[Federal Register Volume 76, Number 141 (Friday, July 22, 2011)]
[Rules and Regulations]
[Pages 44226-44244]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-18676]
[[Page 44225]]
Vol. 76
Friday,
No. 141
July 22, 2011
Part V
Bureau of Consumer Financial Protection
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12 CFR Part 1004
Alternative Mortgage Transaction Parity (Regulation D); Interim Final
Rule
Federal Register / Vol. 76 , No. 141 / Friday, July 22, 2011 / Rules
and Regulations
[[Page 44226]]
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BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Part 1004
[Docket No. CFPB-2011-0004]
RIN 3170-AA04
Alternative Mortgage Transaction Parity (Regulation D)
AGENCY: Bureau of Consumer Financial Protection.
ACTION: Interim final rule with request for public comment.
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SUMMARY: The Bureau of Consumer Financial Protection (CFPB) is
publishing for public comment an interim final rule establishing
Regulation D (Alternative Mortgage Transaction Parity) pursuant to the
Alternative Mortgage Transaction Parity Act (AMTPA) and the Truth in
Lending Act. The interim final rule is necessary to avoid a regulatory
gap created by the amendments to AMTPA in the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank Act). Without an interim
final rule that takes immediate effect, state housing creditors would
no longer be able to make variable rate mortgage loans and other
alternative mortgage transactions pursuant to AMTPA in states that
prohibit such transactions, thus denying consumers access to that form
of credit. Until July 22, 2012, the interim final rule applies only to
state housing creditors seeking to invoke federal preemption of state
law under AMTPA. The interim final rule will be in place as a temporary
measure pending the CFPB's completion of a notice-and-comment
rulemaking to promulgate permanent rules, including rules governing
alternative mortgage transactions made by federally chartered housing
creditors. The CFPB seeks public comment in anticipation of that
process.
DATES: This interim final rule is effective July 22, 2011.
Mandatory compliance date: Compliance with Sec. 1004.4 of this
interim final rule is optional until July 22, 2012 for federal housing
creditors and for state housing creditors that are not relying on
preemption of state law under Sec. 1004.3. On July 22, 2012,
compliance with Sec. 1004.4 is mandatory for all creditors, except as
provided in Sec. 1004.4(d).
Comments: Comments must be received on or before September 22,
2011.
ADDRESSES: You may submit comments, identified by Docket No. CFPB-2011-
0004, by any of the following methods:
Electronic: http://www.regulations.gov. Follow the
instructions for submitting comments.
Mail or Hand Delivery/Courier in Lieu of Mail: Monica
Jackson, Office of the Executive Secretary, Consumer Financial
Protection Bureau, 1801 L Street, NW., Washington, DC 20036.
All submissions must include the agency name and docket number or
Regulatory Information Number (RIN) for this rulemaking. In general,
all comments received will be posted without change to http://www.regulations.gov. In addition, comments will be available for public
inspection and copying at 1801 L Street, NW., Washington, DC 20036, on
official business days between the hours of 10 a.m. and 5 p.m. Eastern
Time. You can make an appointment to inspect the documents by
telephoning (202) 435-7275.
All comments, including attachments and other supporting materials,
will become part of the public record and subject to public disclosure.
Sensitive personal information, such as account numbers or social
security numbers, should not be included. Comments will not be edited
to remove any identifying or contact information.
FOR FURTHER INFORMATION CONTACT: Monica Jackson, Office of the
Executive Secretary, Consumer Financial Protection Bureau, 1801 L
Street, NW., Washington, DC 20036, (202) 435-7275.
SUPPLEMENTARY INFORMATION:
I. Overview
The Bureau of Consumer Financial Protection (CFPB) is publishing
for public comment this interim final rule implementing amendments to
the Alternative Mortgage Transaction Parity Act (AMTPA) \1\ made by the
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank
Act).\2\ AMTPA authorizes state-licensed or -chartered housing
creditors (state housing creditors) \3\ to make alternative mortgage
transactions in compliance with federal rather than state law, in order
to establish parity and competitive equality between state and federal
lenders. Effective July 21, 2011, the Dodd-Frank Act amended AMTPA to
transfer rule-writing authority to the CFPB and to narrow the scope of
federal preemption. After July 21, the Dodd-Frank Act provides that
state housing creditors may only make alternative mortgage transactions
under AMTPA if they comply with rules issued by the CFPB, even though
the Dodd-Frank Act does not vest the CFPB with authority to issue such
rules before that date. Accordingly, CFPB interim rules are needed
immediately in order to avoid a suspension in the operation of AMTPA,
which would prevent state housing creditors from making variable rate
loans and other alternative mortgage transactions in states where such
loans are otherwise prohibited by state law.
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\1\ 12 U.S.C. 3801 et seq.
\2\ Public Law 111-203, 124 Stat. 1376 (2010) (hereinafter
``Pub. L. 111-203'').
\3\ Under 12 U.S.C. 3802(2), the term ``housing creditor''
means: (1) A depository institution as defined in 12 U.S.C. 1735f-7
note; (2) a lender approved by the Secretary of Housing and Urban
Development for participation in any mortgage insurance program
under the National Housing Act; (3) a person who regularly makes
loans, credit sales, or advances secured by an interest in
residential real property, dwellings, cooperatives or residential
manufactured homes; and (4) any transferee of a person in the other
three categories.
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The CFPB does not believe that Congress intended its amendments to
AMTPA to create a regulatory gap that would interrupt access to credit.
As discussed below in Section IV, the CFPB finds that there is good
cause to issue this interim final rule without notice and comment and
effective immediately in order to avoid the risk of disrupting mortgage
markets, placing state housing creditors at an inappropriate
competitive disadvantage, and reducing consumers' access to credit. In
particular, the CFPB is concerned that failure to issue an interim
final rule addressing the modification of existing AMTPA loans could
create uncertainty and discourage such modifications. In advance of
issuing this interim final rule, the CFPB issued a public bulletin
alerting state chartered and licensed lenders and other interested
parties that: (1) the Dodd-Frank Act amendments to AMTPA take effect on
July 21, 2011; and (2) the amendments affect what laws apply to
mortgage loans issued by state chartered or licensed lenders after that
date by narrowing the statutory definition of ``alternative mortgage
transaction'' and the scope of preemption under AMTPA.\4\ In addition,
the CFPB reached out to state and federal regulators, trade
associations, and consumer advocates to urge planning for an orderly
transition process. The CFPB will continue its outreach and
consultations while it engages in a notice-and-comment rulemaking to
more fully effectuate the Dodd-Frank Act amendments. The CFPB is
committed to beginning the notice-and-comment rulemaking process as
soon as possible after the comment period closes on the interim final
rule.
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\4\ Available at http://www.consumerfinance.gov/wp-content/uploads/2011/06/Amendments-to-the-Alternative-Mortgage-Transaction-Parity-Act.pdf.
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[[Page 44227]]
II. Summary of the Interim Final Rule
The interim final rule applies to an alternative mortgage
transaction if the creditor received an application for that
transaction on or after July 22, 2011. If the creditor received the
application before July 22, 2011, the alternative mortgage transaction
is generally grandfathered and remains subject to the AMTPA provisions
and regulations in effect at the time of application. Thus, a
consistent set of requirements will apply from application to
completion of an alternative mortgage transaction. The rule also
clarifies that modifications, renewals, or extensions of alternative
mortgage transactions do not result in a loss of AMTPA preemption. This
clarification is intended to facilitate the modification of loans for
distressed borrowers. However, refinancings are treated as new
transactions that must independently meet the requirements for
preemption in effect at the time of refinancing.
Consistent with the Dodd-Frank Act amendments to AMTPA, the interim
final rule's definition of ``alternative mortgage transaction'' is
limited to transactions in which the interest rate or finance charge
may be adjusted or renegotiated. As a result, previously preempted
state consumer protection laws will apply to fixed-rate mortgage loans
with interest-only payment periods or negative amortization features,
fixed-rate balloon loans where the lender does not make a commitment to
renew the loan, and certain other fixed-rate products that previously
qualified as alternative mortgage transactions but no longer qualify
because of the Dodd-Frank Act amendments.
The interim final rule also implements the Dodd-Frank Act's
amendment to the scope of preemption under AMTPA. Specifically, the
rule provides that state laws are preempted only to the extent that
they restrict the ability of a state housing creditor to adjust or
renegotiate an interest rate or finance charge with respect to an
alternative mortgage transaction or the ability of a state housing
creditor to change the amount of interest or finance charges included
in a payment as a result of the adjustment or renegotiation of the rate
or charge. In addition, the interim final rule provides that general
state laws regulating loan features or charges that are not integral to
alternative mortgage transactions are no longer preempted. Accordingly,
state law mortgage disclosure requirements and restrictions on late
fees, rate increases as a result of late payment, prepayment penalties,
interest-only payment periods, and negative amortization are no longer
preempted under AMTPA with respect to alternative mortgage
transactions. Furthermore, state laws prohibiting unfair or deceptive
acts and practices generally are not subject to preemption under AMTPA.
The interim final rule also provides standards governing
alternative mortgage transactions made by state housing creditors
pursuant to AMTPA. The rule generally requires that adjustable rate
mortgages utilize a publicly available index that is beyond the
creditor's control. In the alternative, a closed-end mortgage may use a
formula or schedule identifying the amount and timing of interest rate
increases. Renegotiable rate mortgages (also called renewable balloon-
payment mortgages) must include a written commitment by the lender to
renew the loan, subject to certain limitations. In addition, state
housing creditors (like all other creditors) must comply with certain
federal underwriting requirements.
Initially, these standards are applicable only to state housing
creditors seeking to invoke preemption of certain state laws under
AMTPA. However, because AMTPA is designed to promote parity between
federal and state creditors, the Dodd-Frank Act amendments effectively
require the CFPB to engage in a two-part rulemaking that: (1)
Establishes standards for origination of alternative mortgage
transactions by federally chartered housing creditors (federal housing
creditors) under sources of law other than AMTPA; and then (2)
designates such standards as applicable to state housing creditors that
make alternative mortgage transactions under AMTPA. The interim final
rule therefore relies on the Truth in Lending Act (TILA) \5\ to
establish the minimum federal standards for alternative mortgage
transactions.
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\5\ 15 U.S.C. 1601, et seq.
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The CFPB has provided a one-year extended compliance period (until
July 21, 2012) and a temporary safe harbor for federal housing
creditors and for state housing creditors that do not seek to invoke
AMTPA preemption so that these lenders may continue to originate
variable rate mortgages and other alternative mortgage transactions in
accordance with other sources of law. However, the CFPB expects that
its notice-and-comment rulemaking process to more fully implement the
Dodd-Frank Act amendments will focus on the origination of alternative
mortgage transactions across the broader marketplace, and seeks comment
in anticipation of that rulemaking.
III. Background
A. AMTPA
AMTPA was enacted by Congress in 1982 to stimulate consumer access
to credit and increase parity between state and federal creditors
during an era of unusually high interest rates. In Senate hearings held
in 1981, mortgage bankers testified that laws in 26 states either
barred state housing creditors from originating alternative mortgage
loans or imposed significantly greater restrictions on such loans than
those that applied to federal housing creditors operating under federal
regulations.\6\ As the first section of the Act explained:
\6\ Testimony cited in 67 FR 60542, 60543 (Sept. 26, 2002).
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It is the purpose of [AMTPA] to eliminate the discriminatory
impact that [federal regulations authorizing federally chartered
depository institutions to make, purchase, and enforce alternative
mortgage transactions] have upon nonfederally chartered housing
creditors and provide them with parity with federally chartered
institutions by authorizing all housing creditors to make, purchase,
and enforce alternative mortgage transactions so long as the
transactions are in conformity with the regulations issued by the
Federal agencies.\7\
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\7\ 12 U.S.C. 3801(b).
Accordingly, except in states that opted out of the preemption
regime within three years after enactment,\8\ AMTPA generally
authorized state housing creditors to make, purchase, and enforce
alternative mortgage transactions ``notwithstanding any State
constitution, law, or regulation.'' \9\ However, this statutory
preemption applied only to the extent that state housing creditors made
alternative mortgage transactions in accordance with the regulations
governing similar federal housing creditors. Specifically, AMTPA
provided that state-chartered banks were to comply with regulations
issued by the OCC for national banks. Similarly, state-chartered credit
unions were to comply with regulations issued by the NCUA for Federal
credit unions, while all other state housing creditors were to comply
with regulations issued by the Federal Home Loan Bank Board (FHLBB)
(the predecessor of the OTS).\10\ Furthermore, rather than creating
separate authority for the OCC, NCUA,
[[Page 44228]]
and FHLBB/OTS to issue regulations governing alternative mortgage
transactions under AMTPA itself, AMTPA specifically stated that, in
order to receive preemption, state housing creditors must comply with
regulations issued by these agencies under other statutory
authority.\11\
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\8\ 12 U.S.C. 3804. Six states exercised their opt-out authority
in whole or in part: Arizona, Maine, Massachusetts, New York, South
Carolina, and Wisconsin. See, e.g., Grant S. Nelson & Dale A.
Whitman, Real Estate Finance Law Sec. 11.4 (4th ed. 2001).
\9\ 12 U.S.C. 3803(c).
\10\ 12 U.S.C. 3803(a).
\11\ Id.
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Thus, AMTPA established a sort of ``piggybacking'' regime under
which state housing creditors could choose to comply with federal
regulations applicable to their federally chartered counterparts if
state law would otherwise prohibit or restrict a particular mortgage
transaction. The OCC, NCUA, and FHLBB/OTS were directed to designate
which of their regulations issued under other statutory authority
applied in place of state law to the state housing creditors within
their respective jurisdictions.\12\
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\12\ AMTPA also directed these agencies to determine whether any
of their existing regulations were ``inappropriate'' to apply to
state housing creditors or needed to be conformed for use by such
lenders. Garn-St Germain Depository Institutions Act of 1982, Public
Law 97-320, Sec. 807(b), 96 Stat. 1469 (Oct. 15, 1982) (codified at
12 U.S.C. 3801 note). No guidance was provided as to standards for
appropriateness.
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The NCUA designated all of its regulations concerning mortgage
lending as applicable to state credit unions conducting alternative
mortgage transactions,\13\ while the OCC and the FHLBB/OTS each
designated a narrower set of regulations that addressed the origination
of alternative mortgage loans specifically. The OCC regulations applied
to ``adjustable-rate mortgage loans'' as defined by that agency,\14\
while the FHLBB/OTS rules applied to a broader range of alternative
mortgage transactions as defined under AMTPA.\15\ Although the OCC and
OTS rules differed regarding the scope of transactions subject to AMTPA
and the extent of preemption, they overlapped significantly with regard
to the substantive standards applicable to alternative mortgage
transactions.
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\13\ 47 FR 54,424 (Dec. 3, 1982).
\14\ 47 FR 55,911 (Dec. 14, 1982).
\15\ 47 FR 51,732 (Nov. 17, 1982); see also 48 FR 23,032 (May
23, 1983) (explaining that the earlier rulemaking was designed to
apply federal standards regarding adjustments to rate, payment,
balance, and term, and regarding disclosure, but not general safety
and soundness requirements such as loan-to-value ratios).
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B. The Dodd-Frank Act
The Dodd-Frank Act was enacted on July 21, 2010, in response to
widespread disruption in mortgage markets and the larger economy. A
significant focus of the statute was the enhancement of consumer
protections regarding mortgage lending practices that contributed to
the crisis. In addition to consolidating in the CFPB certain consumer
financial protection authorities that had previously been spread across
seven different federal agencies, the Dodd-Frank Act amends existing
federal consumer financial laws and establishes new standards that
phase in over time concerning a wide range of mortgage lending
practices, including compensation for mortgage originators, assessments
of consumers' ability to repay, and mortgage servicing.
The Dodd-Frank Act makes three significant amendments with regard
to AMTPA, all of which are effective on the designated transfer date
(July 21, 2011).\16\ First, Section 1083 of the Dodd-Frank Act narrows
the definition of ``alternative mortgage transactions'' that are
eligible for preemption of state law under AMTPA. The revised
definition in 12 U.S.C. 3802(1) continues to include loans ``in which
the interest rate or finance charge may be adjusted or renegotiated,''
but deletes additional language that specifically included within the
prior definition: (1) Fixed-rate mortgage loans in which the debt
matures before the end of the loan's amortization schedule (a type of
balloon loan); and (2) mortgage loans ``involving any similar type of
rate, method of determining return, term, repayment, or other variation
not common to traditional fixed rate, fixed term transactions,''
including but not limited to shared equity and shared appreciation
transactions.
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\16\ 75 FR 57252 (Sept. 20, 2010).
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The result of this amendment is that AMTPA no longer preempts some
state laws governing these types of loans, although they may be
preempted by other statutes for some creditors. For example, prior to
the Dodd-Frank Act, a fixed-rate mortgage loan with an interest-only
payment period would have met the definition of an ``alternative
mortgage transaction'' because it involved a payment variation ``not
common to traditional fixed rate, fixed term transactions.'' If a state
housing creditor made such an alternative mortgage in compliance with
the applicable federal regulations, AMTPA preempted any conflicting
state law, thereby permitting the housing creditor to offer and
complete the transaction. Under the Dodd-Frank Act, however, only loans
``in which the interest rate or finance charge may be adjusted or
renegotiated'' are eligible for AMTPA preemption. Because a fixed-rate
mortgage loan with an interest-only payment period does not meet this
definition, AMTPA will not preempt state laws governing such products
as of July 22, 2011.
Second, Section 1083 narrows the types of state laws that are
preempted under AMTPA. 12 U.S.C. 3803(c) originally provided that a
state housing creditor could make alternative mortgage transactions
``notwithstanding any State constitution, law, or regulation.'' Section
1083 amended that language to provide that, after July 21, 2011, a
state housing creditor may make such transactions ``notwithstanding any
State constitution, law, or regulation that prohibits an alternative
mortgage transaction.'' \17\ Section 1083 further amended AMTPA to
provide that ``a State constitution, law, or regulation that prohibits
an alternative mortgage transaction does not include any State
constitution, law, or regulation that regulates mortgage transactions
generally, including any restriction on prepayment penalties or late
charges.'' \18\ Thus, if a state law prohibited certain conduct with
respect to both alternative mortgage transactions and other mortgage
transactions, that law generally would not be preempted with respect to
alternative mortgage transactions.
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\17\ Public Law 111-203, Sec. 1083(a)(2)(B) (emphasis added).
\18\ Id. (emphasis added).
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Third, Sections 1061 and 1083 of the Dodd-Frank Act transferred,
among other things, rule-writing authority under AMTPA from the OCC,
NCUA, and OTS to the CFPB.\19\ In doing so, Congress replicated AMTPA's
original ``piggybacking'' scheme. Accordingly, after July 21, 2011,
alternative mortgage transactions made by state housing creditors must
comply with regulations issued by the CFPB for ``federally chartered
housing creditors under provisions of law other than [12 U.S.C.
3803].'' \20\ The rulemaking required under Section 1083 therefore
effectively requires two components: one establishing standards for
federal housing creditors to follow in originating alternative mortgage
transactions under other federal consumer financial laws administered
by the CFPB; and the other designating those standards as applicable to
state housing creditors that seek to invoke federal preemption under
AMTPA.
[[Page 44229]]
Accordingly, the regulations required by Section 1083 impact the
mortgage market as a whole, not just a subset of state lenders.\21\
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\19\ Public Law 111-203, Sec. 1061 (transferring, among other
things, the ``consumer financial protection functions'' of the
federal prudential regulators to the CFPB as of the designated
transfer date); see also Sec. 1002(14) (defining ``Federal consumer
financial law'' to include the ``enumerated consumer laws''); id.
Sec. 1002(12) (defining ``enumerated consumer laws'' to include
AMTPA and TILA); id. Sec. 1083 (amending 12 U.S.C. 3803).
\20\ Public Law 111-203, Sec. 1083(a)(2)(A)(iv).
\21\ However, as discussed above, federal housing creditors and
any state housing creditors that do not seek AMTPA preemption are
not required to comply with the CFPB's regulations until July 22,
2012. Furthermore, Sec. 1004.4(d) of the interim final rule
provides that these creditors may continue to make variable rate
mortgages and other alternative mortgage transactions consistent
with other applicable provisions of law.
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As a general matter, the amendments to AMTPA do not affect
transactions entered into on or before July 21, 2011.\22\ After July
21, however, AMTPA will preempt state laws that prohibit new
alternative mortgage transactions only if: (1) Such transactions meet
the revised definition of ``alternative mortgage transaction;'' (2) the
state law in questions falls within the narrowed scope of AMTPA
preemption; and (3) the creditor complies with regulations issued by
the CFPB.\23\ Thus, in order for AMTPA to continue facilitating access
to credit in states in which alternative mortgage transactions are
prohibited by state law, the CFPB must issue regulations governing such
transactions. Despite this requirement, however, the Dodd-Frank Act did
not vest the CFPB with authority to issue such regulations until after
July 21, 2011.\24\ Accordingly, absent adoption of this interim final
rule on July 22, 2011, state housing creditors could no longer invoke
AMTPA preemption because there would be no CFPB regulations governing
alternative mortgage transactions.
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\22\ Public Law 111-203, Sec. 1083(a)(2)(A)(i). As discussed
below with respect to Sec. 1004.1, an alternative mortgage
transaction is made for purposes of this interim final rule on the
date the creditor receives the application. Thus, the amended AMTPA
preemption standards do not apply to an alternative mortgage
transaction if the application was received on or before July 21,
2011, even if the transaction is completed after that date.
\23\ Public Law 111-203, Sec. 1083(a)(2)(A)(iv).
\24\ Public Law 111-203, Sec. 1061 (transferring, among other
things, the ``consumer financial protection functions'' of the
federal prudential regulators to the CFPB as of the designated
transfer date); Sec. 1083(b) (transferring AMTPA authority to the
CFPB on the designated transfer date); see also id. Sec.
1083(a)(2)(C) (directing the CFPB to issue AMTPA regulations ``after
the designated transfer date'').
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IV. Legal Authority
A. Rulemaking Authority
The CFPB is issuing this interim final rule pursuant to its
authority under AMTPA, TILA, and the Dodd-Frank Act. Effective July 21,
2011, Section 1061 of the Dodd-Frank Act transfers to the CFPB the
``consumer financial protection functions'' previously vested in
certain other federal agencies. The term ``consumer financial
protection function'' is defined to include ``all authority to
prescribe rules or issue orders or guidelines pursuant to any Federal
consumer financial law, including performing appropriate functions to
promulgate and review such rules, orders, and guidelines.'' \25\ AMTPA
and TILA are Federal consumer financial laws.\26\ Accordingly,
effective July 21, 2011, the authority of the OCC, NCUA, and OTS to
issue regulations pursuant to AMTPA and the authority of the Board of
Governors of the Federal Reserve System (Federal Reserve Board) to
issue regulations pursuant to TILA transfer to the CFPB.\27\
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\25\ Public Law 111-203, Sec. 1061(a)(1). Effective on the
designated transfer date, the CFPB is also granted ``all powers and
duties'' vested in each of the federal agencies, relating to the
consumer financial protection functions, on the day before the
designated transfer date.
\26\ Public Law 111-203, Sec. 1002(14) (defining ``Federal
consumer financial law'' to include the ``enumerated consumer
laws''); id. Sec. 1002(12) (defining ``enumerated consumer laws''
to include AMTPA and TILA).
\27\ Section 1066 of the Dodd-Frank Act grants the Secretary of
the Treasury interim authority to perform certain functions of the
CFPB. Pursuant to that authority, Treasury is publishing this
interim final rule on behalf of the CFPB.
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Section 1083 of the Dodd-Frank Act directs the CFPB to issue
regulations implementing the amended AMTPA ``after the designated
transfer date.'' \28\ Specifically, the CFPB is directed to: (1) Review
the regulations identified by the OCC and NCUA pursuant to AMTPA; (2)
determine whether those regulations are fair, not deceptive, and
otherwise meet the objectives of title X of the Dodd-Frank Act;\29\ and
(3) promulgate regulations governing alternative mortgage transactions
that are eligible for AMTPA preemption.\30\ In addition, AMTPA provides
that the statutory definition of ``alternative mortgage transaction''
in 12 U.S.C. 3802(1) is to be further ``described and defined by
applicable regulation.'' \31\
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\28\ Public Law 111-203, Sec. 1083(a)(2)(C) (creating a new 12
U.S.C. 3803(d)).
\29\ As discussed below with respect to Sec. 1004.4, the CFPB
believes that it is consistent with the intent and purpose of
Section 1083 to interpret the requirement that the CFPB determine
whether the OCC and NCUA regulations are unfair or deceptive as
requiring the CFPB to determine whether those regulations are
effective in preventing unfair or deceptive acts or practices. In
addition, the CFPB believes that it is appropriate to consider the
OTS regulations governing alternative mortgage transactions when
making this determination.
\30\ Id.
\31\ Furthermore, 12 U.S.C. 3801 note, which was enacted as part
of AMTPA in 1982, directs the OCC, NCUA, and FHLBB to identify,
describe, and publish existing regulations that should or should not
apply to alternative mortgage transactions and to make any necessary
changes to address alternative mortgage transactions. See Public Law
97-320 (1982). The Dodd-Frank Act does not remove this authority,
which transfers to the CFPB pursuant to Section 1061 of the Dodd-
Frank Act.
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As amended, AMTPA states that, in order to receive preemption,
state housing creditors must comply with regulations issued by the CFPB
with respect to federally chartered housing creditors ``under
provisions of law other than this section [12 U.S.C. 3803].'' \32\ As
noted above, the Federal Reserve Board's rulemaking authority pursuant
to TILA transferred to the CFPB under Section 1061 on the designated
transfer date. Accordingly, in addition to its authority under AMTPA,
the CFPB is using its rulemaking authority under TILA to issue this
interim final rule.
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\32\ Public Law 111-203, Sec. 1083(a)(2)(A)(iv) (emphasis
added).
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As amended by the Dodd-Frank Act, TILA directs the CFPB to
``prescribe regulations to carry out the purposes of [TILA].''\33\ In
addition, the CFPB is generally authorized to issue regulations that
contain such classifications, differentiations, or other provisions, or
that provide for such adjustments and exceptions for any class of
transactions, that in the CFPB's judgment are necessary or proper to
effectuate the purpose of TILA, facilitate compliance with TILA, or
prevent circumvention or evasion of TILA.\34\ In the past, the Federal
Reserve Board has used this TILA authority to issue extensive rules
that promote the informed use of credit by mandating disclosures and
substantively regulating certain practices regarding mortgages and home
equity lines of credit.\35\ The CFPB also has the authority under TILA
(as amended by Section 1405(a) of the Dodd-Frank Act) to issue
regulations that it ``finds to be * * * necessary or proper to ensure
that responsible, affordable mortgage credit remains available to
consumers in a manner consistent with'' Sections 129B and 129C of TILA,
which are new sections added by the Dodd-Frank Act to regulate various
mortgage originator practices and the evaluation of borrowers' ability
to repay their mortgages.\36\
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\33\ Id. Sec. 1100A(2); 15 U.S.C. 1604(a).
\34\ Id.
\35\ See Regulation Z, 12 CFR Part 226.
\36\ Public Law 111-203, Sec. 1405(a); see also 15 U.S.C.
1639b, 1639c.
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B. Authority To Issue an Interim Final Rule Without Prior Notice and
Comment
The Administrative Procedure Act (APA) \37\ generally requires
public notice and an opportunity to comment before promulgation of
substantive regulations.\38\ It also generally requires that a final
regulation be published not less than 30 days prior to its effective
[[Page 44230]]
date.\39\ However, the APA provides an exception to notice-and-comment
procedures where an agency for good cause finds that such procedures
are impracticable, unnecessary, or contrary to the public interest.\40\
The APA also provides a good cause exception to the effective date
requirement.\41\ The CFPB finds that there is good cause to conclude
that providing notice and opportunity for comment would be
impracticable and contrary to the public interest under these
circumstances. The CFPB also finds that there is good cause to issue
this rule effective immediately; however, the CFPB is making compliance
with the requirements in Sec. 1004.4 optional for certain creditors
until July 22, 2012.
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\37\ 5 U.S.C. 551 et seq.
\38\ 5 U.S.C. 553(b), (c).
\39\ 5 U.S.C. 553(d).
\40\ 5 U.S.C. 553(b)(B).
\41\ 5 U.S.C. 553(d)(3).
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The CFPB's findings are based on the following factors. As
discussed above, beginning on July 22, 2011, state housing creditors
may only make new alternative mortgage transactions pursuant to AMTPA
if they comply with regulations issued by the CFPB. However, the CFPB
was unable to issue a notice of proposed rulemaking under AMTPA or TILA
prior to July 21, 2011, because rule-writing authority under each of
those statutes was vested in other agencies and did not transfer to the
CFPB until that date. As a result, the CFPB finds that it would have
been impracticable to engage in notice-and-comment rulemaking prior to
July 21, 2011.
Furthermore, the CFPB's failure to issue an interim final rule
without advance notice and comment that is effective immediately would
be contrary to the public interest. Without CFPB rules in place by July
22, 2011, a regulatory gap would occur, in which state housing
creditors would not be able to continue issuing variable rate and other
alternative mortgage loans pursuant to AMTPA in states that prohibit
such transactions, thus denying consumers access to that form of
credit.\42\ In addition, the CFPB is concerned that failure to issue an
interim final rule addressing the modification of existing AMTPA loans
could create uncertainty and discourage such modifications.
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\42\ The CFPB notes that the amendments to AMTPA and this
interim final rule do not affect preemption of state law under other
statutes.
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Although originations of variable rate alternative mortgage loans
have slowed significantly in recent years, they still constitute
approximately 12 percent of mortgage originations and are experiencing
modest growth.\43\ In addition, while balloon mortgage loans represent
a very small percentage of total originations, they can be important
products in certain markets served by rural and community banks. Absent
this interim final rule, state housing creditors would no longer be
able to offer--and consumers would no longer be able to obtain--these
products to the extent they are inconsistent with state law.
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\43\ Federal Reserve Bank of New York, Current Issues in
Economics and Finance (Dec. 2010); Inside Mortgage Finance data; see
also Tara Siegel Bernard, Borrowers Wade Back Into Adjustable-Rate
Mortgages, N.Y. Times, June 21, 2011 (available at http://bucks.blogs.nytimes.com/2011/06/21/borrowers-wade-back-into-adjustable-rate-mortgages/).
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Furthermore, as discussed below with respect to Sec. 1004.1, this
interim final rule clarifies that modifying an alternative mortgage
transaction made on or before July 21, 2011 does not result in a loss
of AMTPA preemption. Without this guidance, state lenders would likely
reduce the availability of modifications for fear of losing AMTPA
preemption.
No current data sources track the amount of lending activity that
would be impermissible but for AMTPA preemption. However, even with
regard to basic variable rate mortgages, the CFPB's initial research
indicates that a significant number of states impose restrictions on
the size, frequency, or timing of interest rate and payment adjustments
and renegotiations.\44\ Similarly, several states impose substantive
restrictions on the ability of housing creditors to offer mortgage
loans with a balloon payment feature.\45\
[[Page 44231]]
In some cases, these state law requirements are stricter than--or
materially different from--the restrictions on federal housing
creditors that state housing creditors were entitled to follow until
July 22, 2011.
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\44\ See, e.g., Cal. Civ. Code Sec. 1916.5 (2004) (requiring
certain provisions for any variable rate loan, including caps on
interest rate increases and a promise that the rate of interest
shall change no more than twice a year); Sec. 1916.7 (1981)
(requiring certain provisions for adjustable-rate mortgages,
including minimum term and amortization periods, limitations on
changes in interest and monthly payments, limitations on which
indices lenders may use to determine interest rate changes, and
requirements relating to extending the loan under certain
circumstances); Sec. 1916.8 (1980) (defining a renegotiable rate
mortgage loan as a loan issued for a term of three, four, or five
years, automatically renewable at equal intervals, repayable in
equal monthly installments of principal and interest, in an amount
at least sufficient to amortize the loan over the remaining term of
the mortgage, and setting requirements for interest rate changes and
disclosures); Sec. 1920 (1997) (providing requirements for any
mortgage instrument, including standards for the adjustment of
interest rates and monthly payments); Cal. Fin. Code Sec. 7504
(1984) (allowing an association to adjust the interest rate,
payment, balance, or term-to-maturity on any loan secured by real
property as authorized by the loan contract; requiring that such
adjustments be subject to certain limitations including loan term
limits, loan-to-value ratios, and interest rate indices, and
allowing loans to be fully amortized, partially amortized,
nonamortized, a reverse annuity mortgage, or an open end line of
credit loan); Ga. Code Sec. 7-6A-5 (2004) (subjecting high-cost
home loans to certain limitations, including balloon payments and
interest rate increases, and requiring creditors to allow the
borrower to modify, renew, extend, or amend the loan at no cost);
Ind. Code Sec. 28-15-11-14 (1997) (setting requirements for
adjustable mortgage loans, including limitations on adjustments to
the principal loan balance, interest rate adjustments, and fees);
Kan. Stat. Sec. 16-207 (1999) (setting interest rate limitations on
any loan, including all first mortgage loans and contracts for deed
to real estate); Ky. Rev. Stat. Sec. 360.150 (1984) (subjecting all
adjustable rate mortgages to certain provisions, including
limitations on interest rate changes and installment payments and
disclosures); La. Rev. Stat. Sec. 9:3504 (2004) (authorizing
adjustable rate mortgages on certain terms relating to interest rate
indices, the frequency of interest rate adjustments, and installment
adjustments, and exempting certain types of adjustable rate
mortgages from the applications of laws on usury and interest upon
interest); N.J. Stat. Sec. 46:10B-40 (2008) (providing for a
mandatory three-year extension period during which the interest rate
on an introductory rate mortgage shall not increase for certain
eligible borrowers who do not have sufficient monthly income to pay
monthly payments that will apply after the interest rate resets);
N.M. Stat. 56-1-16 (1983) (setting requirements for mobile home
loans, including that adjustments in the rate shall be tied to a
specific index, limitations on frequency and amount of rate
adjustments, and allowance of changes in installment payments due to
rate adjustments); 41 Pa. Stat. Sec. 301 (2008) (setting caps on
interest rates and limitations on frequency and amount of rate
adjustments for residential mortgages); Tex. Fin. Code Sec. 347.102
(1997) (authorizing interest rate adjustments provided that the
lender ties the rate changes to an approved index according to the
statute). This footnote is included for illustrative purposes and
does not constitute a determination by the CFPB that specific state
laws are or are not preempted by the interim final rule.
\45\ See, e.g., Cal. Bus. & Prof. Sec. 10244.1 (1973)
(restricting payments greater than twice the amount of the smallest
installment for loans with a term of six years or less); Colo. Rev.
Stat. Sec. 5-3.5-102 (2003) (restricting payments greater than
twice the average of earlier regularly scheduled payments unless
such balloon payment becomes due and payable not less than 120
months after the date of execution of the loan); DC Code Sec. 26-
1152.13 (2002) (restricting scheduled payment more than twice as
large as the average of earlier scheduled monthly payments unless
the balloon payment becomes due and payable not less than 7 years
after the date of the loan closing); Ga. Code, Sec. 7-6A-5(2)
(2002) (prohibiting scheduled payments more than twice as large as
earlier payments in certain high cost home loans); Ill. Admin. Code
tit. 38, Sec. 1050.1272 (2005) (restricting certain balloon
payments unless such balloon payment becomes due and payable at
least 15 years after the loan's origination); Ind. Code Sec. 24-9-
4-3 (2005) (restricting payments greater than twice the average of
earlier regularly scheduled payments for certain high cost loans
unless such balloon payment becomes due and payable not less than
120 months after the date of execution of the loan); Ky. Rev. Stat.
Ann. Sec. 360.100 (2010) (restricting payments greater than twice
the amount of the smallest installment for certain high cost loans);
N.C. Gen. Stat. Sec. 24-1.1A (1973) (restricting certain affiliates
from providing balloon payments on home loans in excess of six
months); 7 Pa. Cons. Stat. Ann. Sec. 6020-155 (1995) (prohibiting
balloon loans for financing the purchase of an owner occupied one or
two family residential property); Tex. Fin. Code Ann. Sec. 343.202
(2006) (restricting scheduled payments more than twice as large as
earlier payments in certain high cost home loans unless the balloon
payment becomes due not less than 60 months after the date of the
loan); W. Va. Code Sec. 46A-4-110a (1996) (prohibiting balloon
payments unless preempted by federal law). This footnote is included
for illustrative purposes and does not constitute a determination by
the CFPB that specific state laws are or are not preempted by the
interim final rule.
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A curtailment in variable and adjustable rate loans would be
harmful to consumers for whom these products can serve an important
purpose. For example, they can result in lower interest rates for
borrowers who plan to sell their homes or refinance within a few years
or are otherwise able and willing to assume associated interest rate
risk. These products may also enable some creditworthy consumers who
otherwise could not qualify for a fixed-rate loan to obtain a mortgage
loan. Furthermore, as noted above, balloon-payment mortgage loans can
be an important product in certain markets.
For these reasons, the CFPB finds that the failure to adopt an
interim final rule would create a risk of substantially disrupting
mortgage markets, placing state housing creditors at an inappropriate
competitive disadvantage, and reducing access to credit for consumers.
For many consumers and state lenders, the resulting curtailment of
alternative mortgages would be sudden, unexpected, and disruptive. This
outcome would conflict not only with the purpose of AMTPA but also with
a fundamental purpose of the Dodd-Frank Act, which is to ``ensur[e]
that all consumers have access to markets for consumer financial
products and services and that [such markets] are fair, transparent,
and competitive.'' \46\ The CFPB does not believe that Congress
intended such a result and finds good cause to issue the interim final
rule without notice-and-comment procedures and effective immediately as
a temporary measure pending the completion of a notice-and-comment
rulemaking proceeding.
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\46\ Public Law 111-203 Sec. 1021(a).
---------------------------------------------------------------------------
In order to mitigate disruptions resulting from the implementation
of the amendments to AMTPA, the CFPB issued a public bulletin in
advance of this interim final rule alerting state chartered and
licensed lenders and other interested parties that: (1) The Dodd-Frank
Act amendments to AMTPA take effect on July 21, 2011; and (2) the
amendments affect what laws apply to mortgage loans issued by state
chartered or licensed lenders after that date by narrowing the
statutory definition of ``alternative mortgage transaction'' and the
scope of preemption under AMTPA.\47\ In addition, the CFPB reached out
to state and federal regulators, trade associations, and consumer
advocates to urge planning for an orderly transition. The CFPB will
continue its outreach and consultations while it engages in a notice-
and-comment rulemaking to more fully effectuate the Dodd-Frank Act
amendments. The CFPB is committed to beginning the notice-and-comment
rulemaking process as soon as possible after the comment period closes
on the interim final rule.
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\47\ Available at http://www.consumerfinance.gov/wp-content/uploads/2011/06/Amendments-to-the-Alternative-Mortgage-Transaction-Parity-Act.pdf.
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V. Request for Comment
Requests for comment on the interim final rule and related matters
are listed in the section-by-section analysis below. In anticipation of
its upcoming notice-and-comment rulemaking proceeding, the CFPB also
seeks comment on a wide range of issues relating to AMTPA, state
regulation of alternative mortgage transactions, and regulations that
have previously been designated by the OCC, NCUA, and OTS/FHLBB as
applicable to state housing creditors when conducting alternative
mortgage transactions.
State Housing Creditors' Reliance on AMTPA
1. What categories of mortgage loans were being made in reliance on
AMTPA preemption prior to the Dodd-Frank Act (for example, adjustable
rate mortgages, reverse mortgages, balloon loans)? What was the volume
of these types of mortgage loans? Were these types of loans more
prevalent in particular geographic markets (such as rural areas)? If
so, which geographic markets? What types of entities made these loans?
2. To what extent did AMTPA preemption enable state housing
creditors to make such loans? Do any state laws prohibit state housing
creditors from making such loans? If so, please describe the background
and purpose of the law and its effect on the state housing creditors'
ability to make the type of loan.
3. What categories of mortgage loans are currently being made in
reliance on AMTPA preemption under the interim final rule? What is the
volume of these types of mortgage loans? Are these types of loans more
prevalent in particular geographic locations? If so, which geographic
markets? What types of entities are making these loans?
4. How many balloon loans are community and rural banks originating
today to hold in portfolio? Please describe the terms of the balloon
loans, including whether a written or oral commitment is made to renew
the loan at expiration.
5. What role is AMTPA playing with respect to loan modifications
and refinancings?
State Laws Regulating Alternative Mortgage Transactions
1. How are states currently regulating alternative mortgage
transactions? Which state laws currently prohibit or restrict such
transactions and how do they do so? How burdensome are any
restrictions? Are these restrictions applicable to mortgage
transactions generally?
2. How do state laws that regulate alternative mortgage
transactions help protect consumers?
3. How have state mortgage laws changed since AMTPA was enacted,
and what are the reasons for those changes?
Federal Fegulation of Alternative Mortgage Transactions
1. Should the requirements set forth in Sec. 1004.4(a) through (c)
of this interim final rule be retained? Are any modifications or
additional requirements needed? To what extent do the requirements in
Sec. 1004.4(a) through (c) promote parity between federal and state
housing creditors? To what extent do these requirements affect the cost
of credit, consumers' access to credit, and consumer protection? To
what extent do these requirements affect the burden on lenders?
2. In this interim final rule, the CFPB has used its authority
under TILA to establish standards for alternative mortgage
transactions. The CFPB solicits comment on whether it should utilize
other authorities for establishing such standards in a permanent final
rule.
VI. Section-by-Section Analysis
Section 1004.1 Authority, Purpose, Scope
This section addresses the authority, purpose, and scope of the new
Part 1004, which the CFPB is issuing to implement AMTPA, as amended by
Section 1083 of the Dodd-Frank Act.
(a) Authority
Section 1004.1(a) explains that Part 1004 implements AMTPA as
amended by Section 1083 of the Dodd-Frank Act, pursuant to the
rulemaking authority transferred to the CFPB from various transferor
agencies under Section 1061
[[Page 44232]]
of the Dodd-Frank Act. This section also explains that Sec. 1004.4 is
issued based on the CFPB's authority under TILA.
(b) Purpose
Consistent with AMTPA, TILA, and the Dodd-Frank Act, Sec.
1004.1(b) states that the purpose of Part 1004 is to balance: (1)
Access to responsible credit and enhanced parity between state and
federal housing creditors regarding the making, purchase, and
enforcement of alternative mortgage transactions, with (2) consumer
protection and the interests of the states in regulating mortgage
transactions generally. The purpose of AMTPA (as defined in 12 U.S.C.
3801) is to provide parity between federal and state housing creditors
``by authorizing all housing creditors to make, purchase, and enforce
alternative mortgage transactions so long as the transactions are in
conformity with the regulations issued by the Federal agencies.''
However, as described above, the level of parity provided by AMTPA has
been modified by the Dodd-Frank Act's amendments to the definition of
``alternative mortgage transaction'' and the scope of preemption under
AMTPA, which narrow the range of transactions eligible for AMTPA
preemption and restore the effect of certain state mortgage laws.
Section 1004.1(b) reflects this modification as well as the CFPB's use
of its consumer protection authority under TILA.
(c) Scope
Section 1004.1(c) states that Part 1004 applies to an alternative
mortgage transaction if the creditor received an application for that
transaction on or after July 22, 2011. This section further states that
Part 1004 does not apply to a transaction if the creditor received the
application for that transaction before July 22, 2011.
Section 1083(c) of the Dodd-Frank Act provides that its amendments
to AMTPA do not affect ``any transaction covered by the Alternative
Mortgage Transaction Parity Act of 1982 (12 U.S.C. 3801 et seq.) and
entered into on or before the designated transfer date.'' Accordingly,
the CFPB must determine when a transaction is ``entered into'' for
purposes of determining which preemption standards and rules--pre-Dodd-
Frank Act amendments or post-Dodd-Frank Act amendments--are applicable.
Rather than a single event, a mortgage transaction is a series of steps
progressing from application to consummation to servicing. Each of
these steps is subject to a variety of state and federal consumer
protection statutes, many of which govern activities that occur prior
to consummation (such as disclosure and underwriting). In order to
establish a workable regulatory regime, there must be a readily
identifiable date and a single set of rules to govern the entire
transaction. In light of these considerations, the CFPB has interpreted
an ``alternative mortgage transaction'' as being ``entered into'' on
the date the application is received by the creditor. This
interpretation seeks to ensure that the entire transaction is governed
by a consistent set of rules. For example, if an application for a
mortgage transaction is received on July 21, 2011, but is not completed
on August 21, 2011, AMTPA preemption is determined under the regime in
effect prior to the Dodd-Frank Act amendments. However, if the
application is received on July 22, 2011, AMTPA preemption is
determined under the regime established by the Dodd-Frank Act
amendments and this interim final rule.
Comment 1(c)-1 clarifies that, if an application for a transaction
is received by a creditor prior to July 22, 2011, whether 12 U.S.C.
3803(c) preempts state law with respect to that transaction depends on
whether: (1) The transaction was an alternative mortgage transaction as
defined by the version of 12 U.S.C. 3802(1) in effect at the time of
application; and (2) the state housing creditor complied with
applicable federal regulations issued by the OCC, NCUA, or OTS/FHLBB in
effect at the time of application.
Comment 1(c)-2 clarifies that, if 12 U.S.C. 3803(c) or this interim
final rule (as applicable) preempted state law at the time an
application was received, certain subsequent actions with respect to
that transaction are entitled to the same degree of preemption. This
comment applies regardless of whether the application was received
before, on, or after July 22, 2011. First, if state law was preempted
at the time of application, state law is also preempted with respect to
the subsequent consummation, completion, purchase, or enforcement of
the transaction by a state housing creditor. This interpretation is
consistent with 12 U.S.C. 3801(b) and 3803(a), which address state
housing creditors' ability to ``make, purchase, or enforce''
alternative mortgage transactions.
Second, if state law was preempted at the time of application,
state law is also preempted with respect to the subsequent
modification, renewal, or extension of the transaction. The CFPB
interprets such activity as constituting a continuation of the same
``transaction'' for purposes of AMTPA. For instance, if a distressed
borrower with a variable rate mortgage loan that is currently subject
to preemption under AMTPA would be able to avoid foreclosure through a
modification, the CFPB believes that AMTPA should continue to preempt
state law that would otherwise prohibit the modification. However, if
state law was preempted at the time of application and the transaction
is later satisfied and replaced by another transaction (such as through
a refinancing), the second transaction must independently meet the
requirements for preemption in effect at the time the second
transaction is made under 12 U.S.C. 3803(c) or this interim final rule
(as applicable).
This interpretation is generally similar to the statutory language
that governed the transition period with regard to states that decided
to opt-out of the statutory preemption regime when AMTPA was first
enacted.\48\ However, the interim final rule treats refinancings
differently than modifications, extensions, and renewals because, as
provided in 12 CFR 226.20, a refinancing constitutes a new transaction
that satisfies and replaces an existing obligation. Under these
circumstances, the CFPB believes that the new transaction should be
evaluated independently with respect to AMTPA preemption. The CFPB
seeks comment on these interpretations, particularly as to what types
of modifications might otherwise be prohibited under state law and
whether additional protections are needed with respect to
modifications.
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\48\ 12 U.S.C. 3804(a)(2) (providing that ``any renewal,
extension, refinancing, or other modification of an alternative
mortgage transaction that was entered into during the preemption
period'' would also be afforded AMTPA preemption).
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Section 1004.2 Definitions
(a) Alternative Mortgage Transaction
The interim final rule defines ``alternative mortgage transaction''
to include a loan, credit sale, or account: (1) That is secured by an
interest in a residential structure that contains one to four units,
whether or not the structure is attached to real property, including an
individual condominium unit, cooperative unit, mobile home, and
trailer, if it is used as a residence; (2) that is made primarily for
personal, family, or household purposes; and (3) in which the interest
rate or finance charge may be adjusted or renegotiated.
Comment 2(a)-1 clarifies that home equity lines of credit and
subordinate lien mortgages are alternative mortgage transactions as
long as they meet the definition in Sec. 1004.2(a). Comment 2(a)-
[[Page 44233]]
2, discussed in more detail below, provides specific examples of
transactions that are alternative mortgage transactions, while comment
2(a)-3 provides examples of transactions that are not alternative
mortgage transactions.
The first element of the definition of alternative mortgage
transaction is derived from AMTPA as well as the definition of a
``dwelling'' in 12 CFR 226.2(a)(19). The second element of the
definition requires that an alternative mortgage transaction involve an
extension of consumer credit. AMTPA's findings indicate that Congress
was concerned with the availability of housing credit to consumers.\49\
In addition, AMTPA applies to transactions secured by residential real
property or a dwelling (including stock allocated to a dwelling in a
residential cooperative housing corporation or a residential
manufactured home). While some consumers may use their residence as
security for credit for non-consumer purposes (such as to finance a
business), AMTPA's use of the terms ``residential'' property and
``dwelling'' indicate that it is intended to apply to alternative
mortgage transactions involving consumer credit. In addition, requiring
alternative mortgage transactions to be consumer credit aligns the
AMTPA regulations with the CFPB's general scope of authority under
TILA, which also serves as authority for this interim final rule.
However, the CFPB seeks comment on this issue.
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\49\ See 12 U.S.C. 3801(a)(1) (finding that ``increasingly
volatile and dynamic changes in interest rates have seriously
impaired the ability of housing creditors to provide consumers with
fixed-term, fixed-rate credit secured by interests in real property,
cooperative housing, manufactured homes, and other dwellings''
(emphasis added)).
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The third element of the definition requires that the interest rate
or finance charge for the transaction may be adjusted or renegotiated.
As described above, Section 1083 narrows AMTPA's definition of an
``alternative mortgage transaction'' so that it refers only to loans
and credit sales ``in which the interest rate or finance charge may be
adjusted or renegotiated, [as] described and defined by applicable
regulation.'' As noted above, Section 1083 deletes language that
specifically included within the definition of alternative mortgage
transaction: (1) Fixed-rate balloon loans ``which implicitly permit[]
rate adjustments'' because the debt matures before the end of the
loan's amortization schedule; and (2) mortgage loans ``involving any
similar type of rate, method of determining return, term, repayment, or
other variation not common to traditional fixed rate, fixed term
transactions,'' including but not limited to shared equity and shared
appreciation transactions.
The interim final rule construes the amendment to exclude only
those mortgages that do not involve an adjustable or renegotiable rate
or finance charge. For example, a fixed-rate loan that permits the
consumer to make interest-only payments for a period of time does not
involve an adjustment to or renegotiation of the interest rate or
finance charge. Previously, such transactions were considered
alternative mortgage transactions under the third prong of the original
AMTPA definition since an interest-only feature was ``not common to
traditional fixed rate, fixed term transactions.'' \50\ Under the
interim final rule, however, such transactions are no longer
alternative mortgage transactions. Yet transactions that are
specifically mentioned in the second and third prongs of the original
AMTPA definition, such as shared-equity/shared-appreciation
transactions and renewable balloon-payment transactions (which involve
renegotiation of or adjustments to the rate or finance charge), do
continue to be alternative mortgage transactions under the interim
final rule. Furthermore, under the interim final rule, a mortgage with
both an adjustable or renegotiable rate or finance charge and one or
more other ``nontraditional'' features continues to be an ``alternative
mortgage transaction.'' (However, as discussed below with respect to
Sec. 1004.3, the scope of AMTPA preemption has also been narrowed such
that alternative mortgage transactions with certain nontraditional
features like interest-only payments or negative amortization are
subject to greater state regulation under the amended statute.)
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\50\ See OTS Letter P-2003-9 (Dec. 2, 2003).
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The CFPB recognizes that the amendments to AMTPA's definition could
be interpreted differently. Specifically, by eliminating references to
balloon payment loans and shared-equity/shared-appreciation mortgages,
the amendment could be interpreted as excluding all such transactions
from the definition of an alternative mortgage transaction. In
addition, the amendment removed a provision that defined alternative
mortgage transactions as loans with variations to the rate, method of
determining return, term, repayment, or other variations not common to
traditional fixed-rate, fixed-term transactions. However, rather than
attempting to identify each and every type of loan that could
potentially fall under the deleted portions of the definition, the CFPB
believes that, for purposes of this interim final rule, the best
approach is to focus on whether particular types of transactions fit
within the remaining statutory definition.
As discussed further below, the Dodd-Frank Act's amendments to both
the definition of ``alternative mortgage transaction'' and to the scope
of preemption under AMTPA are subject to different interpretations and
are interrelated. The CFPB seeks public comment about how best to
effectuate congressional intent through implementing regulations that
will protect consumers, promote parity, and be readily understandable
and applicable by creditors, supervising agencies, and others. The CFPB
also requests comment on whether any specific types of mortgages should
be excluded from the definition of an alternative mortgage transaction.
Mortgages with adjustable rates or finance charges. Comment 2(a)-2
provides specific examples of transactions that are alternative
mortgage transactions.\51\ Examples of alternative mortgage
transactions include transactions in which the interest rate changes in
accordance with changes to an index and transactions in which the
interest rate may be increased or decreased after a specified period of
time or under specified circumstances. For example, the definition
includes loans in which the interest rate or finance charge may be
adjusted after a period of time as specified and defined by the
contract, for instance to provide a ``timely payment discount rate''
upon an anniversary of loan origination to borrowers who have made
timely payments for a specified period of time.\52\ (However, as
discussed below with respect to Sec. 1004.3, generally applicable
state laws governing late charges, including increases in the interest
rate due to default, are no longer preempted by AMTPA.)
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\51\ These examples are consistent with the definition of an
``adjustable rate mortgage loan'' in AMTPA, 12 U.S.C. 3806(d)(2), as
one in which the loan agreement permits the creditor to adjust the
rate of interest from time to time. While the definition of
``adjustable rate mortgage loan'' applies to a section of AMTPA that
requires adjustable rate mortgages to have maximum interest rates
(rather than to the preemption provisions), it sheds light on the
types of loans contemplated by AMTPA as having adjustable rates.
\52\ See OTS Letter P-2003-9 (Dec. 2, 2003); OTS Letter P-96-13
(Nov. 27, 1996).
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The definition of ``alternative mortgage transaction'' in Sec.
1004.2(a) includes ``variable rate transactions'' as defined under
Regulation Z for purposes of providing disclosures under 12 CFR
[[Page 44234]]
226.19(b).\53\ The definition is also similar to the OCC's definition
of ``adjustable rate mortgage'' under its AMTPA regulations.\54\
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\53\ As discussed below, Regulation Z also treats renewable
balloon payment loans as variable rate transactions. See 12 CFR
226.17 comment 17(b)-11.
\54\ See 12 CFR 34.20, 34.24 (authorizing state chartered banks
to make ``adjustable rate mortgages,'' defined generally to include
secured extensions of credit ``where the lender, pursuant to an
agreement with the borrower, may adjust the rate of interest from
time to time'').
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With regard to shared appreciation and shared equity features in
particular, although the Dodd-Frank Act amendments to AMTPA deleted the
specific language referencing shared appreciation and shared equity
mortgages, loans with these features continue to fall within the
remaining definition of ``alternative mortgage transaction'' because
they are mortgage transactions in which a finance charge is adjustable.
Indeed, the CFPB notes that Regulation Z currently categorizes shared-
equity/shared appreciation mortgages as variable-rate transactions.\55\
Accordingly, consistent with that interpretation, the interim final
rule includes such mortgages within the definition of alternative
mortgage transaction.
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\55\ See 12 CFR 226 comment 17(c)(1)-11.
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The CFPB seeks comment on whether the products discussed above
should be considered alternative mortgage transactions and what other
products in the current market have adjustable rates or finance
charges. The CFPB in particular seeks comment on whether treating a
mortgage that permits a rate adjustment upon default as an alternative
mortgage transaction is an appropriate approach in light of the Dodd-
Frank Act amendments that specifically preserve states' authority to
regulate late charges.
Mortgages with renegotiable rates or finance charges. The statute
does not define what types of loans provide for the ``renegotiat[ion]''
of the interest rate or finance charge. The CFPB does not believe that
Congress intended this language to apply to every transaction in which
the interest rate or finance charge might theoretically be
renegotiated. Such an interpretation could encompass almost any
mortgage transaction. Instead, the CFPB believes it is appropriate to
consider historical regulations and interpretations issued by the FHLBB
and by the Federal Reserve Board under Regulation Z, both of which
suggest that ``renegotiable rate mortgages'' were commonly understood
at the time that AMTPA was enacted to include a subset of fixed-rate
balloon loans involving renewable short-term notes secured by long-term
mortgages, where the creditor made a commitment to renew the notes but
reserved discretion to adjust the interest rate at renewal.\56\
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\56\ See, e.g., 45 FR 24,108 (Apr. 9, 1980). The FHLBB initially
provided very detailed rules regarding renegotiable rate mortgages,
which were subsumed into regulations on adjustable rate mortgages at
46 FR 24,148 (Apr. 30, 1981). The Federal Reserve also has moved
from a narrower definition of ``renegotiable rate mortgages'' to a
broader category of ``renewable'' balloon loans. Compare 66
Fed.Res.Bull. 830 (Oct. 1980) (defining ``renegotiable rate
mortgages'' to include fixed-rate balloon loan mortgages for which
the lender was obliged to renew the loan upon expiration of the loan
on the same credit terms except for a change in the interest rate,
and interpreting Regulation Z to permit lenders to disclose such
mortgages either as a variable-rate obligation under 12 CFR
226.8(b)(8) or as a balloon-payment obligation under 12 CFR
226.8(b)(3)), with 56 FR 13751, 13754 (Apr. 4, 1991) (dropping the
term ``renegotiable rate mortgage'' in favor of a more generic
category of renewable loans with balloon payments, where the
creditor is either unconditionally obligated to renew the loan or
obligated to renew subject only to conditions within the consumer's
control, and requiring that such loans be disclosed as long-term
variable rate loans rather than as short-term balloon loans).
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This commitment to renew distinguishes renegotiable/renewable loans
from a broader and more generic category of balloon loans that was
included in AMTPA's original definition of ``alternative mortgage
transaction,'' but was then removed from the definition by the Dodd-
Frank Act amendments. That language referred to loans ``involving a
fixed rate, but which implicitly permit[] rate adjustments by having
the debt mature at the end of an interval shorter than the term of the
amortization schedule,'' without reference or regard to renewal
commitments.\57\
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\57\ 12 U.S.C. 3802(1)(B).
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As discussed above, the fact that Section 1083 deleted the
reference to balloon loans while retaining the reference to loans for
which the interest rate or finance charge may be renegotiated creates
significant ambiguity as to how balloon loans should be treated under
AMTPA as amended. However, based on available information, it is
unclear to what the phrase ``renegotiable rate'' in the amended AMTPA
definition refers, if not to balloon loans where there is a commitment
to renew the loan but the rate is subject to renegotiation.
For these reasons, the CFPB believes that, for purposes of this
interim final rule, it is appropriate to construe the category of
renegotiable rate loans to include fixed-rate balloon loans in which
the lender has committed to renew the loan. For example, the interim
final rule provides that, if a loan has, for instance, a 30-year
amortization period but a balloon payment is due at the end of five
years, the product is an ``alternative mortgage transaction'' for
purposes of AMTPA if the creditor commits to renew the mortgage.\58\
The CFPB notes that the requirement of a lender commitment to renew can
help protect borrowers from the heightened default risk associated with
balloon payments.\59\ Furthermore, as discussed below with respect to
Sec. 1004.4(b), this commitment must be made in writing in order for
the transaction to receive AMTPA preemption.
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\58\ This approach is also consistent with the OCC's regulations
applicable to AMTPA loans, which define ``adjustable rate
mortgages'' to exclude ``fixed-rate extensions of credit that are
payable at the end of a term that, when added to any terms for which
the bank has promised to renew the loan, is shorter than the term of
the amortization schedule.'' 12 CFR 34.20. Thus, if the bank
promises to renew the loan for the term of the amortization
schedule, the loan fell within the OCC's definition of ``adjustable
rate mortgage.''
\59\ See, e.g., Roberto G. Quercia, Michael A. Stegman & Walter
Davis, The impact of predatory loan terms on subprime foreclosures:
The special case of prepayment penalties and balloon payments, 18
Housing Pol'y Debate 311 (2007) (finding that first-lien subprime
refinance mortgage loans with balloon payments in general were 50%
more likely to go into foreclosure than other loans, holding other
factors constant).
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The CFPB seeks comment on all aspects of this issue, including
comment on what products, if any, should be considered renegotiable
rate loans, how commitments to renew are typically structured, and
whether further clarity or protections may be appropriate for these
mortgage products.
Adjustable or renegotiable rate loans with additional
nontraditional features. As noted above, the interim final rule defines
``alternative mortgage transaction'' by focusing on the language of the
amended statutory definition--in other words, whether the loan has an
adjustable or renegotiable rate or finance charge. It is unclear
whether the deletion of AMTPA's language recognizing other
nontraditional loan features such as negative amortization or interest-
only payment periods was intended to exclude adjustable rate or
renegotiable rate loans that also contain such features from AMTPA
preemption. For purposes of the interim final rule, the CFPB has
concluded that such loans should not be excluded, for several reasons.
First, a broader exclusion based on the absence of statutory text
would create a number of practical difficulties. The definitions
removed from AMTPA mention two specific loan types--balloon loans and
shared-equity/shared-appreciation loans--which can, in certain
circumstances, be loans with adjustable or renegotiable rates or
[[Page 44235]]
finance charges, as discussed above. While this amendment could be
interpreted as having been intended to exclude these products from
AMTPA coverage entirely, there is no specific language in the amended
statute that provides guidance as to why such products would no longer
be considered loans with adjustable or renegotiable rates or finance
charges, regardless of the other aspects of the loan. In addition, the
definitions removed by the Dodd-Frank Act amendments were quite broad
and vague and overlap substantially with the other definitions.\60\
Accordingly, interpreting the amendments to exclude from AMTPA coverage
any transactions described in the removed definitions could undermine
the remaining definition.
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\60\ See 12 U.S.C. 3802(1)(C) (referring to loans ``involving
any similar type of rate, method of determining return, term,
repayment, or other variation not common to traditional fixed rate,
fixed term transactions, including without limitation, transactions
that involve the sharing of equity or appreciation'') (emphasis
added).
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Second, where unusual circumstances require publication of an
interim rule to take immediate effect without advance notice and
opportunity for comment, the CFPB believes that it is appropriate to
minimize market disruption while the CFPB's notice-and-comment
rulemaking is under way. Thus, it is appropriate to interpret the
remaining definition of ``alternative mortgage transaction'' broadly.
The CFPB also believes it is particularly important to consider the
interaction between the Dodd-Frank Act's definitional changes
(implemented in Sec. 1004.2) and changes to the scope of preemption
(implemented in Sec. 1004.3). Under the definition adopted in the
interim final rule, fixed-rate products involving negative
amortization, interest-only periods, or graduated payment features do
not meet the definition of ``alternative mortgage transaction'' because
they are not loans with adjustable or renegotiable rates or finance
charges. Therefore, these types of loans are not eligible for federal
preemption under AMTPA and instead are subject to applicable state law.
In contrast, loans containing the same features that also have
adjustable or renegotiable rates or finance charges would continue to
qualify as ``alternative mortgage transactions'' under the definition
in Sec. 1004.2(a). However, state law is preempted with respect to
such loans only to the extent provided in Sec. 1004.3 (and only if the
transaction also complies with the requirements in Sec. 1004.4(a)
through (c), as applicable). Thus, to the extent that a state has
enacted a law regulating, for example, negative amortization or
interest-only features, AMTPA would not preempt application of that law
to an alternative mortgage transaction.
In addition, although the alternative mortgage transaction
definition includes loans in which the contract permits the creditor to
adjust the interest rate or finance charge upon default, applicable
state laws governing late charges are not preempted under Sec. 1004.3.
Accordingly, like the statute, the two parts of the interim final rule
work in conjunction with each other to provide for more consistent
application of state law across similar mortgage products.
The CFPB seeks comment not just about the specific definitional
changes but also how those changes relate to the new scope of
preemption as further discussed below.
(b) Creditor
The term ``creditor'' is defined to have the same meaning as under
Regulation Z, 12 CFR 226.2. This reflects the fact that Sec. 1004.4 of
the interim final rule applies broadly to all ``creditors'' as defined
under and pursuant to TILA and Regulation Z when such creditors are
engaged in the making of alternative mortgage transactions. Comment
2(b)-1 clarifies that, under Regulation Z, the term ``creditor''
includes federally and state-chartered banks, thrifts, and credit
unions, as well as non-depository institutions (such as state-licensed
lenders). The comment also references the Official Staff Commentary to
Regulation Z for additional guidance on the definition of the term
``creditor.''
(c) Housing Creditor
The definition of ``housing creditor'' generally mirrors the
statutory language to include a depository institution as defined in 12
U.S.C. 1735f-7 note; a lender approved by the Secretary of Housing and
Urban Development for participation in any mortgage insurance program
under the National Housing Act; other persons who regularly make loans,
credit sales, or advances secured by an interest in a residential
structure that contains one to four units, whether or not that
structure is attached to real property, including an individual
condominium unit, cooperative unit, mobile home, and trailer, if it is
used as a residence; and any transferee of a person in the other three
categories.
(d) State
The term ``State'' is defined as a state of the United States, the
District of Columbia, and U.S. territories and possessions, including
Puerto Rico, the Virgin Islands, the Northern Mariana Islands, American
Samoa, and Guam. This is generally consistent with the federal
prudential agencies' regulations as well as the definition of ``State''
in various other federal consumer financial regulations.\61\
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\61\ See, e.g., 12 CFR 561.50; 12 CFR 563f.2; 12 CFR 700.2.
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(e) State Law
Consistent with 12 U.S.C. 3803, the term ``State law'' is defined
as a State constitution, statute, or regulation or any provision
thereof.
Section 1004.3 Preemption of State law.
Section 1004.3 provides that a state housing creditor may make,
purchase, and enforce alternative mortgage transactions in accordance
with the requirements of Sec. 1004.4(a) through (c) (as applicable),
notwithstanding any provision of State law that restricts the ability
of the housing creditor to adjust or renegotiate an interest rate or
finance charge with respect to the transaction or to change the amount
of interest or finance charges included in a regular periodic payment
as a result of such an adjustment or renegotiation. This regulation
generally tracks the language and structure of 12 U.S.C. 3803, as
amended by the Dodd-Frank Act. However, in order to implement the
purposes of the Dodd-Frank Act's amendments to AMTPA, Sec. 1004.3
interprets and clarifies the amended preemption standard in 12 U.S.C.
3803(c) in several respects.
As an initial matter, the amendments to 12 U.S.C. 3803(c) narrowed
the scope of preemption to apply only to state laws that ``prohibit[]
an alternative mortgage transaction.'' \62\ Although it is unclear from
the statutory text what types of state laws prohibit alternative
mortgage transactions for purposes of AMTPA, the amendments to 12
U.S.C. 3803(c) clarify that an alternative mortgage transaction is not
prohibited by a state law that ``regulates mortgage transactions
generally, including any restriction on prepayment penalties or late
charges.'' \63\
---------------------------------------------------------------------------
\62\ Public Law 111-203, Sec. 1083(a)(2)(B) (emphasis added).
\63\ Id.
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Neither AMTPA nor the Dodd-Frank Act specifically define the term
``prohibit.'' However, that term is generally understood to mean forbid
by law or to otherwise prevent or hinder an activity.\64\ Furthermore,
the purpose of
[[Page 44236]]
AMTPA remains providing state housing creditors ``with parity with
federally chartered institutions by authorizing all housing creditors
to make, purchase, and enforce alternative mortgage transactions so
long as the transactions are in conformity with [federal] regulations.
* * * '' \65\ This purpose would be thwarted if AMTPA were interpreted
not to preempt state laws imposing restrictions on state housing
creditors' ability to adjust interest rates and finance charges where
such restrictions do not apply to federal housing creditors, as the
ability to make such adjustments is integral to alternative mortgage
transactions. Accordingly, because 12 U.S.C. 3802(1) defines an
alternative mortgage transaction as a transaction ``in which the
interest rate or finance charge may be adjusted or renegotiated,'' the
interim final rule construes ``prohibit'' to include not only state
laws banning the making, purchase, or enforcement of alternative
mortgage transactions, but also state laws that restrict or hinder the
adjustment or renegotiation of an interest rate or finance charge. For
example, as explained in comment 2, state laws are preempted to the
extent that they restrict the circumstances under which a rate may be
adjusted, the method by which a rate may be adjusted, or the amount of
a rate adjustment.
---------------------------------------------------------------------------
\64\ See, e.g., Webster's New World Dictionary 1075 (3d College
ed. 1991) (``1 to refuse to permit; forbid by law or by an order 2
to prevent; hinder''); Black's Law Dictionary 1331 (9th ed. 2009)
(``Prohibit, vb. 1. To forbid by law. 2. To prevent or hinder.'').
\65\ 12 U.S.C. 3801(b).
---------------------------------------------------------------------------
Similarly, Sec. 1004.3 provides that state laws are preempted with
respect to alternative mortgage transactions to the extent that they
restrict the ability of a state housing creditor to change the amount
of a payment to include increased interest or finance charges as a
result of the adjustment or renegotiation of an interest rate or
finance charge. The CFPB believes that such changes to payment amounts
are also integral to alternative mortgage transactions. Indeed, if
housing creditors were not permitted to increase the payment amount to
account for an increase in the interest rate, the transaction could
negatively amortize, which would be harmful to some consumers.\66\
---------------------------------------------------------------------------
\66\ However, as explained in comment 2, other state law
restrictions on changes to payments are not preempted by Sec.
1004.3.
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Comment 1 clarifies that, regardless of whether a state law applies
solely to alternative mortgage transactions or applies to both
alternative mortgage transactions and other mortgage or consumer credit
transactions, that law is preempted by Sec. 1004.3 to the extent that
it restricts the ability of a state housing creditor to adjust or
renegotiate an interest rate or finance charge with respect to an
alternative mortgage transaction or to adjust payments as a result of
such an adjustment or renegotiation. Thus, the preemption regime under
Sec. 1004.3 is not tied to whether a state law by its terms applies
solely to alternative mortgage transactions.
Although the amendments to 12 U.S.C. 3803(c) indicate that state
laws that regulate mortgage transactions generally are not preempted,
the CFPB believes that narrowly focusing on whether a state law is by
its terms general or specific would undermine the key determination of
whether a state law prohibits an alternative mortgage transaction's
adjustment or renegotiation of an interest rate or finance charge or
changes to payments as a result of the adjustment or renegotiation. For
example, applying preemption to any state law that specifically
addresses alternative mortgage transactions would preempt state laws
that do not prohibit alternative mortgage transactions because they do
not forbid, prevent, or hinder the ability of the state housing
creditor to make such transactions (such as a state law requiring that
certain disclosures be provided regarding alternative mortgage
transactions). Furthermore, this approach would shield from preemption
state laws that might be couched in general terms but effectively
prohibit an alternative mortgage transaction (for example, a law
prohibiting increases in an interest rate based on increases in an
index). Finally, focusing solely on whether a state law is specific to
alternative mortgage transactions or more general in its terms could
lead to anomalous results if, for example, one state prohibited certain
conduct in a statute that specifically applied to alternative mortgage
transactions while another state prohibited the same conduct in a
statute that applied generally to all mortgage transactions. For these
reasons, the CFPB believes that it would be inconsistent with the goals
of the Dodd-Frank Act amendments to make AMTPA preemption
determinations based solely on whether a state law was specific or
general by its terms.
Comment 2 also clarifies that state law restrictions on shared
equity or shared appreciation transactions in which the creditor and
the consumer share some or all of the appreciation in the value of the
property are preempted by Sec. 1004.3. As discussed above, such
transactions are alternative mortgage transactions under Sec.
1004.2(a). However, the CFPB solicits comment on whether additional
protections are needed with respect to these types of transactions. The
CFPB also solicits comment on the volume of these transactions.
In addition, comment 2 clarifies that state law underwriting
requirements are preempted by Sec. 1004.3 to the extent that they
effectively restrict the adjustment or renegotiation of interest rates
or finance charges or changes in payments as a result of such
adjustments or renegotiations. For example, if a state law requires
housing creditors to underwrite based on the maximum contractual rate,
that particular provision of the law is preempted by Sec. 1004.3 with
respect to alternative mortgage transactions, regardless of whether the
provision applies solely to alternative mortgage transactions or to
both alternative mortgage transactions and other mortgage or consumer
credit transactions. In contrast, state underwriting requirements of
general applicability that do not impact the adjustment or
renegotiation of interest rates or finance charges or changes in
payments as a result of such adjustments or renegotiations are not
preempted. (However, as discussed below, Sec. 1004.4(c) requires state
housing creditors that invoke AMTPA preemption to comply Regulation Z's
underwriting requirements for high-cost and higher-cost mortgages.)
In contrast, comment 3 provides examples of state laws that are not
preempted by Sec. 1004.3 because they do not restrict the ability of
the housing creditor to adjust or renegotiate an interest rate or
finance charge or to change the amount of a payment as a result of such
an adjustment or renegotiation. In particular, the comment states that,
consistent with the amended 12 U.S.C. 3803(c), state law restrictions
on prepayment penalties and late charges are not preempted by Sec.
1004.3 regardless of whether the restriction applies solely to
alternative mortgage transactions or to both alternative mortgage
transactions and other mortgage or consumer credit transactions. Such a
restriction does not prohibit or hinder a feature integral to an
alternative mortgage transaction. The comment further clarifies that an
increase in an interest rate or finance charge as a result of a late
payment is a late charge for purposes of Sec. 1004.3. Therefore, a
state law that prohibits state housing creditors from increasing a
consumer's interest rate as a result of a late payment is not preempted
by Sec. 1004.3.
In addition, comment 3 clarifies that state law restrictions on
transactions in which one or more of the regular periodic payments may
result in an
[[Page 44237]]
increase in the principal balance (a negative amortization feature) or
may be applied solely to accrued interest and not to loan principal (an
interest-only feature) are not preempted by Sec. 1004.3. The comment
also clarifies that state law disclosure requirements are not preempted
by Sec. 1004.3 regardless of whether the law applies specifically to
alternative mortgage transactions because disclosure requirements do
not prohibit a state housing creditor from adjusting or renegotiating
an interest rate or finance charge or making a corresponding change to
a payment. Finally, the CFPB notes that, as a general matter, state
laws prohibiting unfair or deceptive acts or practices are not
preempted under 12 U.S.C. 3803(c) or this interim final rule.
The CFPB seeks comment on all aspects of Sec. 1004.3(b) and on
whether particular state laws should or should not be subject to AMTPA
preemption. The CFPB notes, however, that nothing in this interim final
rule affects the preemption of state law under provisions of federal
law other than AMTPA.
Section 1004.4 Requirements for Alternative Mortgage Transactions
Section 1083 of the Dodd-Frank Act requires the CFPB to promulgate
its own regulations governing alternative mortgage transactions after
the designated transfer date. The CFPB is also required to review and
determine whether the regulations governing alternative mortgage
transactions designated by the OCC and NCUA pursuant to AMTPA are
``fair, not deceptive, and consistent with the purposes of [title X of
the Dodd-Frank Act].'' \67\ The CFPB believes that it is consistent
with the intent and purpose of Section 1083 to interpret this provision
as requiring the CFPB to determine whether the OCC and NCUA regulations
are effective in preventing unfair or deceptive practices. In addition,
although this provision does not require the CFPB to review OTS AMTPA
regulations, the CFPB believes that it is appropriate to do so in order
to predict potential impacts on the marketplace.
---------------------------------------------------------------------------
\67\ Public Law 111-203, Sec. 1083(b).
---------------------------------------------------------------------------
Accordingly, the CFPB has completed an initial review of the
regulations designated by the OCC, NCUA, and OTS as well as agency
interpretive guidance, available court decisions, and secondary
sources. Based on this review, the CFPB has made a preliminary
determination that certain of those regulations are necessary to
prevent unfairness and deception and are consistent with the purposes
of title X of the Dodd-Frank Act. The CFPB has adopted those
regulations in modified form in Sec. 1004.4(a) and (b) of the interim
final rule. However, the CFPB believes that additional research,
consultation, and comment are needed before adoption of a permanent
final rule. The CFPB therefore seeks comment on whether the
requirements in Sec. 1004.4 are sufficient to prevent unfair or
deceptive acts or practices, whether modifications to those
requirements are appropriate, and whether additional protections are
needed.
As discussed above, the CFPB is issuing Sec. 1004.4 pursuant to
its authority under TILA, which applies to all ``creditors'' as defined
by Regulation Z. Thus, Sec. 1004.4 applies to all federal and state
housing creditors that make alternative mortgage transactions. However,
because there has not yet been an opportunity for notice and comment on
the requirements in Sec. 1004.4(a) through (c), the CFPB has delayed
mandatory compliance with Sec. 1004.4 until July 21, 2012 for federal
housing creditors and for state housing creditors that are not relying
on preemption of state law under Sec. 1004.3. Accordingly, only state
housing creditors that choose to seek AMTPA preemption under Sec.
1004.3 are required to comply with Sec. 1004.4 before July 22,
2012.\68\
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\68\ As discussed below, however, nothing in Part 1004 alters
the obligation of all creditors to continue to comply with the
requirements of Regulation Z that are incorporated by reference in
Sec. 1004.4 (specifically, 12 CFR 226.5b, 12 CFR 226.32, 12 CFR
226.34, and 12 CFR 226.35, as applicable).
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The CFPB's interim final rule is designed to protect consumers and
preserve access to credit and federal-state parity while also providing
an orderly transition period while the notice-and-comment rulemaking
process occurs. Because the OCC, NCUA, and OTS AMTPA rules vary
significantly in substance and scope and because the CFPB's rules must
account for the Dodd-Frank Act amendments to AMTPA, the CFPB has
concluded that it would not be practicable or appropriate to simply
replicate the three pre-existing sets of regulations in the CFPB's
interim final rule. However, the CFPB has adopted standards and
language that are comparable to central elements of those regulations
where it was consistent with the Dodd-Frank Act and otherwise
appropriate to do so.
The CFPB did consider simply requiring state housing creditors to
comply with all requirements of federal law in order to receive AMTPA
preemption. However, because state housing creditors are already
required to comply with TILA and other applicable provisions of federal
law that fall within the CFPB's authority, such an approach would be
redundant and unnecessary and could cause confusion regarding the scope
of preemption under Sec. 1004.3. Instead, as discussed below, that
CFPB has designated specific provisions of Regulation Z in Sec.
1004.4.
The CFPB notes that AMTPA provides an opportunity to cure
violations of federal alternative mortgage transaction regulations that
may be helpful to state housing creditors as they make adjustments
necessary to comply with the interim final rule. Specifically, 12
U.S.C. 3803(b) provides that, where a state housing creditor has failed
to comply with the alternative mortgage transaction regulations for
federally chartered housing creditors, an alternative mortgage
transaction will nonetheless be deemed to be made in accordance with
the applicable regulation if: ``(1) The transaction is in substantial
compliance with the regulation; and (2) within sixty days of
discovering any error the housing creditor corrects such error,
including making appropriate adjustments, if any, to the account.''
(a) Adjustable rate mortgages.
Section 1004.4(a) of the interim final rule provides standards by
which creditors making alternative mortgage transactions with
adjustable rates or finance charges may increase the interest rate or
finance charge. To rely on AMTPA's preemption provision, creditors
making alternative mortgage transactions that are open-end home equity
lines of credit subject to the Regulation Z requirements in 12 CFR
226.5b must comply with Sec. 226.5b's requirement that changes in the
annual percentage rate be made according to a publicly available index
that is not subject to the creditor's control.
For closed-end alternative mortgage transactions involving an
adjustable rate or finance charge, the interim final rule provides that
adjustments must be made based on either: (1) an index outside the
creditor's control to which changes in the interest rate are tied; or
(2) a formula or schedule identifying the amount by which the interest
rate or finance charge may increase and the times at which, or
circumstances under which, a change may be made. The content of these
rules is similar to the OCC and OTS regulations for national banks and
federal thrifts, respectively, that were previously designated as
applicable to
[[Page 44238]]
state housing creditors under AMTPA.\69\ Pursuant to its authority
under Section 1405(a) of the Dodd-Frank Act (15 U.S.C. 1639b(e)(1)),
the CFPB finds that the adoption of the standards in Sec. 1004.4(a) as
part of this interim final rule is necessary and proper to ensure that
responsible, affordable mortgage credit remains available to consumers.
Nevertheless, the CFPB seeks comment on whether additional or different
requirements are more appropriate to protect consumers and promote
parity between federal and state housing creditors.
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\69\ 12 CFR 34.20-25; 12 CFR 560.220.
---------------------------------------------------------------------------
Comment 4(a)-1 clarifies that a creditor may use any measure of
index values that meets the requirements in Sec. 1004.4(a)(2)(i). For
example, the index may be either single values as of a specific date or
an average of values calculated over a specified period.
Comment 4(a)-2 clarifies that an index is not beyond the creditor's
control if the index is the creditor's own prime rate or cost of funds.
A creditor is permitted to use a published prime rate, such as the
prime rate published in the Wall Street Journal.\70\ The CFPB notes
that, in other contexts, the Federal Reserve Board has concluded that a
creditor's use of ``rate floors'' (in other words, minimum values below
which the interest rate will not fall regardless of the index value)
constituted control over the operation of an index.\71\ Although the
CFPB has not adopted that interpretation in this interim final rule, it
seeks comment on whether it is appropriate to do so in a permanent
final regulation implementing the amendments to AMTPA.
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\70\ See 12 CFR 226.5b comment 5b(f)(1)-1.
\71\ See 12 CFR 226.55(b)(2) comment 55(b)(2)-2.
---------------------------------------------------------------------------
Comment 4(a)-3 clarifies that a publicly available index need not
be published in a newspaper, but it must be one the consumer can
independently obtain (by telephone, for example) and use to verify the
annual percentage rate applied to the alternative mortgage
transaction.\72\
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\72\ See 12 CFR 226.5b comment 5b(f)(1)-2
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(b) Renegotiable rates for balloon-payment mortgages.
Renegotiable rates and renewable balloon-payment mortgages were not
specifically discussed in the mortgage rules previously designated as
applicable to state housing creditors under AMTPA by the OCC, NCUA, and
OTS. However, pursuant to its authority under Section 1405(a) of the
Dodd-Frank Act (15 U.S.C. 1639b(e)(1)), the CFPB finds that adoption of
the standards in Sec. 1004.4(b) as part of this interim final rule is
necessary and proper to ensure that responsible, affordable mortgage
credit remains available to consumers.
As discussed above, a renewable balloon-payment mortgage is
generally a transaction in which payments are based on an amortization
period and a large final payment is due after a shorter term, but the
borrower has the option to renew the transaction at specified intervals
throughout the amortization period at the interest rate offered by the
creditor at the time of renewal.\73\ To rely on AMTPA's preemption
provision, creditors making such transactions must provide a written
commitment to renew the transaction at specified intervals throughout
the amortization period. Under the terms of the written commitment, the
creditor may negotiate an increase or decrease in the interest rate at
renewal.
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\73\ See 12 CFR 226.17 comment 17(b)-11.
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The CFPB believes that a written commitment is necessary to ensure
that balloon-payment mortgages made under AMTPA are provided
responsibly. However, the CFPB also believes that, based on safety and
soundness and other considerations, creditors should not be required to
renew the loan in certain limited circumstances. Accordingly, the CFPB
has adopted exceptions to the renewal requirement based on the
exceptions in 12 CFR 226.5b(f)(2), which permit a creditor to terminate
a home-equity line of credit and demand payment of the outstanding
balance. The CFPB has modified the Sec. 226.5b(f)(2) exceptions to
ensure that a creditor generally cannot decline to renew a balloon-
payment loan under Sec. 1004.4(b) unless there has been a material
change in circumstance.
Therefore, Sec. 1004.4(b) provides that the creditor is not
required to renew the transaction if: (1) Any action or inaction by the
consumer materially and adversely affects the creditor's security for
the transaction or any right of the creditor in such security; (2)
there is a material failure by the consumer to meet the repayment terms
of the transaction; (3) there is fraud or a willful or knowing material
misrepresentation by the consumer in connection with the transaction;
or (4) Federal law dealing with credit extended by a depository
institution to its executive officers specifically requires that as a
condition of the extension the credit shall become due and payable on
demand, provided that the creditor includes such a provision in the
initial agreement.
The CFPB seeks comment on whether the written commitment
requirement and the exceptions in Sec. 1004.4(b) are appropriate to
protect consumers, promote access to responsible credit, and enhance
parity between federal and state housing creditors.
(c) Requirements for High-Cost and Higher-Priced Mortgage Loans
Section 1004.4(c) provides that, if an alternative mortgage
transaction is a ``high-cost'' loan subject to 12 CFR 226.32, the
creditor must comply with 12 CFR 226.32 and 12 CFR 226.34. In addition,
if an alternative mortgage transaction is a ``higher-priced mortgage
loan'' subject to 12 CFR 226.35, the creditor must comply with 12 CFR
226.35. These provisions of Regulation Z contain underwriting
requirements and restrictions on loan terms for certain types of loans
with higher costs. Because the interim final rule preempts some state
underwriting requirements, the CFPB believes it is appropriate to
require creditors to comply with these provisions in order to obtain
that preemption.\74\ Pursuant to its authority under Section 1405(a) of
the Dodd-Frank Act (15 U.S.C. 1639b(e)(1)), the CFPB finds that the
adoption of Sec. 1004.4(c) as part of this interim final rule is
necessary and proper to ensure that responsible, affordable mortgage
credit remains available to consumers.
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\74\ Because 12 CFR 226.32, 12 CFR 226.34, and 12 CFR 226.35
already apply to all creditors, all creditors must continue to
comply with those provisions, regardless of whether they seek AMTPA
preemption.
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Comment 1004.3(c)-1 clarifies that creditors must comply with the
restrictions on prepayment penalties in Regulation Z, if applicable.
However, as discussed above, creditors are not exempt under AMTPA and
Sec. 1004.3 from state laws regarding prepayment penalties. Thus, with
respect to prepayment penalties, creditors must comply with both
Regulation Z and with state law unless another basis for preemption
exists (such as because the state law is inconsistent with Regulation
Z).\75\ For example, if a loan is a higher-priced mortgage loan under
12 CFR 226.35, it may not have a prepayment penalty unless the penalty
expires within two years after consummation.\76\ However, if a state
law prohibited prepayment penalties unless the penalty expires within
one year, that state law would not be preempted by AMTPA (or by
Regulation Z).
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\75\ See 12 CFR 226.28.
\76\ 12 CFR 226.35(b)(2)(ii)(A).
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The CFPB seeks comment on the inclusion of these requirements in
Sec. 1004.4(c) and on whether additional underwriting requirements are
warranted. In particular, the CFPB requests comment on whether, once
the
[[Page 44239]]
regulations implementing the ability-to-pay requirements in TILA
Section 129C (15 U.S.C. 1639c) are finalized, all or part of those
regulations should be incorporated into Sec. 1004.4(c).
(d) Other Applicable Law
Because Sec. 1004.4 applies to all creditors on July 22, 2012, the
interim final rule provides Sec. 1004.4(d) as an alternative to
compliance with Sec. 1004.4(a) through (c) for creditors that do not
seek preemption under Sec. 1004.3. Specifically, Sec. 1004.4(d)
permits a housing creditor that is not making an alternative mortgage
transaction pursuant to Sec. 1004.3 to make that transaction
consistent with applicable state or federal law other than Sec.
1004.4. Thus, for example, a state housing creditor that does not
invoke AMTPA preemption can make an alternative mortgage transaction
consistent with applicable state law as well as applicable federal law
other than Sec. 1004.4. Similarly, a federally chartered housing
creditor can make an alternative mortgage transaction consistent with
federal law other than Sec. 1004.4 (including any requirements imposed
by the chartering agency and the requirements for high-cost and higher-
priced mortgage loans found in 12 CFR 226.32, 12 CFR 226.34, and 12 CFR
226.35) as well as any applicable state law.
Particularly in view of the fact that this interim final rule is
being published without notice and comment, the CFPB believes that this
provision is necessary and appropriate to enable housing creditors that
are not using AMTPA preemption to make alternative mortgage
transactions to continue making such transactions in accordance with
applicable federal or state standards. The CFPB believes that this
interim final rule strikes an appropriate short-term balance that will
promote greater parity between federal and state housing creditors,
continued access to credit on currently-available terms, and consumer
protection while reflecting the narrowed scope of AMTPA preemption
under the Dodd-Frank Act. The CFPB seeks comment on both the short-term
impacts of this provision and on potential long-term standards under
Sec. 1004.4 that would apply to all creditors or a defined subset of
creditors. In addition, the CFPB seeks comment on whether it should
utilize sources of statutory authority other than TILA to issue
regulations governing alternative mortgage transactions.
Comment 4(d)-1 clarifies that Sec. 1004.4(d) does not exempt
housing creditors that do not seek preemption under Sec. 1004.3 from
complying with provisions of federal law that are incorporated by
reference in Sec. 1004.4. Specifically, nothing in Sec. 1004.4(d)
exempts a housing creditor from complying with 12 CFR 226.5b, 226.32,
226.34, or 226.35.
(e) Reductions in interest rate or finance charge.
Section 1004.4(e) of the interim final rule provides that a
creditor may always decrease the interest rate or finance charge on an
alternative mortgage transaction without violating Sec. 1004.4. The
OCC regulations that are designated as applicable to state housing
creditors contain a similar provision, and the CFPB believes it is
appropriate to replicate that provision here because interest rate and
finance charge reductions are beneficial to consumers.
VII. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA), as amended by the Small
Business Regulatory Enforcement Fairness Act of 1996, 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.\77\ 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. The CFPB is subject to certain
additional procedures under the RFA involving the convening of a panel
to consult with small business representatives regarding any rule for
which an IRFA is required.
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\77\ 5 U.S.C. 601 et seq.
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The RFA requirements do not apply in cases in which an agency finds
good cause to issue an interim final rule without a notice of proposed
rulemaking.\78\ As discussed above in Section IV, the CFPB has made
such a finding. Moreover, the CFPB believes that any delay in the
issuance of the interim final rule would be contrary to the interests
of small businesses, since the ability of small state housing creditors
to make alternative mortgage transactions under AMTPA would be
suspended while the CFPB assessed impacts and completed any other
applicable requirements. The CFPB notes that the interim final rule is
specifically designed to reduce the amount of disruption from
implementation of the statutory amendments by adopting requirements
that are generally consistent with the existing regulations issued by
the federal prudential agencies to the extent permitted under the Dodd-
Frank Act amendments to AMTPA and by providing a delayed mandatory
compliance date and safe harbor for small federally chartered and state
chartered lenders that are not making loans under AMTPA but may be
affected by the broader long-term rulemaking.
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\78\ 5 U.S.C. 553(b)(B); 5 U.S.C. 605(b); 62 FR 23,538 (April
30, 1997); 66 FR 37,752 (July 19, 2001); 64 FR 3,865 (Jan. 26,
1999).
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The CFPB takes its responsibilities under the Regulatory
Flexibility Act seriously and is in the process of refining its long-
term policies, procedures, and methodologies for conducting impact
analyses as required by the statute. The CFPB expects to apply these
enhanced processes when complying with all applicable requirements as
part of its future notice-and-comment rulemaking under AMTPA. In
advance of issuing this interim final rule, the CFPB issued a public
bulletin alerting state chartered and licensed lenders and other
interested parties that: (1) the Dodd-Frank Act amendments to AMTPA
take effect on July 21, 2011; and (2) the amendments affect what laws
apply to mortgage loans issued by state chartered or licensed lenders
after that date by narrowing the statutory definition of ``alternative
mortgage transaction'' and the scope of preemption under AMTPA.\79\ The
CFPB has also conducted outreach with trade associations, state and
federal regulators, and consumer advocates to call attention to the
Dodd-Frank Act's amendments to AMTPA and to urge planning for an
orderly transition period.
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\79\ Available at http://www.consumerfinance.gov/wp-content/uploads/2011/06/Amendments-to-the-Alternative-Mortgage-Transaction-Parity-Act.pdf.
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Because limited information exists concerning AMTPA activity, the
CFPB requests comment and data regarding the amount of activity under
the statute prior to the Dodd-Frank Act amendments, the impact of the
OCC, NCUA, and OTS regulations, and the impact of the statutory
amendments and the interim final rule. All of these topics will help
the CFPB in assessing the potential economic impacts on small lenders
as it prepares to propose a permanent final rule.
VIII. Paperwork Reduction Act
The CFPB has determined that this interim final rule does not
impose any new recordkeeping or reporting
[[Page 44240]]
requirements on state housing creditors, states, or members of the
public that would be collections of information requiring approval
under 44 U.S.C. 3501, et seq.
IX. Dodd-Frank Act Section 1022(b)(2)
The CFPB has conducted an analysis of benefits, costs, and impacts
of this interim final rule and consulted with the prudential
regulators, the Federal Trade Commission, and the Department of Housing
and Urban Development.\80\ In preparing a notice of proposed rulemaking
following the issuance of this interim final rule, the CFPB plans to
perform additional analysis and engage in further consultations
consistent with Section 1022(b)(2).\81\
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\80\ The President's July 11, 2011, Executive Order 13579
entitled ``Regulation and Independent Regulatory Agencies,'' asks
the independent agencies to follow the cost-saving, burden-reducing
principles in Executive Order 13563; harmonization and
simplification of rules; flexible approaches that reduce costs; and
scientific integrity. In the spirit of Executive Order 13563, the
CFPB has consulted with the Office of Management and Budget
regarding this interim final rule, including with respect to the
CFPB's methodologies and analysis regarding the potential benefits,
costs, and impacts of the rule.
\81\ Section 1022(b)(2)(A) calls for consideration of the
potential benefits and costs of regulation to consumers and
industry, including the potential reduction of access by consumers
to consumer financial products or services; the impact of proposed
rules 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. The CFPB is
in the process of further developing its long-term policies and
procedures in this area and evaluating potential methodologies for
conducting impact analyses as required by the statute.
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In the absence of the interim final rule, the provisions of the
Dodd-Frank Act would, by themselves, impact portions of the mortgage
market. As discussed previously, the Dodd-Frank Act requires state
housing creditors to comply with CFPB regulations in order to invoke
AMTPA preemption for alternative mortgage transactions entered into
after July 21, 2011. Accordingly, if the CFPB did not adopt regulations
that took immediate effect on July 22, AMTPA preemption would cease to
apply and the affected state housing creditors would be subject to
applicable state law. In states where alternative mortgage transactions
are prohibited, state housing creditors who were affected would no
longer be able to make--and consumers would no longer be able to
obtain--those forms of credit. Furthermore, in states where alternative
mortgage transactions are regulated but not prohibited, affected state
housing creditors would either choose to cease making such transactions
in order to avoid the cost of compliance or have to incur those costs.
In the absence of an interim final rule, consumers would receive the
benefits of the application of state consumer protection laws while
losing the benefits of a countervailing federal consumer protection
rule under AMTPA and most likely experiencing an increase in the cost
and/or a reduction in the availability of credit.\82\
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\82\ The sudden change in the nature of the regulatory
environment and the short term market disruptions that would ensue
in the absence of the interim final rule would lead to additional
costs as well.
---------------------------------------------------------------------------
The benefits, costs, and impacts of the interim final rule can be
measured against this baseline scenario which assumes that the Dodd-
Frank Act amendments have taken effect and preemption is not in force
since no interim rule exists. Relative to this scenario, the interim
final rule allows preemption of certain state laws and provides federal
consumer protection standards governing certain terms in alternative
mortgage transactions as a condition required before federal preemption
is triggered. Importantly, the interim final rule also allows creditors
not seeking to invoke federal preemption under AMTPA to continue making
alternative mortgage transactions under other sources of federal law or
relevant state laws, as applicable. Furthermore, while compliance with
this interim final rule is mandatory for state housing creditors that
choose to invoke federal preemption under AMTPA, compliance with the
requirements for alternative mortgage transactions in Sec. 1004.4 of
this rule is optional for other creditors until July 22, 2012. In
addition, after July 22, 2012, creditors who are not seeking AMTPA
preemption may comply with other applicable law rather than the
requirements of this interim final rule.
As a result, any potential benefits and costs from the interim
final rule are limited to alternative mortgage transactions, issued by
state housing creditors, that would not be permissible under applicable
state law but for AMTPA's preemption of state restrictions or
requirements or where the lender chooses to issue the mortgage under
AMTPA preemption. Lenders choosing to make such mortgages using AMTPA
preemption will incur the cost of complying with the requirements of
the interim final rule. On the other hand, to the extent that making
alternative mortgage transactions that would otherwise be prohibited or
regulated by state law is profitable to lenders, they will benefit from
the ability to make these loans under the interim final rule and from
any cost savings from avoiding the preempted state requirements.
Consumers will benefit from the provisions of the interim final rule
and any increased availability or lowered price for credit at the cost
of decreased consumer protections from state regulation.\83\
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\83\ Intangible effects, such as the increase in state autonomy
inherent in reducing the scope of preemption, are beyond the scope
of the current discussion.
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The CFPB notes that the interim final rule does not apply to
mortgage transactions that the Dodd-Frank Act has excluded from the
statutory definition of ``alternative mortgage transaction,'' as
discussed above. For these loans, state housing creditors can no longer
invoke AMTPA preemption and therefore the costs and benefits just
described are not relevant. Such mortgages include fixed-rate mortgage
loans with interest-only payment periods or negative amortization
features, fixed-rate balloon loans where the lender does not make a
commitment to renew the loan, and certain other products that
previously fit within the statutory definition.
In order to estimate the potential costs and benefits of the
interim final rule, the CFPB has examined various data sources and
consulted with industry and consumer representatives, market
participants, and other regulators. To date, the CFPB has found no
comprehensive data from either regulatory or private sources to
determine the number, value, location, or type of originator of
mortgages originated specifically using AMTPA preemption. Available
data indicate that variable rate mortgages comprised approximately 12
percent of mortgage originations in the first quarter of 2011. However,
this figure overstates the percentage of transactions made by state
housing creditors under AMTPA preemption because it includes
transactions made by federally chartered housing creditors,
transactions made by state housing creditors under some other form of
preemption or state parity law, and transactions made by state housing
creditors under state law. Still, with a significant number of states
imposing restrictions on the size, frequency, or timing of interest
rate and payment adjustments and renegotiations, the CFPB expects there
are some markets where the volume of mortgages made using AMTPA
preemption may be significant. The CFPB seeks comment on available
sources of information to better evaluate the potential benefits and
costs of AMTPA implementing rules.
[[Page 44241]]
A. Potential Benefits and Costs to Consumers and Covered Persons,
Including any Potential Reduction of Access by Consumers to Consumer
Financial Products or Services
As described above, the interim final rule specifies requirements
for mortgages made using AMTPA preemption, including loans with
variable or adjustable rates, shared equity or shared appreciation
loans, and fixed-rate balloon loans where the creditor commits to
renewing the loan. These include requirements for the index used for
adjustable rate mortgages, certain loan terms regarding renewal
commitments for balloon mortgages, and underwriting requirements for
high-cost and higher-priced mortgage loans.\84\ The potential benefits
and costs from these provisions to consumers and covered entities are
discussed below.
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\84\ The interim final rule does not require these creditors to
report to the CFPB the number of loans made under AMTPA.
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For home equity lines of credit opened by state housing creditors
using AMTPA preemption, the interim final rule mandates that an
adjustable rate be based on a publicly available index that is beyond
the creditor's control. For closed-end mortgages, a state housing
creditor must either comply with this requirement or use a formula or
schedule identifying the amount and timing of interest rate increases.
The CFPB does not have specific information suggesting that creditors
are originating mortgages where the interest rate is tied to an
internal index. Based on discussions with the other regulators and
industry groups, the CFPB understands that at most a few creditors use
internal indices and that precluding their use in AMTPA loans would
have a negligible impact on the mortgage markets.
To the limited extent some creditors might seek to offer ARMs based
on an index within the creditors' control, the interim final rule
benefits consumers by shielding them from rate increases within the
unilateral control of the creditor that are not market-based. At the
same time, the index requirements could increase the costs for
creditors who wish to offer loans based on a prohibited internal index:
These creditors may incur increased operational costs in tracking such
an external index and increased costs of funding relative to using an
internal index. They therefore may raise the price of certain loans or
be unwilling to offer loans to some borrowers. However, the aggregate
costs from these provisions are likely to be minimal since the costs of
compliance for any affected individual lender are likely to be small,
and these rules likely apply to only a limited number of mortgages. On
the other hand, creditors making loans using AMTPA preemption will
benefit to the extent that they are able to originate loans that would
otherwise be preempted by state law and do not have to incur certain
costs related to complying with the preempted state law. The specific
cost reductions would depend on the regulations in the particular
state. For creditors choosing to issue loans using AMTPA preemption,
these benefits are assumed to exceed the costs.
The interim final rule also specifies that, in order to qualify for
preemption, balloon payment mortgages with renegotiable rates must
include a written commitment by the lender to renew the loan, subject
to certain limitations. As discussed in Section III of this Federal
Register notice, this requirement of a written commitment stems
primarily from changes to the definition of ``alternative mortgage
transaction'' made by Congress under the Dodd-Frank Act. The
requirement for a written commitment will benefit some consumers by
reducing the risk of default arising from a borrower's inability to
satisfy the balloon payment or to refinance the loan at the end of the
loan term. Conversely, for state housing creditors that, by virtue of
AMTPA preemption, offer or wish to offer fixed-rate balloon mortgages
with only unwritten (oral or implied) commitments to renew or with no
such commitments, the implementation of this standard is likely to
increase operational costs, such as revising administrative systems and
procedures, including contract forms, in order to conform to the
interim final rule. The commitment to renew will also impose costs on
creditors as they assume additional risk. On the other hand, creditors
making loans using AMTPA preemption will benefit to the extent that
they are able to originate loans that would otherwise be prohibited by
state law and by not having to incur certain costs related to complying
with the preempted state law. The specific cost reductions would depend
on the regulations in the particular state. For creditors choosing to
issue such balloon loans using AMTPA preemption, these benefits are
assumed to exceed the costs, and on net consumers should see greater
credit availability at the cost of any decreased consumer protections
provided by the preempted state regulations. Any effects of these
provisions are likely to be greatest in markets, if any, where such
balloon products are prevalent and where consumers have few
alternatives to such products. The CFPB seeks comment regarding the
size of, and current practices within, this market segment.
The interim final rule also requires that ``high-cost'' or
``higher-priced'' alternative mortgage transactions made using AMTPA
preemption comply with the corresponding underwriting requirements and
restrictions on loan terms contained in Regulation Z. For loan terms in
these mortgages that are not preempted under AMTPA, such as terms
related to prepayment penalties, the interim final rule imposes no
additional costs or benefits since creditors are required to meet the
federal standards even in the absence of the interim final rule and the
state requirements remain in place. For loan terms that are preempted
under AMTPA, creditors may save from not having to comply with the
preempted state requirements. The potential costs and benefits for
consumers depend on the specific provisions that are preempted.
B. The Impact of the Interim Final Rule on Depository Institutions and
Credit Unions With $10 Billion or Less in Total Assets as Described in
Section 1026 and the Impact on Consumers in Rural Areas
During 2010, roughly 1,500 state chartered credit unions with $10
billion or less in assets as described in Section 1026 of the Dodd-
Frank Act made adjustable rate or balloon mortgages. In aggregate that
year, these credit unions issued roughly 240,000 adjustable rate
mortgages and another 30,000 balloon/hybrid loans. Together, these
amount to just under 50 percent of the mortgages (by number) originated
by these credit unions in 2010. To the extent that all or some of these
loans were originated using AMTPA preemption, the benefits and costs
described above would apply to these types of loans as issued by state
chartered credit unions. The CFPB seeks additional information to
specify more precisely the benefits or costs for these credit unions.
Similar issuance figures are not available for other depository
institutions with $10 billion or less in assets as described in Section
1026. The closest available data for banks only detail the value of
outstanding fixed rate and adjustable rate mortgages but not the value
of originations broken out into these categories. As of the end of
2010, approximately 25 percent of the outstanding amount of mortgages
held by state chartered banks with total assets under $10 billion, and
secured by
[[Page 44242]]
1-4 family dwellings, was in adjustable rate loans. Applying that
percentage to preliminary data from the most recently available data
collected under the Home Mortgage Disclosure Act results in an
estimated 340,000 adjustable rate mortgages made in 2009. As the 25
percent figure is likely an overestimate, the result should be viewed
as an upper bound. Were all of these loans made using AMTPA preemption,
they would incur the costs and benefits described for these products.
The CFPB seeks additional information to specify more precisely the
monetary costs or benefits for these institutions.
Further, only a fraction of the loans just described were likely
made using AMTPA preemption. Many states have parity or wild card laws
that allow designated lenders (most often depository institutions and/
or credit unions chartered in those states) the option to follow
mortgage regulations applicable to federally chartered lenders or other
types of institutions operating in the same jurisdiction. Firms that
operate under wild card laws face no added costs under the interim
final rule because they do not need to rely on AMTPA preemption. In
addition, in states that opted out of AMTPA in whole or in part,\85\
the interim final rule will impose no additional costs or benefits to
the extent of the opt out.
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\85\ 12 U.S.C. 3804. Six states exercised their opt-out
authority in whole or in part: Arizona, Maine, Massachusetts, New
York, South Carolina, and Wisconsin. See, e.g., Grant S. Nelson &
Dale A. Whitman, Real Estate Finance Law Sec. 11.4 (4th ed. 2001).
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Still, it is possible that for particular lenders or markets, AMTPA
preemption is an important driver of market outcomes. As discussed
above, balloon mortgage loans without a written commitment to renew may
represent a significant product in certain rural markets served by
credit unions and community banks or by non-depository issuers who may
not be able to avail themselves of wild card laws. The specific
provisions of the interim final rule offering preemption for only those
loans with written commitments, while imposing some costs, should
benefit lenders and consumers in those specific markets by allowing
such mortgages under AMTPA preemption. The CFPB is continuing to
research this question and seeks comment on these issues.
C. Consultation
The CFPB has consulted with the prudential regulators, the Federal
Trade Commission, and the Department of Housing and Urban Development
regarding the substance of the interim final rule, including whether
the rule was consistent with prudential, market, or systemic objectives
administered by those agencies. The CFPB will engage in further
consultations during the notice-and-comment rulemaking process.
List of Subjects in 12 CFR Chapter X
Banks, banking, consumer protection, credit unions, mortgages,
national banks, truth in lending.
Authority and Issuance
For the reasons set forth in the preamble and under the authority
of Public Law 111-203, the CFPB establishes Chapter X in Title 12 of
the Code of Federal Regulations, consisting of parts 1000 through 1099,
to read as follows:
CHAPTER X--BUREAU OF CONSUMER FINANCIAL PROTECTION
0
1. Add part 1004 to read as follows:
PART 1004--ALTERNATIVE MORTGAGE TRANSACTION PARITY (REGULATION D)
Sec.
1004.1 Authority, purpose, and scope
1004.2 Definitions
1004.3 Preemption of State law
1004.4 Requirements for alternative mortgage transactions
Appendix A to Part 1004--Official Commentary on Regulation D
Authority: 12 U.S.C. 3802, 3803; 15 U.S.C. 1604, 1639b; Pub. L.
No. 111-203, 124 Stat. 1376.
Sec. 1004.1--Authority, purpose, and scope.
(a) Authority. This regulation, known as Regulation D, is issued by
the Bureau of Consumer Financial Protection to implement the
Alternative Mortgage Transaction Parity Act, 12 U.S.C. 3801 et seq., as
amended by title X, Section 1083 of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (Pub. L. 111-203, 124 Stat. 1376). Section
1004.4 is issued pursuant to the Alternative Mortgage Transaction
Parity Act (as amended) and the Truth in Lending Act, 15 U.S.C. 1601 et
seq.
(b) Purpose. Consistent with the Alternative Mortgage Transaction
Parity Act, the Truth in Lending Act, and the Dodd-Frank Wall Street
Reform and Consumer Protection Act, the purpose of this regulation is
to balance access to responsible credit and enhanced parity between
State and federal housing creditors regarding the making, purchase, and
enforcement of alternative mortgage transactions with consumer
protection and the interests of the States in regulating mortgage
transactions generally.
(c) Scope. This regulation applies to an alternative mortgage
transaction if the creditor received an application for that
transaction on or after July 22, 2011. This regulation does not apply
to a transaction if the creditor received the application for that
transaction before July 22, 2011.
Sec. 1004.2 Definitions.
For purposes of this part:
Alternative mortgage transaction means a loan, credit sale, or
account:
(1) That is secured by an interest in a residential structure that
contains one to four units, whether or not that structure is attached
to real property, including an individual condominium unit, cooperative
unit, mobile home, or trailer, if it is used as a residence;
(2) That is made primarily for personal, family, or household
purposes; and
(3) In which the interest rate or finance charge may be adjusted or
renegotiated.
Creditor shall have the same meaning as in 12 CFR 226.2.
Housing creditor means:
(1) A depository institution, as defined in section 501(a)(2) of
the Depository Institutions Deregulation and Monetary Control Act of
1980;
(2) A lender approved by the Secretary of Housing and Urban
Development for participation in any mortgage insurance program under
the National Housing Act;
(3) Any person who regularly makes loans, credit sales, or advances
on an account secured by an interest in a residential structure that
contains one to four units, whether or not the structure is attached to
real property, including an individual condominium unit, cooperative
unit, mobile home, or trailer, if it is used as a residence; and
(4) Any transferee of a party listed in paragraph (c)(1), (2), or
(3) of this section.
State means any State of the United States of America, the District
of Columbia, Puerto Rico, the Virgin Islands, the Northern Mariana
Islands, American Samoa, Guam, and any other territory or possession of
the United States.
State law means a State constitution, statute, or regulation or any
provision thereof.
Sec. 1004.3 Preemption of State law.
Pursuant to 12 U.S.C. 3803, a State-chartered or -licensed housing
creditor may make, purchase, and enforce alternative mortgage
transactions in accordance with Sec. 1004.4(a) through (c) of this
part (as applicable), notwithstanding any provision of State law that
restricts the ability of the housing creditor to adjust or renegotiate
an interest rate or finance charge with
[[Page 44243]]
respect to the transaction or to change the amount of interest or
finance charges included in a regular periodic payment as a result of
such an adjustment or renegotiation.
Sec. 1004.4 Requirements for alternative mortgage transactions.
(a) Mortgages with adjustable rates or finance charges and home
equity lines of credit. A creditor that makes an alternative mortgage
transaction with an adjustable rate or finance charge may only increase
the interest rate or finance charge as follows:
(1) If the transaction is subject to 12 CFR 226.5b, the creditor
must comply with 12 CFR 226.5b(f)(1).
(2) For all other transactions, the creditor must use either:
(i) An index to which changes in the interest rate are tied that is
readily available to and verifiable by the borrower and beyond the
control of the creditor; or
(ii) A formula or schedule identifying the amount that the interest
rate or finance charge may increase and the times at which, or
circumstances under which, a change may be made.
(b) Renegotiable rates for renewable balloon-payment mortgages. A
creditor that makes an alternative mortgage transaction with payments
based on an amortization period and a large final payment due after a
shorter term may negotiate an increase or decrease in the interest rate
when the transaction is renewed only if the creditor makes a written
commitment to renew the transaction at specified intervals throughout
the amortization period. However, the creditor is not required to renew
the transaction if:
(1) Any action or inaction by the consumer materially and adversely
affects the creditor's security for the transaction or any right of the
creditor in such security;
(2) There is a material failure by the consumer to meet the
repayment terms of the transaction;
(3) There is fraud or a willful or knowing material
misrepresentation by the consumer in connection with the transaction;
or
(4) Federal law dealing with credit extended by a depository
institution to its executive officers specifically requires that as a
condition of the extension the credit shall become due and payable on
demand, provided that the creditor includes such a provision in the
initial agreement.
(c) Requirements for high-cost and higher-priced mortgage loans.
(1) If an alternative mortgage transaction is subject to 12 CFR 226.32,
the creditor must comply with 12 CFR 226.32 and 12 CFR 226.34.
(2) If an alternative mortgage transaction is subject to 12 CFR
226.35, the creditor must comply with 12 CFR 226.35.
(d) Other applicable law. Notwithstanding paragraphs (a) through
(c) of this section, a housing creditor that is not making an
alternative mortgage transaction pursuant to Sec. 1004.3 of this part
may make that transaction consistent with applicable State or Federal
law other than this section.
(e) Reductions in interest rate or finance charge. Nothing in this
section prohibits a creditor from decreasing the interest rate or
finance charge on an alternative mortgage transaction.
Appendix A to Part 1004--Official Commentary on Regulation D
Sec. 1004.1 Authority, Purpose, and Scope
1(c) Scope.
1. Application received before July 22, 2011. This Part does not
apply to a transaction if the creditor received the application for
that transaction before July 22, 2011, even if the transaction was
consummated or completed on or after July 22, 2011. Whether 12
U.S.C. 3803(c) preempts State law with respect to such a transaction
depends on whether: (1) The transaction was an alternative mortgage
transaction as defined by the version of 12 U.S.C. 3802(1) in effect
at the time of application; and (2) the State housing creditor
complied with applicable federal regulations issued by the Office of
the Comptroller of the Currency, the National Credit Union
Administration, the Office of Thrift Supervision, or the Federal
Home Loan Bank Board in effect at the time of application.
2. Subsequent modifications and other actions. If applicable
regulations under 12 U.S.C. 3803(c) (including this Part) preempted
State law with respect to an alternative mortgage transaction at the
time the application was received, the following actions with
respect to that transaction are entitled to the same degree of
preemption under such regulations:
i. The subsequent consummation, completion, purchase, or
enforcement of the transaction by a housing creditor.
ii. The subsequent modification, renewal, or extension of the
transaction. However, if such a transaction is satisfied and
replaced by another transaction, the second transaction must
independently meet the requirements for preemption in effect at the
time the application for the second transaction was received.
Sec. 1004.2 Definitions
2(a) Alternative Mortgage Transaction
1. Alternative mortgage transaction. For purposes of this Part,
an alternative mortgage transaction that meets the definition in
Sec. 1004.2(a) includes any consumer credit transaction that is
secured by a mortgage, deed of trust, or other equivalent consensual
security interest in a dwelling or in residential real property that
includes a dwelling. The dwelling need not be the primary dwelling
of the consumer. Home equity lines of credit and subordinate lien
mortgages are alternative mortgage transactions for purposes of this
Part to the extent they meet the definition in Sec. 1004.2(a).
2. Examples of alternative mortgage transactions. Examples of
alternative mortgage transactions include:
i. Transactions in which the interest rate changes in accordance
with fluctuations in an index.
ii. Transactions in which the interest rate or finance charge
may be increased or decreased after a specified period of time or
under specified circumstances.
iii. Balloon transactions in which payments are based on an
amortization schedule and a large final payment is due after a
shorter term, where the creditor makes a commitment to renew the
transaction at specified intervals throughout the amortization
period, but the interest rate may be renegotiated at renewal. For
example, a fixed-rate mortgage loan with a 30-year amortization
period but a balloon payment due five years after consummation is an
alternative mortgage transaction under Sec. 1004.2(a) if the
creditor commits to renew the mortgage at five-year intervals for
the entire 30-year amortization period.
iv. Transactions in which the creditor and the consumer agree to
share some or all of the appreciation in the value of the property
(shared equity/shared appreciation).
However, this Part preempts State law only to the extent
provided in Sec. 1004.3 and only to the extent that the
requirements of Sec. 1004.4(a) through (c) (as applicable) are met.
3. Examples of transactions that are not alternative mortgage
transactions. The following are examples of transactions that are
not alternative mortgage transactions:
i. Transactions with a fixed interest rate where one or more of
the regular periodic payments may be applied solely to accrued
interest and not to loan principal (an interest-only feature).
ii. Balloon transactions with a fixed interest rate where
payments are based on an amortization schedule and a large final
payment is due after a shorter term, where the creditor does not
make a commitment to renew the transaction at specified intervals
throughout the amortization period.
iii. Transactions with a fixed interest rate where one or more
of the regular periodic payments may result in an increase in the
principal balance (a negative amortization feature).
2(b) Creditor
1. Creditor. As defined in 12 CFR 226.2, ``creditor'' includes
federally and State-chartered banks, thrifts, and credit unions, as
well as non-depository institutions, such as State-licensed lenders.
The Official Staff Commentary to 12 CFR 226.2 contains additional
guidance on the definition of the term ``creditor.'' See 12 CFR
226.2, Supp. I.
[[Page 44244]]
Sec. 1004.3 Preemption of State Law
1. Scope of State laws. Regardless of whether a State law
applies solely to alternative mortgage transactions or applies to
both alternative mortgage transactions and other mortgage or
consumer credit transactions, that law is preempted by Sec. 1004.3
only to the extent that it restricts the ability of a State-
chartered or -licensed housing creditor to adjust or renegotiate an
interest rate or finance charge with respect to an alternative
mortgage transaction or to change the amount of interest or finance
charges included in a regular periodic payment as a result of such
an adjustment or renegotiation.
2. Examples of State laws that are preempted. The following are
examples of State laws that are preempted by Sec. 1004.3:
i. Restrictions on the adjustment or renegotiation of an
interest rate or finance charge, including restrictions on the
circumstances under which a rate or charge may be adjusted, the
method by which a rate or charge may be adjusted, and the amount of
the adjustment to the rate or charge. For example, if a provision of
State law prohibits creditors from increasing an adjustable rate
more than two percentage points or from increasing an adjustable
rate more than once during a year, that provision is preempted by
Sec. 1004.3 with respect to alternative mortgage transactions that
comply with Sec. 1004.4(a) through (c), as applicable. Similarly,
if a provision of State law prohibits housing creditors from
renewing balloon transactions that meet the definition of an
alternative mortgage transaction in Sec. 1004.2(a) on different
terms, that provision is preempted by Sec. 1004.3 only to the
extent that it restricts a state housing creditor's ability to
adjust or renegotiate the interest rate or finance charge at
renewal. See also comment 1004.3-3.i.
ii. Restrictions on the ability of a housing creditor to change
the amount of interest or finance charges included in regular
periodic payments as a result of the adjustment or renegotiation of
an interest rate or finance charge. For example, if a provision of
State law prohibits housing creditors from increasing payments or
limits the amount of such increases with respect to both alternative
mortgage transactions and other mortgage or consumer credit
transactions, that provision is preempted by Sec. 1004.3 to the
extent that it restricts a housing creditor's ability to adjust
payments as a result of the adjustment or renegotiation of an
interest rate on an alternative mortgage transaction. Other
restrictions on changes to payments are not preempted, including
restrictions on transactions in which one or more of the regular
periodic payments may result in an increase in the principal balance
(a negative amortization feature) or may be applied solely to
accrued interest and not to loan principal (an interest-only
feature).
iii. Restrictions on the creditor and the consumer sharing some
or all of the appreciation in the value of the property (shared
equity/shared appreciation).
iv. Underwriting requirements that address the adjustment or
renegotiation of interest rates or finance charges. For example, if
a provision of State law requires housing creditors to underwrite
based on the maximum contractual rate, that provision is preempted
by Sec. 1004.3 with respect to alternative mortgage transactions,
regardless of whether the provision applies solely to alternative
mortgage transactions or to both alternative mortgage transactions
and other mortgage or consumer credit transactions.
3. Examples of State laws that are not preempted. The following
are examples of State laws that are not preempted by Sec. 1004.3
regardless of whether the provision applies solely to alternative
mortgage transactions or to both alternative mortgage transactions
and other mortgage or consumer credit transactions:
i. Restrictions on prepayment penalties or late charges
(including an increase in an interest rate or finance charge as a
result of a late payment).
ii. Restrictions on transactions in which one or more of the
regular periodic payments may result in an increase in the principal
balance (a negative amortization feature) or may be applied solely
to accrued interest and not to loan principal (an interest-only
feature).
iii. Requirements that disclosures be provided.
Sec. 1004.4 Requirements for Alternative Mortgage Transactions
4(a) Mortgages With Adjustable or Renegotiable Rates or Finance
Charges and Home Equity Lines of Credit
1. Index values. A creditor may use any measure of index values
that meets the requirements in Sec. 1004.4(a)(2)(i). For example,
the index may be either single values as of a specific date or an
average of values calculated over a specified period.
2. Index beyond creditor's control. A creditor may increase an
adjustable interest rate pursuant to Sec. 1004.4(a)(2)(i) only if
the increase is based on an index that is beyond the creditor's
control. For purposes of Sec. 1004.4(a)(2)(i), an index is not
beyond the creditor's control if the index is the creditor's own
prime rate or cost of funds. A creditor is permitted, however, to
use a published prime rate, such as the prime rate published in the
Wall Street Journal, even if the creditor's own prime rate is one of
several rates used to establish the published rate.
3. Publicly available. For purposes of Sec. 1004.4(a)(2)(i),
the index must be available to the public. A publicly available
index need not be published in a newspaper, but it must be one the
consumer can independently obtain (by telephone, for example) and
use to verify the annual percentage rate applied to the alternative
mortgage transaction.
4(c) Requirements for High-Cost and Higher-Priced Mortgage Loans
1. Prepayment penalties. If applicable, creditors must comply
with 12 CFR 226.32, including 12 CFR 226.32(d)(6) and (d)(7) which
provide limitations on prepayment penalties. Similarly, if
applicable, creditors must comply with 12 CFR 226.35, including 12
CFR 226.35(b)(2), which also provides limitations on prepayment
penalties. However, under Sec. 1004.3, State laws regarding
prepayment penalties are not preempted. See comment 1004.3-3.i.
Accordingly, creditors must also comply with any State laws
regarding prepayment penalties unless an independent basis for
preemption exists, such as because the State law is inconsistent
with the requirements of Regulation Z, 12 CFR Part 226. See 12 CFR
226.28.
4(d) Other Applicable Law
1. Other applicable law. Section 1004.4(d) permits state housing
creditors that do not seek preemption under Sec. 1004.3 and federal
housing creditors to make alternative mortgage transactions
consistent with applicable State or federal law other than Sec.
1004.4(a) through (c). However, Sec. 1004.4(d) does not exempt
those housing creditors from complying with the provisions of
federal law that are incorporated by reference in Sec. 1004.4 and
are otherwise applicable to the creditor. Specifically, nothing in
Sec. 1004.4(d) exempts a housing creditor from complying with 12
CFR 226.5b, 226.32, 226.34, or 226.35.
Dated: July 19, 2011.
Alastair M. Fitzpayne,
Deputy Chief of Staff and Executive Secretary, Department of the
Treasury.
[FR Doc. 2011-18676 Filed 7-21-11; 8:45 am]
BILLING CODE 4810-25-P