[Federal Register Volume 72, Number 110 (Friday, June 8, 2007)]
[Pages 31825-31832]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 07-2859]



Office of the Comptroller of the Currency


[Docket No. OP-1267]



Office of Thrift Supervision


Illustrations of Consumer Information for Nontraditional Mortgage 

AGENCIES: Office of the Comptroller of the Currency, Treasury (OCC); 
Board of Governors of the Federal Reserve System (Board); Federal 
Deposit Insurance Corporation (FDIC); Office of Thrift Supervision, 
Treasury (OTS); and National Credit Union Administration (NCUA) 
(collectively, the Agencies).

ACTION: Final guidance `` Illustrations of Consumer Information for 
Nontraditional Mortgage Products.


SUMMARY: The Agencies are publishing three documents that set forth 
Illustrations of Consumer Information for Nontraditional Mortgage 
Products. The illustrations are intended to assist institutions in 
implementing the consumer protection portion of the Interagency 
Guidance on Nontraditional Mortgage Product Risks (Interagency NTM 
Guidance) adopted on October 4, 2006. 71 FR 58609 (Oct. 4, 2006). The 
illustrations are not model forms and institutions may choose not to 
use them in providing information to consumers on nontraditional 
mortgage products as recommended in the Interagency NTM Guidance.

EFFECTIVE DATE: June 8, 2007.

    OCC: Michael Bylsma, Director, Stephen Van Meter, Assistant 
Director, or Kathryn Ray, Special Counsel, Community and Consumer Law 
Division, (202) 874-5750.
    Board: Kathleen C. Ryan, Counsel, or Jamie Z. Goodson, Attorney, 
Division of Consumer and Community Affairs, (202) 452-3667. For users 
of Telecommunication Device for Deaf only, call (202) 263-4869.
    FDIC: April Breslaw, Acting Associate Director, Compliance Policy & 
Exam Support Branch, Division of Supervision and Consumer Protection, 
(202) 898-6609; or Richard Foley, Counsel, Legal Division, (202) 898-
    OTS: Montrice G. Yakimov, Assistant Managing Director, Compliance 
and Consumer Protection Division, (202) 906-6173; or Glenn Gimble, 
Senior Project Manager, Compliance and Consumer Protection Division, 
(202) 906-7158.
    NCUA: Cory Phariss, Program Officer, Examination and Insurance, 
(703) 518-6618.


I. Background

    On December 29, 2005, the Agencies published the Interagency NTM 
Guidance for comment. 70 FR 77249 (Dec. 29, 2005). After carefully 
reviewing and considering all comments received, the Agencies published 
the Interagency NTM Guidance (applicable to all banks and their 
subsidiaries, bank holding companies and their nonbank subsidiaries, 
savings associations and their subsidiaries, savings and loan holding 
companies and their subsidiaries, and credit unions) in final form on 
October 4, 2006. 71 FR 58609 (Oct. 4, 2006).
    The Interagency NTM Guidance sets forth recommended practices to 
ensure that consumers have clear and balanced information about 
nontraditional mortgages prior to making a mortgage product choice, 
such as when lenders provide promotional materials about nontraditional 
mortgages or during face-to-face meetings when consumers are shopping 
for a mortgage. The guidance also recommends that any monthly 
statements given with payment option adjustable rate mortgages (ARMs) 
provide information to enable consumers to make informed payment 
    Several commenters on the proposed guidance, including industry 
trade associations, encouraged the Agencies to include model or sample 
disclosures or other descriptive materials as part of the Interagency 
NTM Guidance. In response, the Agencies determined that illustrations 
of consumer information would be useful to institutions as they seek to 
implement the consumer information recommendations. Therefore, on the 
same day the Interagency NTM Guidance was published in the Federal 
Register, the Agencies published for comment proposed Illustrations of 
Consumer Information for Nontraditional Mortgage Products (Proposed 
Illustrations). 71 FR 58673 (Oct. 4, 2006).
    The three Proposed Illustrations consisted of (1) A narrative 
explanation of nontraditional mortgage products, (2) a chart comparing 
interest only (IO)

[[Page 31826]]

loans and payment option ARMs to fixed rate and traditional adjustable 
rate loans, and (3) a table that could be included with any monthly 
statement for a payment option ARM providing information on the impact 
of various payment options on the loan balance. The Agencies noted that 
there would be no Agency requirement or expectation that institutions 
use the illustrations in their communications with consumers. Instead, 
the Agencies intended to illustrate the type of information that the 
Interagency NTM Guidance contemplates. Institutions would be able to 
determine whether or not to use the illustrations and whether and how 
to tailor them to their own circumstances.
    The Agencies requested comment on all aspects of the Proposed 
Illustrations. Specifically, they requested commenters to address 
whether the illustrations, as proposed, would be useful to 
institutions, including community banks, seeking to implement the 
``Communications with Consumers'' portion of the Interagency NTM 
Guidance, or whether changes should be made. The Agencies also 
encouraged specific comment on whether the illustrations, as proposed, 
would be useful in promoting consumer understanding of the risks and 
material terms of nontraditional mortgage products, as described in the 
Interagency NTM Guidance, or whether changes should be made. Finally, 
the Agencies sought comment on whether other illustrations relating to 
nontraditional mortgages, in addition to those proposed, would be 
useful to institutions and consumers.
    After considering the comments received, the Agencies are now 
issuing final illustrations of consumer information for nontraditional 
mortgage products. The Interagency NTM Guidance recommends that 
promotional materials and other product descriptions provide consumers 
with information about the costs, terms, features, and risks of 
nontraditional mortgage products that can assist consumers in their 
product selection decisions. This includes information about potential 
payment shock and negative amortization and, where applicable, 
information about prepayment penalties and the costs of reduced 
documentation loans.
    Institutions seeking to follow the recommendations set forth in the 
Interagency NTM Guidance may, at their option, elect to:
     Use the illustrations;
     Provide information based on the illustrations, but 
expand, abbreviate, or otherwise tailor any information in the 
illustrations as appropriate to reflect, for example:
     The institution's product offerings, such as by deleting 
information about loan products and loan terms not offered by the 
institution and by revising the illustrations to reflect specific terms 
currently offered by the institution;
     The consumer's particular loan requirements;
     Current market conditions, such as by changing the loan 
amounts, interest rates, and corresponding payment amounts to reflect 
current local market circumstances;
     Other information, consistent with the Interagency NTM 
Guidance, such as the payment and loan balance information for 
statements discussed in connection with Illustration No. 3 or 
information about when a prepayment penalty may be imposed; and
     The results of consumer testing of such forms; or
     Provide the information described in the Interagency NTM 
Guidance, as appropriate, in an alternate format.
    To assist institutions that wish to use the illustrations, the 
Agencies will be posting each of the illustrations on their respective 
websites in a form that can be downloaded and printed for easy 
reproduction. In addition, in response to concerns that the interest 
rates used in Illustration No. 2 may become outdated with changes in 
market interest rates--and consistent with the Agencies' intention, 
expressed above, that the illustrations may be modified to reflect, 
among other things, current market conditions--the Agencies also will 
be posting on their respective websites a template that can be used by 
institutions that wish to modify the information presented in 
Illustration No. 2 to reflect more current interest rates (and 
corresponding payment amounts). Illustration No. 2 itself reflects 
typical interest rates for prime borrowers in today's environment, 
rounded to the nearest whole number to enhance simplicity.\1\

    \1\ Illustration No. 2 also embodies assumptions about other 
product features that are typical in the current market: for 
example, the illustration assumes that the payment option ARM 
provides for a cap on increases in the minimum monthly payment equal 
to 7.5 percent per year for the first 5 years of the loan. Thus, the 
illustration shows the minimum monthly payment increasing over this 
time period from $739 (in Year 1) to $987 (in Year 5).

II. Overview of the Comments

    Collectively, the Agencies received letters from over 30 commenters 
on the proposal, including comments from two financial institutions, 12 
consumer advocates and community organizations, 12 trade organizations, 
two individuals, and three state regulatory organizations.
    Most commenters generally approved of the illustrations and 
expressed appreciation for the Agencies' efforts to demonstrate ways 
lenders could advance the consumer communication goals outlined in the 
Interagency NTM Guidance. Generally, commenters stated that the 
proposed illustrations would be useful to financial institutions--
including community banks--seeking to develop their own disclosures to 
help consumers understand the risks of nontraditional mortgage 
products. Commenters also suggested that the illustrations provided 
helpful guidance on the Agencies' expectations and would help reduce 
implementation costs.
    Most financial institutions and trade organizations supported the 
voluntary nature of the illustrations. These commenters stated that the 
flexibility afforded them by the Agencies would allow them to convey 
information to their customers in a format most suited to customers' 
needs. Additionally, having the flexibility to develop their own 
disclosures would allow financial institutions to tailor their 
disclosures to take into account specific product offerings and market 
    However, a smaller group of commenters that included 8 consumer 
groups and one industry group disagreed, and suggested that consumer 
education efforts should be mandatory. The trade group noted that 
providing for voluntary use of the illustrations makes unclear the 
degree to which the illustrations will be used, when they will be used, 
and how they will assist consumers. This commenter suggested that the 
Agencies propose model forms and provide lenders with a safe harbor 
when they use the model forms.
    Several financial institutions, trade organizations, and community 
organizations suggested that the illustrations should be made part of 
the Board's revisions to Regulation Z, which implements the Truth in 
Lending Act. These commenters suggested that making the illustrations 
part of Regulation Z would ensure more widespread industry use. 
Additionally, some commenters expressed concern that issuing guidance 
on consumer information materials applicable only to federally-
supervised institutions would put those institutions at a competitive 
disadvantage. The Conference of State Bank Supervisors (CSBS), the 
American Association of Residential Mortgage Regulators (AARMR), and 
the National Association of Consumer Credit Administrators (NACCA) 

[[Page 31827]]

that they believe the illustrations also could be used by state-
licensed entities subject to state-issued guidance that parallels the 
Interagency NTM Guidance.
    A number of commenters expressed concern that the illustrations 
were difficult to follow and would be confusing to consumers, and 
should be simplified. A few industry trade groups and a consumer group 
advised the Agencies to engage in consumer testing or hire consultants 
to determine how to improve the illustrations. A number of commenters 
provided very specific suggestions aimed at making the illustrations 
easier to understand. Several industry commenters requested that the 
Agencies add language explaining how a consumer could benefit from 
nontraditional mortgage products. Further, one trade organization 
stated that lenders should be able to implement the consumer 
information recommendations of the Interagency NTM Guidance by 
providing consumers with the interagency publication titled, 
``Interest-Only Mortgage Payments and Payment-Option ARMs--Are They for 

    \2\ ``Interest-Only Mortgage Payments and Payment-Option ARMs--
Are They for You?'' available at: http://www.federalreserve.gov/pubs/mortgage_interestonly/mortgage_interestonly.pdf.

    Finally, two commenters suggested that the Agencies include in 
these illustrations information about two additional products--2/28 and 
3/27 adjustable rate mortgages. These are ``hybrid'' ARMs that start 
with a fixed interest rate for two or three years, respectively, and 
then reset to a variable rate, which generally will be higher than the 
introductory fixed rate. Because the Interagency NTM Guidance does not 
cover fully-amortizing mortgage products such as hybrid ARMs, the 
Agencies are not including information on these products in the NTM 
illustrations. However, when the Agencies finalize the ``Statement on 
Subprime Mortgage Lending,'' which was proposed on March 8, 2007, and 
which provides guidance concerning hybrid ARM products, we expect to 
issue for public comment disclosure illustrations appropriate for that 

    \3\ 72 FR 10533 (March 8, 2007).

III. Final Illustrations

    After carefully considering all of the comments received, the 
Agencies have decided to publish the proposed illustrations, with some 
modifications. The Agencies have determined that illustrations of the 
type of information contemplated in the Interagency NTM Guidance are 
needed now. Additionally, the Agencies believe that issuing the 
materials as nonmandatory illustrations will provide institutions with 
the flexibility needed to tailor the materials to their own 
circumstances and customer needs.
    Some commenters asserted that use of the illustrations may place 
entities subject to the Interagency NTM Guidance at a competitive 
disadvantage. In this regard, we note that the Interagency NTM 
Guidance, which includes the consumer disclosure recommendations, is 
already in effect for these entities, and also has been adopted for 
state-regulated mortgage brokers and companies by over 30 state 
agencies and the District of Columbia.\4\ The illustrations will be 
helpful to those institutions that prefer not to incur the costs and 
burdens of developing their own consumer information documents to 
implement the recommendations in the Interagency NTM Guidance. 
Additionally, as previously noted, CSBS, AARMR, and NACCA stated their 
belief that the illustrations also could be used by state-licensed 
entities subject to state-issued guidance that parallels the 
Interagency NTM Guidance.

    \4\ See www.csbs.org/Content/NavigationMenu/RegulatoryAffairs/ 

    The Agencies agree with the commenters who urged simplification of 
the Proposed Illustrations, particularly Proposed Illustration No. 2. 
The specific changes made in response to these comments are detailed 
below. The Agencies opted not to include additional text in the 
illustrations that would discuss the benefits of nontraditional 
mortgage products, to ensure that the materials focus on an objective 
description of material terms, risks, and features of such products. 
Institutions are not precluded, of course, from providing factual 
information concerning the features of their products to consumers.
    One commenter asked whether the consumer information brochure 
entitled ``Interest-Only Mortgage Payments and Payment-Option ARMs--Are 
They for You?'' could be used in place of the illustrations to provide 
information to consumers. The information contemplated by the 
Interagency NTM Guidance serve a different purpose than this brochure. 
This detailed, multi-page publication includes valuable in-depth 
information, but it does not represent the more concise and focused 
consumer information contemplated by, and recommended in, the 
Interagency NTM Guidance. Illustrations 1 and 2, by contrast, are 
designed to be concise and focused so they can be quickly referenced by 
consumers during the mortgage shopping process. While, as explained in 
detail above, institutions are not required to use the illustrations, 
and may elect to provide the information contemplated in the 
Interagency NTM Guidance in a modified or alternate format, delivering 
this more detailed publication to consumers would not serve this same 
purpose or provide the information as recommended in the guidance.
    The Agencies' changes to each Proposed Illustration are discussed 

A. Proposed Illustration No. 1

    Although most commenters stated that Illustration No. 1 would be 
useful in helping consumers understand the risks of nontraditional 
mortgage products, several suggested that the Agencies make the 
illustration more user-friendly by using simpler language and larger 
fonts. Most trade organization and financial institution commenters 
generally agreed that Illustration No. 1 would be helpful. Consumer 
groups, on the other hand, expressed their desire that the 
illustrations strongly communicate the risks of nontraditional mortgage 
products and add language clarifying that making the minimum payments 
on a payment option mortgage could lead to a reduction in a borrower's 
equity. Several consumer groups recommended that the illustration not 
suggest that consumers should request information orally from a lender, 
because consumers should be encouraged to review written information 
rather than rely on oral representations.
    To address the commenters' concerns, the Agencies have simplified 
Illustration No. 1, deleted text where possible to shorten the length 
of the illustration, and made formatting changes to improve 
readability. Additionally, the Agencies have included language 
clarifying that making the minimum payments on a payment option 
mortgage could lead to a reduction in a borrower's equity. The Agencies 
have also added language advising consumers that if they do not 
understand the terms of a particular loan, they should not sign any 
loan contracts, and may want to consider other types of loans.

B. Proposed Illustration No. 2

    Many commenters found proposed Illustration No. 2 confusing. 
Specifically, several commenters said the footnotes and the explanation 
of the minimum monthly payment row for years one through five of a 

[[Page 31828]]

option ARM would confuse consumers. A few commenters suggested that 
Illustration No. 2 would be most helpful to consumers if a loan officer 
or credit counselor reviewed it with them. Additionally, one financial 
institution suggested that Illustration No. 2 should emphasize the 
risks of payment shock and negative amortization.
    One industry trade group stated that assuming borrowers make 
minimum payments is unrealistic. This commenter added that the interest 
rates in the examples should represent a typical interest rate 
environment in which a fixed rate loan would have a higher rate than an 
adjustable rate loan. However, one financial institution suggested that 
the illustration should use the same interest rates for all the 
products to make comparison easier. One trade group stated that the 
rates for interest-only and payment option ARM loans should be higher 
to reflect the terms offered to non-prime borrowers. Two commenters 
stated that the illustration should use a $100,000 loan amount that 
would be easier for consumers to compare to their loan amounts than the 
$180,000 amount used in the proposed illustration.
    A few commenters warned against using any assumptions that could 
become dated. Instead, one industry group suggested that payment 
amounts and interest rate information in Illustration No. 2 should be 
left blank so that loan officers and consumers could fill out the 
numbers themselves as they discuss and consider loan options. Another 
commenter suggested that the Agencies create a Web site where consumers 
could input their own specific information into different mortgage 
structures and get accurate and easy-to-understand cost alternatives.
    To address commenter concerns, and to maintain consistency with the 
Interagency NTM Guidance, the Agencies have simplified Illustration No. 
2 by reducing the number of products for which information is provided. 
The simplified illustration eliminates the need for footnotes or 
similar explanations. Additionally, the Agencies made formatting 
changes to draw consumers' attention to the important points the chart 
seeks to illustrate.
    The Agencies agreed with commenters that a sample loan amount of 
$180,000 could make it more difficult for consumers to estimate their 
own payment amounts. The Agencies, therefore, have adopted a 
representative loan amount of $200,000, which is closer to the national 
median price for a single family home than the $100,000 loan amount 
suggested by some commenters.

C. Proposed Illustration No. 3

    The Agencies received the fewest specific comments on Illustration 
No. 3. Moreover, commenters did not express concern that consumers 
would have difficulty understanding Illustration No. 3. Several 
commenters, however, asked the Agencies to make clear that lenders will 
have flexibility with regard to how and when to provide the information 
contemplated by the third illustration. One trade group stated that the 
third illustration could be burdensome for lenders that do not provide 
monthly statements. Similarly, another trade group asked the Agencies 
to state that lenders could provide the third illustration less 
frequently than monthly, or through an explanation on the lender's Web 
site. In contrast, another trade group stated that the Agencies should 
encourage lenders to provide monthly statements.
    One financial institution recommended that the illustration include 
the resulting loan balance with each payment choice so that the 
consumer can see how their choice affects the loan on a monthly basis. 
However, one financial institution and one trade group commenter stated 
that providing specific payment information would be burdensome and 
that lenders would require implementation time to make system changes.
    After reviewing and considering the comments, the Agencies decided 
not to make substantial changes to Illustration No. 3. The Interagency 
NTM Guidance recommends that if institutions provide monthly statements 
to consumers on payment option mortgages, those monthly statements 
should provide information that enables consumers to make informed 
payment choices, including an explanation of each payment option 
available and the impact of that choice on loan balances. Illustration 
No. 3 shows one way in which this information could be presented. 
Financial institutions retain the flexibility to provide the 
information in a format best suited to their customer's needs. 
Moreover, it is important to note this illustration is not intended to 
set forth all of the information lenders could provide that may be 
useful, such as the current loan balance, an itemization of the payment 
amount devoted to interest and to principal, and whether the loan 
balance has increased.
    The final illustrations appear below.

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[[Page 31832]]

    Dated: May 30, 2007.
John C. Dugan,
Comptroller of the Currency.
    By order of the Board of Governors of the Federal Reserve 
System, May 29, 2007.
Jennifer J. Johnson,
Secretary of the Board.
    Dated at Washington, DC, the 8th day of May, 2007.

    By order of the Federal Deposit Insurance Corporation.
Robert E. Feldman,
Assistant Executive Secretary.
    Dated: May 30, 2007.

    By the Office of Thrift Supervision.
John Reich,
    Dated: May 31, 2007.

    By the National Credit Union Administration.
JoAnn M. Johnson,
[FR Doc. 07-2859 Filed 6-7-07; 8:45 am]
BILLING CODE 4810-35-P; 7535-01-P; 6210-01-P; 6714-01-P; 6720-01-P