. This information is generally useful to consumers but must be provided in a timely way for selling or refinancing a home or modifying a mortgage loan.

3. Description and, Where Feasible, Provision of an Estimate of the Number of Small Entities to which the Proposed Rule Will Apply

As discussed in the SBREFA Final Report, for purposes of assessing the impacts of the proposed rule on small entities, “small entities” is defined in the RFA to include small businesses, small nonprofit organizations, and small government jurisdictions. 5 U.S.C. 601(6). A “small business” is determined by application of SBA regulations and reference to the North American Industry Classification System (NAICS) classifications and size standards.[142] 5 U.S.C. 601(3). Under such standards, banks and other depository institutions are considered “small” if they have $175 million or less in assets, and for other financial businesses, the threshold is average annual receipts (i.e., annual revenues) that do not exceed $7 million.[143]

During the SBREFA Panel process, the Bureau identified five categories of small entities that may be subject to the proposed rule for purposes of the RFA: commercial banks/savings institutions[144] (NAICS 522110 and 522120), credit unions (NAICS 522130), firms providing real estate credit (NAICS 522292), firms engaged in other activities related to credit intermediation (NAICS 522390), and small non-profit organizations. Commercial banks, savings institutions, and credit unions are small businesses if they have $175 million or less in assets. Firms providing real estate credit and firms engaged in other activities related to credit intermediation are small businesses if average annual receipts do not exceed $7 million.

A small non-profit organization is any not-for-profit enterprise which is independently owned and operated and is not dominant in its field. Small non-profit organizations engaged in mortgage servicing typically perform a number of activities directed at increasing the supply of affordable housing in their communities. Some small non-profit organizations originate and service mortgage loans for low and moderate income individuals while others purchase loans or the mortgage servicing rights on loans originated by local community development lenders. Servicing income is a substantial source of revenue for some small non-profit organizations while others receive most of their income from grants or investments.[145]

The following table provides the Bureau’s estimate of the number and types of entities that may be affected by the proposals under consideration:

Table 1: Estimated number of affected entities and small entities by NAICS code and engagement in closed-end mortgage loan servicing

Category	NAICS	Small entity threshold	Total entities	Small entities	Entities engaged in mortgage loan servicing	Small entities engaged in mortgage loan servicing
Commercial banks & savings institutions	522110, 522120	$175,000,000 assets	7,724	4,250	7,502	4,098
Credit unions	522130	$175,000,000 assets	7,491	6,568	5,190	4,270
Real estate credit	522292	$7,000,000 revenues	5,791	5,152	1,388	800
Other activities related to credit intermediation (includes loan servicing)	522390	$7,000,000 revenues	5,494	5,319	1,388	800

For commercial banks, savings institutions, and credit unions, the number of entities and asset sizes were obtained from December 2010 Call Report data as compiled by SNL Financial. Banks and savings institutions are counted as engaging in mortgage loan servicing if they hold closed-end loans secured by one to four family residential property or they are servicing mortgage loans for others. Credit unions are counted as engaging in mortgage loan servicing if they have closed-end one to four family mortgages in portfolio, or hold real estate loans that have been sold but remain serviced by the institution.

For firms providing real estate credit and firms engaged in other activities related to credit intermediation, the total number of entities and small entities comes from the 2007 Economic Census. The total number of these entities engaged in mortgage loan servicing is based on a special analysis of data from the Nationwide Mortgage Licensing System and Registry and is current as of Q1 2011. The total equals the number of non-depositories that engage in mortgage loan servicing, including tax-exempt entities, except for those mortgage loan servicers (if any) that do not engage in any mortgage-related activities that require a State license. The estimated number of small entities engaged in mortgage loan servicing is based on predicting the likelihood that an entity’s revenue is less than the $7 million threshold based on the relationship between servicer portfolio size and servicer rank in data from Inside Mortgage Finance.[146]

The proposed rule does not impose new reporting or recordkeeping requirements. The possible compliance costs for small entities from each major component of the proposed rule are presented below. The Bureau presents these costs against a pre-statute baseline. Benefits to consumers from the proposed rule are discussed in the DFA section 1022 analysis in part VII above.

(i) ARM – Notice 6 Months Prior to Initial Interest Rate Adjustment

DFA section 1418 amends TILA by adding a new requirement that a creditor or servicer provide a notice regarding the initial interest rate adjustment of a hybrid adjustable-rate mortgage at the end of the introductory period either (a) between six and seven months prior to the adjustment, or (b) at consummation of the mortgage if the first adjustment occurs during the first six months after consummation. The Bureau proposes to use the authority granted by TILA section 128A(b) to require this notice for hybrid as well as ARMs that are not hybrid (1/1, 3/3, 5/5, etc.).[147]

The proposed form would require the content listed in the statute. This includes, in part, a good faith estimate of the amount of the resulting payment; a list of alternatives that the consumer may pursue, including refinancing and loan modification; and information on how to contact housing counselors approved by HUD or a State housing finance authority. Additionally, the Bureau is proposing certain required additional information including details about the loan, key terms of the ARM, and information about the upcoming payment.

The new disclosure may provide some benefit to servicers. Distressed borrowers who contact servicers well in advance of a possible increase in the interest rate and payment may have more time in which to pursue an alternative financing solution. Information about loss mitigation alternatives and the availability of housing counseling may prompt borrowers to work proactively and constructively with their servicers.

The new disclosure will likely impose one-time and ongoing costs on servicers. Servicers will need to obtain system upgrades from vendors or make programming changes themselves. One SER reported the changes could take two to four days of IT support. These would be one-time costs. The Bureau is mitigating the one-time cost by providing servicers with tested model forms.

SERs noted that producing and sending the new disclosures would impose new costs on them either directly or through vendor charges. The ongoing costs are mitigated somewhat since the disclosures can be provided to consumers in electronic form with consumer consent. One SER noted that vendors have not provided cost quotes at this point.

A number of SERs expressed concern that the proposed initial ARM interest rate adjustment disclosure would confuse borrowers because it would only provide an estimate that would not accurately reflect the actual adjusted rate. The costs and benefits to consumers of the initial interest rate adjustment disclosure are discussed in the DFA section 1022 analysis in part VII above.

(ii) Revised 1026.20(c) Notice

The Bureau is also proposing changes to existing Regulation Z § 1026.20(c). The existing provision applies to all ARMs and requires a disclosure prior to each interest rate adjustment that effects a change in payment and annually for interest rate adjustments that do not cause payment changes. The Bureau is proposing to eliminate the annual notice. The Bureau also proposes to amend the current disclosures requiring a notice each time an interest rate adjustment causes a corresponding change in payment.

Regarding timing, the Bureau proposes changing the timeframe for providing the payment change notice to consumers from 25 to 120 days before payment at a new level is due to 60 to 120 days before payment at a new level is due. SERs did not identify any costs associated with this change and two reported they already provide the disclosure 60 to 100 days before payment at a new level is due. One SER reported that the new rate is calculated 45 days prior to the rate change date. This SER provides the borrower with a notice a minimum of 25 days, and typically 42 days, prior to the new interest rate becoming effective. This SER stated that the new interest rate becomes effective 55-72 days prior to the due date of the new payment. Another SER reported substantially similar numbers. The timing of the disclosures reported by these SERs is consistent with the proposed new timeframe.

Regarding content, the Bureau is considering proposing content for the revised 1026.20(c) notices that closely tracks the content it is proposing for the ARM initial interest rate adjustment notices pursuant to DFA section 1418. Servicers will need to obtain one-time system upgrades from vendors or make programming changes themselves. Given the substantial similarity of the revised 1026.20(c) form and the initial ARM interest rate adjustment notice, the Bureau believes that the additional ongoing cost of producing the revised form, on top of the initial ARM interest rate adjustment form, will be minimal.

(iii) Periodic Statements

As discussed in the section-by-section analysis above, DFA section 1420 amends TILA by adding a new requirement that a servicer of any residential mortgage loan provide a periodic statement to the consumer for each billing cycle. The Bureau tested a model periodic statement with consumers.

The proposed rule has the following exemptions: fixed-rate mortgages with coupon books, certain small servicers, reverse mortgages, and timeshares. These proposed provisions are discussed separately below.

The proposed periodic statement requirement imposes one-time and ongoing costs on small servicers. The specific types of costs incurred by a servicer depend on whether the servicer produces the proposed periodic statement in-house or uses a third-party vendor.

In-house one-time costs include the development of a new form, system reprogramming or acquisition, and perhaps new or updated software. In-house ongoing costs for production include additional system use and staff time. In-house ongoing costs would also include paper, printing, and mailing costs for distributing the periodic statement to borrowers who do not give permission to receive the disclosure electronically.

Vendors may also charge an initial one-time cost for developing a new form as well as ongoing costs for producing and distributing the statement. The SERs who use vendors stated that they did not know what their vendors would charge so they could comply with the new periodic statement requirement. The SERs agreed that the one-time charge would be different from what they would be charged if they were the only entity making the change. Vendors can spread the one-time costs of new regulatory requirements over many servicers.

Small servicers reported a range of one-time costs of complying with the proposed provision. One non-depository SER estimated it would cost $150,000-$500,000 to convert to a new periodic statement system, a depository institution SER estimated a cost of $150,000-$200,000, and a credit union SER estimated a cost of $30,000-$40,000. Estimates of ongoing costs ranged from $11,000 per month from a non-depository SER to $2,200 per month from a depository SER; the latter estimated ongoing costs would be approximately $1 per statement. One depository SER estimated $5,000-$6,000 per month in production costs, before postage.

The Bureau understands that the estimates of ongoing costs from the SERs did not exclude the costs of periodic statements, coupon books, or other payment mechanisms that they currently provide borrowers. Some of the SERs stated that they currently provide borrowers with a periodic statement that contains much of the information required under the proposal. However, none of the SERs stated that they include contact information for housing counseling agencies or programs of the type required by DFA section 1420. As explained above in the section-by-section analysis, the Bureau is proposing to use authority under TILA sections 105(a) and (f) and DFA Section 1405(b) to require periodic statements to provide only information about where a borrower can access a complete list of housing counselors. The Bureau believes that the proposed provision will impose a substantially smaller burden than the statutory requirement.

In accordance with DFA section 1420, the proposed rule would include a coupon book exemption for fixed-rate loans where the consumer is given a coupon book with certain of the information required by the periodic statement. It is not possible to estimate the share of residential mortgage loans serviced by small servicers that would qualify for this exception. If this provision is included in the final rule, it is possible that small servicers would provide coupon books to all borrowers with fixed-rate mortgages. Many of the SERs reported that they provide consumers with coupon books for ARMs. However, there is no data with which to estimate the fraction of small servicer portfolio loans that are in fixed-rate mortgages; in fact, the Bureau understands that many small servicer portfolio loans are adjustable-rate mortgages.

The Bureau is also proposing a small servicer exemption. Servicers servicing 1,000 or fewer loans, all of which they must either own or have originated, would be eligible. A preliminary analysis indicates that all but 13 small insured depositories and credit unions would be covered by the exemption and would not have to provide the proposed periodic statement disclosure. The Bureau does not currently have the data necessary to estimate the number of small entity non-depositories that would be covered by the exemption. However, data from depositories suggests that approximately 584 small entity non-depositories (65% of the 800 small entity non-depositories) would be covered by the exemption.[148] As discussed in the DFA section 1022 analysis in part VII.F, the Bureau is currently working to gather additional data that may be relevant to estimating the number of small non-depositories covered by the small servicer exemption. These data may include additional data from the National Mortgage License System (NMLS) and the NMLS Mortgage Call Report, loan file extracts from various lenders, and data from the pilot phases of the National Mortgage Database. The Bureau is also continuing its outreach efforts with industry and requests interested parties to provide data, research results, and other information relating to this issue.

Finally, the proposed rule has exemptions for reverse mortgages and timeshares. Information that would be relevant and useful on a reverse mortgage statement differs substantially from the information required on the periodic statement; see the section-by-section analysis for further discussion. The proposed rule also exempts timeshares as these are not residential mortgage loans as defined in TILA.

(iv) Prompt Crediting and Request for Payoff Amounts

DFA section 1464(a) generally codifies existing Regulation Z § 1026.36 on prompt crediting. The Bureau is further proposing a new requirement for the handling of partial payments (i.e., payments that are not full contractual payments). Under the proposal, if servicers hold partial payments in a suspense account, then once the amount in the account equals a full contractual payment, the servicer must credit the payment to the most delinquent outstanding payment.

DFA section 1464(b) requires that a creditor or servicer of a home loan send an accurate payoff balance 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 borrower. This essentially codifies existing Regulation Z § 1026.36 on payoff statements, except that Regulation Z requires payoff statements to be sent within a reasonable time and creates a safe harbor for responses sent within five business days.

The SERs generally reported that these provisions would have no impact on them as they are already in compliance. In correspondence, one SER suggested that the seven day maximum for payoff amounts should be even shorter, to prevent other servicers from delaying closings.

(v) Estimate of the Classes of Small Entities Which will be Subject to the Requirement and the Type of Professional Skills Necessary for the Preparation of the Report or Record

Section 603(b)(4) of the RFA requires an estimate of the classes of small entities which will be subject to the requirement. The classes of small entities which will be subject to the reporting, recordkeeping, and compliance requirements of the proposed rule are the same classes of small entities that are identified above in part VIII.B.3.

Section 603(b)(4) of the RFA also requires an estimate of the type of professional skills necessary for the preparation of the reports or records. The Bureau anticipates that the professional skills required for compliance with the proposed rule are the same or similar to those required in the ordinary course of business of the small entities affected by the proposed rule. Compliance by the small entities that will be affected by the proposed rule will require continued performance of the basic functions that they perform today: generating disclosure forms and crediting partial payments from borrowers either immediately or when they constitute a full payment.

5. Identification, to the Extent Practicable, of All Relevant Federal Rules which May Duplicate, Overlap, or Conflict with the Proposed Ru

The Dodd-Frank Act codified certain requirements contained in existing regulations and in some cases imposed new requirements that expand or vary the scope of existing regulations. The Bureau is working to eliminate conflicts and to harmonize the earlier rules with the new statutory requirements. In general, the existing and expanded regulations cover the following topics:

New Regulation Z ARM disclosures, as required by DFA section 1418, will be provided six to seven months prior to the initial adjustment of interest rates. These disclosures will provide similar information to existing Regulation Z § 1026.20(c) notices, however there are timing differences, and the new notice is required only for the first rate adjustment. The DFA section 1418 notice is intended to be sent early enough for the consumer to take action (i.e. refinance or apply for a loan modification) before the monthly payment increases.
Regulation Z § 1026.36(c)(1)(i) contains a prompt crediting provision that is generally codified by the prompt crediting provision in DFA section 1464(a).
Regulation Z § 1026.36(c) addresses the application of payments. The Bureau is proposing modifying this rule to mandate the application of funds to the most delinquent outstanding payment if a full contractual payment has accumulated in any suspense or unapplied funds account.
Regulation Z 1026.36(c)(1)(iii) contains a provision regarding payoff amount requests that is generally codified by the Dodd Frank Act.

Elsewhere in today’s Federal Register, the Bureau is publishing a proposed rule that would implement DFA section 1463 and is issued under RESPA. The RESPA proposal addresses procedures for obtaining force-placed insurance; procedures for investigating and resolving alleged errors and responding to requests for information; reasonable information management policies and procedures; early intervention for delinquent borrowers; and continuity of contact for delinquent borrowers.

These regulations do not duplicate, overlap, or conflict and the Bureau is not aware of any other Federal regulations that currently duplicate, overlap, or conflict with the proposals under consideration.

(i) New Initial Interest Rate Adjustment Notice for Adjustable-Rate Mortgages

As discussed above, DFA section 1418 requires servicers to provide a new disclosure to consumers who have hybrid ARMs regarding the initial interest rate adjustment. The Bureau is proposing to use its discretionary authority to require the initial interest rate adjustment notice for ARMs that are not hybrid (e.g., 1/1, 3/3, 5/5, etc.) as well. Thus, the disclosure under the original statutory language would have a smaller economic impact on small entities.

The Bureau opted for its current proposal because all ARMs, not just hybrid ARMs, may subject consumers to the same payment shock after the introductory period expires. Consumers with ARMs that are not hybrid would therefore also benefit from the protections provided by the new disclosure.

The Bureau also considered whether to except small servicers from the proposed initial ARM interest rate adjustment notice. The SERs did express some concern about the one-time and ongoing costs of providing the proposed notice. They expressed concern that consumers would be confused by receiving estimates rather than their actual new interest rate and payment.

The Bureau believes an exception would deprive certain consumers of the seven to eight months advance notice before payment at a new level is due provided by the disclosure. This advance notice is designed to allow consumers time to weigh their alternatives and pursue alternative actions. An exception would also deprive certain consumers of the information provided in the notice about alternatives and how to contact their State housing finance authority and counseling agencies and programs.

The Bureau recognizes that the proposed initial ARM interest rate adjustment notice will impose some burden on small servicers, but it does not believe that it will impose a significant burden since it is a one-time notice. The Bureau seeks comment on whether the burden imposed on small entities by the requirements of the initial rate adjustment notice outweighs the consumer protection benefits it affords.

(ii) Regulation Z § 1026.20(c) Disclosure for Adjustable-Rate Mortgages

The Bureau is proposing to change the timing of the ARM payment change notice required under current § 1026.20(c) to be provided to consumers from 25 to 120 days before payment at a new level is due to 60 to 120 days before payment at a new level is due. The longer lead time is designed to give consumers time to refinance or take other ameliorative actions if they are not financially equipped to pay their mortgages at an increased adjusted rate. The Bureau recognizes that the longer lead time may impose a burden on small servicers.

According to outreach conducted by the Bureau, small servicers often are able to send out the ARM 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 the 28 to 31 days between the change date and the date payment at the new level is due, the interest rate adjustment notice goes out to the consumer 73 to 76 days before the new payment is due. Under these circumstances, small servicers could provide the payment change notice within the 60 day minimum period. The Bureau is also proposing an alternative 25-day minimum period for certain existing adjustable-rate mortgages in which the mortgage note requires a look-back period of less than 45 days.

(iii) Periodic Statements

As discussed above, DFA section 1420 requires servicers to provide a new periodic statement to the consumer for each billing cycle. The proposed rule would generally require both the content listed in the statute, additional billing information, and information about how to dispute and resolve errors. The Bureau is proposing to use its discretionary authority to require the additional information. Thus, the disclosure under the original statutory language would impose a smaller economic impact on small entities that must provide the periodic statement disclosure.

The Bureau believes the additional information provides important consumer benefits. Only some of the information in the disclosure will be required to be provided to consumers on a regular basis. However, distressed or delinquent borrowers will likely need more information. The proposed periodic statement disclosure was the subject of three rounds of consumer testing and refinement to identify the form, content, headings, and format that best promotes consumer understanding.

As discussed above, the Bureau is proposing a small servicer exemption. Servicers servicing 1,000 or fewer loans, all of which they must either own or have originated, would be eligible. As discussed above, the Bureau believes that almost all small insured depositories and credit unions would be covered by the exemption. The Bureau does not currently have the data necessary to estimate the number of small entity non-depositories that would be covered by the exemption. However, the Bureau is currently working to gather additional data that may be relevant to estimating the number of small non-depositories covered by the small servicer exemption.

(iv) Prompt Crediting and Request for Payoff Amounts

As discussed above, the SERs generally reported that the proposed provisions regarding prompt crediting and payoff amounts would have no impact on them as they are already in compliance. In correspondence, one SER suggested that the seven day maximum for payoff amounts should be even shorter, to prevent other servicers from delaying closings.

7. Discussion of Impact on Cost of Credit for Small Entities

Section 603(d) of the RFA requires the Bureau to consult with small entities regarding the potential impact of the proposed rule on the cost of credit for small entities and related matters. 5 U.S.C. 603(d). To satisfy these statutory requirements, the Bureau provided notification to the Chief Counsel on April 9, 2012 that the Bureau would collect the advice and recommendations of the same SERs identified in consultation with the Chief Counsel through the SBREFA Panel process concerning any projected impact of the proposed rule on the cost of credit for small entities as well as any significant alternatives to the proposed rule which accomplish the stated objectives of applicable statutes and which minimize any increase in the cost of credit for small entities.[149] The Bureau sought to collect the advice and recommendations of the SERs during the SBREFA Panel outreach meeting regarding these issues because, as small financial service providers, the SERs could provide valuable input on any such impact related to the proposed rule.[150]

At the time the Bureau circulated the SBREFA materials to the SERs in advance of the SBREFA Panel outreach meeting, it had no evidence that the proposals under consideration would result in an increase in the cost of business credit for small entities. Instead, the summary of the proposals stated that the proposals would apply only to mortgage loans obtained by consumers primarily for personal, family, or household purposes and the proposals would not apply to loans obtained primarily for business purposes.[151]

At the SBREFA Panel outreach meeting, the Bureau asked the SERs a series of questions regarding cost of business credit issues.[152] The questions were focused on two areas. First, the SERs from commercial banks/savings institutions, credit unions, and mortgage companies were asked whether, and how often, they extend to their customers closed-end mortgage loans to be used primarily for personal, family, or household purposes but that are used secondarily to finance a small business, and whether the proposals then under consideration would result in an increase in their customers’ cost of credit. Second, the Bureau inquired as to whether, and how often, the SERs take out closed-end, home-secured loans to be used primarily for personal, family, or household purposes and use them secondarily to finance their small businesses, and whether the proposals under consideration would increase the SERs’ cost of credit.

The SERs had few comments on the impact on the cost of business credit. While they took this time to express concerns that these regulations would increase their costs, they said these regulations would have little to no impact on the cost of business credit. When asked, one SER mentioned that at times people may use a home-secured loan to finance a business, which was corroborated by a different SER based on his personal experience with starting a business. The Bureau is generally interested in the use of personal home-secured credit to finance a business and invites interested parties to provide data and other factual information on this issue.

Based on the feedback obtained from SERs at the outreach meeting, the Bureau currently does not anticipate that the proposed rule will result in an increase in the cost of credit for small business entities. To further evaluate this question, the Bureau solicits comment on whether the proposed rule will have any impact on the cost of credit for small entities.

IX. Paperwork Reduction Act

The Bureau’s information collection requirements contained in this proposed rule, and identified as such, will be submitted to OMB for review under section 3507(d) of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.) (Paperwork Reduction Act” or PRA). Under the Paperwork Reduction Act, the Bureau may not conduct or sponsor, and a person is not required to respond to, an information collection unless the information collection displays a valid OMB control number.

The title of this information collection is 2012 Truth in Lending Act (Regulation Z) Mortgage Servicing. The frequency of response is on-occasion. This proposed rule would amend Regulation Z. Regulation Z currently contains collections of information approved by OMB, and the Bureau’s OMB control number for Regulation Z is 3170-0015 (Truth in Lending Act (Regulation Z) 12 CFR 1026). As described below, the proposed rule would amend the collections of information currently in Regulation Z.

The information collection would be required to provide benefits for consumers and would be mandatory. See 15 U.S.C. 1601 et seq. Because the Bureau does not collect any information, no issue of confidentiality arises. The likely respondents would be federally-insured depository institutions (such as commercial banks, savings banks, and credit unions) and non-depository institutions that service consumer mortgage loans.

Under the proposed rule, the Bureau generally would account for the paperwork burden associated with Regulation Z for the following respondents pursuant to its administrative enforcement authority: insured depository institutions with more than $10 billion in total assets, their depository institution affiliates (together, the Bureau depository respondents), and certain non-depository servicers (the Bureau non-depository respondents). The Bureau and the FTC generally both have enforcement authority over non-depository institutions under Regulation Z. Accordingly, the Bureau has allocated to itself half of its estimated burden to Bureau non-depository respondents. Other Federal agencies, including the FTC, are responsible for estimating and reporting to OMB the total paperwork burden for the institutions for which they have administrative enforcement authority. They may, but are not required to, use the Bureau’s burden estimation methodology.

Using the Bureau’s burden estimation methodology, the total estimated burden under the proposed changes to Regulation Z for the roughly 12,813 institutions, including Bureau respondents,[153]that are estimated to service consumer mortgages subject to the proposed rule would be approximately 25,000 one-time burden hours and 74,000 ongoing burden hours per year. The aggregate estimates of total burdens presented in this part IX are based on estimates averaged across respondents. The Bureau expects that the amount of time required to implement each of the proposed changes for a given institution may vary based on the size, complexity, and practices of the respondent.

A. Information Collection Requirements

The Bureau is proposing four changes to the information collection requirements in Regulation Z. First, as previously discussed, proposed § 1026.20(d) regarding adjustable-rate mortgages would require creditors, assignees, and servicers to send a new initial rate adjustment disclosure at least 210, but not more than 240, days before the date the first payment is due after the initial rate adjustment. The new disclosure includes, among other things, information regarding the calculation of the new interest rate and information to assist consumers in the event the consumer requires alternative financing. Second, proposed § 1026.20(c) regarding adjustable-rate mortgages would change the format, content, and timing of the existing rate adjustment disclosure. The proposed rule would change the minimum time for providing advance notice to consumers from 25 days to 60 days before payment at a new level is due. Servicers would be required to provide certain information that they may not currently disclose, but would no longer be required to notify consumers of a rate adjustment if the payment is unchanged.

Third, proposed § 1026.41 would require a new periodic statement disclosure. The required content would include billing information, such as the amount due, payment due date, and information on any late fees; information on recent transaction activity and how payments were applied; general loan information, such as the interest rate and when it may next adjustment, outstanding principal balance, etc.; and other information that may be helpful to troubled borrowers. Certain small servicers (those servicing less than 1,000 mortgages and own or originated all the loans they are servicing) would be exempt from this requirement. Fixed-rate mortgages would be exempt if the servicer provides the consumer with a coupon book that contained certain information, and makes other information available to the consumer.

Fourth, proposed § 1026.36 would make changes to the existing requirements on servicers to promptly credit borrower payments that satisfy payment rules specified by a servicer. Proposed § 1026.36 would also make changes to the existing requirements on creditors and servicers to provide an accurate payoff balance upon request. An information collection is created by the proposed requirement to provide accurate payoff statements.

B. Burden Analysis under the Four Proposed Information Collection Requirements[154]

1. New Initial Rate Adjustment Notice for Adjustable-Rate Mortgages

All CFPB respondents would have a one-time burden under this requirement associated with reviewing the regulation. Certain CFPB respondents would have a one-time burden from creating software and IT capability to produce the new disclosure. The Bureau estimates this one-time burden to be 140 hours for CFPB depository respondents and 1,488 hours and $115,000 for CFPB non-depository respondents.[155]

Certain CFPB respondents would have ongoing burden associated with the IT used in producing the disclosure. All CFPB respondents would have ongoing costs associated with distributing (e.g., mailing) the disclosure. The Bureau estimates this ongoing burden to be 600 hours and $63,000 for CFPB depository respondents and 70 hours and $3,400 for CFPB non-depository respondents.

2. Changes in the Regulation Z § 1026.20(c) disclosure for adjustable-rate mortgages

All CFPB respondents would have a one-time burden under this requirement associated with reviewing the regulation. Certain CFPB respondents would have one-time burden from creating software and IT capability to provide the additional content in the disclosure. The Bureau estimates this one-time burden to be 165 hours for CFPB depository respondents and 600 hours and $58,000 for CFPB non-depository respondents.

Regarding ongoing burden, the Bureau is proposing to require the disclosure only when the interest rate adjustment results in a corresponding change in the required payment. The Bureau believes it would be usual and customary to provide consumers with a disclosure under these circumstances. Thus, the Bureau believes there is no burden from distribution costs for purposes of PRA from the proposed § 1026.20(c) disclosure. The Bureau recognizes that there is content in the proposed disclosure beyond what may be usual and customary to provide. Bureau respondents that do not use vendors and certain small respondents that use vendors will incur production costs associated with this extra content, and this is burden for purposes of PRA. The Bureau estimates the ongoing burden to be 1,400 hours for CFPB depository respondents and 110 hours and $8,000 for CFPB non-depository respondents.

3. New Periodic Statement

All CFPB respondents that are not exempt would have a one-time burden under this requirement associated with reviewing the regulation. Certain CFPB respondents would have a one-time burden from creating software and IT capability to modify existing periodic disclosures or produce a new disclosure. The proposed disclosure incorporates all of the information in billing statements that many respondents already provide. However, the additional data fields and formatting requirements may not be usual and customary. The Bureau estimates this one-time burden to be 170 hours for CFPB depository respondents and 600 hours and $20,000 for CFPB non-depository respondents.

Regarding ongoing burden, consumers who currently receive a periodic statement or billing statement are receiving these disclosures in the normal course of business. The Bureau believes that most other consumers with mortgages receive a coupon book or other type of payment medium, such as a passbook. The statute provides that servicers do not have to provide the periodic statement disclosure to consumers who have both a fixed-rate mortgage and a coupon book. Thus, the only consumers who are not already receiving a billing statement or periodic disclosure to whom servicers will have to begin providing the periodic statement disclosure under the proposed rule are those with both an adjustable-rate mortgage and a coupon book. The burden of distributing the proposed periodic statement disclosure to these consumers is, for purposes of PRA, the ongoing burden from distribution costs from the proposed periodic statement disclosure. The Bureau recognizes that there is content in the proposed periodic statement disclosure beyond what may be usual and customary to provide in existing billing statements. The Bureau estimates the ongoing burden to be 52,000 hours and $5,600,000 for CFPB depository respondents and 6,300 hours and $300,000 for CFPB non-depository respondents.

4. Prompt crediting of payments and response to requests for payoff amounts

All CFPB respondents would have a one-time burden under this requirement associated with reviewing the regulation. Certain CFPB respondents would have a one-time burden from creating software and IT costs associated with changes in the payoff statement disclosure. The Bureau estimates this one-time burden to be 110 hours for CFPB depository respondents and 500 hours and $115,000 for CFPB non-depository respondents.

Regarding ongoing burden, the Bureau understands that the proposed payoff statement will replace a pre-existing disclosure that respondents are currently providing in the normal course of business. The Bureau does not believe that proposed changes to the content and timing of the existing disclosure will significantly change the ongoing production or distribution costs of the notice currently provided in the normal course of business. The Bureau estimates the ongoing burden to be 1,650 hours and $178,000 for CFPB depository respondents and 200 hours and $9,600 for CFPB non-depository respondents.

C. Summary of Burden Hours for CFPB Respondents

	Respondents	Disclosures per Respondent	Hours Burden per Disclosure	Total Burden Hours	Total Vendor Costs
Ongoing
ARM 20(c) Notice	824	700	0.002777778	1,000	$8,000
ARM 20(d) Notice	824	300	0.002881756	1,000	$67,000
Periodic Statements	564	35,800	0.002881756	58,000	$5,914,000
Prompt Crediting & Payoff Statements	824	800	0.002881756	2,000	$188,000
One-Time
ARM 20(c) Notice	824	1	0.93	1,000	$58,000
ARM 20(d) Notice	824	1	1.97	2,000	$115,000
Periodic Statements	564	1	1.36	1,000	$20,000
Prompt Crediting & Payoff Statements	824	1	0.77	1,000	$115,000

D. Comments

Comments are specifically requested concerning: (i) whether the proposed collections of information are necessary for the proper performance of the functions of the Bureau, including whether the information will have practical utility; (ii) the accuracy of the estimated burden associated with the proposed collections of information; (iii) how to enhance the quality, utility, and clarity of the information to be collected; and (iv) how to minimize the burden of complying with the proposed collections of information, including the application of automated collection techniques or other forms of information technology. All comments will become a matter of public record. Comments on the collection of information requirements should be sent to the Office of Management and Budget (OMB), Attention: Desk Officer for the Consumer Financial Protection Bureau, Office of Information and Regulatory Affairs, Washington, D.C., 20503, or by the internet to http://oira_submission@omb.eop.gov, with copies to the Bureau at the Consumer Financial Protection Bureau (Attention: PRA Office), 1700 G Street NW, Washington, DC 20552, or by the internet to CFPB_Public_PRA@cfpb.gov.

Footnotes

[123] Specifically, section 1022(b)(2)(A) of the Dodd-Frank Act calls for the Bureau to consider the potential benefits and costs of a regulation to consumers and covered persons, including the potential reduction of access by consumers to consumer financial products or services; the impact on depository institutions and credit unions with $10 billion or less in total assets as described in section 1026 of the Dodd-Frank Act; and the impact on consumers in rural areas.

[124] Reference in parts VII, VIII, and IX to “servicers” with regard to the proposed rule for requests for payoff amounts means creditors and servicers.

[125] Reference in parts VII, VIII, and IX to “servicers” with regard to the proposed rules for adjustable-rate mortgages means creditors, assignees, and servicers.

[126] See Christopher Mayer, Karen Pence, & Shane Sherlund, The Rise in Mortgage Defaults, 23 J. Econ. Persps. 27, 37 (2009).

[127] The current payment allocation would also appear on the proposed periodic statement disclosure. However, listing the current and expected new payment allocation in one disclosure benefits consumers by making clear any differences between the two allocations. The Bureau recognizes that the benefit of information in a particular disclosure may be mitigated to the extent that the same information is available in other disclosures that are provided at the same (or nearly the same) time.

[128] For a general discussion of disclosure formatting, disclosure testing and consumer benefits, see Jeanne Hogarth & Ellen Merry, Designing Disclosures to Inform Consumer Financial Decisionmaking: Lessons Learned from Consumer Testing, 97 Fed. Reserve Bull. 1 (Aug. 2011).

[129] Brent W. Ambrose & Michael LaCour-Little, Prepayment Risk in Adjustable Rate Mortgages Subject to Initial Year Discounts: Some New Evidence, 29 Real Est. Econs. 305 (2001) (showing that the expiration of teaser rates causes more ARM prepayments, using data from the 1990s). The same result, using data from the 2000s and focusing on subprime mortgages, is reported in Shane Sherland, The Past, Present and Future of Subprime Mortgages, (Div. of Research & Statistics and Div. of Monetary Affairs, Fed. Reserve Bd., Washington, D.C. 2008); The result that larger payment increases generally cause more ARM prepayments, using data from the 1980s, appears in James Vanderhoff , Adjustable and Fixed Rate Mortgage Termination, Option Values and Local Market Conditions, 24 Real Est. Econs. 379 (1996).

[130] Mayer, Pence, & Sherlund, supra note 125, at 37.

[131] Anthony Pennington-Cross & Giang Ho, The Termination of Subprime Hybrid and Fixed-Rate Mortgages, 38 Real Est. Econs. 399, 420 (2010).

[132] In this and subsequent numerical discussions, “amortizing” an amount $x over a certain number of years means making equal payments in each year that sum up to $x.

[133] As discussed in part VI, the Bureau believes that annual notice is duplicative given the proposed periodic statement, which would provide much of the same information. Thus, eliminating the annual notice reduces costs for servicers with little or no loss in benefits to consumers.

[134] As explained above, the Bureau is aware that for certain ARMs, there is currently less than 60 days between the date on which the index value is selected that serves as the basis for the new payment and the date on which payment at a new level is due. It may therefore be difficult for servicers to provide a notice of interest rate adjustment within 60 days of the date on which payment at a new level is due. The Bureau may provide an accommodation for some of these ARMs by requiring a different minimum time for providing this advance notice. 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.

[135] Of course, a consumer who receives the proposed § 1026.20(c) disclosure may derive little additional benefit from shortly thereafter receiving the same information on the proposed periodic statement disclosure. There would, however, likely be little cost saving for servicers in not having to provide the information on the proposed periodic statement disclosure that also appears on the § 1026.20(c) disclosure for just one or two months.

[136] Reference in parts VII, VIII, and IX to “servicers” with regard to the proposed rule for the periodic statement, means creditors, assignees, and servicers.

[137] More information about the Mortgage Call Report can be found at http://mortgage.nationwidelicensingsystem.org/slr/common/mcr/Pages/default.aspx.

[138] As described in the IRFA in part VIII.B, below, sections 603(b)(3) through (b)(5) and 603(c) of the RFA, respectively, require a description of and, where feasible, provision of an estimate of the number of small entities to which the proposed rule will apply; a description of the projected reporting, record keeping, and other compliance requirements of the proposed rule, including an estimate of the classes of small entities which will be subject to the requirement and the type of professional skills necessary for preparation of the report or record; an identification, to the extent practicable, of all relevant Federal rules which may duplicate, overlap, or conflict with the proposed rule; and a description of any significant alternatives to the proposed rule which accomplish the stated objectives of applicable statutes and which minimize any significant economic impact of the proposed rule on small entities. 5 U.S.C. 603(b)(3), 603(b)(4), 603(b)(5), 603(c).

[139] The Bureau posted these materials on its website and invited the public to email remarks on the materials. See http://www.consumerfinance.gov/pressreleases/consumer-financial-protection-bureau-outlines-borrower-friendly-approach-to-mortgage-servicing/ (the materials are accessible via the links within this document).

[140] This written feedback is attached as appendix A to the SBREFA Final Report, discussed below.

[141] SBREFA Final Report, supra note 22.

[142] The current SBA size standards are found on SBA’s website at http://www.sba.gov/content/table-small-business-size-standards.

[143] See id.

[144] Savings institutions include thrifts, savings banks, mutual banks, and similar institutions.

[145] The Bureau is continuing to refine its description of small non-profit organizations engaged in mortgage loan servicing and working to estimate the number of these entities, but it is not possible to estimate the number of these entities at this time. Non-profits and small non-profits engaged in mortgage loan servicing would be included under real estate credit if their primary activity is originating loans and under other activities related to credit intermediation if their primary activity is servicing.

[146] The CFPB is continuing to refine its estimate of the number of firms providing real estate credit and engaging in other activities related to credit intermediation that are small and which engage in mortgage loan servicing.

[147]Conventional ARMs, unlike hybrid ARMs which have a period with a fixed rate of interest, start with an adjustable rate and that rate readjusts at even intervals.

[148] Roughly 35% of depositories that earn less than $7 million from servicing also have too many loans to qualify for the small servicer exemption. Extrapolating to non-depositories, roughly 35% of non-depositories that earn less than $7 million from servicing—and are small entities—also service too many loans to qualify for the small servicer exemption.

[149] See 5 U.S.C. 603(d)(2). The Bureau provided this notification as part of the notification and other information provided to the Chief Counsel with respect to the SBREFA Panel process pursuant to RFA section 609(b)(1).

[150] See 5 U.S.C. 603(d)(2)(B).

[151] See TILA section 104(1); RESPA section 7(a)(1).

[152] See SBREFA Final Report, supra note 22, at 154-55 (appendix D, PowerPoint slides from the SBREFA Panel outreach meeting, “Topic 7: Impact on the Cost of Business Credit”).

[153] For purposes of this PRA analysis, the Bureau’s depository respondents under the proposed rule are 130 depository institutions and depository institution affiliates that service closed-end consumer mortgages. The Bureau’s non-depository respondents are an estimated 1,388 non-depository servicers. Unless otherwise specified, all references to burden hours and costs for the Bureau respondents for the collection requirements under the proposed rule are based on a calculation of the burden from all of the Bureau’s depository respondents and half of the burden from the Bureau’s non-depository respondents.

[154] Based on discussions with industry, the Bureau assumes that all depository respondents except for one large entity and 95% of non-depository respondents (100% of small non-depository respondents) use third-party vendors for one-time software and IT capability and for ongoing production and distribution activities associated with disclosures. The Bureau believes at this time that under existing mortgage servicing contracts, vendors would absorb the one-time software and IT costs and ongoing production costs of disclosures for large- and medium- sized respondents but pass along these costs to small respondents. The Bureau will further consider the extent to which respondents use third-party vendors and the extent to which third-party vendors charge various costs to different types of respondents, and the Bureau seeks data and other factual information from interested parties on these issues.

[155] Dollar figures include estimated costs to vendors.

Home Mortgage Consumer Protection

TILA: Regulatory Analysis

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