[Federal Register Volume 75, Number 185 (Friday, September 24, 2010)]
[Proposed Rules]
[Pages 58539-58788]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-20667]



Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / 
Proposed Rules

[[Page 58539]]


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FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Docket No. R-1390]


Regulation Z; Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule; request for public comment.

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SUMMARY: The Board proposes to amend Regulation Z, which implements the 
Truth in Lending Act (TILA), and the staff commentary to the 
regulation, as part of a comprehensive review of TILA's rules for home-
secured credit. This proposal would revise the rules for the consumer's 
right to rescind certain open-end and closed-end loan secured by the 
consumer's principal dwelling. In addition, the proposal contains 
revisions to the rules for determining when a modification of an 
existing closed-end mortgage loan secured by real property or a 
dwelling is a new transaction requiring new disclosures. The proposal 
would amend the rules for determining whether a closed-end loan secured 
by the consumer's principal dwelling is a ``higher-priced'' mortgage 
loan subject to the special protections in Sec.  226.35. The proposal 
would provide consumers with a right to a refund of fees imposed during 
the three business days following the consumer's receipt of early 
disclosures for closed-end loans secured by real property or a 
dwelling.
    The proposal also would amend the disclosure rules for open- and 
closed-end reverse mortgages. In addition, the proposal would prohibit 
certain unfair acts or practices for reverse mortgages. A creditor 
would be prohibited from conditioning a reverse mortgage on the 
consumer's purchase of another financial or insurance product such as 
an annuity, and a creditor could not extend a reverse mortgage unless 
the consumer has obtained counseling. The proposal also would amend the 
rules for reverse mortgage advertising.

DATES: Comments must be received on or before December 23, 2010.

ADDRESSES: You may submit comments, identified by Docket No. R-1390, by 
any of the following methods:
     Agency Web Site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: [email protected]. Include the 
docket number in the subject line of the message.
     FAX: (202) 452-3819 or (202) 452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.
    All public comments are available from the Board's Web site at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper in Room MP-500 of the Board's Martin Building (20th and C 
Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: For home-equity lines of credit: 
Jennifer S. Benson or Jelena McWilliams, Attorneys; Krista P. Ayoub or 
John C. Wood, Counsels. For closed-end mortgages: Jamie Z. Goodson, 
Catherine Henderson, Nikita M. Pastor, Samantha J. Pelosi, or Maureen 
C. Yap, Attorneys; Paul Mondor, Senior Attorney. For reverse mortgages, 
Brent Lattin or Lorna M. Neill, Senior Attorneys. Division of Consumer 
and Community Affairs, Board of Governors of the Federal Reserve 
System, at (202) 452-3667 or 452-2412; for users of Telecommunications 
Device for the Deaf (TDD) only, contact (202) 263-4869.

SUPPLEMENTARY INFORMATION: 

I. Background on TILA and Regulation Z

    Congress enacted the Truth in Lending Act (TILA) based on findings 
that economic stability would be enhanced and competition among 
consumer credit providers would be strengthened by the informed use of 
credit resulting from consumers' awareness of the cost of credit. One 
of the purposes of TILA is to provide meaningful disclosure of credit 
terms to enable consumers to compare credit terms available in the 
marketplace more readily and avoid the uninformed use of credit.
    TILA's disclosures differ depending on whether credit is an open-
end (revolving) plan or a closed-end (installment) loan. TILA also 
contains procedural and substantive protections for consumers. TILA is 
implemented by the Board's Regulation Z. An Official Staff Commentary 
interprets the requirements of Regulation Z. By statute, creditors that 
follow in good faith Board or official staff interpretations are 
insulated from civil liability, criminal penalties, or administrative 
sanction.

II. Summary of Major Proposed Changes

    The goal of the proposed amendments to Regulation Z is to update 
and make clarifying changes to the rules regarding the consumer's right 
to rescind certain open- and closed-end loans secured by the consumer's 
principal dwelling. The amendments would also ensure that consumers 
receive TILA disclosures for modifications to key loan terms, by 
revising the rules regarding when a modification to an existing closed-
end mortgage loan results in a new transaction. The amendments would 
ensure that prime loans are not incorrectly classified as ``higher-
priced mortgage loans'' subject to special protections for subprime 
loans in the Board's 2008 HOEPA Final Rule in Sec.  226.35, or as HOEPA 
loans under Sec.  226.32. The proposal would provide consumers a right 
to a refund of fees for three business days after the consumer receives 
early disclosures for closed-end mortgages, ensuring that consumers do 
not feel financially committed to a transaction before they have had a 
chance to review the disclosures and consider other options.
    The amendments also would improve the clarity and usefulness of 
disclosures for open- and closed-end reverse mortgages. They would 
protect consumers from unfair practices in connection with reverse 
mortgages, including conditioning a reverse mortgage on the consumer's 
purchase of a financial or insurance product such as an annuity, and 
originating a reverse mortgage before the consumer has received 
independent counseling. A consumer could not be required to pay a 
nonrefundable fee until three business days after the consumer has 
received counseling. Finally, the amendments would ensure that 
advertisements for reverse mortgages contain balanced information and 
are not misleading. Many of the proposed changes to disclosures are 
based on consumer testing, which is discussed in more detail below.
    The Consumer's Right to Rescind. The proposed revisions to 
Regulation Z would:
     Simplify and improve the notice of the right to rescind 
provided to consumers at closing;
     Revise the list of ``material disclosures'' that can 
trigger the extended right to rescind, to focus on disclosures that 
testing shows are most important to consumers; and

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     Clarify the parties' obligations when the extended right 
to rescind is asserted, to reduce uncertainty and litigation costs.
    Loan Modifications That Require New TILA Disclosure. The proposal 
would provide that new TILA disclosures are required when the parties 
to an existing closed-end loan secured by real property or a dwelling 
agree to modify key loan terms, without reference to State contract 
law.
     New disclosures would be required when, for example, the 
parties agree to change the interest rate or monthly payment, advance 
new money, or add an adjustable rate or other risky feature such as a 
prepayment penalty.
     Consistent with current rules, no new disclosures would be 
required for modifications reached in a court proceeding, and 
modifications for borrowers in default or delinquency, unless the loan 
amount or interest rate is increased, or a fee is imposed on the 
consumer.
     Certain beneficial modifications, such as ``no cost'' rate 
and payment decreases, would also be exempt from the requirement for 
new TILA disclosures.
    Coverage Test for 2008 HOEPA Final Rule and HOEPA. The Board 
proposes to revise how a creditor determines whether a closed-end loan 
secured by a consumer's principal dwelling is a ``higher-priced 
mortgage loan'' subject to the Board's 2008 HOEPA Final Rule in Sec.  
226.35, and how points and fees are calculated for coverage under the 
HOEPA rules in Sec. Sec.  226.32 and 226.34.
     The proposal would replace the APR as the metric a 
creditor compares to the average prime offer rate to determine whether 
the transaction is a higher-priced mortgage loan.
     Creditors instead would use a ``coverage rate'' that would 
be closely comparable to the average prime offer rate, and would not be 
disclosed to consumers.
     The proposal would clarify that most third party fees 
would not be counted towards ``points and fees'' that trigger HOEPA 
coverage.
    Consumer's Right to a Refund of Fees. For closed-end loans secured 
by real property or a dwelling, the proposal would require a creditor 
to:
     Refund any appraisal or other fees paid by the consumer 
(other than a credit report fee), if the consumer decides not to 
proceed with a closed-end mortgage transaction within three business 
days of receiving the early disclosures (fees imposed after this three-
day period would not be refundable); and
     Disclose the right to a refund of fees to consumers before 
they apply for a closed-end mortgage loan.
    Reverse Mortgage Disclosures. The proposal would require a creditor 
to provide a consumer with new and revised reverse mortgage 
disclosures.
     Before the consumer applies for a mortgage, the creditor 
must provide a new two-page notice summarizing basic information and 
risks regarding reverse mortgages, entitled ``Key Questions To Ask 
about Reverse Mortgage Loans;''
     Within three business days of application, and again 
before the reverse mortgage loan is consummated (or the account is 
opened, for an open-end reverse mortgage):
    [cir] Loan cost information specific to reverse mortgages that is 
integrated with information required to be disclosed for all home-
equity lines of credit (HELOCs) or closed-end mortgages, as applicable; 
and
    [cir] A table expressing total costs as dollar amounts, in place of 
the table of reverse mortgage ``total annual loan cost rates.''
    Required Counseling for Reverse Mortgages. The proposal would 
prohibit a creditor or other person from:
     Originating a reverse mortgage before the consumer has 
obtained independent counseling from a counselor that meets the 
qualification standards established by HUD, or substantially similar 
standards;
     Imposing a nonrefundable fee on a consumer (except a fee 
for the counseling itself) until three business days after the consumer 
has received counseling from a qualified counselor; and
     Steering consumers to specific counselors or compensating 
counselors or counseling agencies.
    Prohibition on Cross-Selling for Reverse Mortgages. The proposal 
would:
     Prohibit a creditor or broker from requiring a consumer to 
purchase another financial or insurance product (such as an annuity) as 
a condition of obtaining a reverse mortgage; and
     Provide a ``safe harbor'' for compliance if, among other 
things, the reverse mortgage transaction is consummated (or the account 
is opened) at least ten calendar days before the consumer purchases 
another financial or insurance product.
    Reverse mortgage advertising. The proposal would amend Regulation Z 
to revise the advertising rules for reverse mortgages so that consumers 
receive accurate and balanced information. For example, the proposal 
would require advertisements that state that a reverse mortgage 
``requires no payments'' to clearly disclose the fact that borrowers 
must pay taxes and required insurance.
    Other Proposed Revisions. The proposal would contain several 
changes to the rules for HELOCs and closed-end mortgage loans. These 
changes include:
     Conforming advertising rules for HELOCs to rules for 
closed-end mortgage loans adopted as part of the Board's 2008 HOEPA 
Final Rule;
     Clarifying how creditors may comply with the 2008 HOEPA 
Final Rule's ability to repay requirement when making short-term 
balloon loans;
     Clarifying that certain practices regarding prepayment of 
FHA loans constitute prepayment penalties for purposes of TILA 
disclosures and the Board's 2008 HOEPA Final Rule;
     Requiring servicers to provide consumers with the name and 
address of the holder or master servicer of the consumer's loan 
obligation, upon the consumer's written request; and
     Revising the disclosure rules related to credit insurance 
and debt cancellation and suspension products.

III. The Board's Review of Home-Secured Credit Rules

A. Background

    The Board has amended Regulation Z numerous times since TILA 
simplification in 1980. In 1987, the Board revised Regulation Z to 
require special disclosures for closed-end ARMs secured by the 
borrower's principal dwelling. 52 FR 48665, Dec. 24, 1987. In 1995, the 
Board revised Regulation Z to implement changes to TILA by the Home 
Ownership and Equity Protection Act (HOEPA). 60 FR 15463, Mar. 24, 
1995. HOEPA requires special disclosures and substantive protections 
for home-equity loans and refinancings with APRs or points and fees 
above certain statutory thresholds. Numerous other amendments have been 
made over the years to address new mortgage products and other matters, 
such as abusive lending practices in the mortgage and home-equity 
markets.
    The Board's current review of Regulation Z was initiated in 
December 2004 with an advance notice of proposed rulemaking.\1\ 69 FR 
70925, Dec. 8, 2004. At that time, the Board announced its intent to 
conduct its

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review of Regulation Z in stages, focusing first on the rules for open-
end (revolving) credit accounts that are not home-secured, chiefly 
general-purpose credit cards and retailer credit card plans. In January 
2008, the Board issued final rules for open-end credit that is not 
home-secured. 74 FR 5244, Jan. 29, 2009. In May 2009, Congress enacted 
the Credit Card Accountability Responsibility and Disclosure Act of 
2009 (Credit Card Act), which amended TILA's provisions for open-end 
credit. The Board approved final rules implementing the Credit Card Act 
in January and June 2010 (February 2010 Credit Card Rule). 75 FR 7658, 
Feb. 22, 2010; 75 FR 37526, June 29, 2010.
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    \1\ The review was initiated pursuant to requirements of section 
303 of the Riegle Community Development and Regulatory Improvement 
Act of 1994, section 610(c) of the Regulatory Flexibility Act of 
1980, and section 2222 of the Economic Growth and Regulatory 
Paperwork Reduction Act of 1996. An advance notice of proposed 
rulemaking is published to obtain preliminary information prior to 
issuing a proposed rule or, in some cases, deciding whether to issue 
a proposed rule.
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    Beginning in 2007, the Board proposed revisions to the rules for 
home-secured credit in several phases.
     HOEPA. In 2007, the Board proposed rules under HOEPA for 
higher-priced mortgage loans (2007 HOEPA Proposed Rules). The final 
rules, adopted in July 2008 (2008 HOEPA Final Rule), prohibited certain 
unfair or deceptive lending and servicing practices in connection with 
closed-end mortgages. The Board also approved revisions to advertising 
rules for both closed-end and open-end home-secured loans to ensure 
that advertisements contain accurate and balanced information and are 
not misleading or deceptive. The final rules also required creditors to 
provide consumers with transaction-specific disclosures early enough to 
use while shopping for a mortgage. 73 FR 44522, July 30, 2008.
     Timing of Disclosures for Closed-End Mortgages. In May 
2009, the Board adopted final rules implementing the Mortgage 
Disclosure Improvement Act of 2008 (the MDIA).\2\ The MDIA adds to the 
requirements of the 2008 HOEPA Final Rule regarding transaction-
specific disclosures. Among other things, the MDIA and the final rules 
require early, transaction-specific disclosures for mortgage loans 
secured by dwellings even when the dwelling is not the consumer's 
principal dwelling, and requires waiting periods between the time when 
disclosures are given and consummation of the transaction. 74 FR 23289, 
May 19, 2009.
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    \2\ The MDIA is contained in Sections 2501 through 2503 of the 
Housing and Economic Recovery Act of 2008, Public Law 110-289, 
enacted on July 30, 2008. The MDIA was later amended by the 
Emergency Economic Stabilization Act of 2008, Public Law 110-343, 
enacted on October 3, 2008.
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     Examples of Rate and Payment Increases for Variable Rate 
Mortgage Loans. The MDIA also requires payment examples if the interest 
rate or payments can change. Those provisions of the MDIA become 
effective January 30, 2011. As part of the August 2009 Closed-End 
Proposal, the Board proposed rules to implement the examples required 
by the MDIA. The Board has adopted an interim final rule published 
elsewhere in today's Federal Register that would include the examples 
and model clauses, to provide guidance to creditors until the August 
2009 Closed-End Proposal is finalized.
     Closed-End and HELOC Proposals. In August 2009, the Board 
issued two proposals. For closed-end mortgages, the proposal would 
revise the disclosure requirements and address other issues such as 
loan originators' compensation. 74 FR 43232, Aug. 26, 2009. For HELOCs, 
the proposal would revise the disclosure requirements and address other 
issues such as account terminations, suspensions and credit limit 
reductions, and reinstatement of accounts. 74 FR 43428, Aug. 26, 2009. 
Public comments for both proposals were due by December 24, 2009. The 
Board has adopted a final rule on mortgage originator compensation, 
published elsewhere in today's Federal Register. The Board is reviewing 
the comments on the other aspects of the Closed-End and HELOC 
Proposals.
     Final Rule on Mortgage Originator Compensation. The Board 
has adopted a final rule on mortgage originator compensation, published 
elsewhere in today's Federal Register. In the August 2009 Closed-End 
Proposal, the Board proposed to prohibit compensation to mortgage 
brokers and loan officers (collectively ``originators'') that is based 
on a loan's interest rate or other terms, and to prohibit originators 
from steering consumers to loans that are not in consumers' interests. 
The final rule is substantially similar to the proposal.
     Notice of Sale or Transfer of Mortgage Loans. On November 
20, 2009, the Board issued an interim final rule to implement 
amendments to TILA in the Helping Families Save Their Homes Act of 
2009. 74 FR 60143, Nov. 20, 2009. The statutory amendments took effect 
on May 20, 2009, and require notice to consumers when their mortgage 
loan is sold or transferred. The Board has adopted a final rule that is 
published elsewhere in today's Federal Register.
    This proposal would add or revise several rules, including rules 
that apply to rescission; modifications of existing closed-end loans; 
the method for determining whether a closed-end loan is a ``higher-
priced mortgage'' loan; the fee restriction for early disclosures for 
closed-end mortgage loans; reverse mortgage disclosures; restrictions 
on certain acts and practices in connection with reverse mortgages; and 
advertising practices for reverse mortgages and HELOCs.

B. Consumer Testing for This Proposal

    A principal goal for the Regulation Z review is to produce revised 
and improved disclosures that consumers will be more likely to 
understand and use in their decisions, while not creating undue burdens 
for creditors. Currently, Regulation Z requires creditors to provide a 
notice to inform the consumer about the right to rescind and how to 
exercise that right.
    Regulation Z also provides that a consumer who applies for a 
reverse mortgage must receive the ``standard'' TILA disclosure for a 
HELOC or closed-end mortgage, as applicable, and a special disclosure 
tailored to reverse mortgages. In addition, the Board has recently 
proposed some new disclosures that were tested as part of this 
proposal:
     In the Board's August 2009 HELOC Proposal, the Board 
proposed model clauses and forms for periodic statements, and notices 
that would be required when a creditor terminates, suspends, or reduces 
a HELOC, as well as when a creditor responds to a consumer's request to 
reinstate a suspended or reduced line.
     In the Board's August 2009 Closed-End Proposal, the Board 
proposed model clauses for credit insurance, debt suspension, and debt 
cancellation products (``credit protection products'') offered in 
connection with a HELOC or closed-end mortgage loan.
    The Board retained ICF Macro, a research and consulting firm that 
specializes in designing and testing documents, to conduct consumer 
testing to help the Board's review of Regulation Z's disclosures.
    ICF Macro worked closely with the Board to test model rescission 
notices, model HELOC periodic statements and other HELOC notices, model 
notices for credit protection products, and model forms for reverse 
mortgages. Each round of testing involved testing several model 
disclosure forms. Interview participants were asked to review model 
forms and provide their reactions, and were then asked a series of 
questions designed to test their understanding of the content. Data 
were collected on which elements and features of each form were most 
successful in providing information clearly and effectively. The 
findings from each round of interviews were incorporated in revisions 
to the model forms for the following round of testing.
    Some of the key methods and findings of the consumer testing are 
summarized below. ICF Macro prepared reports of the results of the 
testing, which are available on the Board's public Web site

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along with this proposal at: http://www.federalreserve.gov.
    Rescission and Credit Protection Testing. This consumer testing 
consisted of four rounds of one-on-one cognitive interviews. The goals 
of these interviews were to learn more about what information consumers 
read and understand when they receive disclosures, to research how 
easily consumers can find various pieces of information in these 
disclosures, and to test consumers' understanding of certain words and 
phrases. To address specific issues that surfaced during testing, the 
Board proposes to revise significantly the content of the model form 
for the right to rescind by setting forth new format requirements, and 
new mandatory and optional disclosures for the notice. The Board 
proposes new model and sample forms for the costs and features of 
credit protection products. The Board believes that the proposed new 
format rules and model forms would improve consumers' ability to 
identify disclosed information more readily; emphasize information that 
is most important to consumers; and simplify the organization and 
structure of required disclosures to reduce complexity and information 
overload.
    1. Rescission Testing and Findings. The Board's goal was to develop 
clear and conspicuous model forms for the notice of the right to 
rescind that would enable borrowers to understand that they have a 
right to rescind the transaction within a certain period of time, and 
how to exercise that right. Beginning in the fall of 2009, four rounds 
of one-on-one cognitive interviews with a total of 39 participants were 
conducted in different cities throughout the United States. The 
consumer testing groups were comprised of participants representing a 
range of ethnicities, ages, educational levels, and levels of 
experience with home-secured credit.
    Participants in three rounds of testing were shown HELOC model 
forms for the notice of the right to rescind, and the participants in 
the last round were shown closed-end model forms for the notice of the 
right to rescind. In the first two rounds of testing, approximately one 
half of the participants had some knowledge about the right to rescind 
prior to testing. However, in the last two rounds of testing only a few 
participants had some knowledge about the right to rescind.
    Tabular format for rescission form. In the first round of 
rescission testing, the Board tested two forms, one that provided 
required information in a mostly narrative format based on the current 
model form, and another form that provided required information in a 
tabular form. Almost all participants in the first round commented that 
the information was easier to understand in a tabular form and had more 
success answering comprehension questions with a tabular form. This 
finding is consistent with previous findings in the Board's consumer 
testing of the HELOC disclosures, closed-end mortgage disclosures, and 
credit card disclosures. 74 FR 43428, Aug. 26, 2009; 74 FR 43232, Aug. 
26, 2009; 75 FR 7658, Feb. 22, 2010. As a result, the remaining three 
rounds of testing focused on developing, testing and refining the 
tabular form. The forms tested in subsequent rounds differed mainly in 
how they described the deadline to rescind.
    Tear-off portion of rescission form. Currently, consumers must be 
given two copies of the notice of right to rescind--one to use to 
exercise the right and one to retain for the consumer's records. See 
Sec. Sec.  226.15(b) and 226.23(b). The current model forms contain an 
instruction to the consumer to keep one copy of the two notices that 
they receive because it contains important information regarding their 
right to rescind. See Model Forms G-5 through G-9 of Appendix G and 
Model Forms H-8 and H-9 of Appendix H. The Board tested a model form 
that would allow the consumer to detach the bottom part of the form and 
use it to notify the creditor that the consumer wishes to rescind the 
transaction. Most participants said that they would use the bottom part 
of the form to cancel the transaction. A few participants said that 
they would prepare and send a separate statement in addition to the 
form. When asked what they would do if they lost the notice and wanted 
to rescind, most participants said that they would call the creditor or 
visit their creditor's Web site to obtain another copy of the notice. 
Almost all participants said that they would make and keep a copy of 
the form if they decided to exercise the right.
    Accordingly, the Board is proposing to eliminate the requirement 
that creditors provide two copies of the notice of the right to rescind 
to each consumer entitled to rescind. See proposed Sec. Sec.  
226.15(b)(1) and 226.23(b)(1), below. Instead, the Board is proposing 
to require creditors to provide a form at the bottom of the notice that 
the consumer may detach and use to exercise the right to rescind, 
enabling them to retain the portion explaining their rights. See 
proposed Sec.  226.15(b)(2)(i) and (3)(viii), Sec.  226.23(b)(2)(i) and 
(3)(vii).
    Deadline for rescission. Consumer testing also revealed that 
consumers are generally unable to calculate the deadline for rescission 
based on the information currently required in the notice. The current 
model forms provide a blank space for the creditor to insert a date 
followed by the language ``(or midnight of the third business day 
following the latest of the three events listed above)'' as the 
deadline by which the consumer must exercise the right. The three 
events referenced are the following: (1) The date of the transaction or 
occurrence giving rise to right of rescission; (2) the date the 
consumer received the Truth in Lending disclosures; and (3) the date 
the consumer received the notice of the right to rescind.
    Most participants had difficulty using the three events to 
calculate the deadline for rescission. The primary causes of errors 
were not counting Saturdays as a business day, counting Federal 
holidays as a business day, and counting the day the last event took 
place as the first day of the three-day period. Alternative text was 
tested to assist participants in calculating the deadline based on the 
three events; however, the text added length and complexity to the form 
without a significant improvement in comprehension. Participants in all 
rounds strongly preferred forms that provided a specific date over 
those that required them to calculate the deadline themselves. Thus, 
the Board is proposing to require a creditor to provide the calendar 
date on which it reasonably and in good faith expects the three 
business day period for rescission to expire. See proposed Sec. Sec.  
226.15(b)(3)(vii) and 226.23(b)(3)(vi).
    Extended right to rescind. Consumer testing also indicated that 
consumers do not understand how an extended right to rescind could 
arise. Consumers were confused when presented with a single disclosure 
that provided information about the three-business-day right to rescind 
and an extended right to rescind. In two rounds of testing, 
participants were presented with a model form that contained a 
statement explaining when a consumer might have an extended right to 
rescind. However, consumer testing revealed that these explanations 
added length and complexity but did not increase consumer comprehension 
of the extended right to rescind. Nonetheless, the Board believes that 
some disclosure regarding the extended right to rescind is necessary 
for full disclosure of the consumer's rights. Thus, the Board is 
proposing to include a statement in the model forms that the right to 
cancel the

[[Page 58543]]

transaction or occurrence giving rise to the right of rescission may 
extend beyond the date disclosed in the notice.
    How to exercise the right of rescission. Consumer testing revealed 
that consumers are particularly concerned about proving that they 
exercised the right to rescind before the three-day period expires. 
Participants offered varied responses about a preferred delivery method 
to submit the notice of the right to rescind to the creditor: some 
preferred to send it by e-mail and facsimile to receive instant 
electronic confirmation; others preferred to send it by mail with 
return receipt and tracking requested. Most participants said they 
would not hand-deliver the notice to a bank employee unless they could 
be certain that the employee was authorized to receive the notice on 
the creditor's behalf and could provide them with a receipt.
    The proposed rule would require a creditor, at minimum, to disclose 
the name and address to which the consumer may mail the notice of 
rescission. See proposed Sec. Sec.  226.15(b)(3)(vi) and 
226.23(b)(3)(v). The proposed rule would also permit a creditor to 
describe other methods, if any, that the consumer may use to send or 
deliver written notification of exercise of the right, such as 
overnight courier, fax, e-mail, or in person. The proposed sample forms 
include information for the consumer to submit the notice of rescission 
by mail or fax. See proposed Samples G-5(B) and G-5(C) of Appendix G 
and Sample H-8(B) of Appendix H.
    2. Credit Protection Products Testing and Findings. The Board and 
ICF Macro also developed and tested model and sample forms for credit 
protection products in the last two rounds of 18 interviews--one round 
with 10 participants for HELOCs, and one round with 8 participants for 
closed-end mortgages. These forms were based on model clauses proposed 
in the August 2009 Closed-End Proposal. The sample form was based on 
samples for credit life insurance disclosures proposed in the August 
2009 Closed-End Proposal.
    Consumer testing revealed that consumers have limited understanding 
of credit protection products, and that some of the current disclosures 
do not adequately inform consumers of the costs and risks of these 
products. For example, the current regulation allows creditors to 
disclose the cost of the product on a unit-cost basis in certain 
situations. However, even when provided with a calculator, only three 
of 10 participants in the first round of testing could correctly 
calculate the cost of the product using the unit cost. When the cost 
was disclosed as a dollar figure tailored to the loan amount in the 
second round of testing, all participants understood the cost of the 
product. Accordingly, the proposal would require creditors to disclose 
the maximum premium or charge per period.
    In addition, most credit protection products place limits on the 
maximum benefit, but the current regulation does not require disclosure 
of these limits. To address this problem, the Board tested a disclosure 
of the maximum benefit amount for a sample credit life insurance 
policy. In the first round of testing, only five of the 10 participants 
understood the disclosure of the maximum benefit when disclosed at the 
bottom of the form by the signature line. In the second round of 
testing, this information was presented in a tabular question-and-
answer format and all eight participants understood the disclosure. 
Accordingly, the proposal would require creditors to disclose the 
maximum benefit amount. In addition, based on consumer testing, the 
proposal would require other improved disclosures, such as the 
disclosure of eligibility requirements.
    Prior to consumer testing, the Board reviewed several disclosures 
for credit protection disclosures, which revealed that many disclosures 
were in small font, not grouped together, and in dense blocks of text. 
Based on the Board's experience with consumer disclosures, the Board 
was concerned that consumers would find these disclosures difficult to 
comprehend. To address these problems, the Board tested a sample credit 
life insurance disclosure that used 12-point font, tabular question-
and-answer format, and bold, underlined text. Participants understood 
the content of the disclosures when presented in this format. 
Accordingly, the proposal would require creditors to provide the 
disclosures clearly and conspicuously in a minimum 10-point font, and 
group them together with substantially similar headings, content, and 
format to the proposed model forms. See proposed Model Forms G-16(A) 
and H-17(A).
    3. Reverse Mortgage Disclosures Testing and Findings.
    The reverse mortgage testing consisted of four focus groups and 
three rounds of one-on-one cognitive interviews. The goals of these 
focus groups and interviews were to learn about consumers' 
understanding of reverse mortgages, how consumers shop for reverse 
mortgages and what information consumers read when they receive reverse 
mortgage disclosures, and to assess their understanding of such 
disclosures. The consumer testing groups contained participants with a 
range of ethnicities, ages, and educational levels, and included 
consumers who had obtained a reverse mortgage as well as those who were 
eligible for one based on their age and the amount of equity in their 
home.
    Exploratory focus groups. In January 2010 the Board worked with ICF 
Macro to conduct four focus groups with consumers who had obtained a 
reverse mortgage or were eligible for one based on their age and the 
amount of equity in their home. Each focus group consisted of ten 
people that discussed issues identified by the Board and raised by a 
moderator from ICF Macro. Through these focus groups, the Board 
gathered information on consumers' understanding of reverse mortgages, 
as well as the process through which consumers decide to apply for a 
reverse mortgage. Focus group participants also provided feedback on a 
sample reverse mortgage disclosure that was representative of those 
currently in use. Following the focus groups, ICF Macro's design team 
used what they learned to develop improved versions of the disclosures 
for further testing.
    Cognitive interviews on existing disclosures. In 2010, the Board 
worked with ICF Macro to conduct three rounds of cognitive interviews 
with a total of 31 participants. These cognitive interviews consisted 
of one-on-one discussions with reverse mortgage consumers, during which 
consumers were asked to explain what they understood about reverse 
mortgages, their experiences and perceptions of shopping for the 
product, and to review samples of existing and revised reverse mortgage 
disclosures. In addition to learning about the information that 
consumers thought was important to know about reverse mortgages, the 
goals of these interviews were: (1) To test consumers' comprehension of 
the existing reverse mortgage disclosure form; (2) to research how 
easily consumers can find various pieces of information in the existing 
and revised disclosures; and (3) to test consumers' understanding of 
certain reverse mortgage related words and phrases.
    Findings of reverse mortgage testing. Many consumer testing 
participants did not understand reverse mortgages or had misconceptions 
about them. Most participants understood that reverse mortgages are 
different from traditional mortgages in that traditional mortgages have 
to be paid back during the borrower's lifetime, while reverse mortgage 
borrowers receive payments from the lender based on the equity in the 
consumer's home. However,

[[Page 58544]]

important misconceptions about reverse mortgages were shared by a 
significant number of participants. For example, some participants 
believed that by getting a reverse mortgage, a borrower is giving the 
lender ownership of his or her home. Rather than seeing a reverse 
mortgage as a loan that needs to be repaid, these participants believed 
it represented the exchange of a home for a stream of funds. Some 
participants also believed that if the amount owed on a reverse 
mortgage exceeds the value of the home, the borrower is responsible for 
paying the difference and that if at any point a borrower ``outlives'' 
their reverse mortgage--that is, if the equity in their home decreases 
to zero--they will no longer receive any payments from the lender.
    Therefore, the proposal would require creditors to provide key 
information about reverse mortgages at the time an application form is 
provided to the consumer, as discussed below.
    Reverse mortgage disclosures provided to consumers before 
application. Currently, for reverse mortgages, creditors must provide 
the home equity line of credit (HELOC) or closed-end mortgage 
application disclosures required by TILA, depending on whether the 
reverse mortgage is open-end or closed-end credit. These documents are 
not tailored to reverse mortgages.
    For open-end reverse mortgages this includes a Board-published 
HELOC brochure or a suitable substitute at the time an application for 
an open-end reverse mortgage is provided to the consumer. For an 
adjustable-rate closed-end reverse mortgage, consumers would receive 
the lengthy CHARM booklet that explains how ARMs generally work. 
However, closed-end reverse mortgages are almost always fixed rate 
transactions, so consumers generally do not receive any TILA 
disclosures at application.
    Since consumers have a number of misconceptions about reverse 
mortgages that are not addressed by the current disclosures, the 
proposal would require creditors to provide, for all reverse mortgages, 
a two-page document that explains how reverse mortgages work and about 
terms and risks that are important to consider when selecting a reverse 
mortgage, rather than the current documents.
    Reverse mortgage disclosures provided to consumers after 
application. Depending on whether a reverse mortgage is open-end or 
closed-end credit, the current cost disclosure requirements under TILA 
and Regulation Z differ. All reverse mortgage creditors must provide 
the total annual loan cost (``TALC'') disclosure at least three 
business days before account-opening for an open-end reverse mortgage, 
or consummation for a closed-end reverse mortgage. For closed-end 
reverse mortgages, TILA and Regulation Z require creditors to provide 
an early TILA disclosure within three business days after application 
and at least seven business days before consummation, and before the 
consumer has paid a fee other than a fee for obtaining a credit 
history. For open-end reverse mortgages, creditors must provide 
disclosures on or with an application that contain information about 
the creditor's open-end reverse mortgage plans. These disclosures do 
not include information dependent on a specific borrower's 
creditworthiness or the value of the dwelling, such as the APRs offered 
to the consumer, because the application disclosures are provided 
before underwriting takes place. Creditors are required to disclose 
transaction-specific costs and terms at the time that an open-end 
reverse mortgage plan is opened.
    In addition, reverse mortgage creditors currently must disclose a 
table of TALC rates. The table of TALC rates is designed to show 
consumers how the cost of the reverse mortgage varies over time and 
with house price appreciation. Generally, the longer the consumer keeps 
a reverse mortgage the lower the relative cost will be because the 
upfront costs of the reverse mortgage will be amortized over a longer 
period of time. Thus, the TALC rates usually will decline over time 
even though the total dollar cost of the reverse mortgage is rising due 
to interest and fees being charged on an increasing loan balance.
    Very few participants understood the table of TALC rates. Although 
participants seemed to understand the paragraphs explaining the TALC 
table, the vast majority could not explain how the description related 
to the percentages shown in the TALC table. Participants could not 
explain why the TALC rates were declining over time even though the 
reverse mortgage's loan balance was rising. Most participants thought 
the TALC rates shown were interest rates, and interpreted the table as 
showing that their interest rate would decrease if they held their 
reverse mortgage for a longer period of time. Participants, including 
those who currently have a reverse mortgage (and thus presumably 
received the TALC disclosure), consistently stated that they would not 
use the disclosure to decide whether or not to obtain a reverse 
mortgage. Instead, participants consistently expressed a preference for 
a disclosure providing total costs as a dollar amount.
    Thus, the proposal would require a table that demonstrates how the 
reverse mortgage balance grows over time. The table expresses this 
information as dollar amounts rather than as annualized loan cost 
rates. The table would show (1) How much money would be advanced to the 
consumer; (2) the total of all costs and charges owed by the consumer; 
and (3) the total amount the consumer would be required to repay. This 
information would be provided for each of three assumed loan periods of 
1 year, 5 years, and 10 years. Consumer testing has shown that 
consumers would have a much easier time understanding this table and 
would be much more likely to use it in evaluating a reverse mortgage 
than they would the TALC rates.
    In addition, the proposed reverse mortgage disclosures would 
combine reverse-mortgage-specific information with much of the 
information that the Board proposed for HELOCs and closed-end mortgages 
in 2009. For example, the proposed disclosure would include information 
about APRs, variable interest rates and fees. However, because not all 
of the information currently required for HELOCs and closed-end 
mortgages is relevant or applicable to reverse mortgage borrowers, the 
disclosures would not contain information that would not be meaningful 
to reverse mortgage consumers. By consolidating the reverse mortgage 
disclosures, the proposal would ensure that consumers receive 
meaningful information in an understandable format that is largely 
similar for open-end and closed-end reverse mortgages, and has been 
designed and consumer tested for reverse mortgage consumers.
    Additional testing during and after comment period. During the 
comment period, the Board may work with ICF Macro to conduct additional 
testing of model disclosures proposed in this notice.

IV. The Board's Rulemaking Authority

    TILA Section 105. TILA mandates that the Board prescribe 
regulations to carry out the purposes of the act. TILA also 
specifically authorizes the Board, among other things, 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 
Board's judgment are necessary or proper to effectuate the purposes of 
TILA, facilitate compliance with the act, or prevent circumvention or 
evasion. 15 U.S.C. 1604(a).

[[Page 58545]]

     Exempt from all or part of TILA any class of transactions 
if the Board determines that TILA coverage does not provide a 
meaningful benefit to consumers in the form of useful information or 
protection. The Board must consider factors identified in the act and 
publish its rationale at the time it proposes an exemption for comment. 
15 U.S.C. 1604(f).
    In the course of developing the proposal, the Board has considered 
the views of interested parties, its experience in implementing and 
enforcing Regulation Z, and the results obtained from testing various 
disclosure options in controlled consumer tests. For the reasons 
discussed in this notice, the Board believes this proposal is 
appropriate pursuant to the authority under TILA Section 105(a).
    Also, as explained in this notice, the Board believes that the 
specific exemptions proposed are appropriate because the existing 
requirements do not provide a meaningful benefit to consumers in the 
form of useful information or protection. In reaching this conclusion 
with each proposed exemption, the Board considered (1) The amount of 
the loan and whether the disclosure provides a benefit to consumers who 
are parties to the transaction involving a loan of such amount; (2) the 
extent to which the requirement complicates, hinders, or makes more 
expensive the credit process; (3) the status of the borrower, including 
any related financial arrangements of the borrower, the financial 
sophistication of the borrower relative to the type of transaction, and 
the importance to the borrower of the credit, related supporting 
property, and coverage under TILA; (4) whether the loan is secured by 
the principal residence of the borrower; and (5) whether the exemption 
would undermine the goal of consumer protection. The rationales for 
these proposed exemptions are explained in part VI below.
    TILA Section 129(l)(2). TILA also authorizes the Board to prohibit 
acts or practices in connection with:
     Mortgage loans that the Board finds to be unfair, 
deceptive, or designed to evade the provisions of HOEPA; and
     Refinancing of mortgage loans that the Board finds to be 
associated with abusive lending practices or that are otherwise not in 
the interest of the borrower.
    The authority granted to the Board under TILA Section 129(l)(2), 15 
U.S.C. 1639(l)(2), is broad. It reaches mortgage loans with rates and 
fees that do not meet HOEPA's rate or fee trigger in TILA section 
103(aa), 15 U.S.C. 1602(aa), as well as mortgage loans not covered 
under that section, such as home purchase loans. Moreover, while 
HOEPA's statutory restrictions apply only to creditors and only to loan 
terms or lending practices, Section 129(l)(2) is not limited to acts or 
practices by creditors, nor is it limited to loan terms or lending 
practices. See 15 U.S.C. 1639(l)(2). It authorizes protections against 
unfair or deceptive practices ``in connection with mortgage loans,'' 
and it authorizes protections against abusive practices ``in connection 
with refinancing of mortgage loans.'' Thus, the Board's authority is 
not limited to regulating specific contractual terms of mortgage loan 
agreements; it extends to regulating loan-related practices generally, 
within the standards set forth in the statute.
    HOEPA does not set forth a standard for what is unfair or 
deceptive, but the Conference Report for HOEPA indicates that, in 
determining whether a practice in connection with mortgage loans is 
unfair or deceptive, the Board should look to the standards employed 
for interpreting state unfair and deceptive trade practices statutes 
and the Federal Trade Commission Act (FTC Act), Section 5(a), 15 U.S.C. 
45(a).\3\
---------------------------------------------------------------------------

    \3\ H.R. Rep. 103-652, at 162 (1994) (Conf. Rep.).
---------------------------------------------------------------------------

    Congress has codified standards developed by the Federal Trade 
Commission (FTC) for determining whether acts or practices are unfair 
under Section 5(a), 15 U.S.C. 45(a).\4\ Under the FTC Act, an act or 
practice is unfair when it causes or is likely to cause substantial 
injury to consumers which is not reasonably avoidable by consumers 
themselves and not outweighed by countervailing benefits to consumers 
or to competition. In addition, in determining whether an act or 
practice is unfair, the FTC is permitted to consider established public 
policies, but public policy considerations may not serve as the primary 
basis for an unfairness determination.\5\
---------------------------------------------------------------------------

    \4\ See 15 U.S.C. 45(n); Letter from Commissioners of the FTC to 
the Hon. Wendell H. Ford, Chairman, and the Hon. John C. Danforth, 
Ranking Minority Member, Consumer Subcomm. of the H. Comm. on 
Commerce, Science, and Transp. (Dec. 17, 1980).
    \5\ 15 U.S.C. 45(n).
---------------------------------------------------------------------------

    The FTC has interpreted these standards to mean that consumer 
injury is the central focus of any inquiry regarding unfairness.\6\ 
Consumer injury may be substantial if it imposes a small harm on a 
large number of consumers, or if it raises a significant risk of 
concrete harm.\7\ The FTC looks to whether an act or practice is 
injurious in its net effects.\8\ The FTC has also observed that an 
unfair act or practice will almost always reflect a market failure or 
market imperfection that prevents the forces of supply and demand from 
maximizing benefits and minimizing costs. \9\ In evaluating unfairness, 
the FTC looks to whether consumers' free market decisions are 
unjustifiably hindered. \10\
---------------------------------------------------------------------------

    \6\ Statement of Basis and Purpose and Regulatory Analysis, 
Credit Practices Rule, 42 FR 7740, 7743, Mar. 1, 1984 (Credit 
Practices Rule).
    \7\ Letter from Commissioners of the FTC to the Hon. Wendell H. 
Ford, Chairman, and the Hon. John C. Danforth, Ranking Minority 
Member, Consumer Subcomm. of the H. Comm. on Commerce, Science, and 
Transp., n.12 (Dec. 17, 1980).
    \8\ Credit Practices Rule, 42 FR at 7744.
    \9\ Id.
    \10\ Id.
---------------------------------------------------------------------------

    The FTC has also adopted standards for determining whether an act 
or practice is deceptive (though these standards, unlike unfairness 
standards, have not been incorporated into the FTC Act).\11\ First, 
there must be a representation, omission or practice that is likely to 
mislead the consumer. Second, the act or practice is examined from the 
perspective of a consumer acting reasonably in the circumstances. 
Third, the representation, omission, or practice must be material. That 
is, it must be likely to affect the consumer's conduct or decision with 
regard to a product or service.\12\
---------------------------------------------------------------------------

    \11\ Letter from James C. Miller III, Chairman, FTC to the Hon. 
John D. Dingell, Chairman, H. Comm. on Energy and Commerce (Oct. 14, 
1983) (Dingell Letter).
    \12\ Dingell Letter at 1-2.
---------------------------------------------------------------------------

    Many states also have adopted statutes prohibiting unfair or 
deceptive acts or practices, and these statutes employ a variety of 
standards, many of them different from the standards currently applied 
to the FTC Act. A number of states follow an unfairness standard 
formerly used by the FTC. Under this standard, an act or practice is 
unfair where it offends public policy; or is immoral, unethical, 
oppressive, or unscrupulous; and causes substantial injury to 
consumers.\13\
---------------------------------------------------------------------------

    \13\ See, e.g., Kenai Chrysler Ctr., Inc. v. Denison, 167 P.3d 
1240, 1255 (Alaska 2007) (quoting FTC v. Sperry & Hutchinson Co., 
405 U.S. 233, 244-45 n.5 (1972)); State v. Moran, 151 N.H. 450, 452, 
861 A.2d 763, 755-56 (N.H. 2004) (concurrently applying the FTC's 
former test and a test under which an act or practice is unfair or 
deceptive if ``the objectionable conduct [hellip] attain[s] a level 
of rascality that would raise an eyebrow of someone inured to the 
rough and tumble of the world of commerce.'') (citation omitted); 
Robinson v. Toyota Motor Credit Corp., 201 Ill. 2d 403, 417-418, 775 
N.E.2d 951, 961-62 (2002) (quoting 405 U.S. at 244-45 n.5).
---------------------------------------------------------------------------

    In developing proposed rules under TILA Section 129(l)(2)(A), 15 
U.S.C. 1639(l)(2)(A), the Board has considered the standards currently 
applied to the

[[Page 58546]]

FTC Act's prohibition against unfair or deceptive acts or practices, as 
well as the standards applied to similar State statutes.

V. Discussion of Major Proposed Revisions

    The objectives of the proposed revisions are to update and clarify 
the rules for home-secured credit that provide important protections to 
consumers, and to reduce undue compliance burden and litigation risk 
for creditors. The proposal would improve the clarity and usefulness of 
disclosures for the consumer's right to rescind. Disclosures for 
reverse mortgages would be improved, providing greater clarity about 
transactions that are complex and unfamiliar to many consumers. The 
proposal would also ensure that consumers receive disclosures when the 
creditor modifies key terms of an existing loan. Consumers would be 
assured the opportunity to review early disclosures for closed-end 
loans, before a fee is imposed that may make the consumer feel 
financially committed to the loan offered. Proposed changes to 
disclosures are based on consumer testing, to ensure that the 
disclosures are understandable and useful to consumers.
    In considering the revisions, the Board sought to ensure that the 
proposal would not reduce access to credit, and sought to balance the 
potential benefits for consumers with the compliance burdens imposed on 
creditors. For example, the proposal revises the material disclosures 
that can trigger an extended right to rescind, to include disclosures 
that consumer testing has shown consumers find important in their 
decision making, and exclude disclosures that consumers do not find 
useful. The proposal also includes tolerances for certain material 
disclosures, to ensure that inconsequential errors do not result in an 
extended right to rescind.

A. The Consumer's Right to Rescind

    TILA and Regulation Z provide that a consumer generally has three 
business days after closing to rescind certain loans secured by the 
consumer's principal dwelling. The consumer may have up to three years 
after closing to rescind, however, if the creditor fails to provide the 
consumer with certain ``material'' disclosures or the notice of the 
right to rescind (the ``extended right to rescind'').
    The Notice of Rescission. Regulation Z requires creditors to 
provide two copies of the notice of the right to rescind to each 
consumer entitled to rescind the transaction, to ensure that consumers 
can use one copy to rescind the loan and retain the other copy with 
information about the right to rescind. The regulation sets forth the 
contents for the notice and provides model forms that creditors may use 
to satisfy these disclosure requirements. Creditors are required to 
provide the date of the transaction, the date the right expires, and an 
explanation of how to calculate the deadline on the form.
    Consumer testing shows that consumers may have difficulty 
understanding the explanation of the right of rescission in the current 
model forms. Consumers struggled with determining when the deadline to 
rescind expires, based on the later of consummation, delivery of the 
material disclosures, or delivery of the notice of the right to 
rescind. Consumer testing also shows that when rescission information 
was presented in a certain format, participants found information 
easier to locate and their comprehension of the disclosures improved. 
In addition, creditors have raised concerns about the two-copy rule, 
indicting this rule can impose litigation risks when a consumer alleges 
an extended right to rescind based on the creditor's failure to deliver 
two copies of the notice.
    Based on the results of consumer testing and outreach, the Board 
proposes to revise the content and format requirements for the notice 
of the right to rescind and issue revised model forms. The revised 
notice would include:
     The calendar date when the three-business-day rescission 
period expires, without the explanation of how to calculate the 
deadline.
     A statement that the consumer's right to cancel the loan 
may extend beyond the date stated in the notice and in that case, the 
consumer must send the notice to either the current owner of the loan 
or the servicer.
     A ``tear off'' form that a consumer may use to exercise 
his or her right to rescind.
    In addition, the information required in the rescission notice must 
be disclosed:
     In a tabular format, as opposed to a narrative format used 
in the current model rescission forms.
     On the front side of a one-page document, separate from 
all other unrelated material; and
     In a minimum 10-point font.
    Two-copy rule. The proposal also requires creditors to provide just 
one notice of the right to rescind to each consumer entitled to rescind 
(as opposed to two copies required under the current regulation). The 
proposed model rescission notice contains a ``tear off'' form at the 
bottom, so that the consumer could separate that portion to deliver to 
the creditor while retaining the top portion with the description of 
rights. The Board believes that consumers who rescind should be able to 
keep a written explanation of their rights, but is concerned about the 
litigation costs imposed by the two-copy rule. Moreover, the need for 
the two-copy rule seems to have diminished. Today, consumers generally 
have access to copy machines and scanners that would allow them to make 
and keep a copy of the notice if they decide to exercise the right.
    Material Disclosures. A consumer's right to rescind generally does 
not expire until the notice of the right to rescind and the material 
disclosures are properly delivered. If the notice or material 
disclosures are never delivered, the right to rescind expires on the 
earlier of three years from the date of consummation or upon the sale 
or transfer of all of the consumer's interest in the property. Delivery 
of the material disclosures and notice ensures that consumers are 
notified of their right to rescind, and that they have the information 
they need to decide whether to exercise the right. Because different 
disclosures are given for open- and closed-end loans, TILA and 
Regulation Z specify certain ``material disclosures'' that must be 
given for HELOCs and other ``material disclosures'' that must be given 
for closed-end home-secured loans.
    Congress added the statutory definition of ``material disclosures'' 
in 1980. Changes in the HELOC and closed-end mortgage marketplace since 
then have made this statutory definition outdated. Certain disclosures 
that are the most important to consumers in deciding whether to take 
out a loan (based on consumer testing) currently are not considered 
``material disclosures.'' In contrast, other disclosures that are not 
likely to impact a consumer's decision to enter into a loan currently 
are ``material disclosures'' under the statutory definition. The Board 
believes that revising the definition of ``material disclosures'' to 
reflect the disclosures that are most critical to the consumer's 
evaluation of credit terms would better ensure that the compliance 
costs related to rescission are aligned with disclosure requirements 
that provide meaningful benefits for consumers. Thus, the Board 
proposes to use its adjustment and exception authority to add certain 
disclosures and remove other disclosures from the definition of 
``material disclosures'' for both HELOCs

[[Page 58547]]

and closed-end mortgage loans. The Board also proposes to add 
tolerances for accuracy for certain disclosures to ensure 
inconsequential disclosure errors do not result in extended rescission 
rights.
    Material Disclosures for HELOCs. In the August 2009 HELOC Proposal, 
the Board proposed comprehensive revisions to the account-opening 
disclosures for HELOCs that would reflect changes in the HELOC market. 
The proposed account-opening disclosures and revised model forms were 
developed after extensive consumer testing to determine which credit 
terms consumers find the most useful in evaluating HELOC plans. 
Consistent with the August 2009 HELOC Proposal, the staff recommends 
proposed revisions to the definition of material disclosures to include 
the information that is critical to consumers in evaluating HELOC 
offers, and to remove information that consumers do not find to be 
important. For example, the proposal revises the definition of 
``material disclosures'' to include the credit limit applicable to the 
HELOC plan, which consumer testing shows is one of the most important 
pieces of information that consumers wanted to know in deciding whether 
to open a HELOC plan. The proposal also adds to the definition of 
``material disclosures'' a disclosure of the total one-time costs 
imposed to open a HELOC plan (i.e., total closing costs), but removes 
from the definition an itemization of these costs. Consumer testing 
shows that it is the total closing costs (rather than the itemized 
costs) that is more important to consumers in deciding whether to open 
a HELOC plan. Also, based on the results of consumer testing, the 
proposal would add and remove other disclosures from the definition of 
``material disclosures.'' The proposal contains tolerances for accuracy 
of the credit limit and the total one-time costs imposed to open a 
HELOC plan, to ensure inconsequential errors in these disclosures do 
not result in extended rescission rights.
    Material Disclosures for Closed-End Mortgage Loans. In the August 
2009 Closed-End Proposal, the Board proposed comprehensive revisions to 
the disclosures for closed-end mortgages that would reflect the changes 
in the mortgage market. The Board developed the proposed disclosures 
and revised model forms based on extensive consumer testing to 
determine which credit terms consumers find the most useful in 
evaluating closed-end mortgage loans. Consistent with the August 2009 
Closed-End Proposal, this proposal revises the definition of material 
disclosures to include the information that is critical to consumers in 
evaluating closed-end mortgage offers, and to remove information that 
consumers do not find to be important. For example, the proposal adds 
to the definition of ``material disclosures'' information about the 
interest rate, the total settlement charges, and whether a loan has 
negative amortization or permits interest-only payments. Consumer 
testing shows these disclosures are critical to consumers in evaluating 
closed-end mortgage loans. In addition, the proposal adds disclosures 
of the loan amount and the loan term (e.g., 30 year loan) to the 
definition of ``material disclosures.'' These disclosures would replace 
disclosures of the amount financed, and the total and number of 
payments. Also, based on the results of consumer testing, other 
disclosures would be added to the definition of ``material 
disclosures,'' such as disclosure of any prepayment penalty. The 
proposal retains the current rule's existing tolerances for certain 
material disclosures, and provides tolerances for certain of the 
proposed material disclosures, such as the total settlement charges, 
the loan amount and the prepayment penalty, to ensure inconsequential 
errors in these disclosures do not result in extended rescission 
rights.
    Parties' Obligations When a Consumer Rescinds. TILA and Regulation 
Z set out the process for rescission. The regulation specifies that 
when a consumer rescinds:
     The creditor's security interest becomes void;
     The creditor must refund all interest and fees paid by the 
consumer; and
     After the creditor's performance, the consumer must return 
any money or property to the creditor.
    TILA and Regulation Z allow a court to modify the process for 
rescission.
    The rescission process during the initial three-business-day period 
after closing normally is straightforward, because loan funds typically 
have not been disbursed yet. In those cases, when a consumer provides a 
notice of rescission, the creditor's security interest is automatically 
void. Within 20 calendar days of receipt of the consumer's notice, the 
creditor must return any money paid by the consumer and take whatever 
steps are necessary to terminate its security interest.
    If the consumer provides a notice of rescission after the initial 
three-business-day period, however, the process is problematic. In this 
case, the creditor has typically disbursed money or delivered property 
to the consumer and perfected its security interest. In addition, it 
may be unclear whether the consumer's right to rescind has expired. 
Therefore, a creditor may be reluctant to terminate the security 
interest until the consumer establishes that the right to rescind has 
not expired and the consumer can tender the loan balance. Given these 
circumstances, questions have been raised about: (1) Whether the 
creditor must respond to a notice of rescission, (2) how the parties 
may resolve a claim outside of a court proceeding, and (3) whether the 
release of the security interest may be conditioned on the consumer's 
tender. Both consumer advocates and creditors have urged the Board to 
clarify the operation of the rescission process in the extended right 
context. To address the concerns discussed above, the Board proposes a 
revised process for rescission in the extended right context.
    Rescission process outside a court proceeding. The proposal 
provides that if a creditor receives a consumer's notice of rescission 
outside of a court proceeding, the creditor must send a written 
acknowledgement to the consumer within 20 calendars days of receipt of 
the notice. The acknowledgement must indicate whether the creditor will 
agree to cancel the transaction. If the creditor agrees to cancel the 
transaction, the creditor must release its security interest upon the 
consumer's tender of the amount provided in the creditor's written 
statement. Under this proposed process, consumers would be promptly and 
clearly informed about the status of their notice of rescission, and 
better prepared to take appropriate action. The proposal would ensure 
that if a consumer tenders the amount requested, the creditor must 
terminate its security interest in the consumer's home.
    Rescission process in a court proceeding. The Board proposes to use 
its adjustment authority to ensure a clearer and more equitable process 
for resolving rescission claims raised in court proceedings. The 
sequence of rescission procedures set forth in TILA and the current 
regulation would seem to require the creditor to release its security 
interest whether or not the consumer can tender the loan balance. The 
Board does not believe that Congress intended for the creditor to lose 
its status as a secured creditor if the consumer does not return the 
loan balance. Therefore, the proposal provides that when the parties 
are in a court proceeding, the creditor is not required to release its 
security interest until the consumer tenders the principal balance less 
interest and fees, and any damages and costs, as determined by the

[[Page 58548]]

court. The Board believes this adjustment would facilitate compliance 
with TILA. The majority of courts that have considered this issue 
condition the creditor's release of the security interest on the 
consumer's proof of tender.
    Other Revisions Related to Rescission. The Board proposes several 
changes to Regulation Z that are designed to preserve the right to 
rescind while reducing undue litigation costs and compliance burden for 
creditors. These amendments would provide that:
     A consumer who exercises the extended right may send the 
notice to the servicer rather than the current holder, because many 
consumers cannot readily identify the holder;
     Certain events terminate the extended right to rescind, 
such as a refinancing with a new creditor;
     Bona fide personal financial emergencies that enable a 
consumer to waive the right to rescind will usually involve imminent 
property damage or threats to health or safety, not the imminent 
expiration of a discount on goods or services; and
     A consumer who guarantees a loan that is subject to the 
right of rescission and who pledges his principal dwelling has a right 
to rescind.

B. Loan Modifications That Require New TILA Disclosures

    Currently Regulation Z provides that for closed-end loans, a 
``refinancing'' by the same creditor is a new transaction that requires 
new TILA disclosures. Whether there is a ``refinancing'' depends on the 
parties' intent and State law. State law is largely based on court 
decisions that determine whether the original obligation has been 
satisfied and replaced, or merely modified. Reliance on State law leads 
to inconsistent application of Regulation Z and in some cases to 
loopholes. For example, some creditors simply insert a clause in all 
notes that the parties do not intend to refinance, thus, creditors can 
make significant changes to loan terms without giving TILA disclosures.
    The Board proposes to require new TILA disclosures when the same 
creditor and the consumer agree to modify certain key mortgage loan 
terms. These key terms include changing the interest rate or monthly 
payment, advancing new debt, and adding an adjustable rate or other 
risky feature such as a prepayment penalty. In addition, if a fee is 
imposed on the consumer in connection with a modification, the 
modification would be a new transaction requiring new TILA disclosures. 
Consistent with the current rule, the proposal would exempt 
modifications reached in a court proceeding, and modifications for 
borrowers in default or delinquency, unless the loan amount or interest 
rate is increased, or a fee is imposed on the consumer. Certain 
beneficial modifications, such as rate and payment decreases, would 
also be exempt from the requirement for new TILA disclosures.
    The proposal would result in more modifications being new 
transactions requiring new disclosures. For example, the Board 
estimates in states such as New York and Texas, where refinancings are 
commonly structured as modifications or consolidations to avoid State 
mortgage recording taxes, the number of transactions reported as 
refinancings could potentially double. The Board does not believe, 
however, that consumers located in these states would be unable to 
refinance their mortgage simply because creditors would be required to 
provide TILA disclosures under the proposal. Outreach conducted in 
connection with this proposal revealed that some large creditors in 
these states always provide consumers with TILA disclosures, regardless 
of whether the transaction is classified as a ``refinancing'' for 
purposes of Regulation Z.
    In addition, the proposal provides that whenever a fee is imposed 
on a consumer in connection with a modification, including a 
modification for a consumer in default, a ``new transaction'' would 
occur requiring new TILA disclosures. The Board believes that including 
the imposition of fees as an action that triggers new disclosures is 
appropriate to ensure that consumers receive important information 
about the costs of modifying loan terms. The Board recognizes, however, 
that this aspect of the proposal would likely result in a significant 
number of modifications being deemed ``new transactions,'' and is 
seeking comment on whether fees imposed on consumers in connection with 
modifications should include all costs of the transaction or a more 
narrow range of fees.
    Finally, if the new transaction's APR exceeds the threshold for a 
``higher-priced mortgage loan'' under the Board's 2008 HOEPA rules, 
then special HOEPA protections would apply to the new transaction. The 
right of rescission would likely apply to any new transaction secured 
by the consumer's principal dwelling, unless the transaction qualifies 
for a narrow exemption from rescission. Specifically, transactions are 
exempt from rescission if they (1) involve the original creditor who is 
also the current holder of the note, (2) do not involve an advance of 
new money, and (3) do not add a new security interest in the consumer's 
principal dwelling. The Board believes, however, that the potential 
burdens associated with the right of rescission would not discourage 
modifications that are in consumers' interests.

C. Improve the Coverage Test for the 2008 HOEPA Rules

    In the 2008 HOEPA Final Rule, the Board adopted special consumer 
protections for ``higher-priced mortgage loans'' aimed at addressing 
unfair and deceptive practices in the subprime mortgage market. The 
Board defined a higher-priced mortgage loan as a transaction secured by 
a consumer's principal dwelling for which the annual percentage rate 
exceeds the ``average prime offer rate'' by 1.5 percentage points or 
more, for a first-lien transaction, or by 3.5 percentage points or 
more, for a subordinate-lien transaction.
    In the August 2009 Closed-End Proposal, the Board proposed to amend 
Regulation Z to provide a simpler, more inclusive APR, to assist 
consumers in comparison shopping and reduce compliance burden. APRs 
would be higher under the proposal because they would include most 
third party closing costs. The Board noted that higher APRs would 
result in more loans being classified as ``higher-priced'' mortgage 
loans. More loans would be subject to HOEPA's statutory protections, 
and to State anti-predatory lending laws. The Board concluded, based on 
the limited data it had, that the proposal to improve the APR would be 
in consumers' interests. Comment was solicited on the potential impact 
of the proposed rule.
    Numerous mortgage creditors and their trade associations filed 
comments agreeing in principle with the proposed finance charge 
definition but opposing the change because it would cause many prime 
loans to be incorrectly classified as higher-priced mortgage loans. 
They also stated that it would inappropriately expand the coverage of 
HOEPA and State laws. Consumer advocates, on the other hand, argued 
that any additional loans covered by the more inclusive finance charge 
and APR should be subject to the restrictions for HOEPA loans and 
higher-priced mortgage loans because they would be similarly risky to 
consumers. Accordingly, they argued, the increased coverage would be 
warranted.
    To ensure that loans are not inappropriately classified as higher-
priced mortgage loans, the proposal would replace the APR as the metric 
a creditor compares to the average prime offer rate to determine 
whether the

[[Page 58549]]

transaction is a higher-priced mortgage loan. Creditors instead would 
use a ``coverage rate'' that would not be disclosed to consumers. The 
coverage rate would be calculated using the loan's interest rate, the 
points, and any other origination charges the creditor and a mortgage 
broker (or an affiliate of either party) retains. Thus the coverage 
rate would be closely comparable to the average prime offer rate. The 
proposal would also clarify that the more inclusive APR would have no 
impact on whether a loan's ``points and fees'' exceed the threshold for 
HOEPA's statutory protections. Very few HOEPA loans are made, in part 
because assignees of HOEPA loans are subject to all claims and defenses 
a consumer could bring against the original creditor. Thus, the 
clarification is necessary to avoid unduly restricting access to 
credit.

D. Consumer's Right to a Refund of Fees

    TILA disclosures are intended to help consumers understand their 
credit terms and to enable them to compare available credit options and 
avoid the uninformed use of credit. In 2008, Congress amended TILA 
through the Mortgage Disclosure Improvement Act (the MDIA), to codify 
the Board's 2008 rules requiring creditors to provide good faith 
estimates of credit terms (early disclosures) within three business 
days after receiving a consumer's application for a closed-end mortgage 
loan, and before a fee is imposed on the consumer (other than a fee for 
obtaining a consumer's credit history). Thus, the MDIA helps ensure 
that consumers receive TILA disclosures at a time when they can use 
them to verify the terms of the mortgage loan offered and compare it to 
other available loans. The Board issued rules implementing the MDIA in 
May 2009. 74 FR 74989, Dec. 10, 2008.
    Since the rules required by MDIA were issued, concerns have been 
raised that the rules' fee restriction is not sufficient to protect 
consumers' ability to comparison shop for credit. Under the current 
rule, a fee may be imposed as soon as the consumer receives the early 
disclosures for a closed-end mortgage loan. Thus, the consumer may feel 
financially committed to a transaction as soon as the disclosure is 
received, before having had adequate time to review it and make 
decisions. The fee restriction was intended to ensure that consumers 
are not discouraged from comparison shopping by paying application fees 
that cause them to feel financially committed to the transaction before 
costs are fully disclosed. Fees imposed at application historically 
have been non-refundable application fees, and include an appraisal fee 
and a rate lock fee, if any, which may be significant.
    To address this issue, the Board proposes to provide a right to a 
refund of fees, if the consumer decides not to proceed with the 
transaction during the three business days following receipt of the 
early disclosures. To ensure that consumers are aware of the right, the 
proposal would require a brief disclosure at application. Mortgage 
loans are complex transactions, and thus the proposal would allow 
consumers time to review the terms of the loan and decide whether to go 
forward without feeling financially committed due to having paid an 
application fee. TILA and Regulation Z provide a substantially similar 
refund right for HELOCs.
    The Board recognizes that the proposal may result in creditors 
refraining from imposing any fees until four days after a consumer 
receives the early disclosures, to avoid having to refund fees. As a 
result, creditors likely will not order an appraisal or lock a rate 
without collecting a fee from the consumer, thus, the proposal may 
cause a delay in processing the consumer's transaction. The right to a 
refund for HELOCs, however, does not seem to have caused undue delays 
or burdens for consumers seeking HELOCs. In addition, the proposal 
would guarantee that consumers have three days to consider their 
disclosures free of any financial constraints or pressures, whereas 
under RESPA, an originator may impose a nonrefundable fee on a consumer 
as soon as the consumer receives the early RESPA disclosure and has 
agreed to go forward with the transaction.

E. Reverse Mortgage Disclosures

    Disclosures at Application. TILA and Regulation Z require that 
creditors provide, as applicable, closed-end or HELOC disclosures for 
reverse mortgage transactions. Currently, a creditor is required to 
provide a consumer with a Board-published HELOC brochure or a suitable 
substitute at the time an application for a HELOC is provided to the 
consumer. The HELOC brochure is 20 pages long and provides general 
information about HELOCs and how they work, as well as a glossary of 
relevant terms and a description of various features that can apply to 
HELOCs. However, it does not contain information specific to reverse 
mortgages. Closed-end reverse mortgages are almost always fixed-rate 
transactions, so consumers generally do not receive any TILA 
disclosures at application. For an adjustable-rate closed-end reverse 
mortgage, however, consumers would receive the lengthy CHARM booklet 
that is not tailored to reverse mortgages.
    The Board proposes to use its adjustment and exception authority to 
replace the current HELOC and closed-end application disclosures with a 
new two-page document published by the Board entitled, ``Key Questions 
to Ask about Reverse Mortgage Loans'' (the ``Key Questions'' document). 
Consumer testing on reverse mortgage disclosures has shown that 
consumers have a number of misconceptions about reverse mortgages that 
are not addressed by the current disclosures. The proposal would 
require a creditor to provide the new ``Key Questions'' document that 
would be published by the Board for all reverse mortgages, whether 
open- or closed-end, or fixed- or adjustable-rate. This two-page 
document is intended to be a simple, straightforward and concise 
disclosure informing consumers about how reverse mortgages work and 
about terms and risks that are important to consider when selecting a 
reverse mortgage. The ``Key Questions'' document was designed based on 
consumers' preference for a question-and-answer tabular format, and 
refined in several rounds of consumer testing.
    Reverse Mortgage Cost Disclosures. Depending on whether a reverse 
mortgage is open-end or closed-end credit, the cost disclosure 
requirements under TILA and Regulation Z differ. All reverse mortgage 
creditors must provide the TALC disclosure at least three business days 
before account-opening for an open-end reverse mortgage, or 
consummation for a closed-end reverse mortgage. For closed-end reverse 
mortgages, TILA and Regulation Z require creditors to provide an early 
TILA disclosure within three business days after application and at 
least seven business days before consummation, and before the consumer 
has paid a fee other than a fee for obtaining a credit history. If 
subsequent events make the early TILA disclosure inaccurate, the 
creditor must provide corrected disclosures before consummation. 
However, if subsequent events cause the APR to exceed certain 
tolerances, the creditor must provide a corrected disclosure that the 
consumer must receive at least three business days before consummation.
    For open-end reverse mortgages, TILA and Regulation Z require 
creditors to provide disclosures on or with an application that 
contains information about the creditor's open-end reverse mortgage 
plans. These disclosures do not include information dependent on a 
specific borrower's creditworthiness or the value of the dwelling, such 
as the

[[Page 58550]]

APRs offered to the consumer, because the application disclosures are 
provided before underwriting takes place. Creditors are required to 
disclose transaction-specific costs and terms at the time that an open-
end reverse mortgage plan is opened.
    Content of proposed reverse mortgage disclosures. The Board 
proposes three consolidated reverse mortgage disclosure forms: (1) An 
early disclosure for open-end reverse mortgages, (2) an account-opening 
disclosure for open-end reverse mortgages, and (3) a closed-end reverse 
mortgage disclosure. The proposal would ensure that consumers receive 
meaningful information in an understandable format using forms that are 
designed, and have been tested, for reverse mortgage consumers. Rather 
than receive two or more disclosures under TILA that come at different 
times and have different formats, consumers would receive all the 
disclosures in a single format that is largely similar regardless of 
whether the reverse mortgage is structured as open-end or closed-end 
credit. The proposal would also facilitate compliance with TILA by 
providing creditors with a single set of forms that are specific to and 
designed for reverse mortgages, rather than requiring creditors to 
modify and adapt disclosures designed for forward mortgages.
    For reverse mortgages, the proposal would require creditors to 
provide either:
     The ``early'' open-end reverse mortgage disclosure within 
three business days after application, and the account-opening 
disclosure at least three business days before account opening; or
     The closed-end reverse mortgage disclosures within three 
business days after application and again at least three business days 
before consummation.

The timing of these disclosures would generally match the proposed 
timing requirements in the Board's 2009 HELOC and closed-end mortgage 
proposals.
    Information about reverse mortgage total costs. Currently, 
Regulation Z requires reverse mortgage creditors to disclose a table of 
TALC rates. The table of TALC rates is designed to show consumers how 
the cost of the reverse mortgage varies over time and with house price 
appreciation. Generally, the longer the consumer keeps a reverse 
mortgage the lower the relative cost will be because the upfront costs 
of the reverse mortgage will be amortized over a longer period of time. 
Thus, the TALC rates usually will decline over time even though the 
total dollar cost of the reverse mortgage is rising.
    As discussed above, very few consumers in testing understood the 
table of TALC rates. Although participants seemed to understand the 
explanation accompanying the TALC table, the vast majority could not 
explain how the explanation related to the percentages shown in the 
TALC table. Consumers, including those who currently have a reverse 
mortgage (and thus presumably received the TALC disclosure), 
consistently stated that they would not use the disclosure to decide 
whether or not to obtain a reverse mortgage. Instead, consumers 
consistently expressed a preference for a disclosure providing total 
costs as a dollar amount.
    For these reasons, the Board proposes to use its exception and 
exemption authority to propose replacing the TALC rates disclosure with 
other information that is likely to be more meaningful to consumers. 
The proposal would require a table that demonstrates how the reverse 
mortgage balance grows over time. The table expresses this information 
as dollar amounts rather than as annualized loan cost rates. Under the 
proposal, the creditor must provide three items of information: (1) The 
sum of all advances to and for the benefit of the consumer; (2) the sum 
of all costs and charges owed by the consumer; and (3) the total amount 
the consumer would be required to repay. This information must be 
provided for each of three assumed loan periods of one year, 5 years, 
and 10 years. Consumer testing has shown that consumers would have a 
much easier time understanding this table and would be much more likely 
to use it in evaluating a reverse mortgage.
    Other reverse mortgage cost information. The proposed reverse 
mortgage disclosures would combine reverse-mortgage-specific 
information with much of the information that the Board proposed for 
HELOCs and closed-end mortgages in 2009. For example, the proposed 
disclosure would include information about APRs, variable interest 
rates and fees. However, because not all of the information currently 
required for HELOCs and closed-end mortgages is relevant or applicable 
to reverse mortgage borrowers, the Board proposes to use its exception 
and exemption authority to remove or replace disclosures that are not 
likely to provide a meaningful benefit to reverse mortgage consumers. 
For example, TILA and Regulation Z require HELOC disclosures to state 
whether a grace period exists within which any credit extended may be 
repaid without incurring a finance charge. For reverse mortgage 
borrowers who do not make regular payments to the lender, such a 
disclosure is unlikely to be meaningful and may confuse consumers into 
thinking that some type of regular repayment is required.
    Open-end reverse mortgage account-opening disclosures. For open-end 
reverse mortgages, the proposal would require creditors to provide 
disclosures at least three business days before account opening, 
consistent with the current rule for the TALC disclosure. The content 
of the open-end reverse mortgage account-opening disclosures would be 
largely similar to the early disclosure, but would contain additional 
information about fees, consistent with the Board's 2009 HELOC 
proposal.

F. Requirement for Reverse Mortgage Counseling

    Prospective borrowers of FHA-insured reverse mortgages, known as 
Home Equity Conversion Mortgages (HECMs), must receive counseling 
before obtaining a HECM. While proprietary reverse mortgage creditors 
have in the past routinely required counseling for borrowers from HUD-
approved counselors, Federal law does not require such counseling for 
proprietary reverse mortgages. Recently, concerns have surfaced about 
abusive practices in proprietary reverse mortgages. Reverse mortgages 
are complex transactions, and even sophisticated consumers seeking 
reverse mortgages may not be sufficiently aware of the risks and 
obligations of reverse mortgages solely through disclosures provided 
during the origination process. Although the proposed rule would 
improve TILA's reverse mortgage disclosures, the Board believes that 
the complexity of and risks associated with reverse mortgages warrant 
added consumer protections. Home equity is a critical financial 
resource for reverse mortgage borrowers, who generally must be 62 years 
of age or older. Reverse mortgage borrowers also risk foreclosure if 
they do not clearly understand important facts about reverse mortgages.
    To address these concerns, the proposal would prohibit a creditor 
or other person from originating a reverse mortgage before the consumer 
has obtained counseling from a counselor or counseling agency that 
meets the counselor qualification standards established by HUD, or 
substantially similar standards. The proposed rule would apply to HECMs 
and proprietary reverse mortgages. To confirm that the consumer 
received the required counseling, creditors could rely on a certificate 
of counseling in a form approved by HUD, or a substantially

[[Page 58551]]

similar written form. In addition, the proposal would prohibit a 
creditor or any other person from imposing a nonrefundable fee (except 
a fee for counseling) on a consumer until three business days after the 
consumer has obtained counseling. Under the proposal, creditors or 
others could not steer consumers to particular counselors, or 
compensate counselors or counseling agencies. These rules would be 
proposed under the Board's HOEPA authority to prohibit unfair or 
deceptive acts or practices in connection with mortgage loans.

G. Conditioning a Reverse Mortgage on the Purchase of Other Financial 
or Insurance Products

    Reverse mortgage originators often refer reverse mortgage consumers 
to third parties that offer the consumers other products or services. 
Some originators affirmatively require the consumer to purchase another 
financial product to obtain the reverse mortgage. Originators who refer 
consumers to providers of financial and other products may receive 
referral fees, creating strong incentives to encourage reverse mortgage 
consumers to purchase additional products regardless of whether they 
are appropriate.
    Products often cited as being required as part of a reverse 
mortgage transaction include annuities, certificates of deposit (CDs) 
and long-term care insurance. These may be beneficial products for many 
consumers; however purchase of these and other products may harm 
consumers who do not understand them. For example, some reverse 
mortgage consumers have reportedly been sold annuities scheduled to 
mature after their life expectancy. Further, an annuity may yield at a 
lower rate of interest than the reverse mortgage used to pay for it. 
Reverse mortgage borrowers who become aware of these drawbacks may face 
high fees for early withdrawal or cancellation of the annuity.
    Reverse mortgage borrowers often have limited options for obtaining 
additional funds; for some, a reverse mortgage may be the resource of 
last resort. These consumers may be forced to accept a requirement that 
they use reverse mortgage funds to purchase another product, even if it 
has little benefit. In addition, reverse mortgages are complex loan 
products whose requirements and characteristics tend to be unfamiliar 
even to the most sophisticated consumers. Thus, many consumers may be 
easily misled or confused about the costs of other products and 
services and the potential downsides to tapping their home equity to 
pay for them. Moreover, consumers can obtain the benefits from other 
products and services by voluntarily choosing them.
    The Board proposes anti-tying rules specific to reverse mortgages 
to ensure that all reverse mortgage originations are covered--including 
both HECMs and proprietary products, as well as reverse mortgages 
originated by depository and nondepository institutions. These rules 
would be proposed under the Board's HOEPA authority to prohibit unfair 
or deceptive acts or practices in connection with mortgage loans.
    The proposal would prohibit a creditor or loan originator from 
requiring a consumer to purchase another financial or insurance product 
as a condition of obtaining a reverse mortgage. A creditor or loan 
originator will be deemed not to have required the purchase of another 
product if:
     The consumer receives the ``Key Questions to Ask about 
Reverse Mortgage Loans'' document; and
     The reverse mortgage is consummated (or the account is 
opened for a HELOC) at least ten days before the consumer purchases 
another financial or insurance product.
    The proposal would define ``financial or insurance product'' to 
include both bank products, such as loans and certificates of deposit, 
and non-bank products, such as annuities, long-term care insurance, 
securities, and other nondepository investment products. The proposal 
expressly exempts from the definition of ``financial or insurance 
product'' savings and certain other deposit accounts established to 
disburse reverse mortgage proceeds, as well as products and services 
intended to protect the creditor's or insurer's investment, such as 
mortgage insurance, property inspection services, and appraisal or 
property valuation services.

H. Reverse Mortgage Advertising

    Regulation Z currently contains rules that apply to advertisements 
of HELOCs and closed-end mortgages, including reverse mortgages. The 
advertisement of rates is addressed in these rules. In addition, 
advertisements that contain certain specified credit terms, including 
payment terms, must include additional advertising disclosures, such as 
the APR. For closed-end mortgages, including reverse mortgages, 
Regulation Z prohibits seven misleading or deceptive practices in 
advertisements. For example, Regulation Z prohibits use of the term 
``fixed'' in a misleading manner in advertisements where the rate or 
payment is not fixed for the full term of the loan.
    Reverse mortgage advertisements generally focus on special features 
of reverse mortgages, such as the fact that regular payments of 
principal and interest are not required. For this reason, the proposal 
contains additional advertising requirements specific to reverse 
mortgages that supplement, rather than replace, the general advertising 
requirements for open-end or closed-end credit.
    The proposal would require that a reverse mortgage advertisement 
disclose clarifying information if the advertisement contains certain 
statements that are likely to mislead or confuse consumers. For 
example, a clarifying statement would be required for:
     Advertisements stating that a reverse mortgage ``requires 
no payments;''
     Advertisements stating that a consumer need not repay a 
reverse mortgage ``during your lifetime;'' and
     Advertisements stating that a consumer ``cannot lose'' or 
there is ``no risk'' to a consumer's home with a reverse mortgage.

VI. Section-by-Section Analysis

Section 226.1 Authority, Purpose, Coverage, Organization, Enforcement, 
and Liability

    Section 226.1(d) provides an outline of Regulation Z. The Board 
proposes to revise Sec.  226.1(d)(5) and (7) to reflect the proposed 
changes to the requirements for reverse mortgages.
1(d) Organization
1(d)(5)
    The Board provided in the 2008 HOEPA Final Rule a staff comment to 
clarify how the effective date of October 1, 2009 would apply for each 
of the rule's provisions. See comment 1(d)(5)-1. The Board is proposing 
to make two changes to comment 1(d)(5)-1. One change would provide that 
a radio advertisement occurs on the date it is broadcast, and the other 
would conform comment 1(d)(5)-1 to changes proposed to Sec.  226.20(a).
    Advertising rules. The comment provides that the Board's 
advertising rules adopted as part of the 2008 HOEPA Final Rule would 
apply to advertisements that occur on and after the effective date. It 
then states as an example that ``a radio ad occurs on the date it is 
first broadcast.'' The Board has been asked whether this example means 
that, as long as a radio advertisement was first broadcast prior to 
October 1, 2009, it then may be rebroadcast indefinitely without the 
HOEPA Final Rule's advertising provisions ever

[[Page 58552]]

applying to that advertisement. The Board did not intend this result 
but, rather, intended the new advertising rules to apply to all radio 
advertisements that are broadcast on or after the effective date, 
regardless of whether they happen to have been broadcast prior to the 
effective date.
    This proposal would remove the word ``first'' from the language 
referenced above in comment 1(d)(5)-1. Thus, under proposed comment 
1(d)(5)-1, a radio advertisement broadcast on or after October 1, 2009 
would be subject to the new advertisement rules, regardless of whether 
it is the first time the advertisement has been broadcast. This 
revision would prevent possible misinterpretation of the example about 
the effective date of the advertising rules as they apply to radio 
advertisements.
    Conforming amendments for proposed Sec.  226.20(a). Existing 
comment 1(d)(5)-1 provides that the 2008 HOEPA protections would apply 
to a ``refinancing'' of an existing closed-end mortgage loan under 
Sec.  226.20(a), if the creditor receives an application for the 
refinancing on or after the effective date. The 2008 HOEPA rules would 
not apply, however, if the same creditor and consumer merely ``modify'' 
an existing obligation after the effective date. Under current Sec.  
226.20(a), when the same creditor and consumer modify the terms of an 
existing closed-end mortgage loan, there is no refinancing or new 
transaction unless the existing loan is satisfied and replaced under 
State law.
    As discussed under Sec.  226.20(a) below, the Board is proposing to 
amend Sec.  226.20(a) to provide that a new transaction would occur 
when the same creditor and the consumer agree to change certain key 
terms of an existing closed-end loan secured by real property or a 
dwelling, regardless of State law. As noted in the discussion under 
Sec.  226.20(a) below, the proposal would increase significantly the 
number of modifications that are new transactions. A modification that 
is a new transaction under proposed Sec.  226.20(a)(1) also would be 
subject to the 2008 HOEPA rules in Sec.  226.35, if the new transaction 
is a ``higher-priced mortgage loan'' under Sec.  226.35(a). Thus, the 
Board expects that the number of transactions that are subject to Sec.  
226.35 will increase but believes that the burdens associated with 
increased coverage are offset by the consumer protections in Sec.  
226.35. The Board solicits comment on the extent of any increased 
coverage under Sec.  226.35, and whether the costs of complying with 
Sec.  226.35 would unduly restrict consumers' ability to modify their 
loans.

Section 226.2 Definitions and Rules of Construction

2(a) Definitions
2(a)(6) Business Day
    Currently, Sec.  226.2(a)(6) contains two definitions of business 
day. Under the general definition, a business day is a day on which the 
creditor's offices are open to the public for carrying on substantially 
all of its business functions. See comment 2(a)(6)-1. For some 
purposes, however, a more precise definition of business day applies: 
all calendar days except Sundays and specified Federal legal holidays 
for purposes of determining the three-business-day right of rescission 
under Sec. Sec.  226.15 and 226.23, as well as when disclosures are 
deemed received, or by when disclosures must be received, for certain 
mortgage transactions under Sec. Sec.  226.19(a)(1)(ii), 226.19(a)(2), 
and 226.31(c) and for private education loans under Sec.  226.46(d)(4). 
In addition, the Board has proposed to apply this more precise 
definition of business day to determining when consumers have received 
disclosures required under proposed Sec. Sec.  226.5b(e) and 
226.9(j)(2). See 74 FR 43428, 43575, 43593, 43608, Aug. 26, 2009.
    Nonrefundable fees for closed-end mortgages. Section 
226.19(a)(1)(i) currently requires a creditor to provide good faith 
estimates of credit terms (early disclosures) within three business 
days after the creditor receives a consumer's application for a closed-
end mortgage that is secured by the consumer's dwelling and subject to 
RESPA. Under the August 2009 Closed-End Proposal, Sec.  
226.19(a)(1)(iv) would require that any fee paid within three business 
days after a consumer receives the early disclosures be refundable 
during that period, as discussed in detail below. For purposes of 
proposed Sec.  226.19(a)(1)(iv), the more precise definition of 
business day would apply. The Board therefore proposes to revise Sec.  
226.2(a)(6) and comment 2(a)(6)-2 to reflect the use of the more 
precise definition in determining when the refund period ends.
    Reverse mortgages. For reverse mortgages, the proposal would use 
the general definition of business day for purposes of providing the 
early open-end reverse mortgage disclosure within three business days 
after application. The Board proposes to revise Sec.  226.2(a)(6) and 
comment 2(a)(6)-2 to use the more precise definition of business day 
for purposes of the requirement in Sec.  226.33 that creditors provide 
disclosures for open-end reverse mortgages at least three business days 
before account opening. This proposal would also apply the more precise 
definition of business day to the proposed prohibition on imposing a 
nonrefundable fee until three business days after a reverse mortgage 
consumer has obtained required counseling. See proposed Sec.  
226.40(b)(2) and accompanying commentary. This prohibition is discussed 
in greater detail below, in the section-by-section analysis of Sec.  
226.40(b)(2).
2(a)(11) Consumer
Rescission
    TILA and Regulation Z provide that, unless the transaction is 
exempted, a consumer has a right to rescind a consumer credit 
transaction in which a security interest is or will be retained or 
acquired in a consumer's principal dwelling. TILA Section 125(a), (e); 
15 U.S.C. 1635(a), (e); Sec.  226.23(a), (f). Accordingly, for purposes 
of rescission, Regulation Z defines a consumer as ``a natural person in 
whose principal dwelling a security interest is or will be retained or 
acquired, if that person's ownership interest in the dwelling is or 
will be subject to the security interest.'' Section 226.2(a)(11).
    Comment 2(a)(11)-1 states that guarantors, endorsers, and sureties 
(hereinafter, ``guarantors'') ``are not generally consumers for 
purposes of the regulation, but they may be entitled to rescind under 
certain circumstances.'' A number of questions have been raised about 
the circumstances under which a guarantor may be entitled to rescind. 
In particular, the Board is aware of uncertainty regarding when a 
guarantor who has pledged his principal dwelling as security for 
repayment of another person's consumer credit obligation would have the 
right to rescind. For example, creditors have asked if a guarantor 
pledging his principal dwelling as additional collateral for a 
consumer's residential mortgage transaction would have the right to 
rescind. The Board notes the holding of one court that a guarantor 
giving a security interest in her principal dwelling as additional 
collateral for her nephew's consumer credit transaction to purchase an 
automobile and primarily secured by the automobile has the right to 
rescind.\14\
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    \14\ See, e.g., Soto v. PNC Bank, 221 B.R. 343 (Bankr. E.D. Pa. 
1998).
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    The Board's proposal. The Board proposes to revise comment 
2(a)(11)-1 to specify the circumstances under which a guarantor has the 
right of rescission. The proposed comment clarifies that a guarantor 
who has pledged his principal dwelling as

[[Page 58553]]

security for repayment of a borrower's consumer credit obligation would 
have the right to rescind when: (1) the borrower has the right to 
rescind because he or she is a natural person to whom consumer credit 
is offered or extended and in whose principal dwelling a security 
interest is or will be retained or acquired; and (2) the guarantor 
pledges his or her principal dwelling as additional security for the 
consumer credit transaction, and personally guarantees the borrower's 
repayment of the consumer credit transaction. The Board believes that 
in the circumstances outlined in the proposed comment, TILA affords the 
guarantor the right to rescind, just as the borrower on the underlying 
obligation has a right to rescind.
    Where the underlying transaction is not a consumer credit 
transaction, TILA Section 125(a) and Sec. Sec.  226.15 and 226.23 do 
not provide a guarantor with the right to rescind. 15 U.S.C. 1635(a). 
TILA Section 125(a) provides a right to rescind ``in the case of a 
consumer credit transaction * * * in which a security interest * * * is 
or will be retained or acquired in any property which is used as the 
principal dwelling of the person to whom credit is extended.* * *'' 15 
U.S.C. 1635(a) (emphasis added). Regulation Z applies to consumer 
credit (defined in Sec.  226.2(a)(12) as credit offered or extended to 
a consumer primarily for personal, family, or household purposes), not 
business credit. Section 226.3(a). Accordingly, comments 15-1 and 23-1 
state that the right of rescission does not apply to a business-purpose 
loan, even though the loan is secured by the borrower's principal 
dwelling.
    In addition, a guarantor would not have a right to rescind where 
the underlying consumer credit transaction is not secured by the 
borrower's principal dwelling, as in the case of an automobile loan 
secured only by the automobile, or an unsecured education loan. With 
these loans, no security interest is taken in ``the principal dwelling 
of the person to whom credit is extended,'' as required by TILA Section 
125(a) for the right to rescind to apply to a transaction. 15 U.S.C. 
1635(a) (emphasis added). The guarantor's pledge of his or her own 
principal dwelling as collateral for the consumer credit transaction is 
irrelevant under the statute, because the guarantor is not ``the person 
to whom credit is extended.''
    Similarly, a guarantor does not have a right to rescind where the 
underlying consumer credit transaction is a loan used by the borrower 
to purchase his or her principal dwelling and is secured by that 
principal dwelling. The right of rescission does not arise in these 
transactions because they are ``residential mortgage transactions.'' 
TILA Section 125(e)(1), 15 U.S.C. 1635(e)(1); Sec. Sec.  226.15(f)(1) 
and 226.23(f)(1). Congress exempted residential mortgage transactions 
from rescission. It would be impracticable to unwind home-purchase 
transactions and return all parties, including the home seller, to the 
financial status each occupied before the transaction occurred. Thus, 
neither the borrower to whom the consumer credit is extended, nor the 
guarantor who has pledged his own principal dwelling as security for 
that extension of credit, has the right to rescind such a transaction.
    A guarantor who personally guarantees and offers his home as 
security for a rescindable consumer credit transaction should have the 
right to rescind because the guarantor is in a situation very similar 
to that of the borrower. Both the borrower and the guarantor are 
obligors who are liable on the promissory note, a security interest is 
taken in both the borrower's and the guarantor's principal dwelling, 
and the consumer credit transaction is not exempt from rescission. 
While the Board believes that it would be unusual for a creditor to 
accept the pledge of a guarantor's home without a personal guarantee, 
the Board solicits comment on the frequency of such a practice.
Revocable Living Trusts
    As discussed in detail below, under Sec.  226.3(a), the Board is 
proposing to clarify that credit extensions to revocable living trusts 
for a consumer purpose are consumer credit, even though a trust is not 
a natural person. Accordingly, proposed comment 2(a)(11)-3 includes 
clarification that, therefore, such transactions are considered credit 
extended to a consumer.
Reverse Mortgages
    The Board proposes to adopt an alternative definition of consumer 
for purposes of the counseling requirement for reverse mortgages under 
proposed Sec.  226.40(b). The Board proposes to add a sentence to Sec.  
226.2(a)(11) cross-referencing the definition of consumer in proposed 
Sec.  226.40(b)(7). For clarity, proposed comment 2(a)(11)-4 restates 
the proposed Sec.  226.40(b)(7) definition of consumer: for purposes of 
the counseling requirements under Sec.  226.40(b) for reverse mortgages 
subject to Sec.  226.33, with one exception, a consumer includes any 
person who, at the time of origination of a reverse mortgage subject to 
Sec.  226.33, will be shown as an owner on the property deed of the 
dwelling that will secure the applicable reverse mortgage. For purposes 
of the prohibition on imposing nonrefundable fees in connection with a 
reverse mortgage transaction until after the third business day 
following the consumer's completion of counseling (proposed Sec.  
226.40(b)(2)(i)), however, the term consumer includes only persons on 
the property deed who will be obligors on the applicable reverse 
mortgage. This proposal is discussed in greater detail in the section-
by-section analysis to Sec.  226.40(b)(7), below.
2(a)(25) Security Interest
    Current Sec.  226.2(a)(25) defines ``security interest'' and 
comment 2(a)(25)-6 provides guidance on the disclosure of a security 
interest. With respect to rescission, current comment 2(a)(25)-6 
provides that the acquisition or retention of a security interest in 
the consumer's principal dwelling may be disclosed in a rescission 
notice with a general statement such as the following: ``Your home is 
the security for the new transaction.'' See also Sec. Sec.  
226.15(b)(1) and 226.23(b)(1)(i). The Board proposes to delete this 
provision in comment 2(a)(25)-6 as obsolete. As discussed in more 
detail in the section-by-section analysis to proposed Sec. Sec.  
226.15(b) and 226.23(b), the rescission notice no longer would include 
a disclosure of ``the retention or acquisition of a security interest 
in the consumer's principal dwelling.'' Based on consumer testing, the 
Board is concerned that the current language in comment 2(a)(25)-6 and 
model rescission forms in Appendices G and H for disclosure of the 
retention or acquisition of a security interest might not alert 
consumers that the creditor has the right to take the consumer's home 
if the consumer defaults. To clarify the significance of the security 
interest, for rescission notices related to HELOC accounts, proposed 
Sec.  226.15(b)(3)(ii) requires a creditor to provide a statement that 
the consumer could lose his or her home if the consumer does not repay 
the money that is secured by the home. Similarly, for rescission 
notices related to closed-end mortgage transactions, proposed Sec.  
226.23(b)(3)(i) requires a creditor to provide a statement that the 
consumer could lose his or her home if the consumer does not make 
payments on the loan. Guidance for how to meet these proposed 
disclosure requirements is contained in proposed Samples G-5(B) and G-
5(C) for HELOC accounts, and in proposed Model Forms H-8(A) and H-9 and 
Sample H-8(B) for closed-end mortgage transactions.

[[Page 58554]]

Section 226.3 Exempt Transactions

3(a) Business, Commercial, Agricultural, or Organizational Credit
    Generally, TILA and Regulation Z cover extensions of credit to a 
consumer, which is defined as a natural person. See TILA Section 
103(h), 15 U.S.C. 1602(h); Sec.  226.2(a)(11). Extensions of credit to 
other than a natural person, such as an organization, are exempt from 
coverage. See TILA Sections 103(c), 104(1), 15 U.S.C. 1602(c), 1603(1); 
Sec.  226.3(a). Thus, credit extended to a trust is exempt from 
coverage, because a trust is considered an organization, not a natural 
person. See TILA Section 103(c), 15 U.S.C. 1602(c). However, under 
Regulation Z, credit extended to a land trust for consumer purposes is 
considered credit extended to a natural person rather than to an 
organization, and thus is covered by the regulation. See comment 3(a)-
8. In a land trust transaction, the creditor extends credit to the land 
trust, which has been created by a natural person to purchase real 
property, borrow against equity, or refinance a loan already secured by 
the property. Assuming that these transactions are for personal, 
family, or household purposes, they are substantively the same as other 
consumer credit transactions covered by the regulation. See comment 
3(a)-8.
    Concerns have been raised about whether Regulation Z should apply 
to loans made to revocable living (``intervivos'') trusts in the same 
manner as it applies to land trusts. Revocable living trusts have 
become popular estate planning devices for consumers. A natural person 
creates the revocable living trust (also referred to as the ``settlor'' 
of the trust) and is also a beneficiary and trustee of the trust. Title 
to the personal and real property of the settlor/beneficiary/trustee is 
held by the revocable living trust. A creditor may extend credit to the 
revocable living trust (the borrower) to purchase personal or real 
property, borrow against equity, or refinance an existing secured or 
unsecured loan. Upon the settlor's death, new persons become 
beneficiaries of the trust--usually the settlor's heirs.
    Many creditors treat loans made to revocable living trusts for 
consumer purposes and secured by real property as consumer credit 
transactions subject to TILA and Regulation Z. At least one court has 
held that the refinancing of a loan originally made to a natural person 
and secured by that person's principal dwelling, which was later 
transferred to a revocable living trust that refinanced the loan, was a 
rescindable consumer credit transaction.\15\
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    \15\ See Amonette v. Indymac Bank, F.S.B., 515 F. Supp. 2d 1176 
(D. Haw. 2007).
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    The Board believes that credit extended to a revocable living trust 
should be subject to Regulation Z because in substance (if not form) 
consumer credit is being extended. Accordingly, the Board proposes to 
revise comments 2(a)(11)-3 and 3(a)-8 to clarify that credit extended 
to revocable living trusts for consumer purposes is considered credit 
extended to a natural person and, thus, to a consumer.

Section 226.4 Finance Charge

 4(a) Definition
    Current comment 4(a)(1)-2 clarifies that an annuity required by the 
creditor in a reverse mortgage transaction is a finance charge. As 
discussed more fully in the section-by-section analysis to Sec.  226.40 
below, the Board is proposing to prohibit creditors from requiring the 
purchase of an annuity with a reverse mortgage. Accordingly, the Board 
is proposing to remove this comment about required annuity purchases.
4(d)(1) and (3) Voluntary Credit Insurance Premiums; Voluntary Debt 
Cancellation and Debt Suspension Fees
    Under TILA and Regulation Z, a premium or other charge for credit 
insurance or debt cancellation or debt suspension coverage 
(collectively, ``credit protection products'') is a finance charge if 
the insurance or coverage is written in connection with a credit 
transaction. TILA Section 106(a)(5), 15 U.S.C. 1605(a)(5); Sec.  
226.4(b)(7) and (b)(10). However, under TILA and Regulation Z, the 
creditor may exclude the premium or charge from the finance charge if: 
(1) The insurance or coverage is not required by the creditor and the 
creditor discloses this fact in writing; (2) the creditor discloses the 
premium or charge for the initial term of the insurance or coverage; 
(3) the creditor discloses the term of the insurance or coverage, if 
the term is less than the term of the credit transaction; (4) the 
creditor provides a disclosure for debt suspension coverage, as 
applicable; and (5) the consumer signs or initials an affirmative 
written request for the insurance or coverage after receiving the 
required disclosures. TILA Section 106(b), 15 U.S.C. 1605(b); Sec.  
226.4(d)(1) and (d)(3).
    In the August 2009 Closed-End Proposal, the Board proposed several 
changes to the finance charge, the conditions for exclusion from the 
finance charge, and the required disclosures. First, under proposed 
Sec.  226.4(g), the provisions of Sec.  226.4(d) would not apply to 
closed-end credit transactions secured by real property or a dwelling, 
so the premium or charge for a credit protection product written in 
connection with the credit transaction would be included in the finance 
charge for the credit transaction whether or not it was voluntary. 
Under proposed Sec.  226.38(h), however, a creditor would still be 
required to provide the credit protection product disclosures required 
under Sec.  226.4(d)(1) and (d)(3). Second, concerns about eligibility 
requirements were addressed in proposed Sec.  226.4(d)(1)(iv) and 
(d)(3)(v), which would require the creditor to determine at the time of 
enrollment that the consumer meets any applicable age or employment 
eligibility criteria for insurance or coverage. The creditor would be 
required to make this determination in order to exclude the premium or 
charge from the finance charge for the credit transaction. Finally, 
based on consumer testing, revised disclosures were proposed to address 
concerns about disclosure of the voluntary nature, costs, and 
eligibility requirements of the product. See proposed Model Clauses and 
Samples G-16(C), G-16(D), H-17(C), and H-17(D) in Appendices G and H, 
74 FR 43232, 43338, 43348, Aug. 26, 2009.
    Based on comments to the August 2009 Closed-End Proposal and the 
Board's review of creditor solicitations and disclosures for credit 
protection products, the Board now proposes changes to the timing, 
format, and content of disclosures required under Sec.  226.4(d). These 
disclosures would be necessary to satisfy the disclosure requirements 
of proposed Sec.  226.6(a)(5)(i) for HELOCs, Sec.  226.6(b)(5)(i) for 
open-end credit that is not home-secured, Sec.  226.18(n) for closed-
end credit that is not home-secured, and Sec.  226.38(h) for closed-end 
mortgages. These disclosures would be required whether the credit 
protection product was optional or required. As discussed more fully in 
the section-by-section analyses for proposed Sec.  226.38 in the August 
2009 Closed-End Proposal and for proposed Sec. Sec.  226.6 and 226.18 
below, the Board is proposing to use its TILA Section 105(a) authority 
to require these disclosures for credit protection products that are 
required in connection with the credit transaction to ensure that 
consumers are fully informed of the costs and risks of these products. 
The disclosures and requirements are discussed more fully in the 
section-by-section analyses below for Sec. Sec.  226.6(a)(5)(i), 
226.6(b)(5)(i), and 226.18(n). In the August 2009 Closed-

[[Page 58555]]

End Proposal, the credit protection product disclosures were listed in 
proposed Sec.  226.38(h). In the final rule, the list of these 
disclosures would be consolidated in Sec.  226.4(d)(1) and (d)(3), and 
Sec.  226.38(h) would simply provide a cross-reference to Sec.  
226.4(d)(1) and (d)(3).
    Timing. Under a final rule for credit cards issued in January 2009 
(January 2009 Credit Card Rule), a credit protection product sold 
before or after the opening of an open-end (not home-secured) plan 
would be considered ``written in connection with the credit 
transaction.'' See comments 4(b)(7) and (b)(8)-2 and 4(b)(10)-2; 74 FR 
5244, 5459, Jan. 29, 2009. (The January 2009 Credit Card Rule was 
withdrawn as of February 22, 2010, but comments 4(b)(7) and (b)(8)-2 
and 4(b)(1)-2 were retained in a final rule published separately that 
same day (February 2010 Credit Card Rule). 75 FR 7925 and 7658, 7858-
7859, Feb. 22, 2010.) The August 2009 Closed-End Proposal would apply 
this same rule to HELOCs. See proposed comments 4(b)(7) and (b)(8)-2 
and 4(b)(10)-2; 74 FR 43232, 43370, Aug. 26, 2009. That is, to exclude 
a premium or charge from the finance charge, a creditor would have to 
comply with Sec.  226.4(d) if the credit protection product was sold 
before or after the opening of an open-end plan (whether or not it was 
home-secured). Thus, for closed-end credit, a creditor would have to 
comply with Sec.  226.4(d) if the creditor protection product was sold 
before--but not after--consummation. To clarify these requirements, 
proposed Sec.  226.4(d)(1) and (d)(3) and comment 4(d)-2 would state 
that a creditor must fulfill the conditions of Sec.  226.4(d) before 
the consumer enrolls in the insurance or coverage ``written in 
connection with the credit transaction.'' Comment 4(d)-2 would also 
cross-reference comments 4(b)(7) and (b)(8)-2 and 4(b)(10)-2 for a 
discussion of when insurance or coverage is ``written in connection 
with the credit transaction.'' Comment 4(d)-6 would be revised to 
clarify that if the premium is not imposed by the creditor in 
connection with the credit transaction, it is not covered by Sec.  
226.4.
4(d)(1)(i)
    Format. Currently, Regulation Z does not mandate the format of the 
disclosures required under Sec.  226.4(d) and does not provide model 
forms or samples specific to the disclosures for credit protection 
products. The Board's review of several disclosures for credit 
protection products revealed that many disclosures were in small font, 
not grouped together, and in dense blocks of text. For example, one 
creditor provided credit protection product disclosures in 6-point font 
on the back of an enrollment form, separate from the signature line, 
and with multiple Federal and State disclosures in dense blocks of 
text. Although the August 2009 Closed-End Proposal provided model 
clauses and a credit life insurance sample, there was no model form 
with a specific format. In addition, although the proposal included a 
credit life insurance sample, commenters requested separate samples for 
debt cancellation and debt suspension products.
    To address these problems, the Board tested a sample credit life 
insurance disclosure that used 12-point font, tabular and question-and-
answer format, and bold and underlined text. Participants understood 
the content of the disclosure when presented in this format. The Board 
also worked with its consultant to develop samples for debt 
cancellation and debt suspension products. Accordingly, the Board 
proposes to revise Sec.  226.4(d)(1)(i) and (d)(3)(i) to require the 
creditor to provide clearly and conspicuously in a minimum 10-point 
font the disclosures, which must be grouped together and substantially 
similar in headings, content, and format to Model Forms G-16(A) or H-
17(A) in Appendix G or H. Proposed Sec.  226.4(d)(1)(i)(D) would 
require several disclosures in a tabular and question-and-answer 
format. Also, samples for credit life insurance, disability debt 
cancellation coverage, and unemployment debt suspension coverage are 
proposed at Samples G-16(B), (C) and (D), and H-17(B), (C) and (D), 
respectively.
4(d)(1)(i)(D)(1)
    Need for product. To address concerns about the costs and benefits 
of the product relative to traditional life insurance, the August 2009 
Closed-End Proposal required the creditor to provide the following 
statement: ``If you have insurance already, this policy may not provide 
you with any additional benefits.'' Several industry trade 
associations, banks, community banks, and credit protection companies 
noted that this language could be misleading. Credit protection 
products can supplement existing insurance policies. Accordingly, the 
Board proposes Sec.  226.4(d)(1)(i)(D)(1) to require a revised 
statement that if the consumer already has enough insurance or savings 
to pay off or make payments on the debt if a covered event occurs, the 
consumer may not need the product. Proposed comment 4(d)-15 would 
clarify that a ``covered event'' refers to the event that would trigger 
coverage under the policy or agreement, such as loss of life, 
disability, or involuntary unemployment. Examples of how to provide 
this statement for particular products would be provided in Samples G-
16(B), (C) and (D) and H-17(B), (C) and (D) in Appendices G and H.
4(d)(1)(i)(D)(3)
    Cost. Currently, Regulation Z permits a creditor to disclose the 
premium or charge on a unit-cost basis for: Open-end transactions; 
closed-end credit transactions by mail or telephone under Sec.  
226.17(g); and certain closed-end credit transactions involving 
insurance or coverage that limits the total amount of indebtedness 
subject to coverage. Section 226.4(d)(1)(ii) and (d)(3)(ii). Concerns 
have been raised that unit-cost disclosures do not provide a meaningful 
disclosure of the potential cost of the product. The Board's review of 
several disclosures for credit protection products revealed that 
creditors often provide multiple unit-cost disclosures for each State 
in which the creditor offers the product. Moreover, during consumer 
testing conducted by the Board for this proposal, most participants 
could not correctly calculate the cost of the product based on a unit-
cost disclosure. However, when the cost was disclosed as a dollar 
figure tailored to the loan amount, all participants understood the 
cost of the credit insurance. The Board believes that consumers would 
benefit from disclosure of the maximum premium or charge for the 
insurance or coverage to determine whether the product is affordable 
for them.
    Accordingly, the Board proposes Sec.  226.4(d)(1)(i)(D)(3) to 
require a statement of the maximum premium or charge per period. The 
Board understands that the premium or charge is typically calculated 
based on the rate multiplied by the outstanding balance, monthly 
principal and interest payment, or minimum monthly payment. Thus, for a 
product based on the outstanding balance of closed-end credit, the 
periodic premium or charge may decline as the balance declines. 
Alternatively, for a product based on the minimum monthly payment under 
an open-end credit plan, the periodic premium or charge may vary. Thus, 
the Board also proposes to require a disclosure that the cost depends 
on the consumer's balance or interest rate, as applicable.
    Proposed comment 4(d)-16 would clarify that the creditor must use 
the maximum rate under the policy or coverage. In addition, if the 
premium or charge is based on the outstanding balance or periodic 
principal and

[[Page 58556]]

interest payment, the creditor must base the disclosure on the maximum 
outstanding balance or periodic principal and interest payment possible 
under the loan contract or line of credit plan. Current comment 4(d)-4 
regarding unit-cost disclosures would be revised to apply only to 
property insurance disclosures. Comment 4(d)-2 would be revised to 
state that, if disclosures are given early, a creditor must redisclose 
if the statement of the maximum premium or charge per period is 
different at the time of consummation or account-opening.
4(d)(1)(i)(D)(4)
    Maximum benefit. The August 2009 Closed-End Proposal would require 
creditors to disclose the loan amount together with cost information 
for the credit protection product. See proposed Sec.  226.38(h)(9). 
However, the Board's review of several disclosures for credit 
protection products revealed that the loss-of-life insurance or 
coverage sometimes does not cover the full loan amount. Moreover, debt 
cancellation or debt suspension coverage usually places limits on the 
dollar amount and number of payments to be paid. The Board is concerned 
that consumers may not realize that there are limits to the benefits, 
and that they will have to pay any amounts that are not covered under 
the insurance or coverage. During consumer testing conducted by the 
Board for this proposal, some participants were surprised that benefits 
would be capped at an amount less than the loan amount, but most 
understood the disclosure. Accordingly, the Board proposes Sec.  
226.4(d)(1)(i)(D)(4) to require a statement of the maximum benefit 
amount, together with a statement that the consumer will be responsible 
for any balance due above the maximum benefit amount, as applicable.
4(d)(1)(i)(D)(5) and (6)
    Eligibility. The August 2009 Closed-End Proposal would require 
creditors to make a determination at the time of enrollment that the 
consumer meets any applicable age or employment eligibility criteria 
for insurance or debt cancellation or debt suspension coverage. See 
proposed Sec.  226.4(d)(1)(iv) and (d)(3)(v). If the insurance or 
coverage contained other eligibility restrictions in addition to age 
and employment, the proposal provided the following model clauses: 
``Based on our review of your age and/or employment status at this 
time, you may be eligible to receive benefits. However, you may not 
qualify to receive any benefits because of other eligibility 
restrictions.'' See proposed Model Clauses G-16(C) in Appendix G and H-
17(C) in Appendix H. Comments from consumer advocates, a Federal 
banking agency, a trade association, a bank, two credit protection 
companies, and several community banks indicated that they felt that 
these statements were too vague and potentially misleading. Consumer 
advocates suggested the Board conduct more testing to find the right 
balance between information overload and information sufficient for 
rational decision making.
    To address these concerns, the Board conducted additional rounds of 
testing to improve this disclosure. The following language was tested: 
``You may not qualify for benefits even if you buy this product. Based 
on our review you currently meet the age and employment eligibility 
requirements, but there are other requirements that you may not meet. 
If you do not meet these eligibility requirements, you will not receive 
any benefits even if you purchase this product and pay the monthly 
premium.'' Most participants understood the disclosure, and were 
surprised that they might not receive benefits even after purchasing 
the product and making payments for a number of years. Most indicated 
that they would use the Federal Reserve Board Web site to learn more 
about eligibility requirements.
    Accordingly, the Board proposes Sec.  226.4(d)(1)(i)(D)(5) to 
require a statement that the consumer meets the age and employment 
eligibility requirements. If there are other eligibility requirements, 
the Board further proposes Sec.  226.4(d)(1)(i)(D)(6) to require a 
statement in bold, underlined text that the consumer may not receive 
any benefits even if the consumer pays for the product, together with a 
statement that there are other requirements that the consumer may not 
meet and that, if the consumer does not meet these eligibility 
requirements, the consumer will not receive any benefits even if the 
consumer purchases the product and pays the periodic premium or charge. 
Sample language is included in Model Forms G-16(A) and H-17(A), and 
Sample Forms G-16(B), (C) and (D), and H-17(B), (C) and (D) in 
Appendices G and H.
4(d)(1)(i)(D)(7)
    Coverage period. Currently, Regulation Z requires disclosure of the 
term of the insurance or coverage if it is less than the term of the 
credit transaction. Section 226.4(d)(1)(ii) and (d)(3)(ii). The August 
2009 Closed-End Proposal would require disclosure of the term in all 
cases. See proposed Sec.  226.38(h)(9). Consumer advocates that 
commented on the proposal also suggested disclosure of the date on 
which the consumer would no longer meet the age eligibility 
requirement. One bank suggested a highlighted disclosure of the age 
eligibility requirement. To address these concerns, the Board proposes 
Sec.  226.4(d)(1)(i)(D)(7) to require a statement of the time period 
and age limit for coverage. The Board believes that disclosure of the 
age, rather than the date, would be more meaningful to consumers.
4(d)(1)(ii)
    The August 2009 Closed-End Proposal would require creditors to make 
a determination at the time of enrollment that the consumer meets any 
applicable age or employment eligibility criteria for insurance or debt 
cancellation or debt suspension coverage. See proposed Sec.  
226.4(d)(1)(iv) and (d)(3)(v). To provide creditors with some 
flexibility, the Board proposes Sec.  226.4(d)(1)(ii) to allow 
creditors to make the determination prior to or at the time of 
enrollment. Comment 4(d)-14 regarding age or employment eligibility 
criteria is revised accordingly.
4(d)(3)(i)
    Debt suspension coverage. In the January 2009 Credit Card Rule, the 
existing rules for debt cancellation coverage were applied to debt 
suspension coverage. The rule requires a disclosure that the obligation 
to pay loan principal and interest is only suspended, and that interest 
will continue to accrue during the period of suspension. See Sec.  
226.4(d)(3)(iii); 74 FR 5244, 5401, Jan. 29, 2009. (The January 2009 
Credit Card Rule was withdrawn as of February 22, 2010, but Sec.  
226.4(d)(3)(iii) was retained in the February 2010 Credit Card Rule. 75 
FR 7925 and 7658, 7796, Feb. 22, 2010.) In response to the August 2009 
Closed-End Proposal, several industry commenters requested guidance on 
how to incorporate this requirement into the revised disclosure. 
Accordingly, the Board proposes Sec.  226.4(d)(3)(i) to include this 
requirement in the disclosure, and proposes model forms and samples 
incorporating the disclosure at G-16(A) and (D) in Appendix G and H-
17(A) and (D) in Appendix H.
4(d)(3)(ii)
    The August 2009 Closed-End Proposal would require creditors to make 
a determination at the time of enrollment that the consumer meets any 
applicable age or employment eligibility criteria for insurance or debt 
cancellation or debt suspension coverage. See proposed

[[Page 58557]]

Sec.  226.4(d)(1)(iv) and (d)(3)(v). To provide creditors with some 
flexibility, the Board proposes Sec.  226.4(d)(3)(ii) to allow 
creditors to make the determination prior to or at the time of 
enrollment. Comment 4(d)-14 regarding age or employment eligibility 
criteria is revised accordingly.
4(d)(4) Telephone Purchases
    In the January 2009 Credit Card Rule, the Board exempted open-end 
(not home-secured) plans, from the requirement to obtain a written 
signature or initials from the consumer for the telephone sales of 
credit insurance or debt cancellation or debt suspension plans. See 
Sec.  226.4(d)(4); 74 FR 5244, 5401, Jan. 29, 2009. However, creditors 
must make the disclosures required under current Sec.  226.4(d)(1)(i) 
and (ii) or (d)(3)(i) through (iii) orally; maintain evidence that the 
consumer affirmatively elected to purchase the insurance or coverage; 
and mail the required disclosures within three business days after the 
telephone purchase. (The January 2009 Credit Card Rule was withdrawn as 
of February 22, 2010, but Sec.  226.4(d)(4) was retained in the 
February 2010 Credit Card Rule. 75 FR 7925 and 7658, 7796, Feb. 22, 
2010.) The August 2009 Closed-End Proposal would apply this same rule 
to HELOCs. See proposed Sec.  226.4(d)(4); 74 FR 43232, 43322, Aug. 26, 
2009. Under this proposal, the disclosures would be required under 
Sec.  226.4(d)(1)(i) and (d)(3)(i), rather than under Sec.  
226.4(d)(1)(i) and (ii) and (d)(3)(i) through (iii). Accordingly, the 
Board proposes to revise Sec.  226.4(d)(4) to require creditors making 
telephone disclosures to provide orally the disclosures required under 
Sec.  226.4(d)(1)(i) and (d)(3)(i).

Section 226.5 General Disclosure Requirements

    Section 226.5 provides general disclosure requirements for open-end 
credit. The Board is proposing to revise Sec.  226.5 and the associated 
commentary to include references to the proposed open-end reverse 
mortgage disclosures in Sec.  226.33.

Section 226.5b Requirements for Home-Equity Plans

Reverse Mortgages
    Currently, reverse mortgages that are structured as open-end credit 
plans are subject to Sec.  226.5b. The Board is proposing to 
consolidate the disclosure requirements for open-end reverse mortgages 
in Sec.  226.33. Consequently, the Board proposes to revise Sec.  
226.5b to exclude reverse mortgages from the disclosure requirements in 
current paragraphs (a) through (e). The Board's 2009 HELOC Proposal 
also proposed to amend Sec.  226.5b. See 74 FR 43428 Aug. 26, 2009 for 
further information. The Board has incorporated in the regulatory text 
and commentary for Sec.  226.5b both the changes that were proposed in 
the Board's 2009 HELOC Proposal and the changes proposed in this 
notice. The Board is not soliciting comment on the amendments 
previously proposed.
    Proposed Sec.  226.5b(h) provides a cross-reference to the sections 
in Sec.  226.33 which apply to reverse mortgages. The Board is also 
proposing to remove proposed comments 5b(c)(9)(ii)-6 and 5b(c)(9)(iii)-
4, which provide guidance on how to disclose the payment terms for 
open-end reverse mortgages. See 74 FR 43428, 43586, Aug. 26, 2009. As 
discussed more fully below in the section-by-section analysis to Sec.  
226.33, the Board is proposing not to apply the minimum periodic 
payment disclosures to open-end reverse mortgages.
    Reverse mortgages would remain subject to the other provisions in 
Sec.  226.5b. Current Sec.  226.5b(g) (proposed to be redesignated as 
Sec.  226.5b(d) in the August 2009 HELOC Proposal) requires a creditor 
to refund fees paid for a home equity plan if any term required to be 
disclosed in Sec.  226.5b(d) (proposed to be redesignated as Sec.  
226.5b(c) in the August 2009 HELOC Proposal) changes (other than a 
change due to fluctuations in the index in a variable-rate plan) before 
the plan is opened and the consumer elects not to open the plan. See 74 
FR 43428, 43484, Aug. 26, 2009. For reverse mortgages, proposed Sec.  
226.5b(d) would be revised to apply to the early open-end reverse 
mortgage disclosures required by Sec.  226.33(d)(1). Revisions to 
proposed Sec.  226.5b(d) also would clarify that the creditor would not 
be required to refund fees if the consumer changed the type of payment 
he elected to receive under proposed Sec.  226.33(c)(5), or for changes 
resulting from verification of the appraised property value or the 
consumer's age. For example, if the disclosure is based on the 
consumer's choice to receive only monthly payments, but after the 
disclosure is provided the consumer decides instead to receive funds in 
the form of a line of credit, the creditor would not be required to 
refund the consumer's fees if the consumer later decided not to proceed 
with the reverse mortgage.
    Under current Sec.  226.5b(h) (proposed to be redesignated as Sec.  
226.5b(e) in the August 2009 HELOC Proposal), which implements TILA 
Section 127A(c)(2), neither a creditor nor any other person may impose 
a nonrefundable fee on a consumer until after the third business day 
following the consumer's receipt of the disclosures required by Sec.  
226.5b. 15 U.S.C. 1637a(c)(2); 74 FR 43428, 43536, 43593, Aug. 26, 
2009. This provision applies to all HELOCs subject to Sec.  226.5b, 
including reverse mortgages. As discussed in the section-by-section 
analysis to Sec.  226.33, for open-end reverse mortgages, the 
disclosures required by Sec.  226.5b are proposed to be moved to Sec.  
226.33; the nonrefundable fee provision in Sec.  226.5b, however, still 
applies to open-end reverse mortgages subject to Sec.  226.33. Thus, 
under proposed Sec.  226.5b(e), a consumer who has applied for a HELOC, 
including an open-end reverse mortgage, may choose not to proceed with 
the transaction for any reason within three business days after 
application and receive a refund of any fees paid. See proposed comment 
5b(e)-1, 74 FR 43428, 43593, Aug. 26, 2009.
    This proposal amends the commentary to previously proposed Sec.  
226.5b(e) to reflect a new proposed rule regarding reverse mortgages, 
discussed in more detail below in the section-by-section analysis to 
Sec.  226.40(b)(2). Under this new rule, neither a creditor nor any 
other person may impose a nonrefundable fee on a consumer for a reverse 
mortgage until after the third business day following the consumer's 
completion of counseling from a qualified counselor. See proposed Sec.  
226.40(b)(2) and accompanying commentary. Consequently, open-end 
reverse mortgages would be subject to two restrictions on imposing 
nonrefundable fees: (1) The rule under previously proposed Sec.  
226.5b(e) described above, which applies to all HELOCs subject to Sec.  
226.5b (see 74 FR 43428, 43536, Aug. 26, 2009); and (2) the rule under 
proposed Sec.  226.40(b)(2), which applies to all reverse mortgages 
subject to Sec.  226.33.
    The Board proposes to add comment 5b(e)-5 to clarify that, for 
open-end reverse mortgages, the restrictions on imposing nonrefundable 
fees in Sec. Sec.  226.5b and 226.40(b)(2) both apply. The proposed 
comment also cross-references proposed commentary to Sec.  
226.40(b)(2), which explains the practical implications of these 
restrictions in reverse mortgage transactions. See proposed comment 
40(b)(2)(i)-3.
    Current Sec.  226.5b(f) limits the changes that creditors may make 
to HELOCs subject to Sec.  226.5b, including open-end reverse 
mortgages. Current Sec.  226.5b(f)(1) limits changes to the annual 
percentage rate, and current Sec.  226.5b(f)(3) limits changes to plan 
terms; both apply to

[[Page 58558]]

reverse mortgages. Current Sec.  226.5b(f)(2) limits the situations in 
which a creditor may terminate a plan and demand repayment of the 
entire outstanding balance in advance of the original term. It does not 
apply to reverse mortgages. Instead, current Sec.  226.5b(f)(4) limits 
when open-end reverse mortgages may be terminated: in the case of 
default; if the consumer transfers title to the property securing the 
note; if the consumer ceases using the property as the primary 
dwelling; or upon the consumer's death. No substantive revisions to 
these provisions are proposed. The proposal would revise Sec.  
226.5b(f)(4) to reflect the change of the defined term ``reverse 
mortgage transaction'' to ``reverse mortgage'' discussed in the 
section-by-section analysis to Sec.  226.33(a).
Interest Rate Not Under the Creditor's Control
    TILA Section 137(a), implemented by Sec.  226.5b(f)(1), prohibits 
variable-rate HELOCs from being subject to any interest rate changes 
other than those based on ``an index or rate of interest which is 
publicly available and is not under the control of the creditor.'' 15 
U.S.C. 1647(a). Accordingly, Sec.  226.5b(f)(1) prohibits creditors 
from changing a HELOC's APR unless the change is ``based on an index 
that is not under the creditor's control'' and is ``available to the 
general public.'' The Official Staff Commentary to Sec.  226.5b(f)(1) 
explains that a creditor may not make changes based on its own prime 
rate or cost of funds, and may not reserve a contractual right to 
change rates at its discretion. See comment 5b(f)(1)-1. The commentary 
states that a creditor may use a published prime rate, such as that in 
the Wall Street Journal, even if the creditor's own prime rate is one 
of several rates used to establish the published rate. Id.
    In the August 2009 HELOC Proposal, the Board did not propose to 
revise these provisions. However, earlier this year, the Board adopted 
final rules regarding open-end (not-home-secured) credit, which include 
additional guidance regarding what constitutes an index outside of the 
creditor's control in the context of credit cards under an open-end 
(not-home-secured) consumer credit plan (February 2010 Credit Card 
Rule). See 75 FR 7658, 7737, 7819, 7909, Feb. 22, 2010. Under the 
February 2010 Credit Card Rule, new Sec.  226.55(b)(2) provides that a 
creditor may not increase an APR for a variable-rate credit card unless 
the change is based on ``an index that is not under the card issuer's 
control and is available to the general public'' and ``the increase in 
the [APR] is due to an increase in the index.'' See id. at 7819.
    The commentary to this new provision incorporates the explanations 
of ``an index that is not under the [creditor's] control'' that appear 
in the HELOC rules, described above. See comment 55(b)(2)-2.i; 75 FR 
7658, 7909, Feb. 22, 2010. In addition, the commentary includes two 
situations not currently associated with the meaning of this phrase in 
the HELOC rules.
    First, under Sec.  226.55(b)(2), a card issuer exercises control 
over the index if the card issuer has set a minimum rate ``floor'' 
below which a variable rate cannot fall, even if a decrease would be 
consistent with a change in the applicable index. See comment 55(b)(2)-
2.ii; 75 FR 7658, 7737, 7909, Feb. 22, 2010. Second, a card issuer 
exercises control over the index if the variable rate can be calculated 
based on any index value that existed during a period of time. See 
comment 55(b)(2)-2.iii; 75 FR 7658, 7737, 7909, Feb. 22, 2010. In 
explaining this second provision, the SUPPLEMENTARY INFORMATION to the 
February 2010 Credit Card Rule notes that card issuers typically reset 
rates on variable-rate credit cards monthly, every two months, or 
quarterly. Under the new rule, a card issuer is permitted to adjust the 
variable rate based on the value of the index on a particular day, or 
in the alternative, the average index value during a specific period. 
See id. This second provision, however, is designed prevent creditors 
from setting the new rate based on, for example, the highest index 
value during a given period of time preceding the reset date (such as 
the 90 days preceding the last day of a month or billing cycle).
    The Board expressed concerns that setting a rate ``floor'' and 
adjusting rates based on any index value that existed during a period 
of time can prevent consumers from receiving the benefit of decreases 
in the index. Upon review, the Board concluded that these practices 
constitute a creditor's control over an index to change rates in a 
manner prohibited by TILA. See id. at 7909 (citing TILA Section 
171(b)(2); 15 U.S.C. 1666(b)(2)).
    The Board solicits comment on whether to amend the commentary to 
Sec.  226.5b(f)(1) to adopt these clarifications regarding what 
constitutes control over an index for purposes of the restrictions on 
changing the rate for a variable-rate HELOC. The Board requests that 
commenters provide specific reasons why the Board should or should not 
do so.

Section 226.6 Account-Opening Disclosures

Reverse Mortgages
    Section 226.6(a), as proposed to be amended in the Board's August 
2009 HELOC Proposal, would be revised by this proposal to exclude 
reverse mortgages from the tabular disclosure requirements in Sec.  
226.6(a)(1) and (a)(2). Instead, reverse mortgages would be subject to 
the disclosure requirements in proposed Sec.  226.33(c) and (d)(2). In 
addition, as discussed in the section-by-section analysis to Sec.  
226.33(c) below, reverse mortgages would not be subject to the 
requirements in Sec.  226.6(a)(5)(i) to disclose voluntary credit 
insurance, debt cancellation or debt suspension, and in Sec.  
226.6(a)(5)(v) to disclose information about fixed-rate and -term 
payment plans. However, reverse mortgages would remain subject to the 
disclosure requirements in Sec.  226.6(a)(3), (a)(4), (a)(5)(iii) and 
(a)(5)(iv). These provisions require disclosures about charges, rates, 
security interests, billing rights, and possible creditor actions, 
respectively, and would be provided outside the required disclosure 
tables. The Board has incorporated in the regulatory text and 
commentary for Sec.  226.6 both the changes that were proposed in the 
Board's 2009 HELOC Proposal and the changes proposed in this notice. 
The Board is not soliciting comment on the amendments previously 
proposed.
Credit Protection Products
    As discussed in the section-by-section analysis to proposed Sec.  
226.4(d)(1) and (d)(3) above, credit insurance, debt cancellation 
coverage, and debt suspension coverage (collectively, ``credit 
protection products'') are products that are offered in connection with 
a credit transaction and that present unique costs and risks to the 
consumer. Currently, Regulation Z requires the creditor to provide 
detailed disclosures of the costs to the consumer if the product is 
voluntary (as a condition of excluding the costs from the finance 
charge), but not if the product is required. See TILA Section 106(b), 
15 U.S.C. 1605(b); Sec.  226.4(d)(1) and (d)(3). If the product is 
required, Regulation Z requires only a brief disclosure of the cost, 
without further details, such as the length of coverage. See Sec.  
226.6(b)(5)(i) (open-end not home-secured); proposed Sec.  
226.6(a)(5)(i) (HELOCs). Based on comments to the August 2009 Closed-
End Proposal and the Board's review of creditor solicitations and 
disclosures for credit protection products, the Board is proposing more 
comprehensive

[[Page 58559]]

disclosures of the risks associated with the optional products. See 
proposed Sec.  226.4(d)(1) and (d)(3). However, the Board is concerned 
that consumers that are offered HELOCs or open-end (not home-secured) 
credit that require payment for credit protection products will not be 
fully informed of the costs and risks associated with these products.
    Accordingly, the Board proposes to require creditors that require 
credit protection products in connection with open-end credit to 
provide the disclosures required in Sec.  226.4(d)(1)(i) and (d)(3)(i), 
as applicable, except for Sec.  226.4(d)(1)(i)(A), (B), (D)(5), (E) and 
(F). This proposal would replace Sec.  226.6(a)(5)(i), which was 
proposed for HELOCs in the August 2009 HELOC Proposal, and would revise 
Sec.  226.6(b)(5)(i), which was adopted for open-end (not home-secured) 
credit in the January 2009 Credit Card Rule. (The January 2009 Credit 
Card Proposal was withdrawn as of February 22, 2010, but Sec.  
226.6(b)(5)(i) was retained in the February 2010 Credit Card Rule. 75 
FR 7925 and 7658, 7804, Feb. 22, 2010.) Thus, for required credit 
protection products, creditors would have to disclose information about 
the Federal Reserve Board's Web site regarding credit protection 
products, the need for the product, the maximum cost and benefit, 
general eligibility restrictions, and the time period and age limit for 
coverage. However, the creditor would not be required to do the 
following because it is not applicable if the credit protection product 
is required in connection with the credit transaction: (1) Determine 
the consumer's age or employment eligibility at the time of enrollment; 
(2) obtain the consumer's affirmative consent; or (3) disclose the 
optional nature, age and employment eligibility, or statement of the 
consumer's affirmative consent.
    The Board proposes to require these disclosures using its authority 
under TILA Section 105(a), 15 U.S.C. 1604(a). TILA Section 105(a) 
authorizes the Board to prescribe regulations to carry out the purposes 
of the act. TILA's purposes include promoting ``the informed use of 
credit,'' which ``results from an awareness of the cost thereof by 
consumers.'' TILA Section 102(a), 15 U.S.C. 1601(a). A premium or 
charge for a required credit protection product is a cost assessed in 
connection with credit. The credit transaction and the relationship 
between the creditor and the consumer are the reasons the product is 
offered or available. Because there have long been concerns about the 
merits of these products,\16\ the Board believes that consumers would 
benefit from clear and meaningful disclosures regarding the associated 
costs and risks. As discussed more fully in the section-by-section 
analysis for proposed Sec.  226.4(d)(1) and (d)(3) above, consumer 
testing showed that without clear disclosures, participants were 
unaware of the costs and risks of these products. For these reasons, 
the Board believes that this proposed rule would serve to inform 
consumers of the costs and risks of accepting a HELOC or open-end (not 
home-secured) credit plan with a required credit protection product.
---------------------------------------------------------------------------

    \16\ See, e.g., Bd. of Governors of the Fed. Reserve Sys. and 
U.S. Dep't of Hous. and Urban Dev., Joint Report to the Congress 
Concerning Reform to the Truth in Lending Act and the Real Estate 
Settlement Procedures Act at 64-66 (1998) (raising concerns about 
high-pressure sales tactics, costs and cancellation rights for 
credit protection products).
---------------------------------------------------------------------------

Section 226.7 Periodic Statement

    Reverse mortgages. Section 226.7 identifies information about an 
open-end account, including a reverse mortgage, that must be disclosed 
when a creditor is required to provide periodic statements. Section 
226.7(a)(8), which implements TILA Section 127(b)(9), requires a 
creditor offering HELOCs subject to Sec.  226.5b, including reverse 
mortgages, to disclose on the periodic statement the date by which or 
the time period within which the new balance or any portion of the new 
balance must be paid to avoid additional finance charges. 15 U.S.C. 
1637(b)(9). As discussed more fully below in the section-by-section 
analysis to Sec.  226.33(c)(13), the disclosure of a grace period for 
reverse mortgages is not relevant or meaningful to consumers who are 
not making regular payments. For this reason the Board proposes to 
exercise its authority under TILA Sections 105(a) and 105(f) to exempt 
reverse mortgages from the requirement to state whether or not any time 
period exists within which any credit extended may be repaid without 
incurring a finance charge. The Board believes that an exemption is 
warranted because the grace period disclosure may be confusing to 
reverse mortgage consumers who are not making regular payments.
    Consumer testing of periodic statements for all HELOCs. Under the 
August 2009 HELOC Proposal, creditors would be required to provide 
periodic statements that group fees and interest together, separate 
from transactions. See proposed Sec.  226.7(a)(6)(i), 74 FR 43428, 
43541, Aug. 26, 2009. The Board also proposed to eliminate the 
requirement that creditors disclose the effective APR on HELOC periodic 
statements. The Board proposed sample forms for HELOC periodic 
statements, developed largely based on the results of the Board's prior 
consumer testing conducted for credit cards. See proposed Samples G-
24(A), G-24(B), and G-24(C) in Appendix G of part 226, 74 FR 43428, 
43570, Aug. 26, 2009. The Board indicated that it would conduct 
additional consumer testing of model disclosures before finalizing the 
August 2009 HELOC Proposal. 74 FR 43428, 43433, Aug. 26, 2009. In 2009 
and 2010, the Board and ICF Macro tested sample periodic statements in 
three rounds of interviews with 31 participants. Macro prepared a 
detailed report of findings, which is available on the Board's public 
Web site: http://www.federalreserve.gov. The Board is also providing 
this summary of the testing and solicits comment.
    Consistent with the results from the Board's credit card testing, 
participants in the three rounds of HELOC testing found it beneficial 
to have fees and interest separated from transactions on the periodic 
statement. Consumer testing also further supported the Board's August 
2009 HELOC Proposal to eliminate the requirement for creditors to 
disclose the effective APR on HELOC periodic statements. Participants 
in the three rounds of HELOC testing were asked questions about the 
effective APR disclosure designed to elicit their understanding of the 
rate. A very small minority of participants correctly explained that 
the effective APR for fixed-rate advances was higher than the 
corresponding APR for fixed-rate advances because the effective APR 
included a fixed-rate advance fee that had been imposed. An even 
smaller minority also correctly explained that the effective APR for 
variable-rate advances was the same as the corresponding APR for 
variable-rate advances because no transaction fee had been imposed on 
those advances. A majority offered incorrect explanations or did not 
offer any explanation. In addition, the inclusion of the effective APR 
disclosure on the statement was often confusing to participants; in two 
rounds some participants mistook the effective APR for the 
corresponding APR. These results are consistent with the testing 
results of the effective APR for credit cards.

Section 226.9 Subsequent Disclosure Requirements

    Reverse mortgages. Section 226.9 sets forth a number of disclosure 
requirements that apply after a home-equity plan subject to Sec.  
226.5b, including an open-end reverse

[[Page 58560]]

mortgage, is opened. This section contains cross-references to the 
account-opening disclosures in Sec.  226.6. The proposal would revise 
Sec.  226.9 and the associated commentary to reference the reverse 
mortgage account-opening disclosure requirements in Sec.  226.33 as 
well. The Board has incorporated in the regulatory text and commentary 
for Sec.  226.9 both the changes that were proposed in the Board's 2009 
HELOC Proposal and the changes proposed in this notice. The Board is 
not soliciting comment on the amendments previously proposed.
    Consumer testing of notices of action taken and reinstatement 
notices and responses for all HELOCs. Under the August 2009 HELOC 
Proposal, proposed Sec.  226.9(j)(1) would retain the existing 
requirement that a creditor provide the consumer with notice of 
temporary account suspension or credit limit reduction under Sec.  
226.5b(f)(3)(i) or (f)(3)(vi). 74 FR 43428, 43521, Aug. 26, 2009. Under 
proposed Sec.  226.9(j)(3), creditors taking action under Sec.  
26.5b(f)(2) would be required to provide the consumer with a notice of 
the action taken and specific reasons for the action. In addition, 
proposed Sec.  226.5b(g)(2)(v) would require creditors to provide 
consumers with a notice of results of a reinstatement investigation. To 
facilitate compliance, model clauses were proposed to illustrate the 
requirements for these notices. See proposed Model Clauses G-22(A), G-
22(B), G-23(A) and G-23(B) in Appendix G of part 226, 74 FR 43428, 
43569, Aug. 26, 2009. The Board indicated that it would conduct 
additional consumer testing of model disclosures before finalizing the 
August 2009 HELOC Proposal. 74 FR 43428, 43433, Aug. 26, 2009.
    The Board and ICF Macro conducted testing in 2009 and 2010 of the 
proposed model clauses for notices that would be required when a 
creditor suspends or reduces the credit limit for a HELOC, and when a 
creditor responds to a consumer's request to reinstate a suspended or 
reduced line. In this proposal, the Board provides a summary of the 
findings for comment. A detailed report of the findings is included in 
Macro's report, available on the Board's public Web site: http://www.federalreserve.gov.
    In the August 2009 HELOC Proposal, the Board included model clauses 
G-23(A) and G-23(B) to illustrate language for a notice to be used in 
circumstances in which the creditor:
     Temporarily suspends, advances or reduces a credit limit 
due to a significant decline in the value of the property, a material 
change in the consumer's financial circumstances, or the consumer's 
default of a material obligation under the plan; or
     Takes action (including termination of the account as well 
as temporary suspension or credit limit reduction) due to the 
consumer's failure to make a required minimum periodic payment within 
30 days of the due date, the consumer's action or inaction that 
adversely affected the creditor's interest in the property, or an 
occurrence of fraud or material misrepresentation concerning the 
account.
    Notice of suspension or reduction. A notice that included model 
clauses in G-23(A) was tested in two rounds of interviews with a total 
of 21 participants. The notice that was shown to participants indicated 
that their credit limit had been reduced because the value of the 
property securing their loan had declined significantly. The notice 
tested in one round was in the form of a checklist that the creditor 
could use to indicate the reason for reducing the credit line. A few 
participants were confused by the listing of other options on the list, 
even though only one option was checked and the others did not apply to 
the consumer's situation. Several other participants seemed somewhat 
confused by the format but eventually understood the form.
    As a result, the notice tested in the following round included the 
specific reason for credit line reduction with no other options listed 
on the notice. Participants in the next round expressed significantly 
better understanding of the revised notice. All participants understood 
that the purpose of the disclosure was to inform them that their credit 
line was reduced because the value of their home decreased. All 
participants also understood that they could ask for reinstatement of 
their original credit limit and how to do so. Some participants 
understood that they would not be charged a fee by the creditor for the 
first request to reinstate the credit line, and all but one participant 
understood that they might be charged for subsequent requests.
    Response to request for reinstatement. The Board also tested model 
clauses in proposed G-22(B) regarding the consumer's rights when the 
consumer requests reinstatement of a HELOC that has been suspended or 
reduced and for the creditor's response to a reinstatement request. 
These clauses were tested in one round with 11 participants. The model 
clauses, for example, inform the consumer that the consumer's 
reinstatement request has been received and that the creditor has 
investigated the request. They contain sample language for explaining 
the results of a reinstatement investigation in which the creditor 
found that a reason for suspension of advances or reduction of the 
credit limit still exists, either because the condition permitting the 
freeze or credit limit reduction continues to exist or because another 
condition permitting a freeze or credit line reduction under Regulation 
Z exists.
    Consumer testing indicated that consumers understand the proposed 
model clauses for a reinstatement notice. In one round of interviews, 
all participants were able to explain the purpose of the reinstatement 
notice. All participants also understood that: Their credit limit was 
not being reinstated to the previous level due to factors other than a 
reduction in the value of their home; the creditor's decision was based 
on information received from an examination of the consumer's credit 
report; and that they could ask the creditor to reinstate their credit 
limit again, but would have to pay a fee in connection with the 
request. The proposed model clauses for a reinstatement notice tested 
so well that the Board did not repeat the testing of this disclosure in 
subsequent rounds.

Section 226.15 Right of Rescission

15(a) Consumer's Right To Rescind
15(a)(1) Coverage
    Section 226.15(a)(1), which implements TILA Section 125(a), 
generally provides that in a credit plan in which a security interest 
is or will be retained or acquired in a consumer's principal dwelling, 
each consumer whose ownership interest is or will be subject to the 
security interest shall have the right to rescind: (1) Each credit 
extension made under the plan; (2) the plan when the plan is opened; 
(3) a security interest when added or increased to secure an existing 
plan; and (4) the increase when a credit limit on the plan is 
increased. 15 U.S.C. 1635(a). Nonetheless, as provided in TILA Section 
125(e), the consumer does not have the right to rescind each credit 
extension made under the plan if the extension is made in accordance 
with a previously established credit limit for the plan. 15 U.S.C. 
1635(e). The Board proposes technical edits to Sec.  226.15(a)(1) and 
related commentary. No substantive change is intended.
    Different terminology is used throughout Sec.  226.15 and the 
related commentary to refer to the events mentioned above that give 
rise to a right of rescission, such as ``transactions'' and 
``occurrences.'' For consistency, the Board proposes to revise Sec.  
226.15 and

[[Page 58561]]

related commentary to refer to these events as ``transactions'' for 
purposes of Sec.  226.15.
15(a)(2) Exercise of the Right
    As discussed in the section-by-section analysis to proposed Sec.  
226.23(a)(2) below, the Board proposes to revise Sec.  226.23(a)(2) and 
related commentary on rescission for closed-end loans to describe (1) 
How the consumer must exercise the right of rescission, (2) whom the 
consumer must notify during the three-business-day period following 
consummation and after that period has expired (the extended right), 
and (3) when the creditor or current owner will be deemed to receive 
the consumer's notice. Proposed Sec.  226.23(a)(2) provides that the 
party the consumer must notify depends on whether the right of 
rescission is exercised during the three-business-day period following 
consummation or after expiration of that period. Proposed Sec.  
226.23(a)(2)(ii)(A) states that, during the three-business-day period, 
the consumer must notify the creditor or the creditor's agent 
designated on the rescission notice. Proposed Sec.  226.23(a)(2)(ii)(A) 
also includes the guidance from current comment 23(a)(2)-1, that if the 
notice does not designate the address of the creditor or its agent, the 
consumer may mail or deliver notification to the servicer, as defined 
in Sec.  226.36(c)(3). The proposed rule is intended to ensure that the 
notice is sent to the person most likely still to own the debt 
obligation. Generally, closed-end loans are not transferred during the 
three-business-day period following consummation.
    Proposed Sec.  226.23(a)(2)(ii)(B) addresses to whom the notice 
must be sent after the three-business-day period has expired, and is 
intended to ensure that consumers can exercise the extended right of 
rescission if the creditor has transferred the consumer's debt 
obligation. Under proposed Sec.  226.23(a)(2)(ii)(B), the consumer must 
mail or deliver notification to the current owner of the debt 
obligation. However, notice to the servicer would also constitute 
delivery to the current owner. As discussed in the section-by-section 
analysis to proposed Sec.  226.23(a)(2), closed-end loans are often 
transferred shortly after consummation and securitized. In addition, 
the original creditor may no longer exist because of dissolution, 
bankruptcy, or merger. As a result, consumers may have difficulty 
identifying the current owner of their loan, and may reasonably be 
confused as to whom they should contact to rescind their loan. In 
contrast, consumers usually know the identity of their servicer. They 
may regularly receive statements or other correspondence from their 
servicer, for example, and many consumers continue to mail monthly 
mortgage payments to the servicer rather than have these payments 
automatically debited from their checking or savings account.
    The Board proposes revisions to Sec.  226.15(a)(2) applicable to 
HELOCs, consistent with those proposed in Sec.  226.23(a)(2) as 
discussed above. While the Board realizes that HELOC accounts may not 
be transferred and securitized as often as closed-end loans, there are 
cases for HELOCs where the original creditor no longer exists because 
of dissolution, bankruptcy, or merger. Thus, the Board believes that 
the proposed rules in Sec.  226.15(a)(2) are needed for HELOCs to 
ensure that consumers can exercise the extended right of rescission if 
the creditor has transferred the consumer's debt obligation. The Board 
also believes that having consistent rules on these issues for closed-
end mortgage loans and HELOCs will facilitate creditors' compliance 
with the rules. As discussed in more detail in the section-by-section 
analysis to proposed Sec.  226.23(a)(2), the Board solicits comment on 
this proposed approach.
15(a)(3) Rescission Period
    For the reasons discussed in the section-by-section analysis to 
proposed Sec.  226.23(a)(3) below, the Board proposes to revise Sec.  
226.15(a)(3) and related commentary to clarify the following: (1) The 
consumer's death terminates an unexpired right to rescind; (2) the 
consumer's filing for bankruptcy generally does not terminate the 
unexpired right to rescind if the consumer still retains an interest in 
the property after the bankruptcy estate is created; and (3) a 
refinancing with a creditor other than the current holder of the 
obligation and paying off the loan would terminate the unexpired right 
to rescind. The Board also proposes to clarify when the rescission 
period expires where a creditor provides corrected material disclosures 
or a rescission notice.
15(a)(4) Joint Owners
    Section 226.15(a)(4) provides that when more than one consumer in a 
transaction has the right to rescind, the exercise of the right by one 
consumer is effective for all consumers. Comment 15(a)(4)-1 provides 
that when more than one consumer has the right to rescind a 
transaction, any one consumer may exercise that right and cancel the 
transaction on behalf of all. For example, if both a husband and wife 
have the right to rescind a transaction, either spouse acting alone may 
exercise the right and both are bound by the rescission. The Board 
proposes technical edits to these provisions. No substantive change is 
intended.
15(a)(5) Material Disclosures
Background
    TILA and Regulation Z provide that a consumer may exercise the 
right to rescind until midnight after the third business day following 
the latest of (1) the transaction that gives rise to the right of 
rescission (such as opening the HELOC account), (2) delivery of the 
notice of the right to rescind, or (3) delivery of all material 
disclosures. TILA Section 125(a); 15 U.S.C. 1635(a); Sec.  
226.15(a)(3). Thus, the right to rescind does not expire until the 
notice of the right to rescind and the material disclosures are 
properly delivered. This ensures that consumers are notified of their 
right to rescind, and that they have the information they need to 
decide whether to exercise the right. If the rescission notice and 
material disclosures are not delivered, a consumer's right to rescind 
may extend for up to three years from the date of the transaction that 
gave rise to the right to rescind. TILA Section 125(f); 15 U.S.C. 
1635(f); Sec.  226.15(a)(3).
    TILA defines the following as ``material disclosures'' for purpose 
of the right of rescission related to HELOCs: (1) The method of 
determining the finance charge and the balance upon which a finance 
charge will be imposed, and (2) the APR. TILA Section 103(u); 15 U.S.C. 
1602(u). Consistent with TILA, current footnote 36 to Sec.  
226.15(a)(3) defines the term ``material disclosures'' to include the 
above disclosures. In addition, the Board has previously added 
information about membership or participation fees and certain payment 
information to the regulatory definition of ``material disclosures'' 
for HELOCs, pursuant to the Board's authority to make adjustments to 
TILA requirements as in the judgment of the Board are necessary or 
proper to effectuate the purposes of TILA. See TILA Sections 102(a), 
105(a); 15 U.S.C. 1601(a), 1604(a); 46 FR 20847, Apr. 7, 1981; 54 FR 
24670, June 9, 1989. Thus, current footnote 36 to Sec.  226.15(a)(3) 
also includes the following information as ``material disclosures:'': 
(1) The amount or method of determining the amount of any membership or 
participation fee that may be imposed as part of the plan; and (2) 
payment information described in current Sec. Sec.  226.5b(d)(5)(i) and 
(ii) that is required under former Sec.  226.6(e)(2)

[[Page 58562]]

(redesignated as Sec.  226.6(a)(3)(ii) in the February 2010 Credit Card 
Rule). This payment information is: (1) The length of the draw period 
and any repayment period; (2) an explanation of how the minimum 
periodic payment will be determined and the timing of the payments; and 
(3) if payment of only the minimum periodic payment may not repay any 
of the principal or may repay less than the outstanding balance, a 
statement of this fact as well as that a balloon payment may result.
    Congress first added the definition of ``material disclosures'' to 
TILA in 1980 so that creditors would be ``in a better position to know 
whether a consumer may properly rescind a transaction.'' \17\ The HELOC 
market has changed considerably since Congress created this definition 
of ``material disclosures.'' In the August 2009 HELOC Proposal, the 
Board proposed comprehensive revisions to the account-opening 
disclosures for HELOCs that would reflect these changes in the HELOC 
market. The proposed account-opening disclosures and revised model 
forms were developed after extensive consumer testing to determine 
which credit terms consumers find the most useful in evaluating credit 
transactions. Based on consumer testing, the August 2009 HELOC Proposal 
made less prominent or eliminated certain account-opening disclosures 
that are currently defined as ``material disclosures,'' while adding 
other disclosures that are more important to consumers today. As 
discussed below, the Board proposes to revise the definition of 
``material disclosures'' consistent with the Board's proposed changes 
to the account-opening disclosures in Sec.  226.6(a) under the August 
2009 HELOC Proposal and with the proposed changes to open-end reverse 
mortgage disclosures discussed in the section-by-section analysis to 
Sec.  226.33 below. The Board also proposes to revise the definition of 
``material disclosures'' for closed-end mortgage loans, as discussed 
under Sec.  226.23(a)(5) below.
---------------------------------------------------------------------------

    \17\ S. Rep. No. 368, 98 Cong. 2d Sess. 29, reprinted in 1980 
U.S.C.A.N.N. 236, 264.
---------------------------------------------------------------------------

August 2009 HELOC Proposal
    In the August 2009 HELOC Proposal, the Board proposed two 
significant revisions to the account-opening disclosures for HELOCs 
under Sec.  226.6(a) (moved from former Sec. Sec.  226.6(a) through 
(e)). The proposed revisions (1) require a tabular summary of key terms 
to be provided before the first transaction on the HELOC plan (see 
proposed Sec. Sec.  226.6(a)(1) and (a)(2)), and (2) change how and 
when cost disclosures must be made (see proposed Sec.  226.6(a)(3) for 
content, and proposed Sec.  226.5(b) and proposed Sec.  226.9(c) for 
timing)).
    Under the current rules, a creditor must disclose any ``finance 
charge'' or ``other charge'' in the account-opening disclosures that 
must be provided before the first transaction on a HELOC plan. In 
addition, the regulation identifies fees that are not considered to be 
either ``finance charges'' or ``other charges'' and therefore need not 
be included in the account-opening disclosures. The distinctions among 
finance charges, other charges, and charges that do not fall into 
either category are not always clear. Examples of included or excluded 
charges are in the regulation and commentary, but these examples cannot 
provide definitive guidance in all cases. This uncertainty can pose 
legal risks for creditors that act in good faith to comply with the 
law. Creditors are subject to civil liability and administrative 
enforcement for underdisclosing the finance charge or otherwise making 
erroneous disclosures, so the consequences of an error can be 
significant. Furthermore, over-disclosure of rates and finance charges 
is not permitted by Regulation Z for open-end credit. The fee 
disclosure rules also have been criticized as being outdated and 
impractical. These rules require creditors to provide fee disclosures 
at account opening, which may be months and possibly years before a 
particular disclosure is relevant to the consumer, such as when the 
consumer calls the creditor to request a service for which a fee is 
imposed. In addition, an account-related transaction may occur by 
telephone, when a written disclosure is not feasible.
    The proposed changes to the disclosures in Sec.  226.6(a) in the 
August 2009 HELOC Proposal are designed to respond to these criticisms 
while still giving full effect to TILA's requirement to disclose credit 
charges before they are imposed. Specifically, in the August 2009 HELOC 
Proposal, the Board proposed to require creditors to provide a tabular 
summary of key terms in writing to a consumer before the first 
transaction is made under the HELOC plan. This proposed tabular summary 
contains information about rates, fees, and payment information that 
the Board believes to be the most important information in the current 
marketplace for consumers to know before they use a HELOC account. 
``Charges imposed as part of the HELOC plan,'' as set forth in proposed 
Sec.  226.6(a)(3), that are not required to be disclosed in the 
account-opening table must be disclosed orally or in writing before the 
consumer agrees to or becomes obligated to pay the charge.
The Board's Proposal
    Consistent with the August 2009 HELOC Proposal, the Board now 
proposes to revise the definition of material disclosures to include 
information that is critical to consumers in evaluating HELOC offers, 
and to remove information that consumers do not find to be important. 
The proposal is intended to ensure that consumers have the information 
they need to decide whether to rescind a HELOC.
    Proposed Sec.  226.15(a)(5) would retain the following as material 
disclosures:
     Any APR, information related to introductory rates, and 
information related to variable rate plans that is required to be 
disclosed in the proposed account-opening table except for the lowest 
and highest value of the index in the past 15 years;
     Any annual or other periodic fees that may be imposed by 
the creditor for the availability of the plan (including any fee based 
on account activity or inactivity), how frequently the fee will be 
imposed, and the annualized amount of the fee;
     The length of the plan, the length of the draw period and 
the length of any repayment period;
     An explanation of how the minimum periodic payment will be 
determined and the timing of the payments. If paying only the minimum 
periodic payments may not repay any of the principal or may repay less 
than the outstanding balance by the end of the plan, a statement of 
this fact, as well as a statement that a balloon payment may result or 
will result, as applicable; and
     A fee for required credit insurance, or debt cancellation 
or suspension coverage.
    The following disclosures would be added to the list of material 
disclosures:
     The total of all one-time fees imposed by the creditor and 
any third parties to open the plan (this disclosure would replace an 
itemization of the one-time fees to open the plan that are currently 
material disclosures);
     Any fee that may be imposed by the creditor if a consumer 
terminates the plan prior to its scheduled maturity;
     If applicable, a statement that negative amortization may 
occur, and that negative amortization increases the principal balance 
and reduces the consumer's equity in the dwelling;
     Any limitations on the number of extensions of credit and 
the amount of credit that may be obtained during any time period, as 
well as any minimum outstanding balance and minimum draw

[[Page 58563]]

requirements (this disclosure would replace the disclosure of fees 
imposed for these limitations or restrictions, which are currently 
material disclosures); and
     The credit limit applicable to the plan.
    The following disclosures would be removed from the list of 
material disclosures:
     Any APRs that are not required to be in the proposed 
account-opening table, specifically any penalty APRs or APRs for fixed-
rate and fixed-term advances during the draw period (unless they are 
the only advances allowed during the draw period);
     An itemization of one-time fees imposed by the creditor 
and any third parties to open the plan;
     Any transaction charges imposed by the creditor for use of 
the home-equity plan;
     Any fees imposed by the creditor for a consumer's failure 
to comply with any limitations on the number of extensions of credit 
and the amount of credit that may be obtained during any time period, 
as well as for failure to comply with any minimum outstanding balance 
and minimum draw requirements;
     Any finance charges that are not required to be disclosed 
in the account-opening table; and
     The method of determining the balance upon which a finance 
charge will be imposed (i.e., a description of balance computation 
methods).
    Proposed comment 15(a)(5)(i)-1 states that the right to rescind 
generally does not expire until midnight after the third business day 
following the latest of: (1) The transaction that gives rise to the 
right of rescission, (2) delivery of the rescission notice, as set 
forth in Sec.  226.15(b), or (3) delivery of all material disclosures, 
as set forth in Sec.  226.15(a)(5)(i). A creditor must make the 
material disclosures clearly and conspicuously, consistent with the 
requirements of proposed Sec.  226.6(a)(2) or, for open-end reverse 
mortgages, Sec.  226.33(c). The proposed comment clarifies that a 
creditor may satisfy the requirements to provide the material 
disclosures by providing an account-opening table described in proposed 
Sec.  226.6(a)(1) or Sec.  226.33(d)(1) and (d)(4) that complies with 
the regulation. Failure to provide the required non-material 
disclosures set forth in Sec.  226.6 or Sec.  226.33 or the information 
required under Sec.  226.5b does not affect the right of rescission, 
although such failure may be a violation subject to the liability 
provisions of TILA Section 130, or administrative sanctions. 15 U.S.C. 
1640.
    Under the August 2009 HELOC Proposal, proposed Sec. Sec.  
226.6(a)(1)(ii) and (a)(2) sets forth certain terminology and format 
requirements with which creditors must comply in disclosing certain 
terms in the account-opening table. For example, under proposed Sec.  
226.6(a)(2)(vi)(A)(1)(i), if an APR that must be disclosed in the 
account-opening table is a variable rate, a creditor must disclose the 
fact that the APR may change due to the variable-rate feature. In 
describing that the rate may vary, a creditor in the account-opening 
table must use the term ``variable rate'' in underlined text. Similar 
requirements for reverse mortgages are proposed in Sec.  226.33(c), 
(d)(2) and (d)(4).
    Proposed comment 15(a)(5)(i)-3 specifies that failing to satisfy 
terminology or format requirements in proposed Sec. Sec.  226.6(a)(1) 
or (a)(2) or Sec.  226.33(c), (d)(2) and (d)(4) (including the tabular 
format requirement) or in the proposed model forms in Appendix G or 
Appendix K is not by itself a failure to provide material disclosures. 
In addition, a failure to satisfy the proposed 10-point font size 
requirement that would apply to disclosures in the HELOC or reverse 
mortgage account-opening tables, as set forth in proposed comment 
5(a)(1)-3, is not by itself a failure to provide material disclosures. 
Nonetheless, a creditor must provide the material disclosures clearly 
and conspicuously, as described in Sec.  226.5(a)(1) and comments 
5(a)(1)-1 and -2 (as adopted in the February 2010 Credit Card Rule). In 
the example above, as long as a creditor satisfies the requirement to 
disclose clearly and conspicuously the fact that the APR may change due 
to the variable-rate feature, the creditor will be deemed to have 
provided this material disclosure even if the creditor does not use the 
term ``variable rate'' in underlined text to indicate that a rate may 
vary.
    The Board believes that in most cases, creditors will satisfy the 
terminology and format requirements applicable to the account-opening 
disclosures when providing the material disclosures. As discussed 
above, proposed comment 15(a)(5)(i)-1 provides that a creditor may 
satisfy the requirement to provide the material disclosures by giving 
an account-opening table described in Sec.  226.6(a)(1) or Sec.  
226.33(d)(2) and (d)(4) that complies with the regulation (including 
the terminology and format requirements). The Board believes that most 
creditors will take advantage of the safe harbor in proposed comment 
15(a)(5)(i)-1 by using the account-opening disclosures to fulfill the 
obligation to provide material disclosures.
    The Board does not believe that right of rescission should be 
extended when the creditor has provided the material disclosures 
clearly and conspicuously to the consumer, but the material disclosures 
do not meet all the terminology and format requirements applicable to 
the account-opening disclosures. A material disclosure that is clear 
and conspicuous but contains a formatting error, such as failure to use 
bold text, is unlikely to impair a consumer's ability to determine 
whether to exercise the right to rescind. In addition, providing an 
extended right of rescission in these cases may increase the cost of 
credit, as creditors would incur litigation risk and potential costs to 
unwind transactions based on a failure to meet certain technical 
terminology or format requirements, even though the disclosure in a 
particular case was still made clearly and conspicuously to the 
consumer.
    Legal authority to add disclosures. The Board proposes to revise 
the definition of material disclosures pursuant to its authority under 
TILA Section 105. 15 U.S.C. 1604. Although Congress specified in TILA 
the disclosures that constitute material disclosures, Congress gave the 
Board broad authority to make adjustments to TILA requirements based on 
its knowledge and understanding of evolving credit practices and 
consumer disclosures. Under TILA Section 105(a), the Board may make 
adjustments to TILA to effectuate the purposes of TILA, to prevent 
circumvention or evasion, or to facilitate compliance. 15 U.S.C. 
1604(a). The purposes of TILA include ensuring the ``meaningful 
disclosure of credit terms'' to help consumers avoid the uninformed use 
of credit. 15 U.S.C. 1601(a), 1604(a).
    The Board has considered the purposes for which it may exercise its 
authority under TILA Section 105(a) and, based on that review, believes 
that the proposed adjustments are appropriate. The Board believes that 
the proposed amendments to the definition of ``material disclosures'' 
are warranted by the complexity of HELOC products offered today and the 
number of disclosures that are critical to the consumer's evaluation of 
a credit offer. Consumer testing conducted for the Board for the August 
2009 HELOC Proposal showed that certain terms in HELOC products are 
more important to consumers. Defining these disclosures as ``material 
disclosures'' would ensure the ``meaningful disclosure of credit 
terms'' so that consumers would have the information they need to make 
informed decisions about whether to rescind the credit transaction. The

[[Page 58564]]

proposed definition may also prevent circumvention or evasion of the 
disclosure rules because creditors would have a greater incentive to 
ensure that the material disclosures are accurate.
    Legal authority to add tolerances. The Board recognizes that 
increasing the number of material disclosures could increase the 
possibility of errors resulting in extended rescission rights. To 
ensure that inconsequential disclosure errors do not result in extended 
rescission rights, the Board proposes to add tolerances for accuracy of 
disclosures of the credit limit applicable to the plan and the total of 
all one-time fees imposed by the creditor and any third parties to open 
the plan.
    The Board proposes to model the tolerances for disclosures of the 
credit limit and the total of all one-time fees imposed to open the 
plan on the tolerances provided by Congress in 1995 for the disclosure 
of the finance charge for closed-end mortgage loans, as discussed in 
more detail in the section-by-section analysis to proposed Sec.  
226.23(a)(5). As discussed in more detail in the section-by-section 
analyses below, disclosure of the credit limit would be considered 
accurate if the disclosed credit limit: (1) Is overstated by no more 
than \1/2\ of 1 percent of the credit limit required to be disclosed 
under Sec.  226.6(a)(2)(xviii) or $100, whichever is greater; or (2) is 
less than the credit limit required to be disclosed under Sec.  
226.6(a)(2)(xviii). The total of all one-time fees imposed to open the 
plan would be considered accurate if the disclosed amount is 
understated by no more than $100; or is greater than the amount 
required to be disclosed under Sec.  226.6(a)(2)(vii) or Sec.  
226.33(c)(7)(i)(A).
    The Board proposes the new tolerances for these disclosures 
pursuant to its authority in TILA Section 121(d) to establish 
tolerances for numerical disclosures that the Board determines are 
necessary to facilitate compliance with TILA and that are narrow enough 
to prevent misleading disclosures or disclosures that circumvent the 
purposes of TILA. 15 U.S.C. 1631(d). The Board does not believe that an 
extended right of rescission is appropriate if a creditor understates 
or slightly overstates the credit limit applicable to the plan, or 
overstates or slightly understates the total one-time fees imposed to 
open the plan. Creditors would incur litigation and other costs to 
unwind transactions based on the extended right of rescission, even 
though the error in the disclosure was not critical to a consumer's 
decision to enter into the credit transaction, and, in turn, to rescind 
the transaction. These disclosure errors are unlikely to influence the 
consumer's decision of whether to rescind the loan. The Board believes 
that the proposed tolerances are broad enough to alleviate creditors' 
compliance concerns regarding minor disclosure errors, and narrow 
enough to prevent misleading disclosures.
    Legal authority to remove disclosures. As discussed above, the 
proposal removes certain disclosures from the definition of ``material 
disclosures.'' Some of these removed disclosures would be replaced with 
similar, but more useful, disclosures, such as removing an itemization 
of one-time fees imposed to open a HELOC plan from the definition of 
``material disclosures,'' but including the total of one-time fees 
imposed to open a plan as a material disclosure. The Board proposes to 
remove these disclosures from the definition of ``material 
disclosures'' through its exception and exemption authority under TILA 
Section 105. 15 U.S.C. 1604. Although Congress specified in TILA the 
disclosures that constitute material disclosures that extend 
rescission, the Board has broad authority to make exceptions to or 
exemptions from TILA requirements based on its knowledge and 
understanding of evolving credit practices and consumer disclosures. 
Under TILA Section 105(a), the Board may make adjustments to TILA to 
effectuate the purposes of TILA, to prevent circumvention or evasion, 
or to facilitate compliance. 15 U.S.C. 1604(a). The purposes of TILA 
include ensuring ``meaningful disclosure of credit terms'' to help 
consumers avoid the uninformed use of credit. 15 U.S.C. 1601(a), 
1604(a).
    TILA Section 105(f) authorizes the Board to exempt any class of 
transactions from coverage under any part of TILA if the Board 
determines that coverage under that part does not provide a meaningful 
benefit to consumers in the form of useful information or protection. 
15 U.S.C. 1604(f)(1). TILA Section 105(f) directs the Board to make the 
determination of whether coverage of such transactions provides a 
meaningful benefit to consumers in light of specific factors. 15 U.S.C. 
1604(f)(2). These factors are (1) The amount of the loan and whether 
the disclosures, right of rescission, and other provisions provide a 
benefit to consumers who are parties to the transactions involving a 
loan of such amount; (2) the extent to which the requirement 
complicates, hinders, or makes more expensive the credit process; (3) 
the status of the borrower, including any related financial 
arrangements of the borrower, the financial sophistication of the 
borrower relative to the type of transaction, and the importance to the 
borrower of the credit, related supporting property, and coverage under 
TILA; (4) whether the loan is secured by the principal residence of the 
borrower; and (5) whether the exemption would undermine the goal of 
consumer protection.
    The Board has considered each of these factors and, based on that 
review, believes that the proposed exceptions and exemptions are 
appropriate. Consumer testing of borrowers with varying levels of 
financial sophistication shows that the disclosures the Board proposes 
to remove from the definition of ``material disclosures'' (as listed 
above) are not likely to impact a consumer's decision to obtain a HELOC 
or to exercise the right to rescind. Retaining these disclosures as 
material disclosures increases the cost of credit when failure to 
provide these disclosures or technical violations due to calculation 
errors results in an extended right to rescind. Defining such 
disclosures as ``material disclosures'' would not provide a meaningful 
benefit to consumers in the form of useful information or protection. 
Revising the definition of ``material disclosures'' to reflect the 
disclosures that are most critical to the consumer's evaluation of 
credit terms would better ensure that the compliance costs are aligned 
with disclosure requirements that provide meaningful benefits for 
consumers.
    An analysis of the disclosures retained, added, and removed from 
the definition of ``material disclosures'' is set forth below.
15(a)(5)(i)(A) Annual Percentage Rates
    Consistent with TILA Section 103(u), current footnote 36 of Sec.  
226.15(a)(3) defines ``material disclosures'' to include APRs. Current 
comment 15(a)(3)-3 further provides that for variable rate programs, 
the material disclosures also include variable rate disclosures that 
must be given as part of the account-opening disclosures, namely the 
circumstances under which the rate may increase, the limitations on the 
increase, and the effect of the increase. The Board proposes to include 
any APRs that must be disclosed in the proposed account-opening table 
as material disclosures. See proposed Sec.  226.15(a)(5)(i)(A), 
proposed Sec.  226.6(a)(2)(vi), and proposed Sec.  226.33(c)(6)(i). 
This includes all APRs that may be imposed on the HELOC plan related to 
the payment plan disclosed in the table, except for any penalty APR or 
any APR for fixed-rate

[[Page 58565]]

and fixed-term advances during the draw period (unless those are the 
only advances allowed during the draw period). See proposed comment 
15(a)(5)(i)-4; see also proposed Sec. Sec.  226.6(a)(2) and (a)(2)(vi). 
The Board believes that APRs are critical to consumers in deciding 
whether to open a particular HELOC plan, and in deciding whether to 
rescind the plan. Consumer testing conducted for the Board on HELOC 
disclosures for the August 2009 HELOC Proposal shows that that current 
APRs on the HELOC plan are among the most important pieces of 
information that consumers want to know in deciding whether to open a 
HELOC plan.
    The Board notes that the tolerance amount set forth in Sec.  
226.14(a) applies to the disclosure of APRs as material disclosures 
under proposed Sec.  226.15(a)(5). See comment 14(a)-1. Under Sec.  
226.14(a), an APR is considered accurate if it is not more than \1/8\ 
of 1 percentage point above or below the APR determined in accordance 
with Sec.  226.14.
    Introductory rate information. The Board proposes to continue to 
define information related to introductory rates as material 
disclosures. Thus, the term ``material disclosures'' would include the 
following introductory information: (1) The introductory rate; (2) the 
time period during which the introductory rate will remain in effect; 
and (3) the rate that will apply after the introductory rate expires. 
See proposed Sec.  226.15(a)(5)(i)(A) and proposed Sec.  
226.6(a)(2)(vi)(B); see also proposed comment 15(a)(5)(i)-5. Based on 
consumer testing conducted for the Board on HELOC plans for the August 
2009 HELOC Proposal, the Board believes that this information related 
to introductory rates is critical to consumers in understanding the 
current APRs that apply to the HELOC plan.
    Variable-rate information. In addition, the Board proposes to 
continue to define information related to variable-rate plans as 
material disclosures. Specifically, the term ``material disclosures'' 
would include the following information related to variable-rate plans: 
(1) The fact that the APR may change due to the variable-rate feature; 
(2) an explanation of how the APR will be determined; (3) the frequency 
of changes in the APR; (4) any rules relating to changes in the index 
value and the APR, and resulting changes in the payment amount, 
including, for example, an explanation of payment limitations and rate 
carryover; and (5) a statement of any limitations on changes in the 
APR, including the minimum and maximum APR that may be imposed under 
the payment plan disclosed in the table, or if no annual or other 
periodic limitations apply to changes in the APR, a statement that no 
annual limitation exists. See proposed Sec.  226.15(a)(5)(i)(A) and 
proposed Sec.  226.6(a)(2)(vi)(A); see also proposed comment 
15(a)(5)(i)-6.
    Based on consumer testing conducted for the Board on HELOC plans 
for the August 2009 HELOC Proposal, the Board believes that the above 
information about variable rates is critical to consumers in 
understanding the variable nature of the APRs on HELOC plans. For 
example, consumers in the testing consistently said that they found an 
explanation of how the APR will be determined, which means the type of 
index used in making the rate adjustments and the value of the margin 
(such as prime rate plus 1 percent), to be valuable information in 
understanding how their APRs would be determined over time. In 
addition, the Board believes that consumers should be informed of all 
rate caps and floors, as consumer testing has shown that this rate 
information is among the most important information to a consumer in 
deciding whether to open a HELOC plan. Current comment 15(a)(3)-3 
dealing with variable rate plans would be moved to proposed comment 
15(a)(5)(i)-6 and would be revised to list the information related to 
variable rate plans that would be considered material disclosures, as 
discussed above.
    The Board proposes not to include the disclosure of the lowest and 
highest value of the index in the past 15 years as a material 
disclosure even though this information is required to be included in 
the proposed account-opening table as part of the variable-rate 
information. See proposed Sec.  226.15(a)(5)(i)(A), proposed Sec.  
226.6(a)(2)(vi)(A)(1)(vi), and proposed Sec.  
226.33(c)(6)(i)(A)(1)(vi). This disclosure may be useful to some 
consumers in understanding how the index moved in the past, so that 
they would have some sense of how it might change in the future; the 
Board does not propose to include this disclosure as a material 
disclosure, however, because it provides general information and does 
not describe a specific term applicable to the HELOC plan.
    Exemption for APRs that are not required to be disclosed in the 
account-opening table. As discussed above, the Board proposes to 
exclude APRs that are not required to be disclosed in the proposed 
account-opening table from the definition of ``material disclosures.'' 
These APRs are penalty APRs and APRs for fixed-rate and fixed-term 
advances during the draw period (unless they are the only advances 
allowed during the draw period). See proposed Sec. Sec.  226.6(a)(2) 
and (a)(2)(vi).
    The Board does not believe that removing penalty APRs and APRs for 
fixed-rate and fixed-term advances during the draw period (unless they 
are the only advances allowed during the draw period) from the 
definition of ``material disclosures'' would undermine the goals of 
consumer protection provided by the right of rescission. With respect 
to penalty APRs, under the August 2009 HELOC Proposal, the Board 
proposed to restrict creditors offering HELOCs subject to Sec.  226.5b 
from imposing a penalty rate on the account for a consumer's failure to 
pay the account when due, unless the consumer is more than 30 days late 
in paying the account. See proposed comment 5b(f)(2)(ii)-1. In 
addition, under the August 2009 HELOC Proposal, creditors offering 
HELOCs subject to Sec.  226.5b would be required to provide consumers 
with a written notice of the increase in the APR to the penalty rate at 
least 45 days before the effective date of the increase. See proposed 
Sec.  226.9(i). Due to the very limited circumstances in which a 
penalty rate may be imposed under the August 2009 HELOC Proposal, as 
well as the more stringent advance notice requirements proposed, the 
Board believes that information about the penalty rate would not be 
useful to consumers in deciding whether to open a HELOC plan, and, in 
turn, deciding whether to exercise the right of rescission. For these 
reasons, the Board proposes to remove penalty APRs from the definition 
of ``material disclosures.''
    Regarding APRs for fixed-rate and fixed-term advances during the 
draw period, some HELOC plans offer a fixed-rate and fixed-term payment 
feature, where a consumer is permitted to repay all or part of the 
balance at a fixed rate (rather than a variable rate) over a specified 
time period. In the August 2009 HELOC Proposal, the Board proposed that 
if a HELOC plan is generally subject to a variable interest rate but 
includes a fixed-rate and fixed-term option during the draw period, a 
creditor generally must not disclose in the proposed account-opening 
table the terms applicable to the fixed-rate and fixed-term feature, 
including the APRs applicable to the fixed-rate and fixed-term 
advances. See proposed Sec.  226.6(a)(2). However, if a HELOC plan 
offers only a fixed-rate and fixed-term feature during the draw period, 
a creditor must disclose in the table information related to the fixed-
rate and fixed-term feature when making the

[[Page 58566]]

disclosures in the proposed account-opening table. The Board believes 
that including information about the variable-rate feature and the 
fixed-rate and fixed-term feature in the proposed account-opening table 
would create ``information overload'' for consumers. The Board chose to 
highlight the terms of the variable-rate feature in the table because 
this feature is automatically accessed when a consumer obtains advances 
from the HELOC plan. The Board understands that consumers generally 
must take active steps to access the fixed-rate and fixed-term payment 
feature.
    When the fixed-rate and fixed-term features are optional features, 
the Board believes that information about the APRs applicable to fixed-
rate and fixed-terms advances during the draw period is not critical to 
most consumers' decisions on whether to open a HELOC plan, and, in 
turn, their decisions on whether to exercise the right of rescission. 
Many consumers may never exercise the optional fixed-rate and fixed-
term feature. For these reasons, the Board proposes to remove APRs 
applicable to optional fixed-rate and fixed-terms advances during the 
draw period from the definition of ``material disclosures.''
15(a)(5)(i)(B) Total of All One-Time Fees Imposed by the Creditor and 
Any Third Parties To Open the Plan
    Consistent with TILA Section 103(u), footnote 36 to Sec.  
226.15(a)(3) defines ``material disclosures'' to include the method of 
determining the finance charge. Under Sec.  226.4, some one-time fees 
imposed by the creditor or any third parties to open the HELOC plan are 
considered finance charges, such as loan origination fees, and those 
fees currently are considered material disclosures. Other one-time fees 
to open the HELOC plan are not considered ``finance charges'' under 
Sec.  226.4, such as appraisal fees, and those fees currently are not 
considered material disclosures. See Sec.  226.4(c). In addition, the 
total of one-time fees imposed by the creditor or any third parties to 
open the plan is not currently required to be disclosed in the account-
opening disclosures set forth in current Sec.  226.6, and that 
disclosure currently is not considered a material disclosure.
    Under the August 2009 HELOC Proposal, a creditor would be required 
to disclose in the proposed account-opening table both (1) the total of 
all one-time fees imposed by the creditor and any third parties to open 
the HELOC plan, stated as a dollar amount; and (2) an itemization of 
all one-time fees imposed by the creditor and any third parties to open 
the plan, stated as dollar amounts, and when such fees are payable. See 
proposed Sec. Sec.  226.6(a)(2)(vii) and 226.33(c)(7)(i)(A). Under this 
proposal, the Board proposes to revise the definition of ``material 
disclosures'' to add the total of one-time fees imposed by the creditor 
and any third parties to open the HELOC plan. See proposed Sec.  
226.15(a)(5)(i)(B). The Board believes that the total of one-time fees 
imposed by the creditor and any third parties to open the HELOC plan is 
critical information for consumers to understand the cost of the credit 
transaction and to decide whether to enter into the credit transaction 
or exercise the right of rescission. In consumer testing on HELOCs 
conducted for the Board for the August 2009 HELOC Proposal, 
participants consistently said that the total of one-time fees imposed 
to open the HELOC plan was one of the most important pieces of 
information they would consider in deciding whether to open the HELOC 
plan.
    Tolerances. To reduce the likelihood that rescission claims would 
arise because of minor discrepancies in the disclosure of the total of 
one-time fees to open the HELOC plan, the Board proposes a tolerance in 
Sec.  226.15(a)(5)(ii). As discussed above, this tolerance would be 
modeled after the tolerance for the finance charge for closed-end 
mortgage loans created by Congress in 1995. Specifically, proposed 
Sec.  226.15(a)(5)(ii) provides that the total of all one-time fees 
imposed by the creditor and any third parties to open the plan and 
other disclosures affected by the total would be considered accurate 
for purposes of rescission if the disclosed total of all one-time fees 
imposed by the creditor and any third parties to open the plan is 
understated by no more than $100 or is greater than the amount required 
to be disclosed under proposed Sec.  226.6(a)(2)(vii) or Sec.  
226.33(c)(7)(i)(A). As discussed in more detail in the section-by-
section analysis to proposed Sec.  226.23, these tolerances are 
consistent with the proposed tolerances applicable to the total 
settlement charges disclosed for closed-end mortgage loans under Sec.  
226.23(a)(5).
    Proposed comment 15(a)(5)(ii)-1 addresses a situation where the 
total one-time fees imposed to open the account may affect the 
disclosure of fees imposed by the creditor if a consumer terminates the 
plan prior to its scheduled maturity. Specifically, waived total costs 
of one-time fees imposed to open the account would be considered a fee 
imposed by the creditor for early termination of the account by the 
consumer, if the creditor will impose those costs on the consumer if 
the consumer terminates the plan within a certain amount of time after 
account opening. Proposed comment 15(a)(5)(ii)-1 makes clear that the 
tolerances set forth in proposed Sec.  226.15(a)(5)(ii) also apply to 
these waived total costs of one-time fees if they are disclosed as fees 
imposed by the creditor for early termination of the plan by the 
consumer.
    The Board believes that the proposed tolerances are broad enough to 
alleviate creditors' compliance concerns regarding minor disclosure 
errors, and narrow enough to prevent misleading disclosures. The total 
cost of one-time fees imposed to open the HELOC account may be more 
prone to calculation errors than other material disclosures defined in 
proposed Sec.  226.15(a)(5) because it is a tally of costs (as opposed 
to being a single fee), and is a term that is generally customized to 
the consumer (as opposed to being a standard fee amount that is the 
same for all consumers offered a particular HELOC plan by the 
creditor). The Board notes that the tolerance amounts for the total 
one-time fees imposed to open the account only applies to disclosures 
for purposes of rescission under Sec.  226.15. These tolerances do not 
apply to disclosure of these total costs under Sec.  226.6(a)(2)(vii) 
or Sec.  226.33(c)(7)(i)(A); this ensures that creditors continue to 
take steps to provide accurate disclosure of the total one-time fees to 
open the account under Sec.  226.6(a)(2)(vii) or Sec.  
226.33(c)(7)(i)(A) to avoid civil liability or administrative 
sanctions.
    The Board proposes to model the tolerance for the disclosure of the 
total of one-time fees imposed to open the account on the narrow 
tolerances provided for closed-end mortgage loans by Congress in 1995. 
However, due to compliance concerns, the Board has not proposed a 
special tolerance for foreclosures as is provided for the finance 
charge for closed-end loans. The Board solicits comment on this 
approach. Moreover, the Board believes that the total of one-time fees 
imposed to open an account is often smaller than the finance charge for 
closed-end mortgages, and for this reason has proposed a tolerance 
based on a dollar figure, rather than a percentage of the credit limit 
applicable to the plan. The Board requests comment on whether it should 
increase or decrease the dollar figure. The Board also requests comment 
on whether the tolerance should be linked to an inflation index, such 
as the Consumer Price Index.

[[Page 58567]]

    Exemption for itemization of one-time fees to open the account. 
While the Board proposes to include the total cost of one-time fees 
imposed to open the HELOC plan in the definition of ``material 
disclosures,'' the Board proposes not to include the itemization of 
one-time fees imposed by the creditor and any third parties to open the 
HELOC plan as material disclosures. For each itemized one-time account 
opening fee that is a ``finance charge,'' the Board would be removing 
this fee from the definition of ``material disclosures.'' (Each 
itemized one-time account opening fee that is not a ``finance charge'' 
is currently not considered a material disclosure.) The Board does not 
believe that removing the itemization of one-time fees imposed to open 
the account from the definition of ``material disclosures'' would 
undermine the goals of consumer protection provided by the right of 
rescission. In consumer testing on HELOCs conducted for the Board for 
the August 2009 HELOC Proposal, participants indicated that they found 
the itemization of the one-time fees imposed to open the account 
helpful to them for understanding what fees they would be paying to 
open the HELOC plan. Nonetheless, as noted above, they indicated that 
the total of one-time fees imposed to open the account, and not the 
itemization of the fees, is one of the most important pieces of 
information on which they would base a decision of whether to enter 
into the credit transaction. Therefore, the Board believes that the 
total of one-time fees imposed to open the account, and not the 
itemization of the fees, is material to the consumer's decision about 
whether to enter the credit transaction or, in turn, rescind it. In 
addition, the Board believes that defining ``material disclosures'' to 
include the itemization of fees imposed to open the plan is unnecessary 
because, in most cases, if the itemization of the one-time fees imposed 
to open the account is incorrect, the total of those one-time fees will 
be incorrect as well. Nonetheless, there may be some cases where the 
total of one-time fees to open the account is correct but the creditor 
either fails to disclose one of the itemized fees or discloses it 
incorrectly. The Board believes that even though consumers would not 
have an extended right to rescind in those cases, consumers would not 
be harmed because the total of the one-time fees imposed to the open 
the account would be correct, and it is this disclosure which consumers 
are likely to use to base their decision of whether to enter into the 
credit transaction or rescind the transaction. For these reasons, the 
Board proposes to remove the itemization of one-time fees imposed to 
open the HELOC account from the definition of ``material disclosures.''
15(a)(5)(i)(C) Fees Imposed by the Creditor for the Availability of the 
HELOC Plan
    Under the August 2009 HELOC Proposal, a HELOC creditor would be 
required to disclose in the proposed account-opening table any annual 
or other periodic fees that may be imposed by the creditor for the 
availability of the plan (including any fee based on account activity 
or inactivity), how frequently the fee will be imposed, and the 
annualized amount of the fee. See proposed Sec. Sec.  226.6(a)(2)(viii) 
and 226.33(c)(7)(ii). These fees currently are considered material 
disclosures under footnote 36 to Sec.  226.15(a)(3) because these fees 
would either be ``finance charges'' as defined in Sec.  226.4, or 
membership or participation fees. The Board proposes to retain these 
disclosures as material disclosures. See proposed Sec.  
226.15(a)(5)(i)(C). The Board believes that fees for the availability 
of the HELOC plan are important to consumers in deciding whether to 
open the HELOC account and thus, in deciding whether to rescind the 
transaction. As discussed in the SUPPLEMENTARY INFORMATION to the 
August 2009 HELOC Proposal, Board research indicates that many HELOC 
consumers do not plan to take advances at account opening, but instead 
plan to use the HELOC account in case of emergency. The on-going costs 
of maintaining the HELOC plan may be of particular importance to these 
consumers in deciding whether to open a HELOC plan for these purposes 
and, in turn, whether to rescind it.
15(a)(5)(i)(D) Fees Imposed by the Creditor for Early Termination of 
the Plan by the Consumer
    Under the August 2009 HELOC Proposal, a creditor would be required 
to disclose in the proposed account-opening table any fees that may be 
imposed by the creditor if a consumer terminates the plan prior to its 
scheduled maturity. See proposed Sec. Sec.  226.6(a)(2)(ix) and 
226.33(c)(7)(iii). These fees currently are not considered ``material 
disclosures'' under footnote 36 to Sec.  226.15(a)(3) because these 
fees traditionally have not be considered ``finance charges'' and are 
not membership or participation fees. See comment 6(a)(2)-1.vi (as 
designated in the February 2010 Credit Card Rule). The Board proposes 
to include these fees in the definition of ``material disclosures.'' 
The Board believes it is important for consumers to be informed of 
these early termination fees as consumers decide whether to open a 
HELOC plan, and, in turn, whether to rescind the transaction. This 
information may be especially important for consumers who want the 
option of re-negotiating or cancelling the plan at any time. HELOC 
consumers may particularly value these options, as most HELOCs are 
subject to a variable rate. The Board believes that adding fees imposed 
by the creditor for early termination of the plan by the consumer to 
the definition of ``material disclosures'' would not unduly increase 
creditor burden, as these fees typically do not require mathematical 
calculations that expose the creditor to the risk of errors. As 
discussed above, where waived total one-time fees imposed to open a 
HELOC are disclosed as fees imposed by the creditor for early 
termination of the plan by the consumer, proposed comment 15(a)(5)(ii)-
1 makes clear that the tolerances set forth in proposed Sec.  
226.15(a)(5)(ii) would apply.
15(a)(5)(i)(E)-(F) Payment Terms
    Under the August 2009 HELOC Proposal, a creditor would be required 
to disclose in the proposed account-opening table certain information 
related to the payment terms of the plan that will apply at account 
opening, including the following: (1) The length of the plan, the 
length of the draw period, and the length of any repayment period; (2) 
an explanation of how the minimum periodic payment will be determined 
and the timing of the payments; (3) if paying only the minimum periodic 
payments may not repay any of the principal or may repay less than the 
outstanding balance by the end of the plan, a statement of this fact, 
as well as a statement that a balloon payment may result or will 
result, as applicable; and (4) sample payments showing the first 
minimum periodic payment for the draw period and any repayment period, 
and the balance outstanding at the beginning of the repayment period 
for both the current APR and the maximum APR, based on the assumption 
that the consumer borrows the entire credit line at account opening and 
does not make any further draws. See proposed Sec.  226.6(a)(2)(v).
    Currently, the following payment terms are defined as ``material 
disclosures:'' (1) The length of the draw period and any repayment 
period; (2) an explanation of how the minimum periodic payment will be 
determined and the timing of the payments; and (3) if payment of only 
the minimum

[[Page 58568]]

periodic payment may not repay any of the principal or may repay less 
than the outstanding balance, a statement of this fact as well as that 
a balloon payment may result. The Board proposes to retain these 
disclosures as ``material disclosures.'' See proposed Sec.  
226.15(a)(5)(i)(E) and (F). In addition, the Board proposes to include 
the length of the plan as a ``material disclosure.''
    Based on consumer testing, the Board believes that the payment 
information described above is critical to consumers in understanding 
how payments will be structured under the HELOC plan. The length of the 
plan, the length of the draw period, and the length of any repayment 
period communicate important information to consumers about how long 
consumers may need to make at least minimum payments on the plan. In 
addition, an explanation of how the minimum periodic payment will be 
determined and the timing of the payment, as well as information about 
any balloon payment, provide important information to consumers about 
whether the minimum payments will only cover interest during the draw 
period (and any repayment period) or whether the minimum payments will 
pay down some or all of the principal by the end of the HELOC plan. 
Consumer testing has shown that whether a plan has a balloon payment is 
important information that consumers want to know when deciding whether 
to open a HELOC plan.
    Sample payments. As discussed above, the proposed account-opening 
table also contains sample payments based on the payment terms 
disclosed in the table. The Board proposes not to include these sample 
payments as material disclosures. These sample payments would be based 
on a number of assumptions, and in most cases would not be the actual 
payments for consumers. Specifically, sample payments would show the 
first minimum periodic payment for the draw period and the first 
minimum periodic payment for any repayment period, and the balance 
outstanding at the beginning of any repayment period, based on the 
following assumptions: (1) The consumer borrows the maximum credit line 
available (as disclosed in the account-opening table) at account 
opening, and does not obtain any additional extensions of credit; (2) 
the consumer makes only minimum periodic payments during the draw 
period and any repayment period; and (3) the APRs used to calculate the 
sample payments remain the same during the draw period and any 
repayment period. The sample payments would be based on the maximum APR 
possible for the plan, as well as the current APR offered to the 
consumer on the HELOC plan. With respect to the current APR, if an 
introductory APR applies, a creditor would be required to calculate the 
sample payments based on the rate that would otherwise apply to the 
plan after the introductory APR expires. While the Board believes these 
sample payments are useful to consumers in understanding the payment 
terms offered on the HELOC plan, the Board proposes not to include them 
as material disclosures because in most cases they would not be the 
actual payments for consumers. This is particularly true for HELOCs, as 
opposed to the proposed payment summary for closed-end mortgage loans 
(discussed in the section-by-section analysis to Sec.  226.23), because 
most HELOC consumers do not take out the full credit line at account 
opening and most HELOCs have a variable interest rate, so the rate is 
unlikely to remain the same throughout the life of the HELOC plan. The 
purpose of the sample payments disclosure is to give the consumer an 
understanding of the payment terms applicable to the HELOC plan, not to 
ensure that the consumer knows what his or her payments will be.
15(a)(5)(i)(G) Negative Amortization
    Under the August 2009 HELOC Proposal, a creditor would be required 
to disclose in the proposed account-opening table the statement that 
negative amortization may occur and that negative amortization 
increases the principal balance and reduces the consumer's equity in 
the dwelling, as applicable. See proposed Sec.  226.6(a)(2)(xvi). This 
statement about negative amortization currently is not considered a 
material disclosure. The Board proposes to include this statement about 
negative amortization in the definition of ``material disclosures.'' 
See proposed Sec.  226.15(a)(5)(i)(G). The Board believes that whether 
negative amortization may occur on a HELOC account is likely to impact 
a consumer's decision on whether to open a particular HELOC account, 
and, in turn, a consumer's decision about whether to rescind the 
transaction. Many consumers may want to avoid HELOCs that will erode 
the equity in their homes. An explanation of how the minimum periodic 
payment will be calculated is a material disclosure, but it will not 
always be clear from this explanation that negative amortization might 
occur on the HELOC plan. For example, if the minimum periodic payment 
is calculated as 1 percent of the outstanding balance--but the APR is 
above 12 percent--negative amortization would occur. Nonetheless, 
simply disclosing that the minimum periodic payment is calculated as 1 
percent of the outstanding balance would not alert most consumers to 
the possibility of negative amortization. Consumer testing conducted on 
closed-end mortgages in relation to the August 2009 Closed-End Proposal 
showed that participants were generally unfamiliar with the term or 
concept of negative amortization. Thus, the Board proposes to include 
the statement about negative amortization as a material disclosure to 
ensure that consumers are informed about the possibility of negative 
amortization when deciding whether to open or rescind the HELOC 
account. The Board believes that adding this statement about negative 
amortization to the definition of material disclosures would not unduly 
increase creditor burden, as this statement does not require 
mathematical calculations that expose the creditor to the risk of 
errors.
15(a)(5)(i)(H) Transaction Requirements
    Under the August 2009 HELOC Proposal, a creditor would be required 
to disclose in the proposed account-opening table any limitations on 
the number of extensions of credit and the amount of credit that may be 
obtained during any time period, as well as any minimum outstanding 
balance and minimum draw requirements. See proposed Sec. Sec.  
226.6(a)(2)(xvii) and 226.33(c)(7)(v). This information about 
transaction requirements currently is not considered a material 
disclosure. The Board proposes to include this information in the 
definition of ``material disclosures.'' See proposed Sec.  
226.15(a)(5)(i)(H). The Board believes that these transaction 
restrictions are likely to impact a consumer's decision to enter into a 
particular HELOC account, and the consumer's decision whether to 
rescind the transaction. For example, as discussed in the SUPPLEMENTARY 
INFORMATION to the August 2009 HELOC Proposal, Board research indicates 
that many HELOC consumers do not plan to take advances at account 
opening, but instead plan to use that HELOC account in emergency cases. 
Any minimum balance requirement, and any required initial advance, 
would be particularly important to consumers that intend to use the 
account in emergency cases only. Also, restrictions on the number of 
advances or the amount of the advances per month or per year may be 
important to consumers, depending on how they plan to use the HELOC 
plan. The Board believes that adding disclosures about any limitations 
on the number of

[[Page 58569]]

extensions of credit and the amount of credit that may be obtained 
during any time period, as well as any minimum outstanding balance and 
minimum draw requirement, to the definition of material disclosures 
would not unduly increase creditor burden, as these disclosures do not 
require mathematical calculations that expose the creditor to the risk 
of errors.
15(a)(5)(i)(I) Credit Limit
    Under the August 2009 HELOC Proposal, creditors would be required 
to disclose in the proposed account-opening table the credit limit 
applicable to the plan. See proposed Sec.  226.6(a)(2)(xviii). 
Currently, the credit limit is not considered a ``material 
disclosure.'' The Board proposes to include the credit limit in the 
definition of ``material disclosures.'' See proposed Sec.  
226.15(a)(5)(i)(I). Based on consumer testing on HELOCs conducted for 
the Board for the August 2009 HELOC Proposal, the Board believes that 
the credit limit is likely to impact a consumer's decision to open a 
particular HELOC account, and a consumer's decision to rescind the 
transaction. As discussed in the SUPPLEMENTARY INFORMATION to the 
August 2009 HELOC Proposal, participants in consumer testing indicated 
that the credit limit was one of the most important pieces of 
information that they wanted to have in deciding whether to open a 
HELOC plan.
    Tolerances. As discussed above, this proposal provides a tolerance 
for disclosure of the credit limit applicable to the HELOC plan, 
modeled after the tolerances for the finance charge for closed-end 
mortgage loans created by Congress in 1995. Specifically, proposed 
Sec.  226.15(a)(5)(iii) provides that the credit limit applicable to 
the plan shall be considered accurate for purposes of Sec.  226.15 if 
the disclosed credit limit (1) is overstated by no more than \1/2\ of 1 
percent of the credit limit applicable to the plan required to be 
disclosed under Sec.  226.6(a)(2)(xviii) or $100, whichever is greater; 
or (2) is less than the credit limit required to be disclosed under 
Sec.  226.6(a)(2)(xviii). For example, for a HELOC plan with a credit 
limit of $100,000, a creditor may overstate the credit limit by $500 
and the disclosure would still be considered accurate for purposes of 
triggering an extended rescission right. In addition, a creditor may 
understate the credit limit by any amount and still be considered 
accurate for purposes of rescission. As discussed in more detail in the 
section-by-section analysis to proposed Sec.  226.23, these tolerances 
are consistent with the proposed tolerances under Sec.  226.23(a)(5) 
applicable to the loan amount for closed-end mortgage loans.
    The Board believes that the proposed tolerances are broad enough to 
alleviate creditors' compliance concerns regarding minor disclosure 
errors, and narrow enough to prevent misleading disclosures. The credit 
limit may be more prone to errors than other material disclosures 
defined in proposed Sec.  226.15(a)(5) because it is a term that is 
customized to the consumer (as opposed to being a standard term that is 
the same for all consumers offered a particular HELOC plan by the 
creditor). The Board notes that the tolerance amounts for the credit 
limit applicable to the plan apply only to disclosures for purposes of 
rescission under Sec.  226.15. These tolerances do not apply to 
disclosure of the credit limit applicable to the plan under Sec.  
226.6(a)(2)(xviii); this ensures that creditors continue to take steps 
to provide accurate disclosure of the credit limit applicable to the 
plan under Sec.  226.6(a)(2)(xviii) to avoid civil liability or 
administrative sanctions.
    As stated above, the Board proposes to model the tolerance for 
disclosure of the credit limit on the tolerances provided by Congress 
in 1995 for disclosure of the finance charge for closed-end mortgage 
loans. However, the Board believes that the credit limit for HELOCs is 
often smaller than the finance charge for closed-end mortgages. The 
Board requests comment on whether it should decrease the amount of the 
tolerance in light of the difference between the amount of the finance 
charge for closed-end mortgages and the credit limit for HELOCs. On the 
other hand, the Board recognizes that Congress set the $100 figure in 
1995 and a higher dollar figure may be more appropriate at this time. 
Alternatively, it may be more appropriate to link the dollar figure to 
an inflation index, such as the Consumer Price Index. Thus, the Board 
also requests comments on whether the tolerance should be set at a 
higher dollar figure, or linked to an inflation index, such as the 
Consumer Price Index. In addition, due to compliance concerns, the 
Board has not proposed a special tolerance for disclosure of the credit 
limit in connection with foreclosures as is provided for the finance 
charge for closed-end mortgage loans. The Board solicits comment on 
this approach. Finally, the Board requests comment on whether the Board 
should limit the amount by which the credit limit could be understated 
and still be considered accurate, and if so, what that limit should be. 
For example, could an underdisclosure of the credit limit by a large 
amount harm consumers (particularly homeowners that are not also 
borrowers on the HELOC) because the amount of the security interest 
that would be taken in the property would be larger than the disclosed 
credit limit?
15(a)(5)(i)(J) Fees for Required Credit Insurance, Debt Cancellation, 
or Debt Suspension Coverage
    Under the August 2009 HELOC Proposal, a creditor would be required 
to disclose in the proposed account-opening table a premium for credit 
insurance described in Sec.  226.4(b)(7) or debt cancellation or 
suspension coverage described in Sec.  226.4(b)(10), if the credit 
insurance or debt cancellation or suspension coverage is required as 
part of the plan. See proposed Sec.  226.6(a)(2)(xx). Fees for required 
credit insurance, or debt cancellation or suspension coverage currently 
are defined as ``material disclosures'' because these fees would be 
considered ``finance charges'' under Sec.  226.4. See Sec. Sec.  
226.4(b)(7) and (b)(10). The Board proposes to retain these fees as 
material disclosures. See proposed Sec.  226.15(a)(5)(i)(J). If credit 
insurance or debt cancellation or suspension coverage is required to 
obtain a HELOC, the Board believes that consumers should be aware of 
these charges or fees when deciding whether to open a HELOC plan, and, 
in turn, whether to rescind the plan, because consumers will be 
required to pay the charge or fee for this coverage every month to have 
the plan.
Disclosures That Would Be Removed From the Definition of ``Material 
Disclosures''
    As discussed above, the proposal removes the following disclosures 
from the definition of ``material disclosures:'' (1) Any APRs that are 
not required to be in the account-opening table, specifically any 
penalty APR or APR for fixed-rate and fixed-term advances during the 
draw period (unless they are the only advances allowed during the draw 
period); (2) an itemization of one-time fees imposed by the creditor 
and any third parties to open the plan; (3) any transaction charges 
imposed by the creditor for use of the home-equity plan; (4) any fees 
imposed by the creditor for a consumer's failure to comply with any 
limitations on the number of extensions of credit and the amount of 
credit that may be obtained during any time period, as well as for 
failure to comply with any minimum outstanding balance and minimum draw 
requirements; (5) any finance charges that are not required to be 
disclosed in the account-opening table; and (6) the method of

[[Page 58570]]

determining the balance upon which a finance charge will be imposed 
(i.e., a description of balance computation methods). The proposed 
exemptions from the definition of ``material disclosures'' for APRs 
that are not required to be in the account-opening table and for an 
itemization of one-time fees imposed by the creditor and any third 
parties to open the account are discussed in more detail above in the 
section-by-section analyses to proposed Sec. Sec.  226.15(a)(3)(A) and 
(B) respectively. The other exemptions are discussed below.
    Transaction charges. Under the August 2009 HELOC Proposal, a 
creditor would be required to disclose in the proposed account-opening 
table any transaction charges imposed by the creditor for use of the 
home-equity plan (except for transaction charges imposed on fixed-rate 
and fixed-term advances during the draw period, unless those are the 
only advances allowed during the draw period). See proposed Sec. Sec.  
226.6(a)(2) and (a)(2)(xii), and Sec.  226.33(c)(13)(i). For example, a 
creditor may impose a charge for certain types of transactions under a 
variable-rate feature, such as cash advances or foreign transactions 
made with a credit card that accesses the HELOC plan. Transaction 
charges currently are considered material disclosures because they are 
``finance charges'' under Sec.  226.4. The Board proposes to remove 
transaction charges as material disclosures. The Board does not believe 
that removing transaction charges from the definition of ``material 
disclosures'' would undermine the goals of consumer protection provided 
by the right of rescission. Board research and outreach for the August 
2009 HELOC Proposal indicates that transaction charges typically 
imposed today are not critical to a consumer's decision about whether 
to enter into the HELOC plan, or the consumer's decision to rescind the 
plan. Based on outreach for the August 2009 HELOC Proposal, the Board 
understands that creditors typically do not impose transaction charges 
on each advance under the variable-rate feature; instead, transaction 
charges typically are only imposed on cash advances or foreign 
transactions made with a credit card that accessed the HELOC plan. 
While the Board believes that it is important that consumers receive 
information about cash advance and foreign transaction fees before 
using a HELOC account to avoid being surprised by these fees, the Board 
does not believe that these fees are critical to a consumer's decision 
about whether to enter into the credit transaction or rescind the 
transaction. For these reasons, the Board proposes to remove 
transaction charges from the definition of ``material disclosures.''
    Fees for failure to comply with transaction requirements. As 
discussed above, under the August 2009 HELOC Proposal, a creditor would 
be required to disclose in the proposed account-opening table any 
limitations on the number of extensions of credit and the amount of 
credit that may be obtained during any time period, as well as any 
minimum outstanding balance and minimum draw requirements. See proposed 
Sec. Sec.  226.6(a)(2)(xvii) and 226.33(c)(7)(v). In addition, a 
creditor must disclose in the proposed account-opening table any fee 
imposed by the creditor for a consumer's failure to comply with any of 
the transaction requirements or limitations listed above, as well as 
any minimum outstanding balance and minimum draw requirements. See 
proposed Sec. Sec.  226.6(a)(2)(xiv) and 226.33(c)(13)(ii). Currently, 
these fees for failure to comply with the transaction requirements or 
limitations, as well as any minimum outstanding balance and minimum 
draw requirements, are considered material disclosures because these 
fees are ``finance charges'' under Sec.  226.4.
    The Board proposes to remove fees for failure to comply with the 
transaction requirements or limitations, as well as minimum outstanding 
balance and minimum draw requirements, as material disclosures. While 
the Board believes it is important that consumers be informed of these 
fees before using the HELOC plan to avoid being surprised by these 
fees, the Board does not believe that these fees are critical to a 
consumer's decision about whether to enter into the credit transaction 
or rescind the transaction. In addition, as discussed above, the Board 
proposes to include the transaction requirements or limitations, as 
well as minimum outstanding balance and minimum draw requirements, as 
material disclosures. Thus, a consumer will have an extended right of 
rescission if a creditor incorrectly discloses (or does not disclose) 
the transaction requirements or limitations, as well as minimum 
outstanding balance and minimum draw requirements, to the consumer. The 
Board believes that it is the transaction requirements or limitations 
or minimum outstanding balance and minimum draw requirements 
themselves, rather than the fees for failure to comply with those 
requirements or limitations, that are critical to a consumer's 
decisions about whether to enter into the HELOC plan, and whether to 
rescind the transaction. For these reasons, the Board proposes to 
remove fees for failure to comply with the transaction requirements or 
limitations, as well as minimum outstanding balance and minimum draw 
requirements, from the definition of ``material disclosures.''
    Finance charges not required to be disclosed in the proposed 
account-opening table. Again, all finance charges on the HELOC plan 
currently must be disclosed prior to the first transaction under the 
HELOC plan, and are considered material disclosures. As discussed 
above, in the August 2009 HELOC Proposal, the Board proposed no longer 
to require that all finance charges be disclosed prior to the first 
transaction under the HELOC plan; instead, only finance charges 
required to be disclosed in the account-opening table would have to be 
provided in writing before the first transaction under the HELOC plan. 
``Charges imposed as part of the HELOC plan,'' as set forth in proposed 
Sec.  226.6(a)(3), that are not required to be disclosed in the 
account-opening table would have to be disclosed orally or in writing 
before the consumer agrees to or becomes obligated to pay the charge. 
The Board believes that it is appropriate to provide flexibility to 
creditors regarding disclosure of less significant charges that are not 
likely to impact a consumer's decision to enter into the credit 
transaction. Disclosure of these charges soon before a consumer agrees 
to pay the charge may be more useful to the consumer because the 
disclosure would come at a time when the consumer would be more likely 
to notice the disclosure.
    Consistent with the August 2009 HELOC Proposal, the Board proposes 
to exclude finance charges that are not disclosed in the proposed 
account-opening table from the definition of ``material disclosures.'' 
The Board does not believe that this would undermine the goals of 
consumer protection provided by the right of rescission. The Board 
believes that the proposed account-opening table contains the charges 
that are most important for consumers to know about before they use a 
HELOC account in the current marketplace. In consumer testing on HELOCs 
conducted for the Board for the August 2009 HELOC Proposal, 
participants could not identify any additional types of fees beyond 
those included in the proposed account-opening table that they would 
want to know before they use the HELOC account.
    On the other hand, continuing to define finance charges that are 
not required to be disclosed in the proposed

[[Page 58571]]

account-opening table as ``material disclosures'' would undercut the 
flexibility set forth in the August 2009 HELOC Proposal for creditors 
to disclose these finance charges at a time after account opening, as 
long as they are disclosed orally or in writing before the consumer 
agrees to or becomes obligated to pay the charge. If these finance 
charges continued to be defined as ``material disclosures,'' creditors 
as a practical matter would be required to disclose these fees at 
account opening, to avoid the extended right of rescission. For these 
reasons, the Board proposes to remove finance charges that are not 
disclosed in the proposed account-opening table from the definition of 
``material disclosures.''
    Description of balance computation methods. Under the August 2009 
HELOC Proposal, a creditor would be required to disclose below the 
account-opening table the name(s) of the balance computation method(s) 
used by the creditor for each feature of the account, along with a 
statement that an explanation of the method(s) is provided in the 
account agreement or disclosure statement. See proposed Sec.  
226.6(a)(2)(xxii). To determine the name of the balance computation 
method to be disclosed, a creditor would be required to refer to Sec.  
226.5a(g) for a list of commonly-used methods; if the method used is 
not among those identified, creditors would be required to provide a 
brief explanation in place of the name. As discussed in the 
SUPPLEMENTARY INFORMATION to the August 2009 HELOC Proposal, the Board 
believes that the proposed approach of disclosing the name of the 
balance computation method below the table, with a more detailed 
explanation of the method in the account-opening disclosures or account 
agreement, would provide an effective way to communicate information 
about the balance computation method used on a HELOC plan to consumers, 
while not detracting from other information included in the proposed 
account-opening table.
    TILA and Regulation Z define the method of determining the balance 
on which the finance charge will be imposed (i.e., explanation of the 
balance computation methods) as a material disclosure. TILA Section 
103(u); 15 U.S.C. 1602(u); Sec.  226.15(a)(3) n. 36. The Board proposes 
to exclude this disclosure from the definition of ``material 
disclosures.'' The Board does not believe that removing information 
about the balance computation method from the definition of ``material 
disclosures'' would undermine the goals of consumer protection provided 
by the right of rescission. Explanations of the balance computation 
methods often are complicated and difficult for consumers to 
understand. In consumer testing on HELOCs conducted for the Board for 
the August 2009 HELOC Proposal, none of the participants indicated that 
information about the balance computation methods was information they 
would use to decide whether to open a particular HELOC account. For 
these reasons, the Board proposes to remove the disclosure of the 
balance computation method from the definition of ``material 
disclosures.''
Proposed Comments 15(a)(5)(i)-1 and -2
    Current comment 15(a)(3)-2 specifies that a creditor must provide 
sufficient information to satisfy the requirements of Sec.  226.6 for 
the material disclosures, and indicates that a creditor may satisfy 
this requirement by giving an initial disclosure statement that 
complies with the regulation. This comment also provides that failure 
to give the other required initial disclosures (such as the billing 
rights statement) or the information required under Sec.  226.5b does 
not prevent the running of the three-day rescission period, although 
that failure may result in civil liability or administrative sanctions. 
In addition, this comment specifies that the payment terms in current 
footnote 36 to Sec.  226.15(a)(3) apply to any repayment phase in the 
agreement. Thus, the payment terms described in former Sec.  
226.6(e)(2) (redesignated as Sec.  226.6(a)(3)(ii) in the February 2010 
Credit Card Rule) for any repayment phase as well as for the draw 
period are material disclosures.
    The Board proposes to move comment 15(a)(3)-2 to proposed comments 
15(a)(5)(i)-1 and -2 and revise it consistent with the new definition 
of ``material disclosures'' in the proposed regulation. Specifically, 
proposed comment 15(a)(5)(i)-1 provides that a creditor must make the 
material disclosures clearly and conspicuously consistent with the 
requirements of Sec.  226.6(a)(2). A creditor may satisfy the 
requirement to provide material disclosures by giving an account-
opening table described in Sec.  226.6(a)(1) or Sec.  226.33(d)(2) and 
(d)(4) that complies with the regulation. Failure to provide the 
required non-material disclosures set forth in Sec. Sec.  226.6, 
226.33, or the information required under Sec.  226.5b does not affect 
the right of rescission, although such failure may be a violation 
subject to the liability provisions of TILA Section 130, or 
administrative sanctions. 15 U.S.C. 1640. In addition, proposed comment 
15(a)(5)(i)-2 clarifies that the terms described in Sec.  226.15(a)(5) 
for any repayment phase as well as for the draw period are material 
disclosures.
Material Disclosures for Reverse Mortgages
    The Board is proposing disclosures for open-end reverse mortgages 
in Sec.  226.33 that would incorporate many of the disclosures required 
by Sec.  226.6(a) for all home-equity plans into the reverse mortgage 
specific disclosures. Proposed Sec.  226.15(a)(5)(i) would contain 
cross-references to analogous provisions in proposed Sec.  226.33. In 
addition, as discussed in the section-by-section analysis to Sec.  
226.33, some of the proposed material disclosures for home-equity plans 
do not apply to reverse mortgages and would not be required. Thus, for 
reverse mortgages, the following disclosures would not be material 
disclosures:
     The length of the plan, the draw period, and any repayment 
period;
     An explanation of how the minimum periodic payment will be 
determined and the timing of payments;
     A statement about negative amortization;
     The credit limit applicable to the plan; and
     Fees for debt cancellation or suspension coverage.

The Board requests comment on whether any of these, or other, 
disclosures should be material disclosures for reverse mortgages.
15(b) Notice of Right To Rescind
    TILA Section 125(a) requires the creditor to disclose clearly and 
conspicuously the right of rescission to the consumer. 15 U.S.C. 
1635(a). It also requires the creditor to provide appropriate forms for 
the consumer to exercise the right to rescind. Section Sec.  226.15(b) 
implements TILA Section 125(a) by setting forth format, content, and 
timing of delivery standards for the notice of the right to rescind for 
transactions related to HELOC accounts that give rise to the right to 
rescind. Section 226.15(b) also states that the creditor must deliver 
two copies of the notice of the right to rescind to each consumer 
entitled to rescind (one copy if the notice is delivered in electronic 
form in accordance with the E-Sign Act). The right to rescind generally 
does not expire until midnight after the third business day following 
the latest of: (1) The transaction giving rise to the right of 
rescission; (2) delivery of the rescission notice; and (3) delivery of 
the material disclosures. TILA Section 125(a); 15 U.S.C. 1635(f); Sec.  
226.15(a)(3). If the rescission notice or the material

[[Page 58572]]

disclosures are not delivered, a consumer's right to rescind may extend 
for up to three years from the date of the transaction that gave rise 
to the right to rescind. TILA Section 125(f); 15 U.S.C. 1635(f); Sec.  
226.15(a)(3).
    As part of the 1980 Truth in Lending Simplification and Reform Act, 
Congress added TILA Section 105(b), requiring the Board to publish 
model disclosure forms and clauses for common transactions to 
facilitate creditor compliance with the disclosure obligations and to 
aid borrowers in understanding the transaction by using readily 
understandable language. 12 U.S.C. 1615(b). The Board issued its first 
model forms for the notice of the right to rescind applicable to HELOC 
accounts in 1981. 46 FR 20848, Apr. 7, 1981. While the Board has made 
some changes to the content of the model forms over the years, the 
current Model Forms G-5 through G-9 in Appendix G to part 226 are 
generally the same as when they were adopted in 1981.
    The Board has been presented with a number of questions and 
concerns regarding the notice requirements and the model forms. 
Creditors have raised concerns about the two-copy rule, indicating that 
this rule can impose litigation risks when a consumer alleges an 
extended right to rescind based on the creditor's failure to deliver 
two copies of the notice. In addition, particular problems with the 
format, content, and timing of delivery of the rescission notice were 
highlighted during the Board's outreach and consumer testing conducted 
for this proposal. To address these problems and concerns, the Board 
proposes to revise Sec.  226.15(b), and the related commentary. As 
discussed in more detail below, the Board proposes to revise Sec.  
226.15(b) to require creditors to provide one notice of the right to 
rescind to each consumer entitled to rescind. In addition, the Board 
proposes to revise significantly the content of the rescission notice 
by setting forth new mandatory and optional disclosures for the notice. 
The Board also proposes new format and timing requirements for the 
notice. Moreover, as discussed in more detail in the section-by-section 
analysis to Appendix G to part 226, the Board proposes to replace the 
current model forms for the rescission notices in Model Forms G-5 
through G-9 with proposed Model Form G-5(A), and two proposed Samples 
G-5(B) and G-5(C).
15(b)(1) Who Receives Notice
    Section 226.15(b) currently states that the creditor must deliver 
two copies of the notice of the right to rescind to each consumer 
entitled to rescind (one copy if the notice is delivered in electronic 
form in accordance with the E-Sign Act). Obtaining from the consumer a 
written acknowledgment of receipt of the notice creates a rebuttable 
presumption of delivery. See 15 U.S.C. 1635(c). Comment 15(b)-1 states 
that in a transaction involving joint owners, both of whom are entitled 
to rescind, both must receive two copies of the notice of the right of 
rescission. For the reasons discussed in the section-by-section 
analysis to proposed Sec.  226.23(b)(1) below, the Board proposes to 
revise Sec.  226.15(b) and comment 15(b)-1 (redesignated as Sec.  
226.15(b)(1) and comment 15(b)(1)-1 respectively) to require creditors 
to provide one notice of the right to rescind to each consumer entitled 
to rescind.
15(b)(2) Format of Notice
    The current formatting requirements for the notice of the right of 
rescission appear in Sec.  226.15(b) and are elaborated on in comment 
15(b)-2. Section 226.15(b) provides that the required information must 
be disclosed clearly and conspicuously. Comment 15(b)-2 provides that 
the rescission notice may be physically separate from the material 
disclosures or combined with the material disclosures, so long as the 
information required to be included on the notice is set forth in a 
clear and conspicuous matter. The comment refers to the forms in 
Appendix G to part 226 as models that the creditor may use in giving 
the notice.
    The Board proposes new format rules in Sec.  226.15(b)(2) and 
related commentary intended to (1) Improve consumers' ability to 
identify disclosed information more readily; (2) emphasize information 
that is most important to consumers who wish to exercise the right of 
rescission; and (3) simplify the organization and structure of required 
disclosures to reduce complexity and ``information overload.'' The 
Board proposes these format requirements pursuant to its authority 
under TILA Section 105(a). 15 U.S.C. 1604(a). Section 105(a) authorizes 
the Board to make exceptions and adjustment to TILA to effectuate the 
statute's purpose, which include facilitating consumers' ability to 
compare credit terms and helping consumers avoid the uninformed use of 
credit. 15 U.S.C. 1601(a), 1604(a). The Board believes that the 
proposed formatting rules described below would facilitate consumers' 
ability to understand the rescission right and avoid the uninformed use 
of credit. The proposed format changes are generally consistent with 
findings from the Board's consumer testing of rescission notices 
conducted to prepare this proposal, as well as the consumer testing on 
HELOC disclosures, credit card disclosures, and closed-end mortgage 
disclosures conducted in connection with the Board's August 2009 HELOC 
Proposal, February 2010 Credit Card Rule, and August 2009 Closed-End 
Proposal, respectively. 74 FR 43428, Aug. 26, 2009; 75 FR 7658, Feb. 
22, 2010; 74 FR 43232, Aug. 26, 2009. Testing generally shows that 
emphasizing terms and costs consumers find important, and separating 
out less useful information, are critical to improving consumers' 
ability to identify and use key information in their decision-making 
process.\18\
---------------------------------------------------------------------------

    \18\ See also Improving Consumer Mortgage Disclosure at 69 
(consumer testing results showed that current mortgage disclosure 
forms failed to convey key cost disclosures, but that prototype 
disclosures, which removed less useful information, significantly 
improved consumers' recognition of key mortgage costs).
---------------------------------------------------------------------------

    Proposed Sec.  226.15(b)(2) requires the mandatory and optional 
disclosures to appear on the front side of a one-page document, 
separate from all other unrelated material, and to be given in a 
minimum 10-point font. Proposed Sec.  226.15(b)(2) also requires that 
most of the mandatory disclosures appear in a tabular format. During 
consumer testing for this proposal, participants overwhelmingly 
preferred a version of a notice of the right to rescind that presented 
information in a tabular format to a version of a notice that presented 
information in narrative form. Moreover, the notice would contain a 
``tear off'' section at the bottom of the page, which the consumer 
could use to exercise the right of rescission. Information unrelated to 
the mandatory disclosures would not be permitted to appear on the 
notice.
    Proposed comment 15(b)(2)-1 states that the creditor's failure to 
comply with the format requirements in Sec.  226.15(b)(2) does not by 
itself constitute a failure to deliver the notice to the consumer. 
However, to deliver the notice properly for purposes of Sec.  
226.15(a)(3), the creditor must provide the mandatory disclosures 
appearing in the notice clearly and conspicuously, as described in 
proposed Sec.  226.15(b)(3) and proposed comment 15(b)(3)-1.
    Section 226.5(a)(1) generally requires that creditors make the 
disclosures required by subpart B regarding open-end credit (including 
the rescission notice) in writing in a form that the consumer may keep. 
Proposed comment 15(b)(2)-2 cross references these requirements in 
Sec.  226.5(a)(1) to clarify that they apply to the rescission notice.

[[Page 58573]]

15(b)(2)(i) Grouped and Segregated
    Current comment 15(b)-2 provides that the rescission notice may be 
physically separate from the material disclosures or combined with the 
material disclosures, so long as the information required to be 
included on the notice is set forth in a clear and conspicuous matter. 
The Board is concerned that allowing creditors to combine the right of 
rescission disclosures with other unrelated information, in any format, 
will diminish the clarity of this key material, potentially cause 
``information overload,'' and increase the likelihood that consumers 
may not read the notice of the right of rescission.
    To address these concerns, proposed Sec.  226.15(b)(2)(i) requires 
the mandatory and any optional rescission disclosures to appear on the 
front side of a one-page document, separate from any unrelated 
information. Only information directly related to the mandatory 
disclosures may be added.
    The proposal also requires that certain information be grouped 
together. Proposed Sec.  226.15(b)(2)(i) requires that disclosure of 
the type of transaction giving rise to the right of rescission, the 
security interest, the right to cancel, the refund of fees upon 
cancellation, the effect of cancellation on the existing line of 
credit, how to cancel, and the deadline for cancelling be grouped 
together in the notice. This information was grouped together in forms 
the Board tested, and participants generally found the information easy 
to identify and understand. In addition, this proposed grouping ensures 
that the information about the consumer's rights would be separated 
from information at the bottom of the notice, which is designed for the 
consumer to detach and use to exercise the right of rescission.
15(b)(2)(ii) Specific Format
    The Board proposes to impose formatting requirements for the 
rescission notice, to improve consumers' comprehension of the required 
disclosures. See proposed Sec. Sec.  226.15(b)(2)(i) and (ii). For 
example, some information would be required to be in a tabular format. 
The current model forms for the rescission notice provide information 
in narrative form, which consumer testing participants found difficult 
to read and understand. However, consumer testing showed that when 
rescission information was presented in a tabular format, participants 
found the information easier to locate and their comprehension of the 
disclosures improved.
    The proposal requires the title of the notice to appear at the top 
of the notice. Certain mandatory disclosures (i.e., the identification 
of the type of transaction giving rise to the right of rescission, the 
security interest, the right to cancel, the refund of fees upon 
cancellation, the effect of cancellation on the existing line of 
credit, how to cancel, and the deadline for cancelling in proposed 
Sec. Sec.  226.15(b)(3)(i)-(vii)) would appear beneath the title and be 
in the form of a table. If the creditor chooses to place in the notice 
one or both of the optional disclosures (e.g., regarding joint owners 
and acknowledgement of receipt as permitted in proposed Sec.  
226.15(b)(4)), the text must appear after the disclosures required by 
proposed Sec. Sec.  226.15(b)(3)(i)-(vii), but before the portion of 
the notice that the consumer may use to exercise the right of 
rescission required by proposed Sec.  226.15(b)(3)(viii). If both 
optional disclosures are inserted, the statement regarding joint owners 
must appear before the statement acknowledging receipt. If the creditor 
chooses to insert an acknowledgement as described in Sec.  
226.15(b)(4)(ii), the acknowledgement must appear in a format 
substantially similar to the format used in Model Form G-5(A) in 
Appendix G to part 226. The proposal would require the mandatory 
disclosures required by proposed Sec.  226.15(b)(3) and the optional 
disclosures permitted under Sec.  226.15(b)(4) to be given in a minimum 
10-point font.
15(b)(3) Required Content of Notice
    TILA Section 125(a) and current Sec.  226.15(b) require that all 
disclosures of the right to rescind be made clearly and conspicuously. 
15 U.S.C. 1635(a). This requirement restates the general requirement in 
Sec.  226.5(a)(1) that creditors make the disclosures required under 
subpart B (including the rescission notice) clearly and conspicuously. 
Comments 5(a)(1)-1 through -3, as revised by the February 2010 Credit 
Card Rule, set forth guidance regarding the clear and conspicuous 
standard contained in Sec.  226.5(a)(1). Proposed comment 15(b)(3)-1 
clarifies that the guidance in comments 5(a)(1)-1 and -2 is applicable 
to the rescission notice.
    Current Sec.  226.15(b) provides the list of disclosures that must 
appear in the notice: (i) An identification of the transaction or 
occurrence giving rise to the right of rescission; (ii) the retention 
or acquisition of a security interest in the consumer's principal 
dwelling; (iii) the consumer's right to rescind the transaction; (iv) 
how to exercise the right to rescind, with a form for that purpose, 
designating the address of the creditor's (or its agent's) place of 
business; (v) the effects of rescission, as described in current Sec.  
226.15(d); and (vi) the date the rescission period expires. Current 
comment 15(b)-3 states that the notice must include all of the 
information described in Sec.  226.15(b)(1)-(5). This comment also 
provides that the requirement to identify the transaction or occurrence 
may be met by providing the date of the transaction. Current Model 
Forms G-5 through G-9 contain these disclosures. However, consumer 
testing of the model forms conducted by the Board for this proposal 
suggests that the amount and complexity of the information currently 
required to be disclosed in the notice might result in information 
overload and discourage consumers from reading the notice carefully. 
The Board also is concerned that certain terminology in the current 
model forms might impede consumer comprehension of the information.
    To address these concerns, the Board proposes to revise the 
requirements for the notice in new Sec.  226.15(b)(3). Proposed Sec.  
226.15(b)(3) removes information required under current Sec. Sec.  
226.15(b)(1)-(5) that consumer testing indicated is unnecessary for the 
consumer's comprehension and exercise of the right of rescission. The 
proposed section also simplifies the information disclosed and presents 
key information in plain language instead of legalistic terms. The 
Board proposes these revisions pursuant to its authority in TILA 
Section 125(a) which provides that creditors shall clearly and 
conspicuously disclose, in accordance with regulations of the Board, to 
any obligator in a transaction subject to rescission the rights of the 
obligor. 15 U.S.C. 1635(a).
15(b)(3)(i) Identification of Transaction
    Current Sec.  226.15(b) requires a creditor to identify in the 
notice the transaction or occurrence giving rise to the right of 
rescission; current comment 15(b)-3 provides that the requirement that 
the transaction or occurrence be identified may be met by providing the 
date of the transaction or occurrence. As discussed in more detail in 
the section-by-section analysis to proposed Sec.  226.15(b)(3)(vii), 
creditors, servicers, and their trade associations noted that creditors 
might be unable to provide an accurate transaction date where a 
transaction giving rise to the right of rescission is conducted by mail 
or through an escrow agent, as is customary in some states. They noted 
that in these cases, the date of the transaction giving rise to the 
right of rescission cannot be identified accurately before it actually 
occurs. For

[[Page 58574]]

example, for a transaction by mail, the creditor cannot know at the 
time of mailing the rescission notice when the consumer will sign the 
loan documents (i.e., the date of the transaction).
    The Board proposes in new Sec.  226.15(b)(3)(i) to retain the 
requirement that the rescission notice identify the transaction giving 
rise to the right of rescission. Nonetheless, to address the concerns 
discussed above, the provision in current comment 15(b)-3 about the 
date of the transaction satisfying this requirement would be deleted. 
Instead, the proposal provides that a creditor would identify the 
transaction giving rise to the right of rescission by disclosing the 
type of transaction that is occurring. For example, proposed Sample G-
5(B) provides guidance on how to satisfy to this disclosure requirement 
when the rescission notice is given for opening a HELOC account where 
the full credit line is secured by the consumer's home and is 
rescindable. In this case, a creditor may meet this disclosure 
requirement by stating: ``You are opening a home-equity line of 
credit.'' Proposed Sample G-5(C) provides guidance on how to satisfy 
this disclosure requirement when the rescission notice is given for a 
credit limit increase on an existing HELOC account. Here, a creditor 
may meet this disclosure requirement by stating: ``We are increasing 
the credit limit on your line of credit.'' The Board believes that 
identifying in the rescission notice the type of transaction that is 
triggering the right of rescission is particularly important for HELOCs 
where a number of transactions give rise to a rescission right, such as 
account opening, an increase in the credit limit, or an addition of a 
security interest. The Board believes that identifying the relevant 
transaction in the rescission notice will clarify for consumers why 
they are receiving the rescission notice.
15(b)(3)(ii) Security Interest
    Current Sec.  226.15(b)(1) requires the creditor to disclose that a 
security interest will be retained or acquired in the consumer's 
principal dwelling. For example, current Model Form G-5, which provides 
a model rescission notice for when a HELOC account is opened, discloses 
the retention or acquisition of a security interest by stating: ``You 
have agreed to give us a [mortgage/lien/security interest] [on/in] your 
home as security for the account.''
    The Board's consumer testing of a similar statement regarding a 
security interest for its August 2009 Closed-End Proposal showed that 
very few participants understood the statement. 74 FR 43232, Aug. 26, 
2009. The Board is concerned that the current language in Model Forms 
G-5 through G-9 for disclosure of the retention or acquisition of a 
security interest might not alert consumers that the creditor has the 
right to take the consumer's home if the consumer defaults. To clarify 
the significance of the security interest, proposed Sec.  
226.15(b)(3)(ii) requires a creditor to provide a statement that the 
consumer could lose his or her home if the consumer does not repay the 
money that is secured by the home. Proposed Sample G-5(B) provides 
guidance on how to satisfy this disclosure requirement when the 
rescission notice is given for opening a HELOC account where the full 
credit line is secured by the consumer's home and is rescindable. In 
this case, a creditor may meet this disclosure requirement by stating, 
``You are giving us the right to take your home if you do not repay the 
money you owe under this line of credit.'' Consumer testing of this 
plain-language version of the security interest disclosure showed high 
comprehension by participants. Proposed Sample G-5(C) provides guidance 
on how to satisfy this disclosure requirement when the rescission 
notice is given for a credit limit increase on an existing HELOC 
account. Here, a creditor may meet this disclosure requirement by 
stating: ``You are giving us the right to take your home if you do not 
repay the money you owe.''
15(b)(3)(iii) Right To Cancel
    Current Sec.  226.15(b)(2) requires the creditor to disclose the 
consumer's right to rescind the transaction. Accordingly, in a section 
entitled ``Your Right to Cancel,'' current Model Form G-5, which 
provides a model rescission notice for opening a HELOC account, 
discloses the right by stating that the consumer has a legal right 
under Federal law to cancel the account, without costs, within three 
business days from the latest of the opening date of the consumer's 
account (followed by a blank to be completed by the creditor with a 
date), the date the consumer received the Truth in Lending disclosures, 
or the date the consumer received the notice of the right to cancel. 
Consumer testing of language similar to the disclosure in current Model 
Form G-5 showed that the current description of the right was 
unnecessarily wordy and too complex for most consumers to understand 
and use.
    In addition, during outreach regarding this proposal, industry 
representatives remarked that consumers often overlook the disclosure 
that the right of rescission is provided by Federal law. They also 
noted that the rule generally requiring creditors to delay remitting 
funds to the consumer until the rescission period has ended, also 
imposed by Federal law, is not a required disclosure and not included 
in the current model forms. See Sec.  226.15(c). Industry 
representatives indicated that consumers should be notified of this 
delay in funding so they are not surprised when they must wait for at 
least three business days after signing the loan documents to receive 
any funds. To address these problems and concerns, proposed Sec.  
226.15(b)(3)(iii) requires two statements: (1) A statement that the 
consumer has the right under Federal law to cancel the transaction 
giving rise to the right of rescission on or before the date provided 
in the notice; and (2) if Sec.  226.15(c) applies, a statement that 
Federal law prohibits the creditor from making any funds (or certain 
funds, as applicable) available to the consumer until after the stated 
date. Proposed Sample G-5(B) provides guidance on how to satisfy these 
disclosure requirements when the rescission notice is given for opening 
a HELOC account where the full credit line is secured by the consumer's 
home and is rescindable. In this case, a creditor may meet these 
disclosure requirements by stating: ``You have the right under Federal 
law to cancel this line of credit on or before the date stated below. 
Under Federal law, we cannot make any funds available to you until 
after this date.'' Proposed Sample G-5(C) provides guidance on how to 
satisfy these disclosure requirements when the rescission notice is 
given for a credit limit increase on an existing HELOC account. Here, a 
creditor may meet these disclosure requirements by stating: ``You have 
the right under Federal law to cancel this credit limit increase on or 
before the date stated below. Under Federal law, we cannot make these 
funds available to you until after this date.''
    The Board notes that in some instances the delay of performance 
requirement in Sec.  226.15(c) does not apply during a rescission 
period. Specifically, comment 15(c)-1 provides that a creditor may 
continue to allow transactions under an existing open-end credit plan 
during a rescission period that results solely from the addition of a 
security interest in the consumer's principal dwelling. Thus, in those 
cases, a creditor would not be required to include in the rescission 
notice a statement that Federal law prohibits the creditor from making 
any funds (or certain funds, as applicable) available to the consumer 
until after the stated date.

[[Page 58575]]

15(b)(3)(iv) Fees
    Current Sec.  226.15(b)(4) requires the creditor to disclose the 
effects of rescission, as described in current Sec.  226.15(d). The 
disclosure of the effects of rescission in current Model Forms G-5 
through G-9 is essentially a restatement of the rescission process set 
forth in current Sec. Sec.  226.15(d)(1)-(3). This information consumes 
one-third of the space in the model forms, is dense, and uses 
legalistic phrases. Moreover, in most cases, this information is 
unnecessary to understand or exercise the right of rescission.
    In addition, consumer testing showed that the current model forms 
do not adequately communicate that the consumer would not be charged a 
cancellation fee for exercising the right of rescission. Also, the 
language of the current model forms did not convey that all fees the 
consumer had paid in connection with the transaction giving rise to the 
right of rescission would be refunded to the consumer. To clarify the 
results of rescission for the consumer, the Board proposes in Sec.  
226.15(b)(3)(iv) to require a plain-English statement regarding fees, 
instead of restating the rescission process in current Sec.  226.15(d). 
Specifically, proposed Sec.  226.15(b)(3)(iv) requires a statement that 
if the consumer cancels, the creditor will not charge the consumer a 
cancellation fee and will refund any fees the consumer paid in 
connection with the transaction giving rise to the right of rescission. 
Most participants in the Board's consumer testing of these proposed 
statements understood that the creditor had to return all applicable 
fees to the consumer, and could not charge fees for rescission. The 
Board believes that the statement about the refund of fees communicates 
important information to consumers about their rights if they choose to 
cancel the transaction. In addition, the Board is concerned that 
without this disclosure, consumers might believe that they would not be 
entitled to a refund of fees. This mistaken belief might discourage 
consumers from exercising the right to rescind where a consumer has 
paid a significant amount of fees related to opening the line of credit 
or other transaction that gave rise to the right of rescission.
15(b)(3)(v) Effect of Cancellation on Existing Line of Credit
    As discussed above, current Sec.  226.15(b)(4) requires the 
creditor to disclose the effects of rescission, as described in current 
Sec.  226.15(d). As part of satisfying this requirement, current Model 
Forms G-6 through G-9 provide a disclosure of how cancellation of the 
transaction giving rise to the right of rescission will impact the 
existing line of credit. (This disclosure is not provided in Model Form 
G-5, which provides a model form for opening a HELOC account.) For 
example, current Model Form G-7 provides a model form for an increase 
in the credit limit on an existing HELOC account. This model form 
states that ``If you cancel, your cancellation will apply only to the 
increase in your credit limit and to the [mortgage/lien/security 
interest] that resulted from the increase in your credit limit. It will 
not affect the amount you presently owe, and it will not affect the 
[mortgage/lien/security interest] we already have [on/in] your home.''
    The Board proposes to retain a description of the effects of the 
cancellation on the existing line of credit. Specifically, proposed 
Sec.  226.15(b)(3)(v) requires creditors to disclose the following 
statements, as applicable: (1) A statement that if the consumer cancels 
the transaction giving rise to the right of rescission, all of the 
terms of the consumer's current line of credit with the creditor will 
still apply; (2) a statement that the consumer will still owe the 
creditor the current balance; and (3) if some or all of that money is 
secured by the home, a statement that the consumer could lose his or 
her home if the consumer does not repay the money that is secured by 
the home. Proposed Sample G-5(C) provides guidance on how to satisfy 
these disclosure requirements when the rescission notice is given for a 
credit limit increase on an existing HELOC account. In this case, a 
creditor may meet these disclosure requirements by stating: ``If you 
cancel this credit limit increase, all of the terms of your current 
line of credit with us will still apply. You will still owe us your 
current balance, and we will have the right to take your home if you do 
not repay that money.''
15(b)(3)(vi) How To Cancel
    Current Sec.  226.15(b)(3) requires the creditor to disclose how to 
exercise the right to rescind, with a form for that purpose, 
designating the address of the creditor's (or its agent's) place of 
business. Current Model Forms G-5 through G-9 contain a statement that 
the consumer may cancel by notifying the creditor in writing; the form 
contains a blank for the creditor to insert its name and business 
address. The current model forms state that if the consumer wishes to 
cancel by mail or telegram, the notice must be sent ``no later than 
midnight of,'' followed by a blank for the creditor to insert a date, 
followed in turn by the language ``(or midnight of the third business 
day following the latest of the three events listed above).'' If the 
consumer wishes to cancel by another means of communication, the notice 
must be delivered to the creditor's business address listed in the 
notice ``no later than that time.''
    Current comment 15(a)(2)-1 states that the creditor may designate 
an agent to receive the rescission notification as long as the agent's 
name and address appear on the notice. The Board proposes to remove 
this comment, but insert similar language into proposed Sec.  
226.15(b)(3)(vi) and proposed comment 15(b)(3)-3. Specifically, 
proposed Sec.  226.15(b)(3)(vi) requires a creditor to disclose the 
name and address of the creditor or of the agent chosen by the creditor 
to receive the consumer's notice of rescission and a statement that the 
consumer may cancel by submitting the form located at the bottom 
portion of the notice to the address provided. Proposed comment 
15(b)(3)-3 states that if a creditor designates an agent to receive the 
consumer's rescission notice, the creditor may include its name along 
with the agent's name and address in the notice.
    Proposed comment 15(b)(3)-2 clarifies that the creditor may, at its 
option, in addition to providing a postal address for regular mail, 
describe other methods the consumer may use to send or deliver written 
notification of exercise of the right, such as overnight courier, fax, 
e-mail, or in-person. The Board requires the notice to include a postal 
address to ensure that an easy and accessible method of sending 
notification of rescission is provided to all consumers. Nonetheless, 
the Board would provide flexibility to creditors to provide in the 
notice additional methods of sending or delivering notification, such 
as fax and e-mail, which consumers might find convenient.
15(b)(3)(vii) Deadline To Cancel
    Current Sec.  226.15(b)(5) requires the creditor to disclose the 
date on which the rescission period expires. Current Model Forms G-5 
through G-9 disclose the expiration date in the section of the notice 
entitled ``How to Cancel.'' The current model forms provide a blank for 
the creditor to insert a date followed by the language ``(or midnight 
of the third business day following the latest of the three events 
listed above)'' as the deadline by which the consumer must exercise the 
right. The three events referenced are the date of the transaction 
giving rise to right of

[[Page 58576]]

rescission, the date the consumer received the Truth in Lending 
disclosures, and the date the consumer received the notice of the right 
to cancel.
    The Board proposes to eliminate the statements about the three 
events and require instead that the creditor provide the calendar date 
on which the three-business-day period for rescission expires. See 
proposed Sec.  226.15(b)(3)(vii). Many participants in the Board's 
consumer testing had difficulty using the three events to calculate the 
deadline for rescission. The primary causes of errors were: Not 
counting Saturdays, not identifying Federal holidays, and counting the 
day the last event took place as day one of the three-business-day 
period. Alternative text was tested to assist participants in 
calculating the deadline based on the three events; however, the text 
added length and complexity to the form without a significant 
improvement in participant comprehension. Moreover, participants in the 
Board's consumer testing strongly preferred forms that provided a 
specific date over those that required them to calculate the deadline 
themselves. Also, parties consulted during the Board's outreach on this 
proposal stated that the model forms should provide a date certain for 
the expiration of the three-business-day period.
    One of the dates that serves as the basis for calculating the 
expiration date is the transaction date. Creditors, servicers, and 
their trade associations noted, however, that creditors might be unable 
to provide an accurate expiration date when a transaction giving rise 
to the right of rescission is conducted by mail or through an escrow 
agent, as is customary in some states. They pointed out that in these 
cases, the date of the transaction giving rise to the right of 
rescission cannot be identified accurately before it actually occurs. 
For example, for a transaction by mail, the creditor cannot know at the 
time the rescission notice is mailed when the consumer will sign the 
loan documents (i.e., the date on which the transaction occurs). Some 
creditors stated that when a transaction giving rise to the right of 
rescission is conducted by mail or through an escrow agent, they 
anticipate dates for the date of the transaction and the deadline for 
rescission. These creditors stated that they calculate a deadline that 
provides extra time to consumers, because they cannot accurately 
predict the date the transaction giving rise to the right of rescission 
would occur (that is, the date the consumer will sign the documents).
    To ensure that consumers can readily identify the deadline for 
rescinding the transaction giving rise to the right of rescission, 
proposed Sec.  226.15(b)(3)(vii) specifies that a creditor must 
disclose in the rescission notice the calendar date on which the three-
business-day rescission period expires. If the creditor cannot provide 
an accurate calendar date on which the three-business-day rescission 
period expires, the creditor must provide the calendar date on which it 
reasonably and in good faith expects the three-business-day period for 
rescission to expire. If the creditor provides a date in the notice 
that gives the consumer a longer period within which to rescind than 
the actual period for rescission, the notice shall be deemed to comply 
with proposed Sec.  226.15(b)(3)(vii), as long as the creditor permits 
the consumer to rescind through the end of the date in the notice. If 
the creditor provides a date in the notice that gives the consumer a 
shorter period within which to rescind than the actual period for 
rescission, the creditor shall be deemed to comply with the requirement 
in proposed Sec.  226.15(b)(3)(vii) if the creditor notifies the 
consumer that the deadline in the first notice of the right of 
rescission has changed and provides a second notice to the consumer 
stating that the consumer's right to rescind expires on a calendar date 
which is three business days from the date the consumer receives the 
second notice. Proposed comment 15(b)(3)-4 provides further guidance on 
these proposed provisions.
    The proposed approach is intended to provide consumers with 
accurate notice of the date on which their right to rescind expires 
while ensuring that creditors do not face liability for providing a 
deadline in good faith, that later turns out to be incorrect. The Board 
recognizes that this approach will further delay access to funds for 
consumers in certain cases where the creditor must provide a corrected 
notice. Nonetheless, the Board believes that a corrected notice is 
appropriate; otherwise, consumers would believe based on the first 
notice that the rescission period ends earlier than the actual date of 
expiration. The Board, however, solicits comment on the proposed 
approach and on alternative approaches for addressing situations where 
the transaction date is not known at the time the rescission notice is 
provided.
    Extended right to rescind. Under TILA and Regulation Z, the right 
to rescind generally does not expire until midnight after the third 
business day following the latest of: (1) The transaction giving rise 
to the right of rescission; (2) delivery of the rescission notice; and 
(3) delivery of the material disclosures. If the rescission notice or 
the material disclosures are not delivered, consumer's right to rescind 
may extend for up to three years from the date of the transaction that 
gave rise to the right to rescind. TILA Section 125(f); 15 U.S.C. 
1635(f); Sec.  226.15(a)(3). In multiple rounds of consumer testing for 
this proposal, the Board tested statements explaining when a consumer 
might have up to three years to rescind (the extended right to 
rescind). The Board found, however, that including such explanations 
added length and complexity to the notice, and confused consumers. 
Nonetheless, the Board believes that some disclosure regarding the 
extended right is necessary for an accurate disclosure of the 
consumer's right of rescission. Thus, the Board proposes in new Sec.  
226.15(b)(3)(vii) to require creditors to include a statement that the 
right to cancel the transaction giving rise to the right of rescission 
may extend beyond the date disclosed in the notice, and in such a case, 
a consumer wishing to exercise the right must submit the form located 
at the bottom of the notice to either the current owner of the line of 
credit or the person to whom the consumer sends his or her payments. 
Proposed Samples G-5(B) and G-5(C) provide examples of how to satisfy 
these disclosure requirements. For example, proposed Sample G-5(B) 
provides guidance on how to satisfy these disclosure requirements when 
the rescission notice is given for opening a HELOC account where the 
full credit line is secured by the consumer's home and is rescindable. 
In this situation, a creditor may meet these disclosure requirements by 
placing an asterisk after the sentence disclosing the calendar date on 
which the right of rescission expires along with a sentence starting 
with an asterisk that states: ``In certain circumstances, your right to 
cancel this line of credit may extend beyond this date. In that case, 
you must submit the bottom portion of this notice to either the current 
owner of your line of credit or the person to whom you send payments.'' 
See proposed Samples G-5(B) and G-5(C). Without this statement, the 
notice would imply that the period for exercising the right is always 
three business days. In addition, this statement would inform consumers 
to whom they should submit notification of exercise when they have this 
extended right to rescind. See proposed Sec.  226.15(a)(2). The Board 
requests comment on the proposed approach to making the consumer aware 
of the extended right.

[[Page 58577]]

15(b)(3)(viii) Form for Consumer's Exercise of Right
    Current Sec.  226.15(b)(3) requires the creditor to disclose how to 
exercise the right to rescind, and to provide a form that the consumer 
can use to rescind. Current Model Forms G-5 though G-9 explain the 
consumer may cancel by using any signed and dated written statement, or 
may use the notice by signing and dating below the statement: ``I WISH 
TO CANCEL.''
    Section 226.15(b) currently requires a creditor to provide two 
copies of the notice of the right (one copy if delivered in electronic 
form in accordance with the E-Sign Act) to each consumer entitled to 
rescind. The current Model Forms contain an instruction to the consumer 
to keep one copy of the two notices because it contains important 
information regarding the right of rescission. The Board tested a model 
notice form that would allow the consumer to detach the bottom part of 
the notice form and use it to notify the creditor that the consumer is 
rescinding the transaction. Participants in the Board's consumer 
testing said unanimously that, if they wished to exercise the right of 
rescission, they would use the bottom part of the notice to cancel the 
transaction. However, a few participants said that they would prepare 
and send a statement of cancellation in addition to the bottom part of 
the notice. When asked what they would do if they lost the notice and 
wanted to rescind, most participants said that they would contact the 
creditor to obtain another copy of the notice. Almost all participants 
said that they would make and keep a copy of the notice if they decided 
to exercise the right.
    Based on these findings, proposed Sec. Sec.  226.15(b)(2)(i) and 
(3)(viii) require creditors to provide a form at the bottom of the 
notice that the consumer may use to exercise the right to rescind. The 
creditor would be required to provide two lines on the form for entry 
of the consumer's name and property address. The creditor would have 
the option to pre-print on the form the consumer's name and property 
address. In addition, a creditor would have the option to include the 
account number on the form, but may not request that or require the 
consumer to provide the account number. Proposed comment 15(b)(3)-5 
elaborates that creditors are not obligated to complete the lines in 
the form for the consumer's name and property address, but may wish to 
do so to identify accurately a consumer who uses the form to exercise 
the right. Proposed comment 15(b)(3)-5 further explains that at its 
option, a creditor may include the account number on the form. A 
creditor would not, however, be allowed to request that or require the 
consumer to provide the account number on the form, such as by 
providing a space for the consumer to fill in the account number. A 
consumer might not be able to locate the account number easily and the 
Board is concerned that allowing creditors to request a consumer to 
provide the account number might mislead the consumer into thinking 
that he or she must provide the account number to rescind.
    Current Model Forms G-5 through G-9 contain a statement that the 
consumer may use any signed and dated written statement to exercise the 
right to rescind. The Board does not propose to retain such a statement 
on the rescission notice because consumer testing showed that this 
disclosure is unnecessary. In fact, the Board's consumer testing 
results suggested that the statement might cause some consumers to 
believe that they must prepare a second statement of cancellation. 
Moreover, the Board believes it is unlikely that consumers who misplace 
the form, and later decide to rescind, would remember the statement 
about preparing their own documents. Based on consumer testing, the 
Board expects that consumers would use the form provided at the bottom 
of the notice to exercise the right of rescission. Participants in the 
Board's testing said that if they lost the form, they would contact the 
creditor to get another copy.
    In addition, current Model Forms G-5 through G-9 contain a 
statement that the consumer should ``keep one copy'' of the notice 
because it contains information regarding the consumer's rescission 
rights. This statement would be deleted as obsolete. As discussed in 
the section-by-section analysis to proposed Sec.  226.15(b)(1), the 
proposal requires creditors to provide a single copy of the notice to 
each consumer entitled to rescind. The notice would be revised to 
permit a consumer to detach the bottom part of the notice to use as a 
form for exercising the right of rescission while retaining the top 
portion of the notice containing the explanation of the consumer's 
rights.
15(b)(4) Optional Content of Notice
    Current comment 15(b)-3 states that the notice of the right of 
rescission may include information related to the required information, 
such as: a description of the property subject to the security 
interest; a statement that joint owners may have the right to rescind 
and that a rescission by one is effective for all; and the name and 
address of an agent of the creditor to receive notification of 
rescission.
    The Board proposes to continue to allow creditors to include 
additional information in the rescission notice that is directly 
related to the required disclosures. Proposed Sec.  226.15(b)(4) sets 
forth two optional disclosures that are directly related to the 
mandatory rescission disclosures: (1) A statement that joint owners may 
have the right to rescind and that a rescission by one owner is 
effective for all owners; and (2) a statement acknowledging the 
consumer's receipt of the notice for the consumer to initial and date. 
In addition, proposed comment 15(b)(4)-1 clarifies that, at the 
creditor's option, other information directly related to the 
disclosures required by Sec.  226.15(b)(3) may be included in the 
notice. For instance, an explanation of the use of pronouns or other 
references to the parties to the transaction is directly related 
information that the creditor may choose to add to the notice.
    The Board notes, however, that under the proposal, only information 
directly related to the disclosures may be added to the notice. See 
proposed Sec.  226.15(a)(2)(i). The Board is concerned that allowing 
creditors to combine disclosures regarding the right of rescission with 
other unrelated information, in any format, will diminish the clarity 
of this key material, potentially cause ``information overload,'' and 
increase the likelihood that consumers may not read the rescission 
notice.
15(b)(5) Time of Providing Notice
    TILA and Regulation Z currently do not specify when the consumer 
must receive the notice of the right to rescind. Current comment 15(b)-
4 states that the creditor need not give the notice to the consumer 
before the transaction giving rise to the right of rescission, but 
notes that the rescission period will not begin to run until the notice 
is given to the consumer. As a practical matter, with respect to the 
rescission notice that must be given when opening a HELOC account, most 
creditors provide the notice to the consumer along with the account-
opening disclosures and other documents given at account opening.
    The Board proposes to require creditors to provide the notice of 
the right to rescind before the transaction that gives rise to the 
right of rescission. See proposed Sec.  226.15(b)(5). The Board 
proposes this new timing requirement pursuant to the Board's authority 
under TILA Section 105(a), which authorizes the Board to make 
exceptions and adjustments to TILA to effectuate the

[[Page 58578]]

statute's purposes which include facilitating consumers' ability to 
compare credit terms and helping consumers avoid the uninformed use of 
credit. 15 U.S.C. 1601(a), 1604(a). The Board believes that this 
proposed timing rule would facilitate consumers' ability to consider 
the rescission right and avoid the uninformed use of credit.
    TILA and Regulation Z provide that a consumer may exercise the 
right to rescind until midnight after the third business following the 
latest of (1) The transaction giving rise to the right of rescission, 
(2) delivery of the notice of right to rescind, or (3) delivery of all 
material disclosures. TILA Section 125(a); 15 U.S.C. 1635(a); Sec.  
226.23(a)(3). Creditors typically provide the account opening 
disclosures at closing, and use these disclosures to satisfy the 
requirement to provide material disclosures. For the right of 
rescission that arises with respect to account opening, requiring that 
the rescission notice be given prior to account opening would better 
ensure that account opening will be the latest of the three events that 
trigger the three-business-day rescission period (assuming the account-
opening disclosures were given no later than account opening). In this 
way, the three-business-day period would occur directly after account 
opening, a time during which the consumer may be most focused on the 
transaction and most concerned about the right to rescind. By tying a 
creditor's provision of the rescission notice to an event in the 
lending process of primary importance to the consumer--account 
opening--this rule might lead consumers to assess the account-opening 
disclosures and other loan documents with a more critical eye. The 
Board solicits comment on any compliance or other operational 
difficulties the proposal might cause. For example, the Board invites 
comment on problems that could arise from applying this requirement to 
transactions that give rise to the right of rescission that occur after 
account opening, such as a credit limit increase on an existing HELOC 
account.
    Current comment 15(b)-4 would be removed as inconsistent with the 
proposed timing requirement. Proposed comment 15(b)(5)-1 clarifies that 
delivery of the notice after the transaction giving rise to the right 
of rescission would violate the timing requirement of Sec.  
226.15(b)(5), and the right of rescission does not expire until three 
business days after the day of late delivery if the notice was complete 
and correct.
15(b)(6) Proper Form of Notice
    Appendix G to part 226 currently contains five model rescission 
notices, one that corresponds to each of the five transactions that 
might give rise to a right of rescission. Consumer advocates have 
expressed concern about creditors failing to complete the model forms 
properly. For example, some courts have held that notices with 
incorrect or omitted dates for the identification of the transaction 
and the expiration of the right are nevertheless adequate to meet the 
requirement of delivery of notice of the right to the consumer.\19\
---------------------------------------------------------------------------

    \19\ See, e.g., Melfi v. WMC Mortgage Corp., 568 F.3d 309 (1st 
Cir. 2009).
---------------------------------------------------------------------------

    To address these concerns, proposed Sec.  226.15(b)(6) provides 
that a creditor satisfies Sec.  226.15(b)(3) if it provides the model 
form in Appendix G, or a substantially similar notice, which is 
properly completed with the disclosures required by Sec.  226.15(b)(3). 
Proposed comment 15(b)(6)-1 explicitly states that a notice is not 
properly completed if it lacks a calendar date or has an incorrectly 
calculated calendar date for the expiration of the rescission period. 
Such a notice would not fulfill the requirement to deliver the notice 
of the right to rescind. As discussed in the section-by-section 
analysis to proposed Sec.  226.15(b)(3)(vii) above, however, a creditor 
who provides a date reasonably and in good faith that later turns out 
to be incorrect would be deemed to have complied with the requirement 
to provide the notice if the creditor complies with proposed Sec.  
226.15(b)(3)(vii) and proposed comment 15(b)-4.
15(c) Delay of Creditor's Performance
    For the reasons discussed in the section-by-section analysis to 
Sec.  226.23(c) below, the Board proposes to revise comment 15(c)-5 to 
state that a creditor may satisfy itself that the consumer has not 
rescinded by obtaining a written statement from the consumer that the 
right has not been exercised. The statement must be signed and dated by 
the consumer only at the end of the three-business-day period.
15(d) Effects of Rescission
    For the reasons discussed in the section-by-section analysis to 
proposed Sec.  226.23(d) below, the Board proposes to revise Sec.  
226.15(d) to address the effects of rescission during the initial 
three-day period following consummation and after that period. 
Generally, during the initial three-day period, the creditor has not 
disbursed money or delivered property to the consumer. Proposed Sec.  
226.15(d)(1) would provide that when a consumer provides a notice of 
rescission during this period, the creditor's security interest is 
automatically void. Within 20 calendar days after receipt after the 
consumer's notice, the creditor must return any money paid by the 
consumer and take whatever steps are necessary to terminate its 
security interest.
    Proposed Sec.  226.15(d)(2) would generally apply after the initial 
three-day period has passed. During this time period, the creditor has 
typically disbursed money or delivered property to the consumer and 
perfected its security interest, but the consumer's right to rescind 
may have expired. Most creditors are reluctant to release a lien under 
these conditions, and courts are frequently called upon to resolve 
rescission claims, which increases costs for consumers and creditors. 
Accordingly, proposed Sec.  226.15(d)(2)(i) would provide a process for 
the parties to resolve a rescission claims outside of a court 
proceeding. The proposal would require that within 20 calendar days 
after receiving a consumer's notice of rescission, the creditor must 
mail or deliver to the consumer a written acknowledgment of receipt 
together with a written statement of whether the creditor will agree to 
cancel the transaction. If the creditor agrees to cancel the 
transaction, the creditor's acknowledgment of receipt must contain the 
amount of money or a description of the property that the creditor will 
accept as the consumer's tender; a reasonable date for tender; and a 
statement that within 20 calendar days after receipt of tender, the 
creditor will take whatever steps are necessary to terminate its 
security interest. The consumer may respond by tendering the amount of 
money or property described in the written statement. The creditor must 
take whatever steps are necessary to terminate its security interest 
within 20 calendar days after receipt of the consumer's tender.
    Proposed Sec.  226.15(d)(2)(ii) would address the effect of 
rescission if the parties are in a court proceeding, the creditor has 
disbursed money or delivered property to the consumer, and the 
consumer's right to rescind has not expired. Consistent with the 
holding of the majority of courts, the proposal would require the 
consumer to tender before the creditor releases its security interest. 
As in the current regulation, a court may modify these procedures.
15(e) Consumer's Waiver of Right To Rescind
    For the reasons discussed in the section-by-section analysis to 
proposed Sec.  226.23(e) below, the Board proposes to

[[Page 58579]]

provide additional guidance on when a consumer may waive the right to 
rescind due to a bona fide personal financial emergency. The proposed 
revisions clarify the procedure to be used for such waiver and add new, 
non-exclusive examples of bona fide personal financial emergencies that 
may justify such waiver and of circumstances that are not a bona fide 
personal financial emergency.
    Proposed Sec.  226.15(e) provides that a consumer may modify or 
waive the right to rescind, after delivery of the notice required by 
Sec.  226.15(b) and the disclosures required by Sec.  226.6, if the 
consumer determines that the loan proceeds are needed during the 
rescission period to meet a bona fide personal financial emergency. 
Proposed Sec.  226.15(e) provides further that to modify or waive the 
right, each consumer entitled to rescind must give the creditor a dated 
written statement that describes the emergency, specifically modifies 
or waives the right to rescind, and bears the consumer's signature. 
Finally, proposed Sec.  226.15(e) provides that printed forms for the 
purposes of waiver are prohibited.
    Proposed comment 15(e)-1 states that a consumer may modify or waive 
the right to rescind only after the creditor delivers the notice 
required by Sec.  226.15(b) and the disclosures required by Sec.  
226.6. Proposed comment 15(e)-1 also states that, after delivery of the 
required notice and disclosures, the consumer may waive or modify the 
right to rescind by giving the creditor a dated, written statement that 
specifically waives or modifies the right and describes the bona fide 
personal financial emergency. In addition, proposed comment 15(e)-1 
clarifies that a waiver is effective only if each consumer entitled to 
rescind signs a waiver statement. Further, proposed comment 15(e)-1 
clarifies that where there are multiple consumers entitled to rescind, 
the consumers may, but need not, sign the same waiver statement. 
Finally, proposed comment 15(e)-1 sets forth a cross-reference to Sec.  
226.2(a)(11), which establishes which natural persons are consumers 
with the right to rescind.
    Proposed comment 15(e)-2 states that to modify or waive the right 
to rescind, there must be a bona fide personal financial emergency that 
requires disbursement of loan proceeds before the end of the rescission 
period. Proposed comment 15(e)-2 states further that whether there is a 
bona fide personal financial emergency is determined by the facts 
surrounding individual circumstances. In addition, proposed comment 
15(e)-2 clarifies that a bona fide personal financial emergency 
typically, but not always, will involve imminent loss of or harm to a 
dwelling or harm to the health or safety of a natural person. Proposed 
comment 15(e)-2 also clarifies that a waiver is not effective if the 
consumer's statement is inconsistent with facts known to the creditor.
    Finally, proposed comment 15(e)-2 provides examples that describe 
circumstances that are and are not a bona fide personal financial 
emergency. Proposed comment 15(e)-2.i states that examples of a bona 
fide personal financial emergency include the following: (1) The 
imminent sale of the consumer's home at foreclosure; (2) the need for 
loan proceeds to fund immediate repairs to ensure that a dwelling is 
habitable, such as structural repairs needed due to storm damage; and 
(3) the imminent need for health care services, such as in-home nursing 
care for a patient recently discharged from the hospital. In each case, 
those examples assume that loan proceeds are needed during the 
rescission period.
    Proposed comment 15(e)-2.ii states that examples of circumstances 
that are not a bona fide personal financial emergency include the 
following: (1) The consumer's desire to purchase goods or services not 
needed on an emergency basis, even though the price may increase if 
purchased after the rescission period; and (2) the consumer's desire to 
invest immediately in a financial product, such as purchasing 
securities. Proposed comment 15(e)-2.iii states that the conditions for 
a waiver are not met where the consumer's waiver statement is 
inconsistent with facts known to the creditor. For example, proposed 
comment 15(e)-2.iii states that the conditions for a waiver are not met 
where the consumer's waiver statement states that loan proceeds are 
needed during the rescission period to abate flooding in a consumer's 
basement, but the creditor is aware that there is no flooding.

Section 226.16 Advertising

Overview
    The Board proposes to revise Sec.  226.16(d) to address certain 
misleading or deceptive practices used in open-end home-secured credit 
plan advertisements and promote consistency in the advertising rules 
applicable to open-end and closed-end home-secured credit. First, the 
Board proposes to revise Sec.  226.16(d)(6) to require advertisements 
for open-end home-secured credit that state any lower payments that 
apply for less than the full term of the plan to state also (1) The 
period of time during which those payments will apply, and (2) the 
amounts and time periods of other payments that will apply. Second, the 
Board proposes to add new Sec. Sec.  226.16(d)(7) through (d)(13), 
which would prohibit the following seven acts or practices in 
connection with advertisements for open-end home-secured credit: (i) 
The use of the term ``fixed'' to refer to rates or payments, unless 
certain conditions are satisfied; (ii) comparisons between actual or 
hypothetical payments or rates and payments or rates available under 
the advertised plan, unless certain conditions are satisfied; (iii) 
misleading statements that a plan is supported or endorsed by the 
government; (iv) misleading use of the name of a consumer's current 
creditor; (v) misleading claims of debt elimination; (vi) misleading 
use of the term ``counselor;'' and (vii) foreign-language 
advertisements that provide some required disclosures only in English.
    In January of 2008, the Board proposed new rules for closed-end 
mortgage advertising (January 2008 Proposal). See 73 FR 1672, January 
9, 2008. The Board proposed a new rule requiring additional disclosures 
about rates and payments to address concerns that advertisements placed 
undue emphasis on low promotional ``teaser'' rates or payments, and 
proposed to prohibit the seven acts or practices listed above in 
connection with closed-end mortgage advertisements. See 73 FR 1672, 
1708, January 9, 2008.
    The January 2008 Proposal also included a rule regarding disclosure 
of promotional rates and payments in advertisements for open-end home-
secured credit (home-equity lines of credit or HELOCs). Unlike the rule 
proposed for closed-end mortgages, however, the proposed HELOC rule did 
not cover all low introductory payments; instead, additional 
disclosures were required in advertisements that included low rates or 
payments not based on the index or margin that would apply to rates and 
payments after the promotional period. See 73 FR 1672, 1705, January 9, 
2008. Low introductory payments based on the index and margin, such as 
interest-only payments, were not covered. The Board did not propose to 
extend the other seven prohibitions to advertisements for HELOC plans, 
but solicited comment on whether to do so and on whether other acts or 
practices associated with advertisements for HELOC plans should be 
prohibited. See 73 FR 1672, 1705, January 9, 2008.

[[Page 58580]]

    Commenters on the January 2008 Proposal were divided on whether to 
extend the proposed prohibitions to HELOC advertising. Many community 
banks argued that the misleading or deceptive acts often associated 
with closed-end mortgage advertisements do not occur in HELOC 
advertisements. Some consumer groups and state regulators, however, 
urged the Board to extend all of the prohibitions to HELOCs. Few 
commenters suggested that Board consider additional prohibitions for 
HELOC advertising.
    In July of 2008, the Board adopted final rules for closed-end 
mortgage advertising, including both the rates and payments disclosure 
rule (Sec.  226.24(f)), and the prohibitions on the seven acts or 
practices listed above (Sec. Sec.  226.24(i)(1) through (i)(7)) (2008 
HOEPA Final Rule). See 73 FR 44522, July 30, 2008. The July 2008 Final 
Rule also adopted Sec.  226.16(d)(6), regarding disclosure of 
promotional rates and payments in HELOC advertising. The Board did not 
extend the prohibitions contained in Sec.  226.24(i) to advertisements 
for open-end home-secured credit. The Board indicated that it had not 
been provided with, or found, sufficient evidence demonstrating that 
advertisements for HELOCs contain deceptive practices similar to those 
found in advertisements for closed-end mortgage loans. The Board 
stated, however, that it might consider prohibiting certain misleading 
or deceptive practices in HELOC advertising as part of its larger 
review of the rules for open-end home-secured credit.
    As part of its review of these rules, Board staff reviewed numerous 
examples of advertisements for HELOCs to identify advertising practices 
that could mislead consumers. This research indicated that many 
advertisements prominently disclose interest-only payments, while 
disclosing with much less prominence, often in a footnote, that higher 
payments also will be required during the term of the plan. Many 
advertisements also include misleading comparisons with other credit 
products and other misleading terms or statements, or employ practices 
prohibited in the July 2008 Final Rule for closed-end mortgages.
    The Board is now proposing to revise Sec.  226.16(d)(6) to improve 
disclosure in advertisements of the rates and payments that will apply 
over the full term of a HELOC and to add new Sec. Sec.  226.16(d)(7) 
through (d)(13) to extend the prohibitions in Sec.  226.24(i) 
applicable to closed-end mortgage advertising to advertising for 
HELOCs.
    The Board solicits comment on the appropriateness of the proposed 
revisions to the advertising rules for open-end home-secured credit 
discussed in greater detail below, and on whether other acts or 
practices associated with advertisements for HELOC plans should be 
prohibited.
Legal Authority
    TILA Section 147, implemented by Sec.  226.16(d), governs 
advertisements of open-end home-equity plans secured by the consumer's 
principal dwelling. 15 U.S.C. 1665b. The statute applies to the 
advertisement itself, and therefore, the statutory and regulatory 
requirements apply to any person advertising an open-end home-secured 
credit plan, whether or not the person meets the definition of 
creditor. See comment 2(a)(2)-2. Under the statute, if an advertisement 
for an open-end home-secured credit plan sets forth, affirmatively or 
negatively, any of the specific terms of the plan, including any 
required periodic payment amount, then the advertisement also must 
clearly and conspicuously state: (i) Any loan fee the amount of which 
is determined as a percentage of the credit limit and an estimate of 
the aggregate amount of other fees for opening the account; (ii) in any 
case in which periodic rates may be used to compute the finance charge, 
the periodic rates expressed as an annual percentage rate; (iii) the 
highest annual percentage rate which may be imposed under the plan; and 
(iv) any other information the Board may by regulation require.
    Under TILA Section 105(a), the Board has authority to adopt 
regulations to ensure meaningful disclosure of credit terms so that 
consumers will be able to compare available credit terms and avoid the 
uninformed use of credit. 15 U.S.C. 1604(a).
    The Board proposes to use its authority under TILA Sections 147 and 
105(a) to require that advertisements for open-end home-equity plans 
with certain payment and rate information also include specified 
additional information as described in the proposed rule. See proposed 
Sec. Sec.  226.16(d)(6), (d)(7), and (d)(8) and proposed comments 
16(d)-5, 16(d)-10, and 16(d)-11.
    TILA Section 129(l)(2) authorizes the Board to prohibit acts or 
practices in connection with mortgage loans that the Board finds to be 
unfair, deceptive, or designed to evade the provisions of TILA Section 
129. 12 U.S.C. 1639(l)(2). The Board proposes to use its authority 
under TILA Sections 129(l)(2) and 105(a), described above, to prohibit 
certain deceptive practices in HELOC advertising. See proposed 
Sec. Sec.  226.16(d)(9)-(d)(13) and proposed comment 16(d)-12.
16(d) Additional Requirements for Home-Equity Plans
16(d)(6) Promotional Rates and Payments
    Many HELOC advertisements emphasize a low monthly payment as one of 
the advantages of the product compared to other forms of credit. The 
monthly payment prominently stated in the advertisement, however, often 
is an interest-only payment that, for example, would apply only during 
the draw period and increase substantially during the repayment period 
or would result in a balloon payment. This may mislead consumers about 
the actual payments they will be required to make over the life of the 
plan.
    Section 226.16(d)(6), as adopted in the July 2008 Final Rule, 
addresses the advertisement of promotional rates and payments in HELOC 
plans. Regarding payments, the rule provides that if an advertisement 
for a home-equity plan states a ``promotional payment,'' the 
advertisement must include the following in a clear and conspicuous 
manner with equal prominence and in close proximity to each listing of 
the promotional payment: (i) The period of time during which the 
promotional payment will apply; and (ii) the amounts and time periods 
of any payments that will apply under the plan (if payments under a 
variable-rate plan will be determined based on application of an index 
and margin, the additional disclosed payments must be determined based 
on application of a reasonably current index and margin). The rule 
defines a ``promotional payment'' for a variable-rate plan as any 
minimum payment (i) that is applicable for less than the full term of 
the loan and is not derived by applying to the outstanding balance the 
index and margin used to determine other minimum payments under the 
plan, and (ii) that is less than other minimum payments under the plan, 
given an assumed balance.
    The rules regarding disclosure of rates and payments in closed-end 
mortgage advertising (Sec.  226.24(f)) are more comprehensive than 
Sec.  226.16(d)(6). Section 226.24(f) generally requires that 
advertisements for closed-end mortgages that state a rate or payment 
amount also disclose other rates and payments that will apply over the 
term of the loan and the time periods during which they apply. In 
contrast, Sec.  226.16(d)(6) does not address advertisements that 
emphasize low monthly payments derived by applying the index and margin 
generally used to determine

[[Page 58581]]

payments under the plan, such as interest-only payments. Also, as 
noted, disclosure of payments such as interest-only payments can be 
problematic in HELOC advertisements. The Board therefore proposes to 
revise the definition of promotional payment for variable-rate plans in 
Sec.  226.16(d)(6)(i)(B)(1) so that, as in closed-end advertising, the 
HELOC advertising rule will cover these types of payments.
    Specifically, the proposal would eliminate the portion of the 
current definition of ``promotional payment'' that restricts the term 
to payments that are not derived from the generally applicable index 
and margin. Instead, the new definition would be limited to the 
following portion of the current definition: ``For a variable-rate 
plan, any minimum payment applicable for a promotional period that is 
less than other minimum payments under the plan derived by applying a 
reasonably current index and margin that will be used to determine the 
amount of such payments, given an assumed balance.'' See proposed Sec.  
226.16(d)(6)(i)(B)(1). Thus, under the proposed rule, a payment would 
be ``promotional'' if it is (1) temporary and (2) lower than any 
payments under the plan based on the index and margin generally 
applicable to the plan. As a result, under this definition, a 
``promotional payment'' could be based on the generally applicable 
index and margin, but would have to be lower than other payments under 
that plan that are also based on the plan's index and margin.
    A technical revision would be made to Sec.  226.16(d)(6)(ii)(C), 
which describes one of the additional disclosures that must be included 
in advertisements with a promotional payment, to reflect the revised 
definition. Thus, this additional disclosure would be described as 
``the amounts and time periods of any payments that will apply under 
the plan given the same assumed balance.'' See proposed Sec.  
226.16(d)(6)(ii)(C) (emphasis added).
    For example, an advertisement for a variable-rate home-equity plan 
might state an interest-only monthly payment derived by applying a 
reasonably current index and margin to an assumed balance. This payment 
would be considered a promotional payment because it is less than, for 
example, fully-amortizing monthly payments or a balloon payment that 
would be required at other times during the life of the plan given the 
same assumed balance. If an advertisement stated this payment, the 
advertisement also would be required to state in a clear and 
conspicuous manner with equal prominence and in close proximity to each 
listing of that payment: (i) The period of time during which that 
payment would apply; and (ii) the amounts and time periods of all 
payments that would apply under the plan given the same assumed 
balance.
    The Board also proposes to revise comment 16(d)-5(i), regarding 
variable-rate plans, to reflect the revised definition of promotional 
payment for variable-rate plans and to provide additional guidance on 
that definition. Revised comment 16(d)-5(i) would state that if the 
advertised payment is the same as other minimum payments under the plan 
derived by applying a reasonably current index and margin, and given an 
assumed balance, it is not a promotional payment. The revised comment 
would further state that if the advertised payment is less than other 
minimum payments under the plan based on the same assumptions, it is a 
promotional payment. The revised comment would give the following 
example: if the advertised payment is an interest-only payment 
applicable during the draw period, and minimum payments during the 
repayment period will be higher because they are based on a schedule 
that fully amortizes the outstanding balance by the end of the 
repayment period, or there is no repayment period and a balloon payment 
would result at the end of the draw period, then the advertised payment 
is a promotional payment.
    The Board also proposes to revise comment 16(d)-5(iii), regarding 
the amounts and time periods of payments, to include the following 
example: if an advertisement for a home-equity plan offers a $100,000 
line of credit with a 10-year draw period and a 10-year repayment 
period, and assumes that the entire line is drawn, resulting in an 
interest-only minimum payment of $300 per month during the draw period, 
increasing to $750 per month during the repayment period, the 
advertisement must disclose the amount and time period of each of the 
two monthly payment streams, with equal prominence and in close 
proximity to the promotional payment.
    The Board also proposes to revise comment 16(d)-5(iv). The comment 
states that if an advertised payment is calculated in the same way as 
other payments based on an assumed balance, the fact that the minimum 
payment could increase if the consumer makes an additional draw does 
not make the payment a promotional payment. Currently, the comment 
applies only to variable-rate plans; under the proposed revision, the 
comment would be applicable to non-variable-rate plans as well as 
variable-rate plans.
    The Board does not propose to revise the definition of promotional 
payment for plans other than variable-rate plans in Sec.  
226.16(d)(6)(i)(B)(2) or the definitions and requirements related to 
promotional rates included in Sec.  226.16(d)(6). Introductory and 
other payments that trigger the additional disclosure requirements in 
Sec.  226.16(d)(6)(ii) under the existing rule would continue to do so 
under the rule as revised.
16(d)(7) Misleading Advertising of ``Fixed'' Rates and Payments
    Use of the term ``fixed'' is addressed in the open-end credit 
advertising rules that apply to both home-secured and other open-end 
credit. Section 226.16(f) provides that an advertisement for open-end 
credit may not refer to an annual percentage rate as ``fixed,'' or use 
a similar term, unless the rate will not increase while the plan is 
open or the advertisement specifies the time period during which the 
rate will be fixed.
    The rules regarding use of the term ``fixed'' in closed-end 
mortgage loan advertising (Sec.  226.24(i)(1)) are different from the 
Sec.  226.16(f) rules applicable to open-end credit. In particular, 
whereas the open-end credit rule applies only to descriptions of annual 
percentage rates as ``fixed,'' the closed-end mortgage rule restricts 
the use of the term ``fixed'' to describe rates, payments, or an 
advertised credit plan as a whole. Advertisements for HELOCs, however, 
often emphasize the amount of payments under the plan as much as, or 
more than, rates associated with the plan.
    In adopting Sec.  226.24(i)(1) for closed-end mortgage 
advertisements, the Board noted that some advertisements do not 
adequately disclose that interest rates or payment amounts are 
``fixed'' only for a limited period of time. The use of the word 
``fixed'' in these advertisements may mislead consumers into believing 
that the advertised product is a fixed-rate mortgage loan with rates 
and payments that will not change during the term of the loan. The 
Board noted that whether the rates and payments for a particular credit 
product are fixed or variable is a key factor for consumers evaluating 
the risks and costs associated with that credit. See 73 FR 44522, 
44587, July 30, 2008.
    The Board believes that inaccurate or incomplete statements about 
whether a rate or payment is fixed would be as misleading in the open-
end context as in the closed-end context. The Board therefore proposes 
to add new Sec.  226.16(d)(7), which would impose requirements 
regarding use of the term ``fixed'' on HELOC advertisements

[[Page 58582]]

similar to those for closed-end mortgage advertisements.
    Proposed Sec.  226.16(d)(7) would prohibit the use of the word 
``fixed'' to refer to rates, payments, or home-equity plans in 
advertisements for variable-rate or other plans in which the payment 
may increase, unless certain conditions are met. The proposed rule 
describes the conditions that must be met for three different cases: 
(i) Advertisements for variable-rate plans; (ii) advertisements for 
non-variable-rate plans; and (iii) advertisements for both variable- 
and non-variable-rate plans. In an advertisement for one or more 
variable-rate plans, ``fixed'' can be used only if: (i) The phrase 
``variable rate'' appears in the advertisement before the first use of 
the word ``fixed'' and is at least as conspicuous as any use of the 
word ``fixed'' in the advertisement; and (ii) each use of ``fixed'' to 
refer to a rate or payment is accompanied by an equally prominent and 
closely proximate statement of the time period for which the rate or 
payment is fixed, and the fact that the rate may vary or the payment 
may increase after that period.
    Under the proposal, in an advertisement solely for non-variable-
rate plans where the payment may increase, ``fixed'' can be used only 
if each use of ``fixed'' to refer to the payment is accompanied by an 
equally prominent and closely proximate statement of the time period 
for which the payment is fixed and the fact that the payment may 
increase after that period.
    Under the proposal, in an advertisement for both variable- and non-
variable-rate plans, ``fixed'' can be used only if:
    (i) The phrase ``variable rate'' appears in the advertisement with 
equal prominence to any use of ``fixed;'' and
    (ii) Each use of the word ``fixed'' to refer to a rate, payment, or 
plan either:
     Refers solely to the plans for which rates are fixed for 
the plan term and is accompanied by an equally prominent and closely 
proximate statement of the time period for which the payment is fixed, 
and, if applicable, the fact that the payment may increase after that 
period; or
     Refers to variable-rate plans and is accompanied by an 
equally prominent and closely proximate statement of the time period 
for which the rate or payment is fixed and the fact that the rate may 
vary or the payment may increase after that period.
    The proposed rule would not prohibit use of the term ``fixed'' in 
advertisements for home-equity plans, including advertisements for 
variable-rate plans. For example, some advertisements for variable-rate 
home-equity plans may state that the consumer has the option to convert 
a portion of their balance to a fixed rate. Such an advertisement would 
comply with proposed Sec.  226.16(d)(7) as long as: (i) The phrase 
``variable rate'' appears in the advertisement with equal prominence as 
any use of the term ``fixed'' or similar terms; (ii) ``fixed'' is used 
solely in reference to the fixed rate conversion option; and (iii) any 
reference to payments associated with that option that may increase as 
``fixed'' includes an equally prominent and closely proximate statement 
of the time period for which the payment is fixed and the fact that the 
payment will increase after that period.
16(d)(8) Misleading Comparisons in Advertisements
    For closed-end mortgage loans, an advertisement may not make any 
comparison between actual or hypothetical credit payments or rates and 
any payment or rate available under the advertised plan unless certain 
additional disclosures are made. See Sec.  226.24(i)(2). In adopting 
this provision, the Board noted that the advertised rates or payments 
used in comparisons included in advertisements for closed-end mortgage 
loans often were low introductory ``teaser'' rates or payments that 
would not apply over the full term of the loan. The Board concluded 
that such comparisons are deceptive and misleading to consumers unless 
certain additional disclosures are made. See 73 FR 44522, 44587, July 
30, 2008.
    Board research indicates that many advertisements for open-end 
home-equity plans compare monthly payments under that plan with the 
combined monthly payment for other consumer loans, such as credit card, 
car loan, and personal loan payments. Without adequate disclosure, 
these comparisons may mislead consumers about the relative advantages 
and disadvantages of a HELOC. For example, the HELOC payment used in 
these comparisons often is an interest-only payment that would apply 
only during the draw period and increase substantially thereafter or 
would result in a balloon payment. This is problematic because some of 
the payments in the comparison group, such as car loan payments, may be 
fully-amortized principal and interest payments. In addition, while 
HELOCs often have variable interest rates, some of the loans in the 
comparison group, such as car loans or personal loans, may have fixed 
rates.
    Home-equity plan advertisements that include comparisons such as 
those described above often explain that the home-equity plan payment 
used in the comparison is an interest-only payment or that the home-
equity plan's interest rate is variable. However, these disclosures 
often are either wholly or partially in small print, in footnotes, or 
on the back of a page. The Board believes that additional, prominent 
disclosure is needed to prevent consumers from being misled by payment 
comparisons.
    The Board therefore proposes to adopt new Sec.  226.16(d)(8), which 
would impose requirements consistent with those for closed-end mortgage 
advertising under Sec.  226.24(i)(2). Proposed Sec.  226.16(d)(8) would 
prohibit an advertisement for a home-equity plan from including any 
comparison between actual or hypothetical credit payments or rates and 
any payment or rate that will be available under the advertised plan 
for a period less than the full term of the plan unless two additional 
disclosures are made. First, the advertisement must include a clear and 
conspicuous comparison to the information required to be disclosed 
under Sec.  226.16(d)(6)(ii) (promotional period and post-promotional 
rates or payments). Second, if the advertisement is for a variable-rate 
plan, and the advertised payment or rate is based on the index or 
margin that will be used to make subsequent rate or payment adjustments 
over the term of the loan, the advertisement must include an equally 
prominent statement in close proximity to the payment or rate that the 
payment or rate is subject to adjustment and the time period when the 
first adjustment will occur.
    Consistent with comment 24(i)-1 for closed-end mortgages, proposed 
comment 16(d)-10 would clarify that the requirements of Sec.  
226.16(d)(8) apply to all advertisements for HELOC plans, including 
radio and television advertisements. The proposed comment also states 
that a claim about the amount a consumer may save under the advertised 
plan, such as ``save $400 per month on a balance of $35,000,'' would 
constitute an implied comparison between the advertised plan's payment 
and an actual or hypothetical payment. The requirements of Sec.  
226.16(d)(8) therefore would apply.
    The Board also proposes to add comment 16(d)-11; the comment would 
clarify that the requirements of Sec.  226.16(d)(8) apply to 
comparisons in advertisements for variable-rate plans, because the 
payments or rates may not be available for the full term of the plan 
due to variation in the rate, even if the

[[Page 58583]]

payments or rates shown for the advertised plan are not promotional 
payments or rates, as defined in Sec.  226.16(d)(6)(i).
16(d)(9) Misrepresentations About Government Endorsement
    For closed-end mortgage loans, an advertisement may not make any 
statement that the loan offered is a ``government loan program,'' 
``government-supported loan,'' or otherwise endorsed or sponsored by a 
Federal, State, or local government entity, unless the advertised loan 
is in fact an FHA loan, a VA loan, or a loan offered under a similar 
program that is endorsed or sponsored by a Federal, State, or local 
government entity. See Sec.  226.24(i)(3). In adopting this provision, 
the Board found these types of advertisements to be deceptive, stating 
its concern that these advertisements can mislead consumers into 
believing that the government is guaranteeing, endorsing, or supporting 
the advertised loan product. See 73 FR 44522, 44589, July 30, 2008. The 
Board further observed that government-endorsed loans often offer 
certain benefits or features that may be attractive to many consumers 
and that, as a result, a loan product's association with a government 
program can be a material factor in the consumer's decision to apply 
for that particular loan.
    The Board believes that false or misleading statements about 
government endorsement would be as misleading in the context of HELOC 
advertising as in the closed-end advertising context. To avoid the 
possibility of home-equity advertisements containing misleading 
statements about government endorsement in the future, and for 
consistency between the advertising rules applicable to open-end and 
closed-end home-secured credit, the Board proposes to prohibit 
statements in HELOC advertisements that a plan is a ``government loan 
program,'' ``government-supported loan,'' or is otherwise endorsed or 
sponsored by any Federal, State, or local government entity, unless the 
advertisement is for a credit program that is, in fact, endorsed or 
sponsored by a Federal, State, or local government entity. See proposed 
Sec.  226.16(d)(9).
    For closed-end mortgages, comment 24(i)-2 provides an example of a 
misrepresentation about government endorsement: A statement that the 
Federal Community Reinvestment Act (CRA) entitles the consumer to 
refinance his or her mortgage at the low rate offered in the 
advertisement. The Board does not propose to adopt a parallel comment 
under Sec.  226.16(d); the example does not appear applicable to 
HELOCs, because HELOCs generally are not refinanced. However, if a 
misleading statement about the CRA were made in a home-equity plan 
advertisement, it would be prohibited under Sec.  226.16(d)(9).
16(d)(10) Misleading Use of the Current Creditor's Name
    For closed-end mortgage loans, an advertisement that is not sent by 
or on behalf of the consumer's current creditor may not use the name of 
that creditor, unless the advertisement also discloses with equal 
prominence the name of the person or creditor making the advertisement, 
and a clear and conspicuous statement that the person making the 
advertisement is not associated with, or acting on behalf of, the 
consumer's current creditor. See Sec.  226.24(i)(4). In research for 
the July 2008 Final Rule, the Board found advertisements for home-
secured loans that prominently displayed the name of the consumer's 
current mortgage creditor, but failed to disclose or to disclose 
adequately that the advertisement is by a mortgage creditor not 
associated with the consumer's current creditor. The Board found that 
these advertisements are deceptive because they may mislead consumers 
into believing that their current creditor is offering the loan 
advertised, or that the advertisement is promoting a reduction in the 
consumer's payment amount or rate on his or her current loan, rather 
than offering to refinance the current loan with a different creditor. 
See 73 FR 44522, 44589, July 30, 2008.
    Board research for this proposal has shown that some HELOC 
advertisements contain misleading uses of the name of the consumer's 
current creditor. To prevent these misleading statements in home-equity 
advertisements, and for consistency between the advertising rules 
applicable to open-end and closed-end home-secured credit, the Board 
proposes to prohibit the use the name of the consumer's current 
creditor in a HELOC advertisement that is not sent by or on behalf of 
the consumer's current creditor, unless the advertisement: (i) 
Discloses with equal prominence the name of the creditor or other 
person making the advertisement; and (ii) includes a clear and 
conspicuous statement that the creditor or other person making the 
advertisement is not associated with, or acting on behalf of, the 
consumer's current creditor. See proposed Sec.  226.16(d)(10).
16(d)(11) Misleading Claims of Debt Elimination
    Section 226.24(i)(5) prohibits advertisements for closed-end 
mortgage loans that offer to eliminate debt, or to waive or forgive a 
consumer's existing loan terms or obligations to another creditor. In 
the July 2008 Final Rule, the Board found these advertisements to be 
deceptive because they can mislead consumers into believing that they 
are entering into a debt forgiveness program, rather than merely 
replacing one debt obligation with another. See 73 FR 44522, 44589, 
July 30, 2008.
    The Board has found evidence that some HELOC advertisements contain 
misleading statements about debt elimination as well. To prevent this 
practice in HELOC advertisements, and for consistency between the 
advertising rules applicable to open-end and closed-end home-secured 
credit, the Board proposes to prohibit misleading claims in a HELOC 
advertisement that the plan offered will eliminate debt or result in a 
waiver or forgiveness of a consumer's existing loan terms with, or 
obligations to, another creditor. See proposed Sec.  226.16(d)(11). The 
Board also proposes to adopt new comment 16(d)-12, parallel to comment 
24(i)-3 in the closed-end rule. The proposed comment provides examples 
of claims that would be prohibited. These include: ``Get out of debt;'' 
``Take advantage of this great deal to get rid of all your debt;'' 
``Celebrate life, debt-free;'' and ``[Name of home-equity plan] gives 
you an easy-to-follow plan for being debt-free.'' The proposed comment 
also clarifies that the rule would not prohibit a HELOC advertisement 
from claiming that the advertised product may reduce debt payments, 
consolidate debts, or shorten the term of the debt.
16(d)(12) Misleading Use of the Term ``Counselor''
    Advertisements for closed-end mortgage loans may not use the term 
``counselor'' to refer to a for-profit mortgage broker or mortgage 
creditor, its employees, or persons working for the broker or creditor 
that are involved in offering, originating or selling mortgages. See 
Sec.  226.24(i)(6). Nothing in the rule prohibits advertisements for 
bona fide consumer credit counseling services, such as counseling 
services provided by non-profit organizations, or bona fide financial 
advisory services, such as services provided by certified financial 
planners. In the July 2008 Final Rule, the Board found that the use of 
the term ``counselor'' is deceptive outside of the context of non-
profit organizations and bona fide financial

[[Page 58584]]

advisory services; outside of these circumstances, the term 
``counselor'' is likely to mislead consumers into believing that the 
creditor or broker has a fiduciary relationship with the consumer and 
is considering only the consumer's best interest. See 73 FR 44522, 
44589, July 30, 2008.
    Board research for this proposal has yielded evidence of this 
practice in HELOC advertising. To prevent this practice in HELOC 
advertising, and for consistency between the advertising rules for 
open-end and closed-end home-secured credit, the Board proposes to 
prohibit use of the term ``counselor'' in a HELOC advertisement to 
refer to a for-profit broker or creditor, its employees, or persons 
working for the broker or creditor that are involved in offering, 
originating or selling home-equity plans. See proposed Sec.  
226.16(d)(12).
16(d)(13) Misleading Foreign-Language Advertisements
    Section 226.24(i)(7) prohibits advertisements for closed-end home-
secured mortgages from providing information about some trigger terms 
or required disclosures, such as an initial rate or payment, only in a 
foreign language, but providing information about other trigger terms 
or required disclosures, such as information about the fully-indexed 
rate or fully-amortizing payment, only in English. Advertisements that 
provide all trigger terms and disclosures in both English and a foreign 
language, or advertisements that provide all trigger terms and 
disclosures entirely in English or entirely in a foreign language, are 
not affected by this prohibition. In the July 2008 Final Rule, the 
Board noted that, in general, advertisements for home-secured loans 
targeted to non-English speaking consumers are an appropriate means of 
promoting home ownership or making credit available to under-served, 
immigrant communities. The Board also noted, however, that some of 
these advertisements provide information about some trigger terms or 
required disclosures, such as a low introductory ``teaser'' rate or 
payment, in a foreign language, but provide information about other 
trigger terms or required disclosures, such as the fully-indexed rate 
or fully-amortizing payment, only in English. The Board found that this 
practice is deceptive because it can mislead non-English speaking 
consumers who may not be able to comprehend the important English-
language disclosures. See 73 FR 44522, 44590, July 30, 2008.
    The Board believes that advertisements that provide some terms only 
in English and others only in a foreign language would be as misleading 
in HELOC advertisements as in closed-end mortgage advertisements. To 
avoid the possibility of this practice in HELOC advertising, and for 
consistency between the advertising rules for open-end and closed-end 
home-secured credit, the Board proposes to prohibit in HELOC 
advertisements the provision of information about some trigger terms or 
required disclosures, such as a promotional rate or payment, only in a 
foreign language, while providing information about other trigger terms 
or required disclosures, such as information about the fully-indexed 
rate or fully-amortizing payment, only in English. See proposed Sec.  
226.16(d)(13).

Section 226.17 General Disclosure Requirements

17(c) Basis of Disclosures and Use of Estimates
    Current comment 17(c)(1)-14 provides guidance on assumptions 
creditors must use in disclosing closed-end reverse mortgages. The 
guidance in comment 17(c)(1)-14 is still required for creditors to 
calculate a finance charge and APR for closed-end reverse mortgages. 
For clarity, the proposal would move the comment into proposed Sec.  
226.33(c)(16), which provides the rules for disclosing closed-end 
reverse mortgages and is discussed in the section-by-section analysis 
of that section. The comment also clarifies that reverse mortgages 
where some or all of the appreciation in the value of the property will 
be shared between the consumer and the creditor are considered 
variable-rate mortgages, and, therefore, must follow the disclosure 
rules for variable-rate mortgages. Under the proposal, the content of 
disclosure for reverse mortgages, including reverse mortgages with 
shared appreciation features, would be set forth in Sec.  226.33, as 
discussed in the section-by-section analysis to that section.
17(d) Multiple Creditors; Multiple Consumers
    The Board is proposing to amend staff comment 17(d)-2 to clarify 
that, in rescindable transactions involving more than one consumer, 
disclosures required by Sec.  226.19(a) need only be provided to one 
consumer who will be primarily liable on the obligation. For example, 
if two consumers apply for a covered mortgage loan as co-applicants, 
with a third consumer acting solely as a guarantor of the debt, only 
either of the first two consumers must receive the Sec.  226.19(a) 
disclosures. In addition, the revised comment would clarify that each 
consumer entitled to rescind, even any such consumer with no legal 
obligation on the transaction, must receive the material disclosures in 
Sec.  226.23(a)(5) and the notice of right to rescind in Sec.  
226.23(b) prior to consummation.
Background
    MDIA amendments to TILA. Prior to the MDIA, TILA and Regulation Z 
required creditors to provide good faith estimates of transaction-
specific disclosures for certain purchase-money mortgage loans secured 
by the consumer's principal dwelling, within three business days after 
application (``the early disclosures''). The MDIA extended this 
requirement for early disclosures to certain closed-end, non-purchase 
money transactions, including refinance loans, home equity loans, and 
reverse mortgages.\20\ The MDIA also extended the requirement for early 
disclosures to loans secured by a dwelling other than a consumer's 
principal dwelling. In addition, the MDIA required creditors to mail or 
deliver the early TILA disclosures at least seven business days before 
consummation and, if the APR in the early disclosure becomes 
inaccurate, provide corrected disclosures that the consumer must 
receive no later than three business days before consummation. See TILA 
Section 128(b)(2), 15 U.S.C. 1638(b)(2). The MDIA became effective on 
July 30, 2009.
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    \20\ This provision of the MDIA codified action that the Board 
had taken in the 2008 HOEPA Final Rule, which was to be effective 
October 1, 2009. 73 FR 44522, July 30, 2008.
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    Final rule implementing the MDIA. The Board published final 
regulations implementing the MDIA on May 19, 2009 (MDIA Final Rule). 74 
FR 23289. The MDIA Final Rule amended Sec.  226.19(a) of Regulation Z 
to require that, in a closed-end mortgage transaction subject to the 
Real Estate Settlement Procedures Act (RESPA) that is secured by a 
consumer's dwelling, the creditor make good faith estimates of the 
disclosures required by Sec.  226.18 and deliver or place them in the 
mail not later than the third business day after the creditor receives 
the consumer's written application.\21\ See Sec.  226.19(a)(1)(i). The 
early disclosures must be delivered or placed in the mail not later 
than the seventh business day

[[Page 58585]]

before consummation. See Sec.  226.19(a)(2)(i). Finally, if the APR 
stated in the early disclosures becomes inaccurate, the creditor must 
provide corrected disclosures with all changed terms, which the 
consumer must receive no later than three business days before 
consummation.\22\ See Sec.  226.19(a)(2)(ii).
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    \21\ The August 2009 Closed-End Proposal would eliminate the 
qualification that the transaction be subject to RESPA and instead 
would apply Sec.  226.19(a) to any transaction secured by real 
property or a dwelling. It also would change the reference to Sec.  
226.18 so that it requires good faith estimates of the Sec.  226.38 
disclosures that the August 2009 Closed-End Proposal would require 
for mortgage transactions generally.
    \22\ The August 2009 Closed-End Proposal would require final 
disclosures three business days before consummation in all cases, 
rather than only when the disclosed APR becomes inaccurate. For 
consistency with the August 2009 Closed-End Proposal, this 
discussion refers to the disclosures provided three business days 
prior to consummation as the ``final disclosures.''
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    Transactions involving multiple consumers. Since the MDIA Final 
Rule, creditors have asked the Board whether, in a transaction 
involving more than one consumer, every consumer must receive the early 
and final disclosures.\23\ TILA Section 121(a) provides that in such 
transactions, except transactions subject to the right of rescission, 
the creditor need only make disclosures to one primary obligor. Section 
226.17(d) implements TILA Section 121(a) and further provides that, if 
the transaction is rescindable, disclosures must be provided to each 
consumer with the right to rescind. Consumers who have the right to 
rescind include non-obligors as well as obligors if (i) They have an 
ownership interest in the property securing the transaction, (ii) their 
ownership interest would be subject to the creditor's security 
interest, and (iii) the property securing the transaction is their 
principal dwelling. See Sec. Sec.  226.23(a)(1), 226.2(a)(11). 
Creditors have expressed uncertainty over whether, for a rescindable 
transaction, they must provide early and final disclosures to each 
obligor and to each non-obligor consumer.
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    \23\ Creditors have noted that practical issues arise for 
consumers who have the right to rescind but will not be liable on 
the obligation. They state that in many cases a creditor may not 
learn of the existence of such consumers until after the early 
disclosures must be made under Sec.  226.19(a)(1)(i).
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The Board's Proposal
    Disclosure requirements for primary obligors. The Board proposes to 
amend staff comment 17(d)-2 to clarify that, in rescindable 
transactions involving multiple consumers, the early and final 
disclosures required by Sec.  226.19(a) need only be made to one 
consumer who will be a primary obligor. The purpose of the early and 
final disclosures is to provide consumers with transaction-specific 
information early enough to use while shopping for a mortgage. Before 
the MDIA was enacted, only consumers considering a purchase-money 
transaction received these early disclosures. If multiple obligors were 
involved in purchase-money transactions, one set of disclosures was 
deemed sufficient to facilitate consumer shopping under Sec.  
226.17(d). The MDIA's purpose is to extend the same early disclosure 
requirement for purchase-money transactions to non-purchase money 
transactions. The MDIA did not amend TILA Section 121(a), which 
provides that only one primary obligor need receive disclosures. Thus, 
nothing in the MDIA suggests that Congress intended to require that, 
for rescindable transactions, each obligor receive the early and final 
shopping disclosures. Accordingly, under proposed comment 17(d)-2, in a 
rescindable transaction involving multiple obligors only one primary 
obligor must receive the early and final disclosures required by Sec.  
226.19(a).
    Disclosure requirements for non-obligor consumers. The Board 
further proposes to amend comment 17(d)-2 to provide that non-obligor 
consumers who have a right to rescind need not be given the early and 
final disclosures required by Sec.  226.19(a). These non-obligors are 
consumers only for the purpose of rescission under Sec.  226.23. See 
Sec.  226.2(a)(11). The purpose of TILA Section 121(a)'s requirement 
that each consumer with the right to rescind receive disclosures is to 
ensure that each such consumer has the necessary information to decide 
whether to exercise that right. Non-obligor consumers do not need the 
early disclosures because they are not shopping for credit and 
comparing different loan offers. Thus, creditors must provide these 
consumers only with the material disclosures and a notice of the right 
to cancel before consummation of the transaction. See Sec.  226.17(b).
    Accordingly, the Board proposes to amend comment 17(d)-2 to clarify 
that the early and final disclosures required by Sec.  226.19(a) need 
not be made to each consumer who has the right to rescind. This rule 
applies in all cases where there are multiple consumers, whether 
primarily liable, secondarily liable, or not liable at all on the 
obligation. The Board believes that this interpretation is consistent 
with the purpose of the Sec.  226.19(a) disclosures. Thus, creditors 
may provide Sec.  226.19(a) disclosures solely to any one primary 
obligor in a rescindable transaction. Pursuant to Sec.  226.17(b), 
however, the creditor must make disclosures before consummation to each 
consumer who has the right to rescind under Sec.  226.23, regardless of 
whether the consumer is also an obligor. The proposed revisions to 
comment 17(d)-2 would contain this guidance. Proposed new comment 
19(a)-1 would contain a cross reference to comment 17(d)-2.
    Thus, proposed comment 17(d)-2 would address the delivery of Sec.  
226.19(a) disclosures to all possible kinds of consumers in a 
rescindable transaction. For example, assume a rescindable transaction 
in which two consumers will be primarily liable as co-borrowers, own 
the collateral property, and occupy it as their principal dwelling, a 
third consumer will act as a guarantor (and thus is secondarily but not 
primarily liable) but has no ownership interest in the property, and a 
fourth consumer will have no liability on the obligation but is 
entitled to rescind under Sec. Sec.  226.23(a)(1) and 226.2(a)(11) by 
virtue of having an ownership interest and residing in the home 
securing the transaction. The creditor satisfies Sec.  226.19(a) by 
delivering early and final disclosures to either of the first two 
consumers. Before consummation, however, the creditor also must deliver 
material disclosures and the notice of the right to rescind to the 
other of the first two consumers and to the fourth consumer (but need 
not deliver them to the third consumer), pursuant to Sec. Sec.  
226.17(b) and 226.23(b).
17(f) Early Disclosures
    Section 226.17(f) establishes general timing requirements for 
corrected disclosures required where disclosures required by Subpart C 
are given before consummation of a closed-end credit transaction and a 
subsequent event makes them inaccurate.\24\ The Board proposes to 
revise a cross-reference in comment 17(f)(2)-2 to reflect a proposed 
change to Sec.  226.22(a)(3), discussed in detail below.
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    \24\ Special disclosure timing requirements for transactions 
secured by a dwelling are set forth in Sec.  226.19(a).
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17(f)(2)
    Section 226.17(f)(2) provides that, if disclosures required by 
Subpart C of Regulation Z are given before consummation of a 
transaction, the creditor must disclose all changed terms before 
consummation if the APR at the time of consummation varies from the APR 
disclosed earlier by more than \1/8\ of 1 percentage point in a regular 
transaction or more than \1/4\ of 1 percentage point in an irregular 
transaction, as defined in Sec.  226.22(a). Comment 17(f)(2)-1 states 
that, for purposes of Sec.  226.17(f)(2), a transaction is deemed to be 
``irregular'' in accordance with footnote 46 to Sec.  226.22(a)(3). The 
Board proposes to revise comment 17(f)(2)-1 to reflect the

[[Page 58586]]

Board's proposal to remove and reserve footnote 46, which defines an 
irregular transaction, and to integrate its text into proposed Sec.  
226.22(a)(3), as discussed below.

226.18 Content of Disclosures

18(k) Prepayment
18(k)(1)
    The Board is proposing to amend comment 18(k)(1)-1 to clarify that, 
on a closed-end transaction, assessing interest for a period after the 
loan balance has been paid in full is a prepayment penalty, even if the 
charge results from the ``interest accrual amortization'' method used 
on the transaction, as discussed below. The 2008 HOEPA Final Rule 
defined a class of higher-priced mortgage loans that are subject to 
certain protections involving prepayment penalties. For example, on a 
higher-priced mortgage loan, a prepayment penalty may not apply after 
the second year following consummation or if the prepayment is effected 
through a refinancing by the creditor or its affiliate. See Sec.  
226.35(b)(2)(ii). These restrictions on prepayment penalties were 
effective for applications taken on or after October 1, 2009.
    Shortly before the 2008 HOEPA Final Rule took effect, the Board was 
asked whether the prepayment penalty provisions would apply to certain 
Federal Housing Administration (FHA) and other loans as of the October 
1, 2009 effective date. Specifically, the Board was informed that, when 
a consumer prepays an FHA loan in full, the consumer must pay interest 
through the end of the month in which prepayment is made. For example, 
if a consumer repays an FHA loan in full on April 20, the payoff amount 
the consumer is required to pay includes the principal balance 
outstanding as of April 1 and interest calculated on that amount for 
all 30 days in April, rather than for only the 20 days elapsed before 
the prepayment.
    Under the Board's existing guidance, a prepayment penalty includes 
``interest charges for any period after prepayment in full is made.'' 
See Comment 18(k)(1)-1.\25\ FHA staff indicated, however, that it has 
not considered the payment of interest for a period after a loan is 
prepaid in full as a prepayment penalty and has advised lenders that 
they need not disclose this practice as a prepayment penalty for FHA 
loans. FHA staff also explained that, under the FHA program, for 
purposes of allocating a consumer's payment to accrued interest and 
principal, all loan payments are treated as being made on the scheduled 
due date if the payment is made prior to the expiration of the payment 
grace period. For example, if the grace period expires on the 15th of 
the month, payments made on the 14th are not treated as late. This 
method of interest accounting is known as ``monthly interest accrual 
amortization.'' Under this arrangement, consumers are not penalized for 
making payments during the grace period because they are treated as 
made on the scheduled due date. At the same time, however, consumers 
that make payments before their scheduled due dates, such as on the 
20th of the preceding month, also are treated as having paid on the 
payment due date and do not receive any reduction in interest due.
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    \25\ In the Board's August 2009 Closed-End Proposal, the Board 
proposed to revise this comment to clarify that ``when the loan 
balance is prepaid in full, there is no balance to which the 
creditor may apply the interest rate.'' 74 FR 43232, 43257, Aug. 26, 
2009. The Board noted that no substantive change was intended.
---------------------------------------------------------------------------

    In response to the concerns about FHA loans and prepayment 
penalties, Board staff issued an interpretive letter to HUD Secretary 
Shaun Donovan on September 29, 2009.\26\ The letter noted that, 
although comment 18(k)(1)-1 provides guidance about prepayment 
penalties, it does not address the specific situation involving loans 
that use the monthly interest accrual amortization method. In light of 
FHA's guidance and the fact that the staff commentary does not 
expressly address this issue in the context of monthly interest accrual 
amortization, Board staff advised HUD that lenders who have followed 
this practice in the past have acted reasonably and have complied in 
good faith with the prepayment penalty provisions of Regulation Z, 
whether or not the additional interest was treated or disclosed as a 
prepayment penalty. The letter also noted that Board staff would review 
the staff commentary and consider whether it should be changed to 
address specifically this aspect of FHA and other lending programs, 
including whether the commentary should be changed to treat this 
practice as a prepayment penalty.
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    \26\ The letter was issued under TILA Section 130(f), which 
provides that creditors are not liable for any act or omission taken 
in good faith and that conforms with any interpretation of TILA or 
Regulation Z issued by a Board official or employee whom the Board 
has authorized to issue such interpretations. 15 U.S.C. 1640(f).
---------------------------------------------------------------------------

    Based on further review and analysis, the Board believes that the 
charging of interest for the remainder of the month in which prepayment 
in full is made should be treated as a prepayment penalty for TILA 
purposes, even when done pursuant to the monthly interest accrual 
amortization method. As the Board's proposed revision in the August 
2009 Closed-End Proposal reflects, there is no loan balance to which 
the creditor can apply the interest rate once the loan has been paid 
off. Thus, although the amount the consumer is charged upon prepayment 
is determined by reference to the interest rate, the charge is not 
accrued interest because there is no balance against which it could 
have accrued. Further, because the charge is triggered by prepayment in 
full, the Board believes that the charge is most appropriately treated 
as a prepayment penalty.
    Accordingly, proposed comment 18(k)(1)-1 would provide that 
prepayment penalties include charges determined by treating the loan 
balance as outstanding for a period after prepayment in full and 
applying the interest rate to such ``balance,'' even if the charge 
results from the interest accrual amortization method used on the 
transaction. The proposed comment would explain by example that, under 
monthly interest accrual amortization, if the amount of interest due on 
May 1 for the preceding month of April is $3,000, the creditor will 
require payment of $3,000 in interest whether the payment is made on 
April 20, on May 1, or on May 10. In this example, if the interest 
charged for the month of April upon prepayment in full on April 20 is 
$3,000, the charge constitutes a prepayment penalty of $1,000 because 
the amount of interest actually earned through April 20 is only $2,000.
    The Board also proposed certain other changes to comment 18(k)(1)-1 
as part of the August 2009 Closed-End Proposal for conforming, clarity, 
and organization purposes. For ease of reference, those other proposed 
changes are reflected in this proposal as well. The Board requests that 
interested parties limit the scope of their comments to the newly 
proposed changes to comment 18(k)(1)-1 discussed in the SUPPLEMENTARY 
INFORMATION to this proposed rule.
18(n) Insurance, Debt Cancellation, and Debt Suspension
    For the reasons discussed in the section-by-section analyses for 
Sec. Sec.  226.4(d)(1) and (d)(3) and 226.6 above, the Board proposes 
to revise Sec.  226.18(n) to require creditors to provide the 
disclosures and comply with the requirements of Sec. Sec.  
226.4(d)(1)(i) through (d)(1)(iii) and (d)(3)(i) through (d)(3)(iii) if 
the creditor offers optional credit insurance, debt cancellation 
coverage, or debt suspension coverage that is identified in Sec. Sec.  
226.4(b)(7) or (b)(10). For required

[[Page 58587]]

credit insurance, debt cancellation coverage, or debt suspension 
coverage, the Board proposes to require the creditor to provide the 
disclosures required in Sec. Sec.  226.4(d)(1)(i) and (d)(3)(i), as 
applicable, except for Sec. Sec.  226.4(d)(1)(i)(A), (B), (D)(5), (E) 
and (F).

Section 226.19 Early Disclosures and Adjustable-Rate Disclosures for 
Transactions Secured by Real Property or a Dwelling

19(a) Mortgage Transactions
    Under TILA Section 128(b)(2), as revised by the Mortgage Disclosure 
Improvement Act (MDIA), a creditor must provide good faith estimates of 
credit terms (early disclosures) to a consumer within three business 
days after receiving the consumer's application and at least seven 
business days before consummation of a closed-end mortgage transaction 
secured by a dwelling.\27\ 15 U.S.C. 1638(b)(2)(A). No person may 
impose a fee, other than a fee for obtaining the consumer's credit 
history, in connection with such transaction before the consumer 
receives the early disclosures. 15 U.S.C. 1638(b)(2)(E). The creditor 
must deliver or mail the early disclosures at least seven business days 
before consummation. 15 U.S.C. 1638(b)(2)(A). If the APR changes beyond 
a specified tolerance, the creditor must provide corrected disclosures, 
which the consumer must receive no later than three business days 
before consummation. 15 U.S.C. 1638(b)(2)(D). The consumer may waive a 
waiting period if the consumer determines that loan proceeds are needed 
during the waiting period to meet a bona fide personal financial 
emergency. 15 U.S.C. 1638(b)(2)(F). The Board implemented these 
requirements in Sec.  226.19(a).\28\
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    \27\ The MDIA is contained in Sections 2510 through 2503 of the 
Housing and Economic Recovery Act of 2008, enacted on July 30, 2008. 
Public Law 110-289, 122 Stat. 2654. The MDIA was amended by the 
Emergency Economic Stabilization Act of 2008, enacted on October 3, 
2008. Public Law No. 110-343, 122 Stat. 3765.
    \28\ Section 226.19(a) also implements the MDIA's timing 
requirements for timeshare transactions. The Board proposed 
revisions to Sec.  226.19(a) under the August 2009 Closed-End 
Proposal. For a detailed discussion of those proposed revisions, see 
74 FR 43232, 43258, Aug. 26, 2009. The Board is implementing 
provisions of the MDIA related to disclosures for adjustable-rate 
mortgages in a separate notice published in today's Federal 
Register.
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    The Board proposes to require that any fee paid by a consumer, 
other than a fee for obtaining the consumer's credit history, be 
refundable for three business days after the consumer receives the 
early disclosures. Specifically, if a consumer pays a fee after 
receiving the early disclosures, the creditor would have to refund such 
a fee upon the consumer's request made within three business days after 
a consumer receives the early disclosures. A similar requirement 
applies to HELOCs under Sec.  226.5b(h) (redesignated Sec.  226.5b(e) 
in the August 2009 HELOC Proposal). The Board also proposes several 
revisions to Sec.  226.19(a) and associated commentary to address 
issues regarding disclosure requirements and limitations on the 
imposition of fees before a consumer receives the early disclosures. 
Those proposed revisions include: (1) Clarifying that a counselor or 
counseling agency may charge a bona fide and reasonable fee for housing 
counseling required for a reverse mortgage insured by HUD (a HECM) or 
other housing or credit counseling required by applicable law before 
the consumer receives the early disclosures; (2) providing examples of 
circumstances that constitute imposing a fee; and (3) providing 
examples of when an overstated APR is accurate under the tolerances 
provided in Sec.  226.22.
    The Board has received questions whether, in a transaction 
involving more than one consumer, every consumer must receive the early 
disclosures and corrected disclosures required by Sec.  226.19(a).\29\ 
The Board proposes to clarify to which consumers creditors must provide 
the disclosures required by Sec.  226.19(a) in a proposed new comment 
17(d)-2, as discussed above in the section-by-section analysis of Sec.  
226.17(d). Proposed comment 19(a)-1 states that creditors should 
utilize comment 17(d)-2 to determine to which consumers a creditor must 
provide the required disclosures.
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    \29\ The August 2009 Closed-End Proposal requires creditors to 
provide final disclosures that a consumer must receive at least 
three business days before consummation and corrected disclosures as 
needed that trigger an additional waiting period, as discussed below 
in the section-by-section analysis of proposed commentary on Sec.  
226.19(a)(2)(iii).
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    Further, the Board proposes to provide additional guidance 
regarding when a consumer may waive a waiting period under Sec.  
226.19(a)(3), where the consumer determines that loan proceeds are 
needed to meet a bona fide personal financial emergency. Those proposed 
revisions are consistent with the proposed revisions to the provisions 
for waiver of a rescission period under Sec. Sec.  226.15(e) and 
226.23(e), discussed below in the section-by-section analysis of Sec.  
226.23(e).
    The Board also proposes to add headings to previously proposed 
Sec.  226.19(a)(4)(i) through (iii), regarding disclosure requirements 
for timeshare transactions, for clarity. Finally, the Board proposes to 
conform headings for commentary on proposed Sec.  226.19 with the 
headings for Sec.  226.19 previously proposed under the August 2009 
Closed-End Proposal. No substantive change is intended by the foregoing 
proposed technical amendments, which are not discussed again below.
    For ease of reference, this proposal republishes revisions to Sec.  
226.19(a) and associated commentary previously proposed under the 
August 2009 Closed-End Proposal. The Board requests that interested 
parties limit the scope of their comments to the newly proposed changes 
to Sec.  226.19(a) and associated commentary discussed in detail in the 
SUPPLEMENTARY INFORMATION to this proposed rule.
19(a)(1)
19(a)(1)(ii) Imposition of Fees
    TILA Section 128(b)(2)(E) provides that a consumer must receive the 
early disclosures ``before paying any fee to the creditor or other 
person in connection with the consumer's application for an extension 
of credit that is secured by the dwelling of a consumer.'' 15 U.S.C. 
1638(b)(2)(E). A creditor or other person may impose a bona fide and 
reasonable fee for obtaining the consumer's credit report before the 
consumer receives the early disclosures, however. Id. Consistent with 
TILA Section 128(b)(2)(E), Sec.  226.19(a)(1)(iii) provides that a 
creditor or other person may impose a fee for obtaining a consumer's 
credit history before the consumer receives the early disclosures. 
Thus, TILA Section 128(b)(2) and Sec.  226.19(a)(1)(ii) help ensure 
that consumers receive disclosures while they still are shopping for a 
loan and before they pay significant fees.
    Creditors and other persons have asked the Board what it means to 
``impose'' a fee. To address that question, the Board proposes to add 
commentary providing several examples of when a fee is imposed. 
Proposed comment 19(a)(1)(ii)-4 clarifies that a fee is imposed if a 
consumer is obligated to pay a fee or pays a fee, even if the fee is 
refundable. This is consistent with the Board's statement when adopting 
Sec.  226.19(a)(1)(ii) that the fee restriction applies to refundable 
fees because ``[l]imiting the fee restriction to nonrefundable fees * * 
* would likely undermine the intent of the rule.'' 74 FR 44522, 44592, 
July 30, 2008.
    Proposed comment 19(a)(1)(ii)-4 states, for example, that a fee is 
imposed if a creditor takes a consumer's check for payment, whether or 
not the check is post-dated and/or the creditor agrees

[[Page 58588]]

to wait until the consumer receives the disclosures required by Sec.  
226.19(a)(1)(ii) to deposit the check. A consumer who gives a creditor 
or other person a negotiable instrument such as a check for payment has 
paid a fee. Post-dating a check for a date after the consumer is 
expected to receive the early disclosures does not prevent the check 
from being deposited immediately. A consumer's account may be charged 
when a properly payable check is presented, even if the check is post-
dated, unless the consumer gives the bank notice of the post-dating and 
describes the check with reasonable certainty. See U.C.C. 4-401(c). 
Moreover, a consumer who provides to a consumer a check for payment of 
fees may feel financially committed to the transaction before he or she 
has had an opportunity to review the credit terms offered.
    For further example, proposed comment 19(a)(1)(ii)-4 states that a 
fee is imposed if a creditor uses a consumer's credit card or debit 
card to initiate payment or places a hold on the consumer's account. A 
hold for fees on a consumer's account may constrain a consumer from 
applying for a mortgage and receiving early disclosures from multiple 
creditors, contrary to the intent of Sec.  226.19(a)(1)(ii). A creditor 
may take account information, however, as long as the creditor does not 
initiate a charge to the consumer's account.
    Many applications for mortgage credit request that a consumer 
provide information identifying a consumer's accounts, including credit 
card accounts and checking accounts likely linked to a debit card. The 
Board believes that providing this information does not likely impede 
consumers from shopping among credit alternatives, provided the 
information is not used to initiate payment before the consumer 
receives the early disclosures. Proposed comment 19(a)(1)(ii)-4 
therefore states that a fee is not imposed if a creditor takes a 
number, code, or other information that identifies a consumer's account 
before a consumer receives the disclosures required by Sec.  
226.19(a)(1)(i), but does not use the information to initiate payment 
from or place a hold on the account until after the consumer receives 
the required disclosures.
    The Board also proposes to revise comment 19(a)(1)(ii)-1, regarding 
the timing of fees, to cross-reference the right to a refund of fees 
imposed within three days after a consumer receives the required 
disclosures under proposed Sec.  226.19(a)(1)(iv), discussed below in 
the section-by-section analysis of proposed Sec.  226.19(a)(1)(iv). In 
addition, the Board proposes to revise comment 19(a)(1)(ii)-2, 
regarding the types of fees that may not be imposed before a consumer 
receives the early disclosures, to discuss the treatment of fees for 
housing or credit counseling. Proposed comment 19(a)(1)(ii)-2 states 
that under proposed Sec.  226.19(a)(1)(v), if housing or credit 
counseling is required by applicable law, a bona fide and reasonable 
charge imposed by a counselor or counseling agency is not a ``fee'' for 
purposes of Sec.  226.19(a)(1)(ii).
    The Board requests comment on the proposed commentary illustrating 
circumstances where a fee is or is not imposed. In particular, the 
Board requests comment on whether the proposed commentary appropriately 
balances consumers' convenience and consumers' ability to shop among 
loan offers without feeling financially committed to a particular 
transaction.
Subsequent Creditors
    The Board has received questions regarding whether a creditor may 
accept a consumer's application made through a third party, such as a 
mortgage broker, where the consumer previously has paid fees in 
connection with two or more applications made through the third party 
that were denied or withdrawn. Comment 19(a)(1)(ii)-3.iii addresses the 
imposition of fees in a case where a third party submits a consumer's 
written application to a second creditor following a prior creditor's 
denial, or the consumer's withdrawal, of an application made to the 
prior creditor. Comment 19(a)(1)(ii)-3.iii states that, if a fee 
already has been assessed, the new creditor or third party complies 
with Sec.  226.19(a)(1)(ii) if it does not collect or impose any 
additional fee until the consumer receives an early mortgage loan 
disclosure from the new creditor. That is, the fact that the consumer 
previously has paid a fee in connection with a mortgage transaction 
does not foreclose a new creditor or third party from accepting or 
approving the consumer's application.
    The Board proposes to revise comment 19(a)(1)(ii)-3.iii to clarify 
that the comment applies not only to a second creditor, but to any 
subsequent creditor. The Board also proposes to clarify that a 
subsequent creditor may impose a fee for obtaining the consumer's 
credit history before the consumer receives the early disclosures. That 
proposed revision conforms comment 19(a)(1)(ii)-3.iii with comments 
19(a)(1)(ii)-3.i and -3.ii.
Reverse Mortgages Subject to Sec.  226.33
    The Board proposes to add a comment 19(a)(1)(ii)-5 to clarify that 
three provisions regarding imposing fees apply to reverse mortgages. 
Under current and proposed Sec.  226.19(1)(ii), fees generally may be 
imposed after a consumer receives the disclosures required by Sec.  
226.19(a)(1)(i). The Board is proposing, however, to prohibit the 
imposition of a nonrefundable fee for three business days after a 
consumer receives the early disclosures. This proposal is discussed in 
detail below in the section-by-section analysis of proposed Sec.  
226.19(a)(1)(iv). Moreover, under the proposal a creditor or any other 
person may not impose a nonrefundable fee for a reverse mortgage 
subject to Sec.  226.33 until after the third business day following 
the consumer's completion of counseling required under proposed Sec.  
226.40(b)(1), as discussed in detail below in the section-by-section 
analysis of proposed Sec.  226.40(b). Proposed comment 19(a)(1)(ii)-5 
clarifies that, for reverse mortgages subject to Sec. Sec.  226.19 and 
226.33, creditors and other persons must comply with the restriction on 
imposing a nonrefundable fee under Sec.  226.40(b)(2) in addition to 
the restrictions on imposing fees under Sec.  226.19(a)(1)(ii) and 
(iv). Proposed comment 19(a)(1)(ii)-5 also cross-references additional 
clarifying commentary under comment 40(b)(2)-4.i.
19(a)(1)(iii) Exception to Fee Restriction
    Currently, Sec.  226.19(a)(1)(iii) provides that a creditor or 
other person may impose a fee for obtaining a consumer's credit history 
before the consumer receives the disclosures required by Sec.  
226.19(a)(1)(i), provided the fee is bona fide and reasonable in 
amount. The Board now proposes to revise Sec.  226.19(a)(1)(iii) to 
clarify that a bona fide and reasonable fee for obtaining a consumer's 
credit history need not be refundable, notwithstanding the requirement 
under proposed Sec.  226.19(a)(1)(iv) that neither a creditor nor any 
other person may impose a nonrefundable fee for three business days 
after a consumer receives the early disclosures required by Sec.  
226.19(a)(1)(i), discussed below.
19(a)(1)(iv) Imposition of Nonrefundable Fees
Background
    Section 226.19(a)(1)(ii) provides that neither a creditor nor any 
other person may impose a fee (other than a fee for obtaining a 
consumer's credit history) in connection with a consumer's application 
for a closed-end, dwelling-secured transaction before the consumer 
receives the early disclosures, as discussed above in the section-by-
section analysis of the provision.

[[Page 58589]]

Section 226.19(a)(1)(ii) also provides that if the early disclosures 
are mailed to a consumer, the consumer is considered to have received 
them three business days after they are mailed. In adopting the fee 
imposition restriction, the Board stated that in most instances 
consumers will receive the early disclosures within three business days 
and that it is common industry practice to deliver mortgage disclosures 
by overnight courier. 74 FR 44522, 44593, July 30, 2008. The Board 
stated further that it had contemplated providing a timeframe longer 
than three business days for the presumption that a consumer has 
received the early disclosures but believed that the adopted time frame 
struck a proper balance between enabling consumers to review their 
credit terms before making a financial commitment and maintaining the 
efficiency of automated and streamlined loan processing. Id.
    Concerns have been raised, however, that under the current rule 
consumers will not necessarily have adequate time to consider the early 
disclosures before a fee is imposed. If a fee is imposed immediately 
after a consumer receives the early disclosures, the consumer may feel 
financially committed to a transaction he or she has not had adequate 
time to consider. The restriction on imposing fees under the MDIA and 
Regulation Z are intended to ensure that consumers are not discouraged 
from comparison shopping by fees, such as an appraisal fee or a rate-
lock fee, that cause them to feel financially committed to the 
transaction.
The Board's Proposal
    To address the concerns discussed above, the Board proposes to 
require that creditors and other persons refund any fees imposed within 
three business days after the consumer receives the early disclosures 
if the consumer decides not to proceed with the transaction. The Board 
makes this proposal pursuant to the Board's authority under TILA 
Section 105(a), which authorizes the Board to prescribe regulations to 
carry out TILA's purposes and to prevent circumvention or evasion of 
TILA's requirements. TILA's purposes include assuring a meaningful 
disclosure of credit terms to enable consumers more readily to compare 
available credit terms and to avoid the uninformed use of credit. 15 
U.S.C. 1601(a) and 1604(a). Allowing consumers time to consider the 
early disclosures without incurring fees would promote the informed use 
of credit, consistent with TILA's purposes. Moreover, the Board 
believes the proposed refund right is necessary to prevent the 
frustration of MDIA's purposes. A consumer who pays an application fee 
immediately upon receiving disclosures may feel committed to proceed on 
the terms stated in the early disclosures rather than seek better loan 
terms from the creditor or from other creditors.
    Proposed Sec.  227.19(a)(1)(iv) provides that neither a creditor 
nor any other person may impose a nonrefundable fee for three business 
days after a consumer receives the early disclosures required by Sec.  
226.19(a)(1)(i). (Proposed Sec.  226.19(a)(1)(iii) provides that a fee 
for obtaining a consumer's credit history need not be refundable under 
the proposal, however, as discussed above. This is because creditors 
generally need to review a consumer's credit history to provide 
meaningful early disclosures.) Proposed Sec.  226.19(a)(1)(iv) also 
provides that a creditor or other person must refund any fees paid 
within three business days after the consumer receives those 
disclosures upon the consumer's request. Proposed Sec.  
226.19(a)(1)(iv) provides, however, that the refund right applies only 
to a refund request the consumer makes within three business days after 
receiving the disclosures and only if the consumer decides not to enter 
into the transaction. That is, under the proposal, a consumer does not 
have a right to obtain a refund of fees if the consumer decides to 
enter into the transaction. Moreover, after three business days have 
elapsed after the consumer receives the early disclosures, a consumer 
has no right to a refund under proposed Sec.  226.19(a)(1)(iv) even if 
the consumer decides not to enter into the transaction.
    The Board recognizes that the proposal may result in some 
creditors' refraining from imposing any fees (other than a fee for 
obtaining the consumer's credit history) until four days after a 
consumer receives the early disclosures (or longer, if there are 
intervening non-business days), to avoid having to refund fees. Some 
creditors may not order an appraisal without collecting a fee from a 
consumer; in such cases, the proposal may result in some delay in the 
processing of a consumer's transaction. Further, some creditors may not 
agree to lock-in an interest rate until a consumer pays a rate-lock 
fee, and interest rates could increase during the refund period. Other 
creditors may anticipate that few consumers will request a refund and 
collect fees during the three-business-day refund period, however. 
Moreover, the Board believes that the proposed refund right for closed-
end mortgages is necessary to implement the purposes of the MDIA. A 
consumer who pays an application fee immediately upon receiving 
disclosures likely feels constrained to proceed on the terms stated in 
the early disclosures rather than seek better loan terms from the 
creditor or from other creditors. In addition, the Board notes that 
TILA Section 137(e) and Sec.  226.5b(h) provides a substantially 
similar refund right for HELOCs. 15 U.S.C. 1647(e).
    The Board requests comment on all aspects of the proposal to 
require that any fee imposed within three business days after the 
consumer receives the early disclosures for a closed-end loan secured 
by real property or a dwelling be refundable, discussed in more detail 
below. In particular, the Board requests comment on differences between 
HELOCs and closed-end mortgages with respect to the timing of loan 
processing and the types of fees imposed that may make it difficult for 
creditors to comply with the proposed refund requirement. The Board 
also requests comments on such differences that may cause the costs of 
the proposed refund requirement to outweigh its benefits to consumers.
    Business day. Section 226.2(a)(6) provides two definitions of 
``business day.'' The general definition provides that a ``business 
day'' is a day on which the creditor's offices are open to the public 
for carrying on substantially all of its business functions. See Sec.  
226.2(a)(6) and comment 2(a)(6)-1. For purposes of certain provisions, 
however, a more precise definition applies; in those cases ``business 
day'' means all calendar days except Sundays and specified Federal 
legal holidays. See Sec.  226.2(a)(6) and comment 2(a)(6)-2.
    For ease of compliance and for consistency with the refund right 
for HELOCs under Sec.  226.5b(h), the Board proposes to apply the more 
precise definition of ``business day'' for the proposed prohibition on 
imposing a nonrefundable fee for three business days after a consumer 
received the early disclosures required by Sec.  226.19(a)(1)(i). 
Proposed comment 19(a)(1)(iv)-1 states that, for purposes of Sec.  
226.19(a)(1)(iv), the term ``business day'' means all calendar days 
except Sundays and the legal public holidays referred to in Sec.  
226.2(a)(6). It is easier to determine when the refund period ends 
using the more precise definition. Using the more precise definition 
also would mean that the standard for determining when a waiting period 
ends is the same for all creditors.
    Using the more precise definition of ``business day'' would not 
account for differences in when creditors and other persons are open 
for business to receive a consumer's refund request, however

[[Page 58590]]

(although a creditor may provide for a refund request to be made when 
the creditor is not open for business, for example, through the 
creditor's Internet Web site). Saturday is a ``business day'' under the 
more precise definition, and some persons' offices are not open on 
Saturdays. Further, if a legal public holiday falls on a weekend, some 
creditors' offices may observe the holiday on a weekday, but the 
observed holiday is a ``business day'' under the more precise 
definition. See comment 2(a)(6)-2. The Board requests comment on 
whether general definition of a ``business day'' (a day on which a 
creditor's offices are open to the public for carrying on substantially 
all of its business functions) is more appropriate than the more 
precise definition of a ``business day'' (all calendar days except 
Sundays and legal public holidays) to use to determine the period 
during which a consumer may request a refund.
    Refund period. Proposed comment 19(a)(1)(iv)-2 states that a fee 
may be imposed after the consumer receives the disclosures required 
under Sec.  226.19(a)(1)(i) and before the expiration of three business 
days, but the fee must be refunded if, within three business days after 
receiving the required disclosures, the consumer decides not to enter 
into a loan agreement and requests a refund. This is consistent with 
comment 5b(h)-1, regarding collection of fees for home equity lines of 
credit. Proposed comment 19(a)(1)(iv)-2 also states that, under Sec.  
226.19(c), a notice of the right to receive a refund is provided in a 
publication entitled ``Key Questions to Ask about Your Mortgage'' 
proposed under the August 2009 Closed-End Proposal.\30\ As previously 
proposed, that publication must be provided at the time an application 
form is provided to the consumer or before the consumer pays a 
nonrefundable fee, whichever is earlier. See 74 FR 43232, 43329, Aug. 
26, 2009. The proposed notice of the refund right is discussed in 
detail below.
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    \30\ The proposed publication was published at 74 FR 43232, 
43425, Aug. 26, 2009.
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    Proposed comment 19(a)(1)(iv)-2 states further that a creditor or 
other person may, but need not, rely on the presumption under Sec.  
226.19(a)(1)(ii) that a consumer a receives the early disclosures three 
business days after they are mailed to the consumer or delivered to the 
consumer by means other than delivery in person. The proposed comment 
clarifies that if a creditor or other person relies on that presumption 
of receipt, a nonrefundable fee may not be imposed until after the end 
of the sixth business day following the day disclosures are mailed or 
delivered by means other than in person.
    Proposed comment 19(a)(1)(iv)-2 also provides examples that 
illustrate how to determine when the refund period ends. For example, 
proposed comment 19(a)(1)(iv)-2.i illustrates a case where a creditor 
receives a consumer's application on Monday, and the consumer receives 
the early disclosures in person on Tuesday and pays an application fee 
that same day. Proposed comment 19(a)(1)(iv)-2.i clarifies that the fee 
must be refundable through the end of Friday, the third business day 
after the consumer received the early disclosures. For further example, 
proposed comment 19(a)(1)(iv)-2.ii illustrates a case where a creditor 
receives a consumer's application on Monday, places the early 
disclosures in the mail on Tuesday, and relies on the presumption of 
receipt, such that the consumer is considered to receive the early 
disclosures on Friday, the third business day after the disclosures are 
mailed. Proposed comment 19(a)(1)(iv)-2.ii clarifies that if the 
consumer pays an appraisal fee the next Monday, the fee must be 
refundable through the end of Tuesday, the third business day after the 
consumer received the early disclosures and the sixth business day 
after the disclosures were mailed.
    Proposed comment 19(a)(1)(iv)-2.iii illustrates a case where a 
creditor receives a consumer's application on Monday and places the 
early disclosures in the mail on Wednesday, and the consumer receives 
the disclosures on Friday. Proposed comment 19(a)(1)(iv)-2.iii 
clarifies that if the consumer pays an application fee the following 
Wednesday, the fee need not be refundable because the refund period 
expired at the end of the previous day, Tuesday, the third business day 
after the consumer received the early disclosures.
    Reverse mortgages subject to Sec.  226.33. The Board proposes to 
add a comment 19(a)(1)(iv)-3 to clarify that two provisions regarding 
imposing nonrefundable fees apply to reverse mortgages. The Board is 
proposing to prohibit the imposition of a nonrefundable fee for three 
business days after a consumer receives the early disclosures, as 
discussed in detail below in the section-by-section analysis of 
proposed Sec.  226.19(a)(1)(iv). Moreover, the Board is proposing to 
prohibit the imposition of a nonrefundable fee for a reverse mortgage 
subject to Sec.  226.33 until after the third business day following 
the consumer's completion of counseling required under proposed Sec.  
226.40(b)(1), as discussed in detail below in the section-by-section 
analysis of proposed Sec.  226.40(b). Proposed comment 19(a)(1)(iv)-3 
clarifies that, for reverse mortgages subject to Sec. Sec.  226.19 and 
226.33, creditors and other persons must comply with the restriction on 
imposing a nonrefundable fee under Sec.  226.40(b)(2) in addition to 
the restriction on imposing a nonrefundable fee under Sec.  
226.19(a)(1)(iv). Proposed comment 19(a)(1)(iv)-3 also cross-references 
additional clarifying commentary under comment 40(b)(2)-4.ii.
    Notice of refund right. The Board proposes to include a notice of 
the refund right for closed-end mortgages in a proposed Board 
publication entitled ``Key Questions to Ask About Your Mortgage,'' 
which under proposed Sec.  226.19(c)(1) and (d) of the August 2009 
Closed-End Proposal is provided when an application form is provided to 
a consumer. See 74 FR 43232, 43329, Aug. 26, 2009. The proposed notice 
reads as follows: ``You cannot be charged a fee, other than a credit 
history fee, until you get disclosures. If you do not want the loan, 
you have a right to a fee refund, except for a credit history fee, for 
three days after you get the disclosures.'' The Board requests comment 
on the content of the proposed notice of the refund right under 
proposed Sec.  226.19(a)(iv). See Attachment B.
    The Board also solicits comment regarding the timing and placement 
of the refund right notice for closed-end mortgages. On the one hand, 
notifying consumers of a refund right in a ``Key Questions'' 
publication may help consumers to comparison shop with confidence, 
knowing that they need not incur fees before they decide to proceed 
with a transaction. On the other hand, if a consumer pays a fee within 
three business days after receiving the early disclosures, the 
consumers may not remember that the fee is refundable. The Board 
requests comment regarding whether notice of the refund right under 
proposed Sec.  226.19(iv) should be included in a ``Key Questions'' 
document provided when an application form is provided to the consumer, 
in transaction-specific disclosures provided soon after a creditor 
receives a consumer's application, in both documents, or in some other 
manner.
19(a)(1)(v) Counseling Fee
    The Board has received questions regarding whether Sec.  
226.19(a)(2)(ii) prohibits the imposition of a fee for housing 
counseling required before a creditor may process an application for a 
reverse mortgage that is insured by the

[[Page 58591]]

Federal Housing Administration of HUD (known as a Home Equity 
Conversion Mortgage or HECM), before the consumer receives the early 
disclosures. The MDIA's prohibition of imposing fees (other than a fee 
for obtaining a consumer's credit history) before a consumer receives 
the early disclosures is designed to help ensure that consumers receive 
the early disclosures without being financially committed to a 
transaction. That prohibition can facilitate comparison shopping of 
loans by consumers.
    The housing counseling requirement for HECMs is intended to ensure 
that consumers considering a reverse mortgage receive information about 
the costs, benefits, and features of HECMs. This information may assist 
consumers in deciding whether to apply for a reverse mortgage, or seek 
other financial options. The Board believes that the information 
consumers receive from HECM housing counseling improves their ability 
to make such a decision, and to comparison shop for loans, as does the 
MDIA's prohibition on imposing fees before a consumer receives the 
early disclosures. The Board also believes that a fee assessed for HECM 
housing counseling is not likely to constrain a consumer from applying 
for loans with multiple creditors. In contrast with fees that different 
creditors each may impose, such as an application fee, a fee for HECM 
housing counseling need be paid only once. A consumer's completion of 
HECM housing counseling satisfies the counseling requirement with 
respect to any HECM application the consumer makes within 180 days, as 
discussed below in the section-by-section analysis of proposed Sec.  
226.40(b)(3).
    For the foregoing reasons, the Board does not believe that Congress 
intended the MDIA's fees restriction to apply to fees for HECM housing 
counseling that are imposed before the consumer receives the early TILA 
disclosures. Proposed Sec.  226.19(a)(1)(v) provides that if housing or 
credit counseling is required by applicable law, a bona fide and 
reasonable charge imposed by a counselor or counseling agency for such 
counseling is not a ``fee'' for purposes of Sec.  226.19(a)(1)(ii). 
Proposed Sec.  226.19(a)(1)(v) and proposed comment 19(a)(1)(v)-1 state 
further that such a counseling fee need not be refundable under 
proposed Sec.  226.19(a)(1)(iv). Proposed comment 19(a)(1)(v)-1 also 
states that a HECM counseling fee is an example of a fee that may be 
imposed before a consumer receives the early disclosures.
    The example of a HECM counseling fee is illustrative and not 
exclusive. Credit or housing counseling may be required by applicable 
law for a closed-end mortgage transaction other than a HECM, to help 
consumers make informed credit decisions. Proposed Sec.  
226.19(a)(1)(ii) therefore applies broadly to a fee for credit or 
housing counseling required by applicable law. The Board solicits 
comment about whether there are other types of fees that should not be 
considered imposed in connection with a consumer's application for a 
mortgage transaction, for purposes of the fee imposition restriction 
under Sec.  226.19(a)(1)(ii).
19(a)(2)
19(a)(2)(i) Seven-Business-Day Waiting Period
    Section 226.19(a)(2)(i) provides that a creditor must deliver or 
place in the mail the early disclosures required by Sec.  
226.19(a)(1)(i) no later than the seventh business day before 
consummation of the transaction. Comment 19(a)(2)(i)-1 states that the 
seven-business-day waiting period begins when the creditor delivers the 
early disclosures or places them in the mail, not when the consumer 
receives or is deemed to have received the early disclosures. (By 
contrast, the three-business-day waiting period after a creditor makes 
corrected disclosures is determined based on when the consumer receives 
the corrected disclosures. Sec.  226.19(a)(2)(ii); comments 
19(a)(2)(ii)-1 and -3.) Comment 19(a)(2)(i)-1 states, for example, that 
if a creditor delivers the early disclosures to a consumer in person or 
places them in the mail on Monday, June 1, consummation may occur on or 
after Tuesday, June 9, the seventh business day following delivery or 
mailing of the early disclosures.
    The Board has received questions regarding how delivering or 
mailing the early disclosures on a Sunday or a legal public holiday 
affects when the seven-business-day waiting period ends. The fact that 
Sundays and legal public holidays are not business days for purposes of 
waiting periods under Sec.  226.19(a)(2) (see comment 19(a)(2)-1) does 
not affect when the seven-business-day waiting period ends, because the 
first day of the waiting period is the first business day after the 
early disclosures are delivered or placed in the mail. This is 
clarified by the example provided in comment 19(a)(2)(i)-1, discussed 
above. The Board proposes to revise comment 19(a)(2)(i)-1 for clarity. 
The Board proposes further to revise the example in comment 
19(a)(2)(i)-1 to be based on a case where the early disclosures are 
delivered or placed in the mail on Sunday, for additional clarity.
    Proposed comment 19(a)(2)(i)-1 states that the seven-business-day 
waiting period after a creditor mails or delivers the early disclosures 
is counted starting with ``the first business day after'' (rather than 
``when'') the creditor delivers the early disclosures or places them in 
the mail. Proposed comment 19(a)(2)(i)-1 states further, for example, 
that if a creditor delivers the early disclosures to a consumer in 
person or places them in the mail on Sunday, May 31, consummation may 
occur on or after Monday, June 8, the seventh business day following 
delivery or mailing of the early disclosures.
    The proposed revisions are technical amendments for clarity and no 
substantive change is intended. The examples provided in existing 
commentary regarding when a consumer is presumed to receive disclosures 
or when a waiting period ends illustrate that such period is counted 
starting with the day after disclosures are mailed (not the day 
disclosures are mailed). See, e.g., comments 19(a)(2)(ii)-1 and -4.
19(a)(2)(iii) Additional Three-Business-Day Waiting Period
    Section 226.19(a)(2)(ii) provides that a creditor must make 
corrected disclosures with all changed terms if the APR disclosed in 
the early disclosures required by Sec.  226.19(a)(1)(i) becomes 
inaccurate, as defined in Sec.  226.22. (Section 226.22 is discussed in 
detail below in connection with proposed revisions.) Under the August 
2009 Closed-End Proposal, the Board proposed to require creditors to 
provide a ``final'' TILA disclosure in all cases for closed-end 
mortgage transactions secured by a dwelling or real property; a 
consumer would have to receive those disclosures at least three 
business days before consummation.\31\ The Board also proposed two 
alternative requirements for corrected disclosures thereafter, each 
under proposed Sec.  226.19(a)(2)(iii). Under Alternative 1, a creditor 
must provide corrected disclosures if any disclosed term becomes 
inaccurate. Under Alternative 2, the creditor must provide corrected 
disclosures only if the disclosed APR becomes inaccurate under Sec.  
226.19(a)(2)(iv) or if a fixed-rate mortgage becomes an adjustable-rate 
mortgage.\32\ The Board proposes

[[Page 58592]]

revisions to commentary under both Alternative 1 and Alternative 2, 
discussed in detail below.
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    \31\ For a detailed discussion of the proposed requirement for 
final disclosures and alternative proposals for corrected disclosure 
requirements, see 74 FR 43232, 43258-43262, Aug. 26, 2009.
    \32\ Under proposed Sec.  226.19(a)(2)(iv), an APR disclosed 
under proposed Sec.  226.19(a)(2)(ii) or (iii) is considered 
accurate as provided by Sec.  226.22, except that in certain 
specified circumstances the APR is considered accurate if the APR 
decreases from the previously disclosed APR. See 74 FR at 43261, 
43326-43327.
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Alternative 1--Proposed Sec.  226.19(a)(2)(iii)
    Under Alternative 1, proposed comment 19(a)(2)(iii)-1 discusses 
whether or not an APR change requires a creditor to provide corrected 
disclosures, after providing final disclosures. The comment is intended 
to clarify that if the APR changes but the disclosed APR is accurate 
under the applicable tolerance, a creditor may provide corrected 
disclosures at consummation. The Board proposes to revise proposed 
comment 19(a)(2)(iii)-1 under Alternative 1 to clarify that the comment 
is limited to cases where only the APR changes. If a term other than 
the APR changes, the creditor must provide corrected disclosures that 
the consumer must receive at least three business days before 
consummation, even if the disclosed APR is accurate.
Alternative 2--Proposed Sec.  226.19(a)(2)(iii)
    Section 226.19(a)(2)(ii) provides that a creditor must make 
corrected disclosures with all changed terms if the APR disclosed in 
the early disclosures required by Sec.  226.19(a)(1)(i) becomes 
inaccurate, as defined in Sec.  226.22. The Board has clarified that 
corrected disclosures are not required as a result of APR changes if 
the disclosed APR is accurate under the tolerances in Sec.  226.22. 74 
FR 23289, 23293, May 19, 2009 (final rule implementing the MDIA). The 
Board also has explained that, under Sec.  226.22(a)(4), a disclosed 
APR is considered accurate and does not trigger corrected disclosures 
if it results from a disclosed finance charge that is greater than the 
finance charge required to be disclosed (i.e., the finance charge is 
overstated). 74 FR 43232, 43261, Aug. 26, 2009. Nevertheless, the Board 
continues to receive questions regarding the application of the special 
APR tolerances for mortgage transactions under Sec.  226.22(a)(4) and 
(5) to the requirement to provide corrected disclosures under Sec.  
226.19(a)(2)(ii).
    To address those questions, the Board proposes to revise certain 
examples in the commentary under Alternative 2 to reflect that all of 
the tolerances under Sec.  226.22, not only the tolerances under Sec.  
226.22(a)(2) and (3), apply in determining whether a disclosed APR is 
accurate.\33\ As proposed under the August 2009 Closed-End Proposal, 
comment 19(a)(2)(iii)-1 states that, if a disclosed APR changes so that 
it is not accurate under Sec.  226.19(a)(2)(iv) or an adjustable-rate 
feature is added, the creditor must make corrected disclosures of all 
changed terms so that the consumer receives them not later than the 
third business day before consummation. Proposed comment 19(a)(2)(iii)-
1 also contains an example that illustrates when consummation may occur 
in such case. The Board proposes to remove the example from comment 
19(a)(2)(iii)-1 and insert a cross-reference to a more detailed example 
in comment 19(a)(2)(iii)-4.
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    \33\ The proposed revision is not necessary in the commentary on 
Sec.  226.19(a)(2)(iii) under Alternative 1, because Alternative 1 
would require creditors to provide corrected disclosures if any 
disclosed terms become inaccurate. A change that affects the APR 
likely would affect other terms and trigger corrected disclosures 
whether or not the disclosed APR becomes inaccurate. Therefore, 
commentary that illustrates whether or not a creditor must provide 
corrected disclosures where the APR changes is not provided under 
Alternative 1.
---------------------------------------------------------------------------

    The Board also proposes to revise proposed comment 19(a)(2)(iii)-4 
to clarify that an APR disclosed for a regular transaction is 
considered accurate not only if the APR is accurate under the tolerance 
of \1/8\ of 1 percentage point under Sec.  226.22(a)(2), but also if 
the disclosed APR is accurate under the special tolerance for mortgage 
transactions set forth in Sec.  226.22(a)(4) or (a)(5) (and no other 
tolerance applies under proposed Sec.  226.19(a)(2)(iv)). Similarly, an 
APR disclosed for an irregular transaction is accurate not only if the 
APR is accurate under the tolerance of \1/4\ of 1 percentage point for 
an irregular transaction under Sec.  226.22(a)(3), but also if the 
disclosed APR is accurate under the special tolerance for mortgage 
transactions set forth in Sec.  226.22(a)(4) or (a)(5) (and no other 
tolerance applies under proposed Sec.  226.19(a)(2)(iv)).
    Under the August 2009 Closed-End Proposal, proposed comment 
19(a)(2)(iii)-2 states that, if corrected disclosures are required 
under proposed Sec.  226.19(a)(2)(iii), a creditor may provide a 
complete set of new disclosures or may redisclose only the changed 
terms. This is consistent with current comment 19(a)(2)(ii)-2.
    The Board proposes to revise proposed comment 19(a)(2)(iii)-2 under 
Alternative 2 to state that if a creditor does not provide a complete 
set of new disclosures, corrected disclosures must contain the changed 
terms and certain general disclosures required by previously proposed 
Sec.  226.38(f) and (g) (``no obligation,'' security interest, ``no 
refinance guarantee,'' and tax deductibility statements) and the 
identities of the creditor and loan originator.\34\ The Board believes 
that requiring the foregoing disclosures in corrected disclosures would 
provide important information to consumers and would impose minimal, if 
any, burdens on creditors.
---------------------------------------------------------------------------

    \34\ For a discussion of those proposed general disclosures, see 
74 FR 43232, 43309-43312, Aug. 26, 2009.
---------------------------------------------------------------------------

19(a)(3) Consumer's Waiver of Waiting Period Before Consummation
    TILA Section 128(b)(2)(E), added by the MDIA, provides that a 
consumer may waive or modify the waiting periods between when a 
creditor provides early disclosures or corrected disclosures and 
consummation of a closed-end, dwelling-secured transaction, if the 
consumer determines that the extension of credit is needed to meet a 
bona fide personal financial emergency.\35\ 15 U.S.C. 1638(b)(2). The 
waiver statement must bear the signature of ``all consumers entitled to 
receive the disclosures'' required by TILA Section 128(b)(2). Id. The 
Board implemented TILA Section 128(b)(2)(E) in Sec.  226.19(a)(3). 
Section 226.19(a)(3) provides that, to modify or waive a waiting period 
required by Sec.  226.19(a)(2), a consumer must give the creditor a 
dated, written statement that describes the emergency, specifically 
modifies or waives the waiting period, and bears the signature of all 
the consumers primarily liable on the legal obligation.\36\ Printed 
forms are prohibited.
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    \35\ Currently, if the APR stated in early disclosures changes 
beyond a specified tolerance, creditors must provide corrected 
disclosures that the consumer must receive at least three business 
days before consummation. Sec.  226.19(a)(2)(ii). Under the August 
2009 Closed-End Proposal, the Board proposed to revise Sec.  
226.19(a)(2)(ii) to require creditors, in all cases, to provide 
final disclosures that a consumer must receive at least three 
business days before consummation of a credit transaction secured by 
real property or a dwelling, as discussed above.
    \36\ A consumer need not waive a waiting period entirely and may 
modify--that is, shorten--a waiting period. References in this 
Supplementary Information and in commentary on Sec.  226.19(a)(3) to 
waiver of a waiting period also refer to modification of a waiting 
period.
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    The requirements for waiving a pre-consummation waiting period 
under Sec.  226.19(a)(3) are substantially similar to the requirements 
for waiving a pre-consummation waiting period under Sec.  
226.31(c)(1)(iii) and waiving the right to rescind under Sec. Sec.  
226.15(e) and 226.23(e). Over the years, creditors have asked the Board 
to clarify the procedures for waiver and provide additional examples of 
a bona fide personal financial emergency.

[[Page 58593]]

    For the reasons discussed in the section-by-section analysis of 
Sec.  226.23(e), the Board proposes to provide additional guidance 
regarding when a consumer may waive a waiting period. The proposed 
revisions clarify the procedure to be used for a waiver. The proposed 
revisions also provide new examples of a bona fide personal financial 
emergency, in addition to the current example of an imminent 
foreclosure sale. See comment 19(a)(3)-1. The Board proposes these new 
examples as non-exclusive illustrations of other bona fide personal 
financial emergencies that may justify a waiver of the right to 
rescind. The Board also proposes examples of circumstances that are not 
bona fide personal financial emergencies. The Board requests comment on 
all aspects of the proposed revisions to Sec.  226.19(a)(3).
Procedures
    Proposed Sec.  226.19(a)(3) and associated commentary clarify that 
a consumer may modify or waive a waiting period, after the consumer 
receives the notice required by Sec.  226.38, if each consumer 
primarily liable on the obligation signs and gives the creditor a 
dated, written statement that specifically modifies or waives the 
waiting period and describes the bona fide personal financial 
emergency. Currently, comment 19(a)(3)-1 clarifies that the bona fide 
personal financial emergency is one in which loan proceeds are needed 
before the waiting period ends. Proposed Sec.  226.19(a)(3) 
incorporates that provision into the regulation. Other proposed 
revisions to Sec.  226.19(a)(3) clarify that each consumer primarily 
liable on the obligation may sign a separate waiver statement; a 
proposed conforming amendment to comment 19(a)(3)-1 is discussed below. 
(Disclosure requirements for closed-end credit transactions that 
involve multiple consumers are discussed above in the section-by-
section analysis of proposed Sec.  226.17(d).)
    Currently, comment 19(a)(3)-1 states that a consumer may modify or 
waive the right to a waiting period required by Sec.  226.19(a)(2) only 
after ``the creditor makes'' the disclosures required by Sec.  226.18. 
(Under the August 2009 Closed-End Proposal, Sec.  228.38, rather than 
Sec.  226.18, sets forth the required content for mortgage disclosures. 
See 74 FR 43232, 43333, Aug. 26, 2009.) Both current and proposed Sec.  
226.19(a)(3) provide that a consumer must receive the required 
disclosures before waiving a waiting period. The Board therefore 
proposes to revise comment 19(a)(3)-1 to clarify that waiver is 
permitted only after ``the consumer receives'' the required 
disclosures. The Board proposes further to revise comment 19(a)(3)-1 to 
clarify that where multiple consumers are primarily liable on the legal 
obligation and must sign a waiver statement, the consumers may, but 
need not, sign the same waiver statement.
    The Board also proposes to move the discussion of circumstances 
that are a bona fide personal financial emergency in comment 19(a)(3)-1 
to a new comment 19(a)(3)-2, to conform the waiver commentary under 
Sec.  226.19(a)(3) with the waiver commentary under Sec. Sec.  
226.15(e) and 226.23(e). Proposed comment 19(a)(3)-2 is discussed 
below.
Bona Fide Personal Financial Emergency
    Proposed comment 19(a)(3)-2 provides clarification regarding bona 
fide personal financial emergencies. The proposed comment contains the 
current guidance under existing comment 19(a)(3)-1, that whether the 
conditions for a bona fide personal financial emergency are met is 
determined by the facts surrounding individual circumstances.
    Proposed comment 19(a)(3)-2 also states that a bona fide personal 
financial emergency typically, but not always, will arise in situations 
that involve imminent loss of or harm to a consumer's dwelling or 
imminent harm to the health or safety of a consumer. Proposed comment 
19(a)(3)-2 states further that a waiver is not effective if a 
consumer's waiver statement is inconsistent with facts known to the 
creditor. The comment is not intended to impose a duty to investigate 
consumer claims.
    In addition, proposed comment 19(a)(3)-2 states that creditors may 
rely on examples and other commentary provided in comment 23(e)-2 to 
determine whether circumstances are or are not a bona fide personal 
financial emergency. That commentary is discussed in detail below in 
the section-by-section analysis of Sec.  226.23(e).
19(b) Adjustable-Rate Loan Program Disclosures
    Section 226.19(b) currently requires special disclosure for closed-
end transactions secured by a consumer's principal dwelling with a term 
greater than one year for which the APR may increase after 
consummation. Section 226.19(b) requires creditors to provide, among 
other things, detailed disclosures about ARM programs (ARM program 
disclosures) if a consumer expresses an interest in an ARM. ARM program 
disclosures must disclose the index or formula used in making 
adjustments and a source of information about the index or formula, 
among other information. Sec.  226.19(b)(2)(ii). If interest rate 
changes are at the creditor's discretion, this fact must be disclosed, 
and if an index is internally defined, such as by a creditor's prime 
rate, the ARM program disclosures should either briefly describe that 
index or state that interest-rate changes are at the creditor's 
discretion. Comment 19(b)(2)(ii)-2.
    Under the August 2009 Closed-End Proposal, the Board proposed to 
revise Sec.  226.19(b) to change the content and format of ARM program 
disclosures required for ARMs defined in proposed Sec.  226.38(a)(3), 
with certain exclusions.\37\ With respect to an ARM's index, the Board 
proposed to require that ARM program disclosures state the index or 
formula used in making adjustments, a source of information about the 
index or formula, and an explanation of how the interest rate will be 
determined when adjusted, including an explanation of how the index is 
adjusted. See proposed Sec.  226.19(b)(1)(iii), 74 FR 43232, 43328, 
Aug. 26, 2009. The August 2009 Closed-End Proposal retained comment 
19(b)(2)(ii)-2, regarding interest rate changes based on an internally 
defined index, and proposed to redesignate that comment as comment 
19(b)(1)(iii)-2.
---------------------------------------------------------------------------

    \37\ For a discussion of the proposed revisions to the content 
and format of ARM program disclosures, see 74 FR 43232, 43262-43269, 
Aug. 26, 2009.
---------------------------------------------------------------------------

    As discussed in detail below, the Board requests comment on whether 
to require the use of an index that is outside a creditor's control and 
publicly available. The Board also proposes a minor conforming 
amendment to comment 19(b)-1 consistent with the Board's proposal, for 
reverse mortgages, to require creditors to provide disclosures specific 
to reverse mortgages rather than general disclosures for closed-end 
mortgages. That proposal is discussed below in the section-by-section 
analyses of proposed Sec.  226.19(e) and 226.33(b).
Index Within Creditor's Control
    TILA does not prohibit using an index within a creditor's control 
for purposes of a closed-end ARM. For open-end credit transactions, 
however, TILA restricts the use of such an index. TILA Sections 137(a) 
and 171(a) and (b) prohibit a creditor from using an index within its 
control, for purposes of a variable-rate HELOC or a credit card account 
under an open-end consumer credit plan that is not home-secured (credit 
card account). 15 U.S.C. 1647(a), 1666i-1(a), (b). TILA Section 137(a) 
provides that, for variable-rate HELOCs, the index or other rate of 
interest to

[[Page 58594]]

which changes in the APR are related must be ``based on an index or 
rate of interest which is publicly available and is not under the 
control of the creditor.'' 15 U.S.C. 1637(a). Section 226.5b(f)(1) 
implements TILA Section 137(a). TILA Section 171(a) provides that, for 
a credit card account, a card issuer may not increase any APR, rate, 
fee, or finance charge applicable to any outstanding balance, except as 
permitted under TILA Section 171(b). 15 U.S.C. 1666i-1(a). TILA Section 
171(b)(2) provides an exception for an increase in a variable APR in 
accordance with a credit card agreement that provides for changes in 
the rate according to the operation of an index that is not under the 
control of the creditor and is available to the general public. 15 
U.S.C. 1666i-1(b)(2). Section 226.55(b)(2) implements TILA Section 
171(b)(2).
    The Board believes that use of an index within a creditor's 
control, such as a creditor's own cost of funds, for closed-end 
mortgages has not been common in recent years but does occur. Although 
TILA does not prohibit using an index within a creditor's control, 
federally chartered banks and thrifts may be subject to rules that 
prohibit using such an index. OCC regulations generally require that an 
ARM index used by a national bank be ``readily available to, and 
verifiable by, the borrower and beyond the control of the bank.'' 12 
CFR 34.22(a). Similarly, OTS regulations generally provide that any 
index a Federal savings association uses for ARMs must be ``readily 
available and independently verifiable'' and must be ``a national or 
regional index.'' 12 CFR 560(d)(1). An exception applies if a national 
bank or Federal savings association notifies the OCC or the OTS, 
respectively, of its use of an index that does not meet the applicable 
standard and the OCC or OTS does not notify the institution that such 
use presents supervisory concerns or raises significant issues of law 
or policy. 12 CFR 34.22(b); 12 CFR 560.35(d)(3). If the OCC or the OTS 
notifies an institution of such concerns or issues, the institution may 
not use the index without prior written approval. Id.
    The Board solicits comment on whether Regulation Z should prohibit 
the use of an index under a creditor's control for a closed-end ARM and 
require the use of a publicly available index. What, if any, are the 
potential benefits to consumers of using an index within a creditor's 
control, such as a creditor's own cost of funds, for closed-end ARMs? 
What are the risks to consumers of using such an index? Are interest 
rates higher or more volatile when creditors base ARMs' interest rates 
on their own internal index rather than on an index not under their 
control and available to the general public? Is the use of an index 
within a creditor's control more common with certain types of creditors 
(for example, community banks), in certain regions of the country, or 
for certain types of closed-end ARMs and if so, why?
Reverse Mortgages
    Under the August 2009 Closed-End Proposal, the Board proposed to 
expand the coverage of Sec.  226.19(b). Currently, Sec.  226.19(b) 
applies to a closed-end credit transaction secured by the consumer's 
principal dwelling with a term greater than one year, if the APR may 
increase after consummation. Under the August 2009 Closed-End Proposal, 
Sec.  226.19(b) generally would apply to a closed-end credit 
transaction if the APR may increase and the transaction is secured by 
real property or a consumer's dwelling.\38\ See proposed Sec. Sec.  
226.19(b) and 226.38(a)(3), 74 FR 43232, 43327, 43333, Aug. 26, 2009.
---------------------------------------------------------------------------

    \38\ For a discussion of previously proposed exclusions from 
coverage by proposed Sec.  226.19(b), see proposed comment 19(b)-3, 
74 FR 43232, 43397, Aug. 26, 2009.
---------------------------------------------------------------------------

    Comment 19(b)-1 currently clarifies the coverage of Sec.  226.19(b) 
and discusses particular transaction types. Under the August 2009 
Closed-End Proposal, comment 19(b)-1 would be revised consistent with 
the proposed expansion of the coverage of Sec.  226.19(b). The Board 
now is proposing, however, to except reverse mortgages from the 
requirement to provide ARM program disclosures, as discussed below in 
the section-by-section analysis of proposed Sec. Sec.  226.19(e) and 
226.33(b). The Board therefore now proposes a conforming amendment to 
comment 19(b)-1 to state that Sec.  226.19(b) does not apply to reverse 
mortgages subject to Sec.  226.33(a). For ease of reference, this 
proposal republishes the previously proposed revisions to proposed 
comment 19(b)-1.\39\ The Board requests that interested parties limit 
the scope of their comments to the newly proposed change to comment 
19(b)-1.
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    \39\ No changes are proposed to previously proposed Sec.  
226.19(b) or to previously proposed commentary, other than the 
coverage commentary under proposed comment 19(b)-1. Therefore, only 
the revisions previously proposed to comment 19(b)-1 are 
republished.
---------------------------------------------------------------------------

19(e) Exception for Reverse Mortgages
    Section 226.19(b) currently requires creditors to provide detailed 
disclosures about adjustable-rate loan programs and a booklet entitled 
Consumer Handbook on Adjustable Rate Mortgages (CHARM booklet) if a 
consumer expresses an interest in ARMs. Section 226.19(b) applies to 
closed-end transactions secured by a consumer's principal dwelling with 
a term greater than one year. Under the August 2009 Closed-End 
Proposal, the Board proposed to revise the information required under 
Sec.  226.19(b) for ARM program disclosures and to remove the 
requirement to provide the CHARM booklet.\40\ The Board also proposed 
to add a new Sec.  226.19(c) requiring creditors to provide two 
proposed publications, ``Key Questions to Ask About Your Mortgage'' and 
``Fixed vs. Adjustable Rate Mortgages,'' whether or not a consumer 
expresses an interest in ARMs. Previously proposed Sec.  226.19(d) 
provides timing requirements for the disclosures required by Sec.  
226.19(c) and (d). For reverse mortgages, the Board is proposing to 
require creditors to provide a separate ``Key Questions about Reverse 
Mortgage Loans'' publication. The Board therefore proposes to except 
reverse mortgages from the requirements of Sec.  226.19(b) through (d).
---------------------------------------------------------------------------

    \40\ For a discussion of the proposed revisions to the content 
and format of ARM program disclosures, see 74 FR 43232, 43258-43262, 
Aug. 26, 2009.
---------------------------------------------------------------------------

Section 226.20 Subsequent Disclosure Requirements

20(a) Refinancings: Modifications to Terms by the Same Creditor
Background
    For closed-end credit transactions, existing Sec.  226.20(a) 
applies to ``refinancings'' undertaken by the original creditor or the 
current holder or servicer of the original obligation. Section 
226.20(a) provides that a refinancing by the original creditor or the 
current holder or servicer of the original obligation is a new 
transaction requiring the creditor to provide new TILA disclosures to 
the consumer. A refinancing by any other person is, in all cases, a new 
transaction under Regulation Z subject to a new set of disclosures, and 
is not governed by the provisions in Sec.  226.20(a). For all 
refinancings, the prohibitions in Sec.  226.35 apply if the new 
transaction is a higher-priced mortgage loan, as defined in Sec.  
226.35(a). See comments 20(a)-2, -5.
    Under Sec.  226.20(a), a refinancing is generally deemed to occur 
when an existing obligation is satisfied and replaced by a new 
obligation involving the same parties, ``based on the parties' contract 
and applicable law.'' See comment 20(a)-1. Any change to an agreement 
by the same parties that does not result in satisfaction and 
replacement of the existing obligation--

[[Page 58595]]

for example, a change in the loan's maturity date--does not require new 
disclosures under Sec.  226.20(a), with two exceptions: (1) An increase 
in a variable rate not previously disclosed; or (2) conversion from a 
fixed rate to a variable rate. See comment 20(a)-3. These two 
modifications to terms are always considered ``refinancings'' under 
Regulation Z, even if the existing obligation is not satisfied and 
replaced.
    On the other hand, the following modifications to terms are not 
treated as new transactions for purposes of Regulation Z, even if 
``satisfaction and replacement'' has occurred: (1) Single payment 
renewals with no changes in original terms; (2) APR reductions with a 
corresponding change in payment schedule; (3) judicial proceeding 
workouts; (4) workouts for delinquent or defaulting consumers, unless 
the APR increases or new money is advanced; or (5) renewal of optional 
insurance if disclosures were previously provided. See Sec.  
226.20(a)(1)-(5).
    The Board originally defined the term ``refinancing'' and 
established it as an event requiring new disclosures to address the 
practice of ``flipping,'' in which a loan involving pre-computed 
financed charges was prepaid and replaced with a new obligation between 
the same parties. See 34 FR 2009, Feb. 11, 1969. The Board believed 
that disclosures for these refinancings would arm consumers with 
information regarding the impact of ``flipping'' on their credit terms. 
Under the 1969 definition of ``refinancing,'' almost any post-
consummation modification to terms created a ``new credit transaction'' 
that required new TILA disclosures, with few clear exceptions. This 
standard proved complex and resulted in many requests for 
interpretation and guidance. In response, the Board issued several 
interpretive letters to clarify, for example, that judicial workouts 
were exempt, but not workouts for delinquent or defaulting consumers.
    In 1980, the Board re-examined the definition of refinancing in 
connection with implementing the TILA Simplification Act. The Board 
initially proposed a broad definition that depended largely on the 
mutual intent of both parties to the agreement. See 45 FR 29726, 29749, 
May 5, 1980. Many commenters, mostly from industry, asserted that the 
definition was too broad, vague, and difficult to apply. 45 FR 80648, 
80685, Dec. 5, 1980. The Board issued a second proposal in December 
1980, ultimately adopted in 1981, setting forth the current definition: 
``A refinancing occurs when an existing obligation that was subject to 
this subpart is satisfied and replaced by a new obligation undertaken 
by the same consumer.'' Sec.  226.20(a). The Board believed that this 
definition would provide a more precise standard that aligned with 
industry use of the term, and would cover modifications to terms that 
are similar to new credit transactions. 46 FR 20882, 20903, Apr. 7, 
1981.
Concerns With the Current Definition of ``Refinancing''
    Since 1981, creditors have frequently requested guidance on the 
types of modifications to an existing obligation that constitute a 
refinancing under existing Sec.  226.20(a). As discussed above, whether 
a refinancing occurs under Regulation Z depends on whether the existing 
obligation is satisfied and replaced under applicable State law. 
However, court decisions on satisfaction and replacement are 
inconsistent. State courts take a case-by-case approach to ascertain 
the parties' intent before deciding whether an existing note was 
satisfied and replaced by a new note (i.e., novation).\41\ Many cases 
focus on determining lien priorities and the equitable interests of 
sureties or guarantors, not on protecting the interests of 
consumers.\42\
---------------------------------------------------------------------------

    \41\ Compare Temores v. Overland Bond and Investment Corp., 1999 
U.S. Dist. LEXIS 11878 (N.D. Ill. 1999) (finding that a change in 
payment schedule resulted in ``satisfaction and replacement,'' and 
therefore, was a ``refinancing''), with Hanson v. Central Savings 
Bk., 2007 Mich. App. LEXIS 920 (Ct. App. MI 2007) (holding that a 
consolidation of several notes, one of which was not originally 
secured by the mortgage, was not a ``refinancing'' but a renewal).
    \42\ See Citizens & Southern Nat'l Bank v. Scheider, 228 S.E.2d 
611 (Ga. App. 1976) (involving the liability of a guarantor); see 
also Metro Hampton Co. v. Dietrich et al., 1999 Mich. App. LEXIS 
2274 (Ct. App. MI 1999) (involving the liabilities of guarantors).
---------------------------------------------------------------------------

    Reliance on State law to determine whether a refinancing occurs 
under Regulation Z has led to inconsistent application of TILA and 
Regulation Z and, in some cases, opportunities to circumvent disclosure 
requirements. Compliance and enforcement are also difficult, as 
creditors and examiners must monitor and interpret State case law. In 
some states, promissory notes routinely include a statement that the 
parties do not intend to extinguish (i.e., satisfy and replace) the 
existing obligation. As a result, transactions involving the same 
creditor are rarely considered refinancings in those states, even when 
the creditor makes significant modifications to the terms of the 
existing obligation. To avoid long-term interest rate risk, some 
creditors that hold loans in portfolio will structure mortgage 
transactions as short-term balloon loans, which they modify shortly 
before the balloon comes due on the note. The modification may include 
an increase in the consumer's interest rate, but may not be a 
refinancing under current Regulation Z. Some creditors may provide TILA 
disclosures in these circumstances, but they need not do so, and the 
protections in Sec.  226.35 for higher-priced mortgage loans do not 
apply. See 73 FR 44522, 44594, July 30, 2008.
    In addition, in certain states, a refinancing may be structured as 
a modification to avoid State taxes on the refinancing.\43\ The 
modifications to the consumer's existing obligation can be significant, 
and may even involve substitution of a new creditor for the existing 
creditor through assignment of the note before the modification occurs. 
Under some states' laws, however, satisfaction and replacement has not 
occurred. These arrangements may help the consumer avoid paying taxes 
associated with a refinancing in certain states, but consumers are not 
entitled to new TILA disclosures to help them fully understand the 
costs of the new transaction, and may not have a right to rescind under 
Sec.  226.23 or the protections in Sec.  226.35 if the modified loan is 
a higher-priced mortgage loan.
---------------------------------------------------------------------------

    \43\ For example, New York's mortgage recording tax rates are 
comparatively high. Consolidations, extensions, and modifications 
are typically used to allow consumers to avoid this tax; consumers 
thus pay taxes only to the extent the refinancing exceeds the amount 
of the original mortgage.
---------------------------------------------------------------------------

The Board's Proposal
    The Board is proposing a new standard for determining when new 
disclosures are required. Under the proposal, new disclosures would be 
required for mortgage transactions when the existing parties agree to 
modify certain key terms, such as the interest rate or loan amount. The 
proposal would replace the existing standard of ``satisfaction and 
replacement,'' which requires an assessment of whether the existing 
legal obligation is satisfied and replaced under applicable State law. 
Instead, under the proposal, when existing parties to a mortgage 
transaction agree to modify certain terms, the creditor would have to 
give the consumer a complete new set of TILA disclosures. At the same 
time, the proposal would expressly provide that changing certain other 
terms does not require new disclosures, even if the existing obligation 
is satisfied and replaced. For non-mortgage transactions, Regulation Z 
continues to rely upon satisfaction and replacement to determine 
whether a ``refinancing'' of the existing obligation between the same

[[Page 58596]]

parties is a new transaction that requires new disclosures.
    Specifically, proposed Sec.  226.20(a)(1)(i) provides that a new 
transaction results, and new disclosures are required, when the same 
creditor and same consumer modify an existing obligation by: (1) 
Increasing the loan amount; (2) imposing a fee on the consumer in 
connection with the agreement to modify an existing legal obligation, 
regardless of whether the fee is reflected in an agreement between the 
parties; (3) changing the loan term; (4) changing the interest rate; 
(5) increasing the periodic payment amount; (6) adding an adjustable-
rate feature or other risk factor identified in proposed Sec.  
226.38(d)(1)(iii) or 226.38(d)(2), such as a prepayment penalty or 
negative amortization; or (7) adding new collateral that is a dwelling 
or real property.
    Proposed Sec.  226.20(a)(1)(ii) provides three exceptions to the 
general definition of a new transaction: (1) Modifications that occur 
as part of a court proceeding; (2) modifications that occur in 
connection with the consumer's default or delinquency, unless the loan 
amount or interest rate is increased, or a fee is imposed on the 
consumer in connection with the modification; and (3) modifications 
that decrease the interest rate with no additional modifications to 
terms other than a decrease in the periodic payment amount, an 
extension of the loan term, or both, and where no fee is imposed on the 
consumer.
    Proposed Sec.  226.20(a)(1)(iii) defines the term ``same creditor'' 
for purposes of proposed Sec.  226.20(a)(1). These proposed provisions 
are explained in further detail below.
    Benefits of the proposal. The proposal is intended to bring 
uniformity to creditors' practices, to facilitate compliance, and to 
ensure that consumers receive disclosures in all cases in which the 
loan terms change significantly, risky features are added, or fees are 
imposed in connection with a modification. In addition, if the 
transaction is a higher-priced mortgage loan, the proposal ensures that 
the consumer will receive the protections in Sec.  226.35, including 
the requirement that the creditor assess the consumer's ability to 
repay the loan. Proposed Sec.  226.20(a)(1) is intended to ensure more 
consistent application of TILA and Regulation Z and to diminish 
possible circumvention of the disclosure requirements. Moreover, the 
proposal should facilitate compliance and enforcement because creditors 
and examiners would no longer need to monitor and apply State case law 
to each transaction to determine whether the transaction requires new 
disclosures.
    The Board believes that when the same parties to an existing 
closed-end mortgage transaction agree to modify key terms, the 
modification is the functional equivalent of a ``refinancing,'' and 
therefore, should be treated as a new credit transaction under TILA and 
Regulation Z. To further TILA's purpose of promoting the informed use 
of credit, this proposal requires that, in defined circumstances, 
consumers receive new TILA disclosures to help them decide whether to 
proceed with a modification or to shop and compare other available 
credit options.
    In particular, the proposed rule would ensure that consumers 
receive important information about modifications to key terms of their 
existing mortgage obligation, such as taking on new debt, a change in 
the interest rate, or the addition of a risky feature (e.g., a 
prepayment penalty), and the costs assessed by creditors to modify 
these terms. These modifications would also be highlighted in the 
revised TILA disclosures that the Board published for comment in August 
2009. See 74 FR 43232, Aug. 26, 2009. Thus, the revised disclosures 
assure a meaningful disclosure of credit terms to apprise consumers of 
the impact that modifications have on their existing credit terms and 
the costs of the transaction, and to enable them to compare the 
modified terms to other credit options.
    The Board believes that removing the standard of ``satisfaction and 
replacement'' to determine whether a modification results in a ``new 
credit transaction'' under TILA and Regulation Z will facilitate 
compliance and diminish creditors' ability to circumvent TILA and 
Regulation Z requirements. The proposed rule, however, would not limit 
states' ability to set their own standards for determining when 
recording taxes are required or for ordering lien priorities.
    Impact of proposal on existing mortgage market. The Board 
recognizes that proposed Sec.  226.20(a)(1) is comprehensive and would 
increase the number of transactions requiring new disclosures.\44\ Most 
changes in terms that are now only ``modifications'' would be new 
transactions. For example, the Board estimates in those states where 
refinancings are commonly structured as modifications or consolidations 
to avoid State mortgage recording taxes, such as New York and Texas, 
the number of transactions requiring new TILA disclosures could 
potentially double.\45\ The Board does not believe, however, that 
consumers located in these states would be unable to refinance their 
mortgages simply because creditors would be required to provide TILA 
disclosures under the proposal. The Board recognizes that requiring new 
TILA disclosures in these cases would increase costs to creditors, and 
that these costs would be passed on to consumers. However, outreach 
conducted by the Board for this proposal revealed that some large 
creditors in these states currently provide consumers with TILA 
disclosures, regardless of whether the transaction is classified as a 
``refinancing'' for purposes of Sec.  226.20(a). In this regard, the 
proposal appears to align with current industry practice. In addition, 
the Board emphasizes that the proposal is not intended to affect 
applicable State law as it relates to the note and mortgage, or other 
matters. For example, the proposal would not limit states' ability to 
impose standards for determining when recording taxes are required or 
the ordering of lien priorities.
---------------------------------------------------------------------------

    \44\ The Board estimates that the number of refinancings that 
occur annually with the same creditor, and which would be impacted 
by this proposal, represents approximately 26% of all loans made in 
the mortgage market. This figure was calculated by taking a sample 
of refinancing transactions that occurred between 2003 and 2008 from 
the database of one of the three national consumer reporting 
agencies, and identifying those transactions that used the same 
mortgage subscriber code.
    \45\ This figure was determined by comparing the share of 
reported refinancing activity (obtained from credit record data 
reported under HMDA for 2008) of counties located within New York 
and Texas to counties directly bordering those states. The number of 
refinancings reported in 2008 for New York was 95,434, and for 
Texas, 141,733. Under the proposal, the number of refinancings 
reported could increase up to 190,868 and 283,466, for New York and 
Texas, respectively.
---------------------------------------------------------------------------

    The Board also recognizes that some creditors might decline to make 
some modifications that are beneficial for consumers because of the 
burden of giving new TILA disclosures and the potential exposure to 
TILA remedies for errors, including rescission. The proposal seeks to 
address this issue by providing several clear exceptions. For example, 
agreements made in connection with consumers' delinquency or default on 
existing obligations do not require new disclosures, unless the loan 
amount or interest rate increases, or a fee is imposed on the consumer 
in connection with the agreement. This exception is intended to ensure 
that creditors are not discouraged from offering workouts to consumers 
at risk of losing their homes and who likely do not have other credit

[[Page 58597]]

options. In addition, the proposal provides exceptions for judicial 
proceeding workouts, and for decreases in the interest rate that lower 
the periodic payment amount or lengthen the loan term but do not 
involve an additional fee. The Board notes that the utility of some of 
these exceptions is limited by the requirement that the creditor not 
impose a fee on the consumer in connection with the agreement to modify 
the existing obligation. The Board is seeking comment on the scope of 
the fee restriction. See section-by-section analysis of proposed Sec.  
226.20(a)(1)(i)(B) discussing fees, and Sec.  226.20(a)(1)(ii), 
discussing exceptions.
    Moreover, under the proposal, some modifications to the terms of an 
existing legal obligation would not be new transactions under TILA and 
Regulation Z, even if State law treats the existing obligation as being 
satisfied and replaced. For example, a change in the payment schedule 
that permits the consumer to make bi-weekly rather than monthly 
payments would not require new TILA disclosures if no other 
modification identified under the proposed definition of new 
transaction occurred, even if applicable State law treats the 
modification as a new transaction.
    Certain informal arrangements by the same parties also remain 
outside the scope of the proposed definition of new transaction for 
mortgages. Generally, a change to the terms of the legal obligation 
between the parties requires new disclosures. See Sec.  226.17(c)(1) 
and corresponding commentary. The ``legal obligation'' is determined by 
applicable State law or other law, and is normally presumed to be 
contained in the note or contract that evidences the agreement. See 
comment 17(c)(1)-2. Thus, if an arrangement between the same parties 
does not rise to the level of a change to the terms of the legal 
obligation under applicable State law (i.e., a change as evidenced in 
the note or contract, or by separate agreement), then new disclosures 
would not be required under proposed Sec.  226.20(a)(1)(i). However, in 
all cases where a fee is imposed on the consumer in connection with the 
arrangement, a new transaction requiring new disclosures occurs under 
proposed Sec.  226.20(a)(1)(i), regardless of whether the fee is 
reflected in any agreement between the parties. See proposed Sec.  
226.20(a)(1)(i)(B) regarding fees. For example, new disclosures would 
not be required if a creditor informally permits the consumer to defer 
payments owed on an obligation from time to time, for instance to 
account for holiday seasons. Under the same example, however, if a 
creditor imposes a fee on the consumer in connection with the 
arrangement, a new transaction requiring new disclosures would result 
under proposed Sec.  226.20(a)(1)(i), regardless of whether the fee is 
reflected in any agreement between the parties.
    As discussed more fully below, the scope of proposed Sec.  
226.20(a)(1)(i) is comprehensive and would increase the number of 
modifications that would result in new transactions subject to the 
right of rescission. The Board solicits comment on whether the features 
identified under proposed Sec.  226.20(a)(1)(i)(A)-(G) that would 
trigger new disclosures, and other applicable requirements under TILA 
and Regulation Z, such as rescission, are appropriate, including 
comment on whether the scope of the rule should be narrower or broader.
    Authority. The Board is proposing to revise when modifications to 
terms of an existing legal obligation result in a new credit 
transaction that requires new TILA disclosures pursuant to its 
authority under TILA Section 105(a). 15 U.S.C. 1604(a). TILA Section 
105(a) authorizes the Board to prescribe regulations and make 
adjustments or exceptions necessary or proper to carry out TILA's 
purposes, which include informing consumers about their credit terms 
and helping them shop for credit, to prevent circumvention or evasion, 
or to facilitate compliance. TILA Section 102; 15 U.S.C. 1601(a), 
1604(a).
    Scope of proposed Sec.  226.20(a)(1). Proposed Sec.  226.20(a)(1) 
applies only to closed-end mortgage transactions secured by real 
property or dwellings, including vacant land and construction loans. 
Covering these transactions would be consistent with the Board's August 
2009 Closed-End Proposal to improve disclosure requirements and provide 
other substantive consumer protections for closed-end mortgages secured 
by real property or a dwelling. See 74 FR 43232, Aug. 26, 2009; 73 FR 
44522, July 30, 2008.
    The Board is not aware of concerns with the existing 
``refinancing'' definition as it relates to non-mortgage transactions. 
Thus, for closed-end non-mortgage transactions, current Sec.  226.20(a) 
would be redesignated as Sec.  226.20(a)(2) and would continue to 
provide that a ``refinancing'' is a new transaction that occurs upon 
``satisfaction and replacement,'' as discussed in further detail below. 
The Board will determine whether proposed Sec.  226.20(a)(1) should 
also extend to non-mortgage credit in the next phase of the Board's 
Regulation Z review.
    Definitions for proposed Sec.  226.20(a)(1). Existing Sec.  
226.20(a) provides that the ``same creditor'' is the original creditor, 
holder or servicer. See comment 20(a)-5. Proposed Sec.  
226.20(a)(1)(iii) defines ``same creditor'' as the current holder of 
the original obligation or the servicer acting on behalf of the current 
holder.
    Proposed section 226.20(a)(1) applies to creditors. Under TILA 
Section 103(f), a person is a ``creditor'' when it extends consumer 
credit and is the person to whom the debt is originally payable (i.e., 
the original creditor). 15 U.S.C. 1602(f); Sec.  226.2(a)(17). 
``Credit'' is defined as ``the right granted by a creditor to a debtor 
to defer payment of debt or to incur debt and defer its payment.'' TILA 
Section 103(e); 15 U.S.C. 1602(e); Sec.  226.2(a)(14). The Board 
believes that any person who makes significant changes to the terms of 
an existing legal obligation, such as the interest rate or the loan 
amount, engages in extending credit to the consumer by continuing the 
extension of debt on different terms and, therefore, is a ``creditor'' 
under TILA. Thus, pursuant to its authority under Section 105(a), the 
Board proposes under Sec.  226.20(a)(1) to treat the current holder or 
servicer as a creditor when it modifies key terms to the existing 
obligation, whether the current holder is the original creditor, an 
assignee or the servicer. 15 U.S.C. 1604(a). For a discussion of 
differences between this proposal and the Secure and Fair Enforcement 
for Mortgage Licensing Act (the SAFE Act),\46\ see ``Impact of Proposed 
Sec.  226.20(a)(1) on Other Rules,'' below.
---------------------------------------------------------------------------

    \46\ The SAFE Act is contained in Sections 1501 through 1517 of 
the Housing and Economic Recovery Act of 2008, Pub. L. 110-289 (July 
30, 2008), codified at 12 U.S.C. 5101-5116.
---------------------------------------------------------------------------

20(a)(1)(i)
Modifications to Terms--Mortgages
    Proposed Sec.  226.20(a)(1)(i) provides that, for an existing 
closed-end mortgage loan secured by real property or a dwelling subject 
to TILA and Regulation Z, a new transaction requiring new disclosures 
occurs when the same creditor and same consumer agree to modify the 
terms of an existing obligation by: (1) Increasing the loan amount; (2) 
imposing a fee on the consumer in connection with the modification of 
an existing legal obligation, regardless of whether the fee is 
reflected in any agreement between the parties; (3) changing the loan 
term; (4) changing the interest rate; (5) increasing the periodic 
payment amount; (6) adding an adjustable-rate feature or other risk 
factor identified in

[[Page 58598]]

proposed Sec.  226.38(d)(1)(iii) or 226.38(d)(2); or (7) adding new 
collateral that is a dwelling or real property. Each of these 
modifications to terms is discussed below.
    Proposed comment 20(a)(1)(i)-1 provides guidance about the scope of 
Sec.  226.20(a)(1). Proposed Sec.  226.20(a)(1) applies only to certain 
modifications to an existing legal obligation that are made by the same 
creditor (i.e., the current holder or the servicer acting on behalf of 
the current holder). This comment also clarifies that all other 
creditors are not subject to Sec.  226.20(a)(1), but must provide TILA 
disclosures when entering into an agreement to extend credit covered by 
TILA, and are subject to all other applicable provisions of TILA and 
Regulation Z.
    Proposed comment 20(a)(1)(i)-2 provides that when the same creditor 
and same consumer modify a term or add a condition that is not 
identified under proposed Sec.  226.20(a)(1)(i), such a modification is 
not a new transaction and therefore, new TILA disclosures are not 
required. Proposed comment 20(a)(1)(i)-2 provides as an example, a 
rescheduling of payments under an existing obligation from monthly to 
bi-weekly with no other modifications to the terms listed under Sec.  
226.20(a)(1)(i)(A)-(G).
    Proposed comment 20(a)(1)(i)-2 also provides that Sec.  
226.20(a)(1) applies only if the modification to terms rises to the 
level of a change to the terms of an existing legal obligation, as 
defined under applicable State law, unless a fee is imposed on the 
consumer. Generally, a change to the terms of the legal obligation 
between the parties requires new disclosures. See Sec.  226.17(c)(1) 
and corresponding commentary. The ``legal obligation'' is determined by 
applicable State law or other law, and is normally presumed to be 
contained in the note or contract that evidences the agreement. See 
comment 17(c)(1)-2. If the modification does not rise to the level of a 
change to the terms of the legal obligation under applicable State law, 
then new disclosures would not be required under proposed Sec.  
226.20(a)(1)(i), unless a fee is imposed. However, in all cases where a 
fee is imposed on the consumer in connection with the modification, a 
new transaction requiring new disclosures occurs, regardless of whether 
the fee is reflected in any agreement between the parties. See proposed 
Sec.  226.20(a)(1)(i)(B). Proposed comment 20(a)(1)(i)-2 provides 
several examples of informal arrangements that would not be new 
transactions under proposed Sec.  226.20(a)(1).
    Proposed comment 20(a)(1)(i)-3 clarifies that a new transaction 
requires the creditor to provide the consumer with a complete set of 
new disclosures and also to comply with other applicable provisions of 
Regulation Z, such as the protections in Sec.  226.35 for higher-priced 
mortgage loans and the notice of rescission in Sec.  226.23(b). 
Proposed comment 20(a)(1)(i)-3 provides several examples of when other 
applicable provisions of Regulation Z, such as the rescission notice 
requirements under proposed Sec.  226.23(b), may apply.
    For mortgage transactions subject to TILA and Regulation Z, 
applicable disclosures must be provided in accordance with specific 
timing requirements. For example, under proposed Sec.  226.19(a), 
creditors must mail or deliver an early disclosure of credit terms to 
the consumer within three business days after the creditor receives an 
application and at least seven business days before consummation, and 
before a fee is imposed on the consumer other than a fee for obtaining 
the consumer's credit history. Proposed comment 20(a)(1)(i)-4 provides 
guidance to creditors on when a written application is received for a 
new transaction for purposes of meeting the timing requirements for 
disclosures under TILA and Regulation Z. Proposed comment 20(a)(1)(i)-4 
cross references existing comment 19(a)(1)(i)-3 (due to technical 
revisions, now proposed comment 19(a)(1)(i)-2), which states that 
creditors may rely on RESPA and Regulation X in deciding when a 
``written application'' is received, regardless of whether the 
transaction is subject to RESPA.
    The Board is aware that consumers may not always formally apply for 
a modification of the terms of an existing obligation. In many cases, 
the creditor may have in its possession the information in the 
definition of ``application'' under RESPA and Regulation X (e.g., the 
consumer's name, monthly income, or property address). See 12 CFR 
3500.2(b). Therefore, proposed comment 20(a)(1)(i)-4 also provides that 
an application is deemed received in those instances where the creditor 
has the information necessary to constitute an ``application'' as 
defined under RESPA and Regulation X, whether the creditor requests the 
information from the consumer anew or uses information on file.
    Proposed comment 20(a)(1)(i)-5 clarifies that if, before the time 
period provided for the early disclosure requirement expires, the 
creditor decides it will not or cannot make the modification requested 
or the consumer withdraws the application, then the creditor need not 
make the early disclosure of credit terms required by Sec.  
226.19(a)(1)(i). This proposed comment also cross references ECOA and 
Regulation B regarding adverse action notice requirements, which may 
apply. See 12 CFR 202.9(a).
    Increase in the loan amount. Proposed Sec.  226.20(a)(1)(i)(A) 
provides that a new transaction occurs when the loan amount is 
increased. ``Loan amount'' is defined under proposed Sec.  226.38(a)(1) 
as ``the principal amount the consumer will borrow as reflected in the 
loan contract,'' and would be required to be disclosed on the revised 
mortgage disclosures published in the Board's August 2009 Closed-End 
Proposal. See 74 FR 43292, Aug. 26, 2009. An increase in the loan 
amount represents new debt secured by the consumer's real estate or 
dwelling. Thus, an increase in the loan amount presents risk to the 
consumer and merits new disclosures and the protections afforded by 
Regulation Z.
    Under proposed Sec.  226.20(a)(1)(i)(A), the new loan amount would 
include any cost of the transaction that is financed, but exclude 
amounts attributable to capitalization of arrearages and funds advanced 
for existing or newly established escrow accounts. Proposed comment 
20(a)(1)(i)(A)-1 clarifies that an increase in the loan amount occurs 
for purposes of Sec.  226.20(a)(1) when the new loan amount exceeds the 
unpaid principal balance plus any earned unpaid finance charge or 
earned unpaid non-finance charge (e.g., a late fee) on the existing 
obligation. Under the proposal, even if a fee is not part of the new 
loan amount, it would nevertheless result in a new transaction that 
requires new disclosures. For example, if a creditor imposes an 
application or modification fee on the consumer in connection with the 
agreement to modify terms of an existing obligation, and the consumer 
pays that fee directly in cash, a new transaction requiring new 
disclosures would occur. See proposed Sec.  226.20(a)(1)(i)(B) for 
further discussion of fees imposed on the consumer in connection with 
the agreement, resulting in a new transaction requiring new 
disclosures.
    Proposed comment 20(a)(1)(i)(A)-2 provides that an increase in the 
loan amount includes any costs of the transaction, such as points, 
attorney's fees, or title examination and insurance fees that are 
financed by the consumer, and provides an example of a transaction 
where the loan amount is increased because fees are paid from loan 
proceeds.

[[Page 58599]]

    Proposed comment 20(a)(1)(i)(A)-3 clarifies that amounts that are 
advanced to the consumer to fund either an existing escrow account, or 
a newly established escrow account, are not considered in determining 
whether an increase in loan amount has occurred under proposed Sec.  
226.20(a)(1). RESPA limits the amount creditors may collect for 
escrows, and therefore, it is unlikely that large advances will be 
financed into the loan amount to establish or fund an escrow account. 
See 24 CFR 3500.17(c)(1)-(9), (f), and (g). In addition, the Board 
believes that a creditor is unlikely to establish an escrow account 
without first notifying the consumer. Thus, the Board believes that any 
benefit of new TILA disclosures in these instances is outweighed by the 
burden imposed on creditors.
    The Board solicits comment on whether to provide that a de minimis 
increase in the loan amount owed on the existing legal obligation would 
not trigger a requirement to give new disclosures. If the Board chose 
to establish a de minimus increase, should the increase be stated in 
terms of a dollar amount, a percentage of the loan, or both? What 
increase in the loan amount should be considered de minimus?
    Fees imposed on the consumer. Proposed Sec.  226.20(a)(1)(i)(B) 
provides that a new transaction occurs when a creditor imposes a fee on 
the consumer in connection with a modification. The Board believes that 
including the imposition of fees as an action that results in a new 
transaction is appropriate to ensure that consumers receive important 
information about the terms and fees relating to the transaction. On 
the revised mortgage disclosures published in the Board's August 2009 
Closed-End Proposal, costs of the transaction would be disclosed as 
``total settlement charges,'' together with required statements 
regarding the amount of charges included in the loan amount. See 74 FR 
43292, Aug. 26, 2009. Thus, providing new TILA disclosures when 
consumers must pay a fee in connection with modifying a term of the 
existing obligation would ensure that consumers are aware of and review 
cost information associated with the modification. In this way, 
consumers would have a meaningful opportunity to shop and compare other 
available credit options.
    Proposed comment 20(a)(1)(i)(B)-1 clarifies that a fee imposed on 
the consumer in connection with a modification of an existing legal 
obligation need not be part of a contractual arrangement between the 
parties to result in a new transaction under Sec.  226.20(a)(1)(i)(B). 
For example, a creditor may impose an application fee on the consumer, 
but not reference that fee in the existing agreement or the agreement 
to modify the terms of an existing obligation. Under the proposal, 
imposing an application fee would result in a new transaction requiring 
new disclosures.
    Proposed comment 20(a)(1)(i)(B)-2 provides guidance that fees 
imposed on the consumer in connection with the agreement include any 
fee that the consumer pays out-of-pocket or from loan proceeds. 
Proposed comment 20(a)(1)(i)(B)-2 also provides examples of fees under 
Sec.  226.20(a)(1)(i)(B), such as points, underwriting fees, and new 
insurance premiums. The commentary further clarifies that charging 
insurance premiums to continue insurance coverage does not constitute 
imposing a fee on the consumer under proposed Sec.  226.20(a)(1)(i)(B). 
For example, where a creditor charges premiums for the continuation of 
insurance coverage, but does not increase the premiums for existing 
hazard insurance or require increased property insurance amounts, such 
costs are not considered fees imposed on the consumer in connection 
with the agreement. Proposed comment 20(a)(1)(i)(B)-3 states that 
creditors may rely on proposed comment 19(a)(1)(i)-2 to determine when 
an application is received for a new transaction subject to proposed 
Sec.  226.20(a)(1).
    The Board recognizes that including any fee imposed on the consumer 
in connection with the modification as an event triggering disclosures 
will likely result in a significant number of modifications being 
deemed ``new credit transactions'' under TILA. The Board solicits 
comment on the proposed scope of Sec.  226.20(a)(1)(i)(B) regarding 
fees. Specifically, the Board seeks comment on whether fees imposed on 
consumers in connection with a modification should include all costs of 
the transaction or, for example, only those fees that are retained by 
creditors or their affiliates. Should the rule further provide that 
Sec.  226.20(a)(1)(i)(B) does not cover those instances where only a de 
minimis fee is retained by the creditor? What fee amount should be 
considered de minimis? And, should a de minimis fee be stated in terms 
of a dollar amount, a percentage of the loan, or both?
    As discussed in greater detail below, the Board proposes several 
exceptions to the general definition of ``new transaction.'' For 
example, agreements entered into in connection with the consumer's 
delinquency or default on the existing obligation, or modifications 
that decrease the rate are generally not ``new transactions'' under the 
proposal. See proposed Sec.  226.20(a)(1)(ii)(B) and (C) discussing 
these exceptions. However, these exceptions are unavailable if a 
creditor imposes a fee on the consumer in connection with the agreement 
to modify the existing legal obligation. The Board is aware that when 
creditors modify existing obligations in these instances, reasonable 
fees may be necessary to underwrite and process the loan modification, 
and that requiring creditors to give a full set of new disclosures for 
imposing these fees may discourage creditors from offering beneficial 
arrangements to consumers. Thus, the Board solicits comment on whether 
an exception should be made for reasonable fees imposed in connection 
with these modifications. What types of fees, if any, are necessary for 
these modifications and thus should be permitted under these 
exceptions, and in what amounts? Are commenters aware of abuses 
concerning these types of fees, suggesting that they should not be 
permitted? Should the amount of any fee permitted under these 
exceptions be stated in terms of a dollar amount, a percentage of the 
loan, or both? The Board also seeks comment on whether adopting two 
separate approaches regarding fees unnecessarily complicates the 
regulatory scheme under TILA and Regulation Z, and whether creditors 
would take advantage of any exception provided for fees.
    Change in the loan term. Under proposed Sec.  226.20(a)(1)(i)(C), a 
new transaction occurs when the creditor modifies the loan term of the 
existing obligation. That is, a new transaction requiring new 
disclosures would occur where the maturity date of the new transaction 
will occur earlier or later than the maturity date of the existing 
legal obligation. The loan term is a key piece of information that 
consumers should be aware of when evaluating a loan offer, as shown by 
the Board's consumer testing, and would be disclosed on the revised 
mortgage disclosures published in the Board's August 2009 Closed-End 
Proposal. See 74 FR 43292, 43299 Aug. 26, 2009. Changing the 
amortization period of a loan can significantly impact the total 
interest that a consumer must pay over the life of the mortgage. Thus, 
the Board believes that consumers should receive new TILA disclosures 
to compare the total cost (expressed as the APR) associated with 
modifying the existing obligation over an extended or shortened period 
of time.
    Proposed comment 20(a)(1)(i)(C)-1 clarifies that a change in the 
loan term occurs when the maturity date of the

[[Page 58600]]

new transaction is earlier or later than the maturity date of the 
existing obligation, and provides an example of a change in the loan 
term that would result in a new transaction. Proposed comment 
20(a)(1)(i)(C)-1 also cross references proposed Sec.  226.38(a) for the 
meaning of ``loan term.''
    Change in the interest rate. Proposed Sec.  226.20(a)(1)(i)(D) 
provides that a new transaction occurs when the creditor changes the 
contractual interest rate of the existing obligation. The interest rate 
is one of the most important pieces of information provided to 
consumers, as shown by the Board's consumer testing, and would be 
required to be disclosed on the revised mortgage disclosures published 
in the Board's August 2009 Closed-End Proposal. See 74 FR 43239, 43299 
Aug. 26, 2009. A change in the interest rate may increase or decrease 
the cost of the loan and periodic payment obligation. In either case, 
the Board believes that consumers may wish to explore other credit 
alternatives before agreeing to a rate change, and therefore should 
receive TILA disclosures before agreeing to the change.
    Proposed comment 20(a)(1)(i)(D)-1 clarifies that, to determine 
whether an increase or decrease in rate occurs, the creditor should 
compare the interest rate of the new obligation (the fully-indexed rate 
for an ARM) to the interest rate for the existing obligation that is in 
effect within a reasonable period of time--for example, 30 calendar 
days. The comment also gives examples of when a change in rate does and 
does not occur. Proposed comment 20(a)(1)(i)(D)-2 clarifies that a rate 
change stemming from changes in the index, margin, or rate does not 
result in a new transaction under proposed Sec.  226.20(a)(1) if these 
changes were disclosed as part of the existing obligation, and provides 
an example. Proposed comment 20(a)(1)(i)(D)-2 clarifies further that if 
the rate feature was not previously disclosed, a modification to the 
rate would be a new transaction requiring new disclosures under 
proposed Sec.  226.20(a)(1)(i).
    Increase in the periodic payment amount. Proposed Sec.  
226.20(a)(1)(i)(E) provides that a new transaction occurs when the same 
creditor increases the periodic payment amount owed on an existing 
legal obligation. Consumer testing consistently showed that consumers 
shop for and evaluate a mortgage based on the monthly or periodic 
payment, as well as the interest rate. See 74 FR 43239, 43299, Aug. 26, 
2009. The monthly payment helps consumers to determine whether they can 
afford the loan, and, accordingly, must be highlighted on the proposed 
mortgage disclosures published in the Board's August 2009 Closed-End 
Proposal. In keeping with the Board's findings about the importance of 
the periodic payment amount to consumers, the Board believes that 
consumers should receive a new TILA disclosure before agreeing to an 
increase in their monthly or other periodic payment obligation.
    The Board solicits comment on whether consumers would benefit from 
having new TILA disclosures not only for increases in the periodic 
payment amount, but also for decreases in the payment amount 
obligation, when no other terms listed in Sec.  226.20(a)(1)(i)(A)-(G) 
are modified. In addition, the Board solicits comment on whether to 
allow for de minimis differences between the periodic payment amount of 
an existing obligation and a new transaction, so that new disclosures 
would not be required for nominal discrepancies between the periodic 
payment amounts owed. What situations would suggest that a de minimis 
threshold for differences in the periodic payment amount is needed? If 
the Board adopts a de minimis threshold for differences in the periodic 
payment amount owed, should the threshold be stated in terms of a 
dollar amount, a percentage of the pre-existing payment, or both? What 
differences in periodic payment amounts would be so nominal as to be de 
minimus?
    Proposed comment 20(a)(1)(i)(E)-1 clarifies that an increase in 
periodic payment amount based on a payment change previously disclosed 
on an existing legal obligation is not a new transaction under proposed 
Sec.  226.20(a)(1)(i), and provides an example. Proposed comment 
20(a)(1)(i)(E)-1 also clarifies that if the payment adjustment was not 
previously disclosed, any change that increases the periodic payment 
amount would be a new transaction requiring new disclosures under 
proposed Sec.  226.20(a)(1)(i).
    Proposed comment 20(a)(1)(i)(E)-2 clarifies that amounts that are 
advanced to the consumer to fund either an existing escrow account, or 
a newly established escrow account, are not considered in determining 
whether an increase in the payment amount has occurred under proposed 
Sec.  226.20(a)(1). For further discussion of the Board's rationale for 
this exception, see the section-by-section analysis to proposed Sec.  
226.20(a)(1)(A) (``Increase in the loan amount'') above, explaining 
proposed comment 20(a)(1)(i)(A)-3.
    Addition of a risk feature. Proposed Sec.  226.20(a)(1)(i)(F) 
provides that a new transaction occurs when an adjustable-rate feature 
one more of the risk features listed in Sec.  226.38(d)(1)(iii) or 
226.38(d)(2) is added to the existing obligation, or is otherwise part 
of the new transaction, as follows: (1) A prepayment penalty; (2) 
interest-only payments; (3) negative amortization; (4) a balloon 
payment; (5) a demand feature; (6) no documentation or low 
documentation; and (7) shared equity or shared appreciation. These 
features would be required to be disclosed to consumers under the 
Board's August 2009 Closed-End Proposal, based on the Board's consumer 
testing. See 74 FR 43304, 43335, Aug. 26, 2009. The Board believes that 
these features can change the fundamental nature of a loan transaction 
and may significantly increase the cost of the loan or risk to the 
consumer. For example, some of these terms pose a significant risk of 
payment shock, such as negative amortization; others, such as shared 
equity or shared appreciation, entitle creditors to the consumer's 
future equity. Consequently, the Board believes that when one or more 
of these features is added to an existing obligation, the consumer 
should receive new TILA disclosures and, if applicable, the right to 
rescind and the special protections in Sec.  226.35.
    Proposed comment 20(a)(1)(i)(F)-1 clarifies that changing the 
underlying index or formula upon which the interest rate calculation is 
based constitutes adding an adjustable-rate feature (unless the change 
was previously disclosed, see proposed Sec.  226.20(a)(1)(i)(D)) and, 
therefore, is a new transaction under proposed Sec.  
226.20(a)(1)(i)(F). Proposed comment 20(a)(1)(i)(F)-1 provides further 
guidance that a new transaction does not result where the original 
index or formula becomes unavailable and is substituted by an 
alternative index or formula with substantially similarly historical 
rate fluctuations, and that produces a rate similar to the rate that 
was in effect at the time the original index or formula became 
unavailable.
    Proposed comment 20(a)(1)(i)(F)-2 clarifies that if a creditor adds 
a feature listed under proposed Sec.  226.38(d)(1)(iii) or 
226.38(d)(2), such as a prepayment penalty, balloon payment, or 
negative amortization, a new transaction requiring new TILA disclosures 
occurs.
    Addition of new collateral. Proposed Sec.  226.20(a)(1)(i)(G) 
provides that adding real property or a dwelling as collateral to 
secure the existing obligation results in a new transaction requiring 
new disclosures. This approach ensures that consumers are notified of 
modifications to key credit terms of an existing

[[Page 58601]]

obligation when they pledge assets as significant as a dwelling or real 
estate.
20(a)(1)(ii)
Exceptions
    Currently, Sec.  226.20(a) provides that, for closed-end credit 
transactions, the following modifications to terms are not new 
transactions even if ``satisfaction and replacement'' occurs: (1) 
Single payment renewals with no changes in original terms; (2) APR 
reductions with a corresponding change in payment schedule; (3) 
judicial proceeding workouts; (4) workouts for delinquent or defaulting 
consumers, unless the APR increases or new money is advanced; and (5) 
renewal of optional insurance if disclosures were previously provided.
    The Board is proposing under Sec.  226.20(a)(1)(ii) to eliminate 
these provisions and to instead provide three exceptions to the general 
definition of a new transaction for closed-end mortgages. The three 
proposed exceptions are modifications that: (1) Occur as part of a 
court proceeding; (2) occur in connection with the consumer's default 
or delinquency, unless the loan amount or interest rate increases, or a 
fee is imposed on the consumer in connection with the agreement to 
modify the existing legal obligation; and (3) decrease the interest 
rate with no other modifications to the terms, except a decrease in the 
periodic payment amount, an extension of the loan term, or both, and no 
fee is imposed on the consumer. Each of these proposed exceptions is 
discussed below.
    Judicial workouts. The Board proposes under Sec.  
226.20(a)(1)(ii)(A) that modifications to terms agreed to as part of a 
court proceeding are not new transactions. This proposed exception is 
consistent with the existing exception from the definition of a 
``refinancing'' under Sec.  226.20(a)(3). Consumers entering into these 
arrangements typically are in bankruptcy and attempting to avoid 
foreclosure, and consequently have few credit options. These workouts 
occur with judicial oversight and benefit from safeguards associated 
with court proceedings. Thus, the Board believes that in those 
circumstances, the benefit to consumers of receiving new TILA 
disclosures is relatively small, and is outweighed by the burden to 
creditors of providing new disclosures. Proposed comment 
20(a)(1)(ii)(A)-1 is adopted without revision from existing comment 
20(a)(3).
    Workout agreements for consumers in delinquency or default. 
Existing Sec.  226.20(a)(4) provides an exception for workouts for 
consumers in delinquency or default unless the rate is increased or 
additional credit is advanced to the consumer (i.e., the new amount 
financed is greater than the unpaid balance plus earned finance charge 
and premiums for the continuation of certain insurance types). Under 
this existing exception, fees imposed on the consumer in connection 
with the agreement to modify an existing legal obligation, and which 
the consumer pays directly or finances from loan proceeds, are not 
considered to be additional credit advanced to the consumer.
    Similarly, proposed Sec.  226.20(a)(1)(ii)(B) provides that 
modifications to terms agreed to as part of a workout arrangement for 
consumers in delinquency or default are not new transactions, unless 
there is an increase in the loan amount or interest rate, or a fee is 
imposed on the consumer in connection with the agreement to modify the 
existing legal obligation. Consumers in delinquency or default are 
unlikely to have other credit options available to them. The Board 
believes that where creditors provide these consumers with certain 
changes to terms, such as a decrease in rate and payment, and the 
consumer does not take on new debt or pay any fee, the modification is 
beneficial. In these instances, the benefit to consumers of a TILA 
disclosure appears outweighed by the risk that creditors would be 
discouraged from extending beneficial modifications (in lieu of 
foreclosure) due to the burden of giving new TILA disclosures and the 
potential exposure to TILA remedies for errors, including rescission.
    Proposed Sec.  226.20(a)(1)(ii)(B) differs from the existing 
exception from the definition of a ``refinancing'' under Sec.  
226.20(a)(4) in two respects. First, the term ``loan amount,'' rather 
than the term ``amount financed,'' is used to determine whether the 
consumer is taking on new debt in connection with the modification. For 
further discussion of the loan amount, see proposed Sec.  
226.20(a)(1)(i)(A). Using the term ``loan amount'' simplifies 
determining whether new debt is involved, but does not create a 
substantive change in the exception.
    Second, the proposed exception under Sec.  226.20(a)(1)(ii)(B) is 
unavailable to creditors if any fee is imposed on the consumer in 
connection with the agreement to modify the existing legal obligation. 
Anecdotal evidence suggests that excessive or abusive fees may be 
imposed as part of loan modifications or other workouts offered to 
consumers in delinquency or default. The Board believes that, although 
consumers in delinquency or default may not have other credit options 
available to them, they should be aware of the costs incurred in 
modifying any term of the existing legal obligation. Providing new TILA 
disclosures in these instances will make these consumers aware of, and 
help them to verify, the changes being made to their existing 
obligation and the costs of the modification; this serves TILA's 
purpose of helping consumers ``avoid the uninformed use of credit.'' 15 
U.S.C. 1601(a).
    At the same time, the Board recognizes that charging some fees for 
underwriting or processing a modification may be necessary, and is 
concerned that requiring new disclosures whenever necessary and 
reasonable fees are charged could discourage creditors from offering 
workouts. As discussed above, the Board solicits comment on whether 
proposed Sec.  226.20(a)(1)(i)(B) should permit creditors to rely on 
the exceptions to the requirement to give new disclosures (such as 
where the consumer is in delinquency or default under proposed Sec.  
226.20(a)(1)(ii)(B)), even if they charge certain fees. Specifically, 
the Board solicits comment on whether there are any fees that creditors 
should be allowed to charge without triggering the requirement to give 
new disclosures. Should permitted fees, if any, include only those paid 
to third parties (who are not affiliates of the creditor), or should 
certain fees retained by the creditor or the creditor's affiliates be 
permitted without triggering the requirement to give new disclosures? 
Should the Regulation Z provide that creditors can retain a de minimis 
fee without triggering disclosure requirements? What amount would be 
appropriate for exclusion? Should the amount be stated in terms of a 
dollar amount, a percentage of the loan, or both?
    Proposed comment 20(a)(1)(ii)(B)-1 clarifies that this exception is 
available for all types of workout arrangements offered to consumers in 
delinquency or default, such as forbearance, repayment or loan 
modification agreements, unless the loan amount or the interest rate 
increase, or a fee is imposed on the consumer in connection with the 
agreement. Proposed comment 20(a)(1)(ii)(B)-1 also cross references 
Sec.  226.20(a)(1)(i)(B) and corresponding commentary regarding fees.
    The Board believes that most workout arrangements will involve fees 
imposed on the consumer and therefore, will be covered under the 
proposed definition of new transaction for mortgages and require new 
disclosures. However, depending on the scope of fees that may or may 
not be allowed under this

[[Page 58602]]

proposed exception, some workout agreements might not be covered and 
new disclosures would not be required. Outreach conducted in connection 
with this proposal revealed that lack of information regarding the 
terms of the modified loan offered to consumers is a concern with many 
of the loan modifications offered to delinquent or defaulting 
consumers. Although modification agreements contain the final credit 
terms, they are typically contracts in dense prose that use legal terms 
unfamiliar to most consumers. As a result, many consumers may not be 
able to determine readily how much is actually owed on the new loan, or 
may simply be unaware of their new monthly payment amount.
    Thus, the Board is concerned that the exception for modifications 
in circumstances of delinquency or default under proposed Sec.  
226.20(a)(1)(ii)(B) may result in some consumers not receiving new 
disclosures, and therefore not knowing how their terms are being 
modified. To address this concern, the Board could adopt a rule 
requiring servicers to provide a full TILA disclosure for every 
modification that occurs in cases of delinquency or default. At the 
same time, however, disclosures required under existing TILA and 
Regulation Z may not offer a clear comparison of existing terms to 
changed terms and, therefore, may not help consumers to understand the 
impact of the modification on their credit terms. Thus, the Board 
solicits comment on whether to require a new, streamlined disclosure 
that highlights changed terms in an effort to ensure that consumers are 
aware of changes made to their existing legal obligation. Although 
delinquent or defaulting consumers may not have an opportunity to shop 
for other credit options, a streamlined disclosure provided in these 
instances could enable a consumer to compare the changed terms that are 
offered to other alternatives, such as a short sale or a deed-in-lieu 
of foreclosure.
    The Board recognizes that servicers would incur significant 
operational and compliance costs to implement a requirement to give a 
new, streamlined disclosure for modifications in the context of 
delinquency or default. Thus, the Board solicits comment on whether 
modifying the proposed exception under Sec.  226.20(a)(1)(ii)(B) and 
requiring a new, streamlined disclosure that highlights changed terms 
would be preferable to eliminating the exception under proposed Sec.  
226.20(a)(1)(ii)(B) entirely. Eliminating the exception would require 
servicers to provide a full TILA disclosure in all cases. The Board 
seeks comment on the relative benefits and costs associated with either 
approach.
    In addition, the Board considered, but does not propose, extending 
the exception under proposed Sec.  226.20(a)(1)(ii)(B) to consumers who 
are in ``imminent'' delinquency or default. The Board is aware that 
current government-sponsored modification programs specifically address 
consumers in imminent ``danger'' of default or delinquency. However, 
the Board believes that these consumers are more likely to have other 
financing options than those who are already delinquent or in default. 
Thus, a new TILA disclosure would apprise these consumers of new credit 
terms and allow them to compare other available credit options, which 
serves TILA's purpose to inform consumers about their credit terms and 
help them shop for credit. TILA Section 102(a); 15 U.S.C. 1601(a). 
Moreover, the Board believes it would be difficult to define the term 
``imminent default'' with sufficient clarity to facilitate compliance 
and avoid undue litigation risk. Nevertheless, the Board seeks comment 
on whether providing an exception for consumers who are in ``imminent'' 
delinquency or default is appropriate, and whether such an exception 
could be crafted with sufficient clarity to facilitate compliance and 
avoid posing undue litigation risk to creditors.
    Decreases in the interest rate. Section 226.20(a)(2) currently 
provides an exception from the definition of a ``refinancing'' for 
closed-end credit transactions that decrease the APR with a 
corresponding decrease in the payment schedule (i.e., a decrease in the 
payment amount or number of payments), even if the change in term 
results in ``satisfaction and replacement'' of the existing legal 
obligation. See comments 20(a)(2)-1 and -2.
    Proposed Sec.  226.20(a)(1)(ii)(C) provides that, for mortgage 
credit, a decrease in the contractual interest rate is not a new 
transaction under the following circumstances: (1) No other 
modifications are made, except a decrease in the periodic payment 
amount, an extension of the loan term, or both, and (2) no fee is 
imposed on the consumer in connection with the modification. This 
proposed exception differs from the existing exception under Sec.  
226.20(a)(2) because it would: (1) Be available only for decreases in 
the contract note rate (not the APR), (2) allows for decreasing the 
periodic payment amount and extending (rather than shortening) the loan 
term, and (3) does not allow any fees to be imposed on the consumer as 
part of the change. For example, as indicated in proposed comment 
20(a)(1)(ii)(C)-1, the exception under proposed Sec.  
226.20(a)(1)(ii)(C) would be unavailable to creditors who decrease the 
interest rate, but then add a prepayment penalty and impose a fee on 
the consumer.
    Exempting creditors from the requirement to provide a complete new 
set of disclosures in situations specified in proposed Sec.  
226.20(a)(1)(ii)(C) is intended to facilitate changes that are helpful 
to consumers. The Board believes that where creditors decrease the 
consumer's note rate and the periodic payment amounts, the modification 
is beneficial to the consumer. The Board also believes that decreasing 
the note rate and increasing the loan term can benefit consumers at 
risk of default or delinquency, because creditors may give consumers 
the option to defer payments for a period of time and make them after 
the existing maturity date. By contrast, shortening the loan term may 
increase periodic payment amounts even if the interest rate is 
decreased, making it more difficult for consumers to meet payment 
obligations. Transactions such as deferrals, forbearance agreements, or 
renewals, are typically entered into in response to a request by a 
consumer who is suffering a temporary financial hardship, or for 
consumers with seasonal income. These transactions may simply extend 
the loan term or provide for new payment due dates. For these reasons, 
the Board believes that where the interest rate is increased, but no 
other modifications to the terms are made except for an extension of 
the loan term, the benefit of the TILA disclosure to the consumer is 
outweighed by the risk that creditors may be discouraged from extending 
these types of beneficial modifications. Again, however, in all cases 
where a fee is imposed on the consumer in connection with a 
modification, a new transaction requiring new disclosures occurs, 
regardless of whether the fee is reflected in any agreement between the 
parties. See proposed Sec.  226.20(a)(1)(i)(B) and (a)(1)(ii)(C).
    Outreach efforts revealed that, apart from loss mitigation, rate 
decreases are typically offered as part of customer retention programs 
in a falling rate environment, and that these programs may offer 
consumers some savings in closing costs, such as lower or no title 
insurance fees. However, in exchange for decreasing the interest rate, 
a consumer may have to pay other significant closing costs (such as 
application or origination fees) or accept new terms that pose risk, 
such as a prepayment penalty or shared-equity feature. The Board 
believes that in these

[[Page 58603]]

cases, consumers should be afforded a meaningful opportunity to review 
the credit terms offered and compare them to other available credit 
options. For example, where consumers must pay a fee to modify a key 
term of an existing mortgage, they should be aware of this cost, and be 
able to compare the cost of the modification and its terms to other 
available credit options. Thus, the Board believes that in these 
instances consumers should receive new TILA disclosures and be afforded 
the right to rescind and the special protections in Sec.  226.35, if 
applicable. As discussed in greater detail above, the Board solicits 
comment on whether some fees, such as third party fees, should be 
permitted without triggering disclosure requirements, or whether all 
fees paid by the consumer out of loan proceeds or out-of-pocket in 
connection with these transactions should trigger the requirement to 
provide new TILA disclosures.
    Proposed comment 20(a)(1)(ii)(C)-1 explains that a decrease in the 
interest rate occurs if the contractual interest rate (the fully-
indexed rate for an adjustable-rate mortgage) for the new loan at the 
time the new transaction is consummated is lower than the interest rate 
(the fully-indexed rate for an adjustable-rate mortgage) of the 
existing obligation in effect at the time of the modification. This 
comment clarifies that a decrease in the interest rate is not a new 
transaction under Sec.  226.20(a)(1) under the following circumstances: 
no additional fees or other changes are made to the existing legal 
obligation, except that the payment schedule may reflect lower periodic 
payments or a lengthened maturity date. The comment further clarifies 
that the exception in Sec.  226.20(a)(1)(ii)(C) does not apply if the 
maturity date is shortened, or if the payment amount or number of 
payments is increased beyond that remaining on the existing 
transaction.
    Proposed comment 20(a)(1)(ii)(C)-1 also provides examples of 
modifications to terms that would and would not result in a new 
transaction requiring new disclosures under proposed Sec.  
226.20(a)(1). First, if a creditor lowers the interest rate of an 
existing legal obligation and retains the existing loan term of 30 
years (resulting in lower monthly payments), no new disclosures are 
required. Second, if a creditor lowers the interest rate and also 
enters into a six-month payment forbearance arrangement with the 
consumer, with those six months of payments to be added to the end of 
the loan term (resulting in a longer loan term), no new disclosures are 
required. However, the comment indicates that a new transaction 
requiring new disclosures occurs if the creditor lowers the interest 
rate and shortens the loan term from, for example, 30 to 20 years. 
Moreover, a new transaction requiring new disclosures also occurs if 
the creditor lowers the interest rate but adds a new term, such as a 
prepayment penalty, or imposes a fee on the consumer.
    Finally, this comment cross references proposed comments 
20(a)(1)(i)(C)-1, 20(a)(1)(i)(D)-1, and 20(a)(1)(i)(B)-1 to provide 
further guidance to creditors regarding changes in the loan term, 
interest rate, and imposition of fees, respectively. To reflect the 
revisions related to rate changes discussed above, the Board proposes 
to eliminate the existing exception for APR reductions under existing 
Sec.  226.20(a)(2) and corresponding commentary as unnecessary for 
mortgage credit, but to retain this exception for non-mortgage credit, 
which was not subject to review as part of this proposal. See proposed 
Sec.  226.20(a)(2)(ii) and accompanying commentary.
    Renewals. The Board proposes to eliminate the current exception for 
renewals under existing Sec.  226.20(a)(1) for closed-end mortgages. 
This exception appears to have limited applicability to closed-end 
mortgages because it relates principally to single payment obligations. 
Typically, mortgages are not structured as single payment obligations 
or periodic payments of interest with no principal reduction. However, 
the Board seeks comment on whether there are any circumstances under 
which this exception may be appropriate for closed-end mortgages.
    Optional insurance. The Board proposes to eliminate the current 
exception for optional insurance under existing Sec.  226.20(a)(5) as 
unnecessary under the proposal. Proposed Sec.  226.20(a)(1)(i) does not 
treat as a new transaction the renewal of an expired insurance policy. 
The Board believes that renewing an expired insurance policy that was 
originally disclosed at consummation does not, by itself, create a new 
``credit'' transaction.
20(a)(2) and (3)
Refinancings by the Same Creditor--Non-mortgage Credit; Unearned 
Finance Charge
    As noted above, the Board is proposing to redefine when 
modifications to terms result in new transactions for closed-end credit 
secured by real property or a dwelling under new Sec.  226.20(a)(1). 
Accordingly, the Board is proposing to redesignate existing Sec.  
226.20(a) as new Sec.  226.20(a)(2), which would apply to transactions 
not secured by real property or a dwelling, and proposes conforming and 
technical revisions, as discussed more fully below.
    Current Sec.  226.20(a) would be redesignated as new Sec.  
226.20(a)(2) and would continue to provide that a ``refinancing'' 
occurs upon ``satisfaction and replacement'' for all non-mortgage 
closed-end credit transactions; no substantive change is intended. 
Existing Sec.  226.20(a)(2), regarding treatment of unearned finance 
charges that are not credited to the existing obligation, would be 
redesignated as new Sec.  226.20(a)(3) and revised to clarify that the 
rule applies to all closed-end credit transaction types, including 
mortgages; no other substantive change is intended.
    In technical revisions, comments 20(a)-1 through -3, which 
generally address the definition of ``satisfaction and replacement,'' 
would be redesignated as new comments 20(a)(2)-1 through -3 and revised 
to reflect their coverage of transactions not secured by real property 
or a dwelling; no substantive change is intended. Current comment 
20(a)(1)-4 addresses treatment of unearned finance charges not credited 
to the existing obligation and would be redesignated as new comment 
20(a)(3)-1, and revised to reflect that it also applies to the proposed 
definition of ``new transaction'' for closed-end credit secured by real 
property or a dwelling; no other substantive change is intended. 
Current comment 20(a)-5 addresses coverage of the general definition of 
refinancing and would be redesignated as comment 20(a)(2)-4; no 
substantive change is intended.
    Existing Sec.  226.20(a)(1)-(5) addresses exceptions to the general 
definition of refinancing under current Sec.  226.20(a). In technical 
revisions, Sec.  226.20(a)(1)-(5) would be redesignated as new Sec.  
226.20(a)(2)(i)-(v), and corresponding commentary 20(a)(1)-(5) would be 
redesignated as new comments 20(a)(2)(i)-(v); no substantive change is 
intended.

Impact of Proposed Sec.  226.20(a)(1) on Other Rules

    Interaction of proposed Sec.  226.20(a)(1) with the right of 
rescission. Currently, only certain refinancings are subject to the 
right of rescission. Specifically, refinancings that provide a ``new 
advance of money'' or add a security interest in the consumer's 
principal dwelling are subject to rescission, whether the same creditor 
(i.e., current holder) is the original creditor or an assignee. See 
comment 23(f)-4. Refinancings that occur with the original creditor or 
its successor are

[[Page 58604]]

exempt under Sec.  226.23(f)(2). As discussed more fully in the 
section-by-section analysis to Sec.  226.23(f)(2), the Board is 
proposing to narrow the exemption from rescission to only those 
refinancings that involve the original creditor who is also the current 
holder. Thus, the exemption from rescission under proposed Sec.  
226.23(f)(2) would be available only for refinancings with the original 
creditor that is also the current holder of the note, and which do not 
advance new money or add a security interest in the principal dwelling.
    Proposed Sec.  226.20(a)(1) would expand the number of closed-end 
mortgage transactions considered ``new transactions'' generally subject 
to rescission. Under existing Sec.  226.20(a), many modifications 
currently do not result in ``satisfaction and replacement'' under 
applicable State law, and therefore are currently not ``refinancings'' 
that trigger new disclosures and the right to rescind. Proposed Sec.  
226.20(a)(1)(i) for closed-end mortgage transactions, however, would 
result in many of these modifications being ``new transactions'' that 
require TILA disclosures. In addition, the scope of proposed Sec.  
226.20(a)(1)(i) would continue to apply to modifications with the same 
creditor, which would be defined as the current holder or servicer 
acting on behalf of the current holder. Thus, ``new transactions'' with 
the current holder, or servicer acting on behalf of the current holder, 
would be subject to the consumer's right to rescind under Sec.  226.23, 
unless exempt from the right of rescission under Sec.  226.23(f)(2), 
because they involve the original creditor who is also the current 
holder of the note and do not entail advancing new money or adding a 
security interest in the consumer's principal dwelling.
    To illustrate, assume that a consumer and the original creditor, 
who is also the current holder of the note, agree to modify an existing 
obligation secured by the consumer's principal dwelling to (a) Reduce 
the consumer's interest rate, (b) advance the consumer $10,000 to 
consolidate bills, and (c) finance $3,000 in closing costs. This 
transaction is a ``new transaction'' requiring TILA disclosures, even 
if the existing obligation is not satisfied and replaced, because the 
loan amount increased by $13,000. See proposed Sec.  
226.20(a)(1)(i)(A). In addition, the consumer may rescind the 
transaction to the extent of the new advance of money, i.e., the 
$10,000 advanced to the consumer to consolidate bills. In the same 
example, if the original creditor did not advance $10,000, the consumer 
would not have the right to rescind because there would be no ``new 
advance of money'' as defined in comment 23(f)-4. However, a new 
transaction would still occur, and new disclosures would be required, 
because the loan amount increased by $3,000. See proposed Sec.  
226.20(a)(1)(i)(B). As noted above, the Board solicits comment on 
whether the scope of modifications under proposed Sec.  226.20(a)(1) 
that would result in new transactions being subject to the right of 
rescission is appropriate, or should be narrower or broader.
    The Home Mortgage Disclosure Act (HMDA) and Regulation C. HMDA 
requires financial institutions to report data on ``refinancings.'' 
Under Regulation C, a refinancing occurs when the existing obligation 
is satisfied and replaced; the regulation and commentary do not refer 
to the parties' contract or applicable law.\47\ As a result, 
``refinancings'' must be reported, whereas mere renewals and 
modifications are not. Although consistency between the rules 
facilitates compliance, the Board notes that the purposes of TILA and 
HMDA differ. TILA is focused on promoting the informed use of credit 
through meaningful disclosure of credit terms. HMDA requires financial 
institutions to provide data to the public to aid in determining how 
well the institution is serving the housing needs of its community, and 
to aid in fair lending enforcement. However, some creditors have 
indicated that they currently treat transactions similarly for purposes 
of both Regulation Z and Regulation C, except for consolidation, 
extension, and modification agreements (CEMAs).\48\ The Board 
anticipates reviewing HMDA and Regulation C at a later date, and seeks 
comment on whether ``refinancing'' in Regulation C should be defined 
the same or differently than ``refinancing'' under proposed Sec.  
226.20(a)(1), and the operational and compliance difficulties raised by 
either approach.
---------------------------------------------------------------------------

    \47\ 12 CFR 203.2(k).
    \48\ In 2002, the Board clarified that CEMAs are not reportable 
under Regulation C. See 67 FR 7227, Feb. 15, 2002.
---------------------------------------------------------------------------

    The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 
(SAFE Act). Congress enacted the SAFE Act on July 30, 2008, to mandate 
a nationwide licensing and registration system for mortgage loan 
originators.\49\ On July 28, 2010, the Board, the Office of the 
Comptroller of the Currency, the Office of Thrift Supervision, the Farm 
Credit Administration, and the National Credit Union Administration 
(the agencies) issued joint final rules to implement the SAFE Act for 
individuals employed by agency-regulated institutions.\50\ The joint 
final rule requires individuals that meet the definition of ``mortgage 
loan originator'' to be licensed and registered in the Nationwide 
Mortgage Licensing System and Registry (``Registry'') in order to 
engage in residential mortgage transactions. For purposes of this 
licensing and registration requirement, ``mortgage loan originator'' is 
defined as an individual who takes a residential mortgage loan 
application and offers or negotiates terms of a residential mortgage 
loan for compensation or gain.\51\ In the preamble to the final rule, 
the agencies state that the term ``mortgage loan originator'' generally 
does not include individuals who engage in transactions such as 
modifications or assumptions that do not result in the extinguishment 
of the existing loan and the replacement by a new loan (i.e., 
satisfaction and replacement).\52\ Thus, under the SAFE Act and 
implementing regulations, individuals that modify the terms of existing 
loans, or allow existing loans to be assumed, are generally not 
considered ``mortgage loan originators,'' and do not need to obtain a 
license or register in the Registry.
---------------------------------------------------------------------------

    \49\ 12 U.S.C. 5101-5116.
    \50\ 75 FR 44656, July 28, 2010. Mortgage loan originators not 
employed by agency-regulated institutions must license and register 
in accordance with the regime provided by the applicable state 
within the timeframes prescribed under the SAFE Act.
    \51\ See, e.g., 24 CFR 208.102(b), implementing Sec.  1503(3) of 
the SAFE Act, 12 U.S.C. 5102(3), and App. A to Subpart I of Pt 208, 
which provides examples of mortgage loan originator activities.
    \52\ 75 FR at 44662-44663, July 28, 2010.
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    In contrast to the SAFE Act, under this proposal modifications to 
certain loan terms would be new transactions requiring new TILA 
disclosures even if not satisfied and replaced under applicable State 
law. See proposed Sec.  226.20(a)(1). The Board recognizes that 
proposed Sec.  226.20(a)(1) takes a different approach to modifications 
than the SAFE Act regulations, but notes that the purposes of the SAFE 
Act and TILA differ. The SAFE Act seeks to improve communications among 
regulators, increase accountability of loan originators, reduce fraud, 
and provide consumers with free and easily accessible information 
regarding the employment history of, and certain disciplinary and 
enforcement actions against, mortgage loan originators. TILA, on the 
other hand, focuses on promoting the informed use of credit through 
meaningful disclosure of credit terms in order to facilitate consumers' 
ability to compare available credit options. TILA Section 102(a); 15 
U.S.C. 1601(a). The

[[Page 58605]]

Board believes that proposed Sec.  226.20(a)(1) serves TILA's purposes. 
Thus, under the proposal, when the parties to an existing agreement 
modify key loan terms, TILA disclosures should be provided to the 
consumer. However, the Board seeks comment on any operational and 
compliance difficulties raised by the approach proposed under Sec.  
226.20(a)(1), specifically in relation to the definition of ``mortgage 
loan originator'' under the SAFE Act for purposes of its licensing and 
registration requirements.
20(c) Rate Adjustments
Background
    Currently, Sec.  226.20(c) requires that disclosures be provided 
when adjustments are made to the interest rate of an ARM subject to 
Sec.  226.19(b).\53\ The timing of the disclosures required by Sec.  
226.20(c) depends on whether or not a payment adjustment accompanies an 
interest rate adjustment. If a payment adjustment accompanies an 
interest rate adjustment, a creditor must deliver or mail disclosures 
regarding the interest rate and payment adjustment at least 25, but no 
more than 120, days before payment at a new level is due. If interest 
rate adjustments are made during the year without accompanying payment 
adjustments, a creditor must disclose the rates charged at least once 
during that year.
---------------------------------------------------------------------------

    \53\ Section 226.19(b) currently requires certain disclosures 
before application for closed-end loans secured by a consumer's 
principal dwelling with a term greater than one year, if the APR may 
increase after consummation. Under the August 2009 Closed-End 
Proposal, proposed Sec.  226.19(b) applies generally to an 
``adjustable-rate mortgage'' described in Sec.  226.38(a)(3), i.e., 
to a closed-end mortgage secured by real property or a dwelling if 
the APR may increase after consummation, with certain exclusions. 
See proposed Sec.  226.19(b) and comment 19(b)-3, 74 FR 43232, 
43327, 44333, Aug. 26, 2009. For a discussion of proposed Sec.  
226.19(b), see 74 FR at 43262-43268.
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    In the August 2009 Closed-End Proposal, the Board proposed to 
revise Sec.  226.20(c) to require that disclosures be provided between 
60 and 120 calendar days before payment at a new level is due, if a 
payment adjustment accompanies an interest rate adjustment.\54\ That 
proposal is designed to ensure that consumers have adequate advance 
notice of a payment change to seek to refinance or modify the loan if 
they cannot afford the adjusted payment. The Board also proposed to 
revise the content and format of disclosures required by Sec.  
226.20(c), based on consumer testing, to improve consumer understanding 
of pending interest and payment adjustments and provide additional 
important information.\55\ In addition, the Board proposed to replace 
the term ``variable-rate mortgage'' with the more commonly understood 
term ``adjustable-rate mortgage.''
---------------------------------------------------------------------------

    \54\ For a discussion of the proposed amendments to timing 
requirements for ARM adjustment notices under Sec.  226.20(c), see 
74 FR at 43269-43271.
    \55\ For a discussion of proposed revisions to the required 
content of disclosures under Sec.  226.20(a), see 74 FR at 43271-
43273.
---------------------------------------------------------------------------

    In this proposal, the Board proposes to clarify that proposed Sec.  
226.20(c) applies to ARM adjustments that are based on interest rate 
adjustments provided for under the terms of an existing legal 
obligation. On the other hand, disclosures are not required under 
proposed Sec.  226.20(c) when an ARM adjustment is not made pursuant to 
an existing loan agreement, such as if the parties modify the terms of 
their loan agreement. If the parties increase the interest rate or 
payment or a fee is imposed in connection with the modification, 
however, proposed Sec.  226.20(a) requires that new TILA disclosures be 
provided unless an exception applies. A detailed discussion of the 
proposed rules for modifications is set forth in the section-by-section 
analysis of proposed Sec.  226.20(a).
The Board's Proposal
    Proposed Sec.  226.20(c) provides that, if an adjustment is made to 
an ARM's interest rate, with or without a corresponding adjustment to 
the payment, disclosures must be provided to the consumer. Proposed 
Sec.  226.20(c) provides further that disclosures are required only for 
ARMs subject to Sec.  226.19(b) and to adjustments made based on the 
terms of the existing legal obligation between the parties.\56\ The 
Board believes that it is not necessary to provide disclosures under 
Sec.  226.20(c) when adjustments not provided for under the existing 
legal obligation are made, because more comprehensive disclosures are 
required under proposed Sec.  226.20(a) if a loan modification 
increases a loan's interest rate or payment or a fee is imposed in 
connection with a loan modification. In some circumstances, moreover, 
providing disclosures under Sec.  226.20(c) 60 to 120 days before 
payment at a new level is due may delay beneficial modifications to a 
consumer's loan terms or otherwise may be impractical.
---------------------------------------------------------------------------

    \56\ Under the August 2009 Closed-End Proposal, Sec.  226.19(b) 
does not apply to ``price level adjusted mortgages'' and certain 
other mortgages for which the APR may increase after consummation. 
Therefore, disclosures are not required for such mortgages under 
Sec.  226.20(c). For a discussion of such mortgages, see 74 FR 
43232, 43264, August 26, 2009.
---------------------------------------------------------------------------

    Proposed Sec.  226.20(c) clarifies that an interest rate adjustment 
for which disclosures are required under Sec.  226.20(c) includes an 
interest rate adjustment made when an ARM subject to Sec.  226.19(b) is 
converted to a fixed-rate transaction as provided under the existing 
legal obligation between the parties. The requirement to provide 
disclosures under Sec.  226.20(c) in connection with conversion of an 
ARM to a fixed-rate transaction is consistent with current comment 
20(c)-1, which the Board proposed to incorporate into Sec.  226.20(c) 
under the August 2009 Closed-End Proposal.
    Proposed comment 20(c)-1 clarifies that Sec.  226.20(c) applies 
only if adjustments are made under the terms of the existing legal 
obligation between the parties. Typically, these adjustments will be 
made based on a change in the value of the applicable index or on the 
application of a formula. Proposed comment 20(c)-1 also clarifies that 
if an interest rate adjustment is not based on the terms of the 
existing legal obligation, then no disclosures are required under Sec.  
226.20(c). Proposed comment 20(c)-1 clarifies that an interest rate 
adjustment not based on the terms of the existing legal obligation 
likely would require new TILA disclosures under proposed Sec.  
226.20(a). For example, proposed comment 20(c)-1 states that no 
disclosures are required under Sec.  226.20(c) when an adjustment to 
the interest rate is made pursuant to a modification of the legal 
obligation, but such modification may be a new transaction for which 
the creditor must provide new disclosures under Sec.  226.20(a). 
Proposed comment 20(c)-1 states further that disclosures must be given 
under Sec.  226.20(c) if that new transaction is an adjustable-rate 
mortgage subject to Sec.  226.20(c) and the interest rate is adjusted 
based on a change in the index value or on the application of a formula 
as provided in the modified legal obligation.
    Examples. Proposed comment 20(c)-1 provides examples to illustrate 
whether or not disclosures are required under Sec.  226.20(c) in 
different circumstances. Proposed comment 20(c)-1.i provides an example 
of a case where disclosures are required under Sec.  226.20(c), 
assuming that: (1) The loan agreement provides that the interest rate 
on an ARM subject to Sec.  226.19(b) will be determined by the 1-year 
LIBOR plus a margin of 2.75 percentage points; (2) the consumer's 
current interest rate is 6%, based on the index and margin; (3) the 
loan agreement provides that the interest rate will adjust annually and 
the corresponding payment will be due on October 1; and (4) when the 
adjusted interest rate is determined, the 1-year LIBOR for 2010 has 
increased by 2 percentage points over the 1-year LIBOR

[[Page 58606]]

for 2009. Under the terms of the loan agreement, therefore, the 
interest rate will be adjusted to 8%, and the corresponding payment 
will be due on October 1, 2010. Proposed comment 20(c)-1 provides that, 
in the case illustrated by the example, the notice required by Sec.  
226.20(c)(1) must be provided 60 to 120 days before the corresponding 
payment is due, that is, between June 3 and August 2, 2010.
    Proposed comment 20(c)-1.ii provides an example of a case where 
disclosures are not required under Sec.  226.20(c), assuming the same 
loan agreement and facts as in the previous example, except that on 
January 4, 2010 the parties modify the loan agreement and the consumer 
pays a $500 modification fee. Proposed comment 20(c)-1.ii provides the 
additional assumptions that: (1) The parties agree that the consumer's 
current interest rate will be reduced temporarily from 6% to 4.5%, with 
the corresponding payment due on February 1, 2010; (2) after 
modification, interest rate adjustments will continue to be made based 
on adjustments to the 1-year LIBOR and the corresponding payment will 
continue to be due on October 1; and (3) when the adjusted interest 
rate is determined, the 1-year LIBOR for 2010 has increased by 2 
percentage points over the 1-year LIBOR for 2009. Under those 
assumptions, the payment due on October 1, 2010 will be based on an 
interest rate of 8% applied because of an adjustment in the 1-year 
LIBOR. Proposed comment 20(c)-1.ii states that, in the example, notice 
need not be provided under Sec.  226.20(c)(1) 60 to 120 days before 
payment based on the interest rate of 4.5% is due on February 1, 
because that payment change is not made based on an interest rate 
adjustment provided for in the original loan agreement. Proposed 
comment 20(c)-1.ii clarifies that disclosures may be required before 
modification under Sec.  226.20(a), however. Moreover, proposed comment 
20(c)-1.ii states that notice must be provided under Sec.  226.20(c)(1) 
60 to 120 days before payment based on the interest rate of 8% is due 
on October 1 (that is, the creditor must send a notice between June 3 
and August 2, 2010); this is because the payment due on October 1 is 
made based on change in the value of the index applied as provided for 
in the modified loan agreement.
    Mortgages not covered. Currently, comment 20(c)-2 states that Sec.  
226.20(c) does not apply to ``shared-equity,'' ``shared-appreciation,'' 
or ``price level adjusted'' or similar mortgages. Under the August 2009 
Closed-End Proposal, the Board proposed to remove the references to 
``shared-equity'' and ``shared-appreciation'' mortgages. Under the 
August 2009 Closed-End Proposal, these types of mortgages are 
adjustable-rate mortgages only if the loan has an adjustable rate. For 
example, a fixed-rate mortgage with an equity sharing feature would not 
be an adjustable-rate mortgage under the August 2009 Closed-End 
Proposal. Thus, whether or not ARM adjustment notices are required for 
shared-equity or shared-appreciation mortgages depends on whether the 
mortgage has an adjustable rate or a fixed rate.\57\ The Board also 
proposed to add a cross-reference to comment 19(b)-3, which under the 
August 2009 Closed-End Proposal clarifies that ``price level adjusted'' 
mortgages and certain other mortgages whose APR may change after 
consummation are not ARMs subject to Sec.  226.19(b) and therefore are 
not subject to Sec.  226.20(c). The Board now proposes to revise 
comment 20(c)-2 further for clarity.
---------------------------------------------------------------------------

    \57\ See 74 FR 43232, 43270, 43405, Aug. 26, 2009.
---------------------------------------------------------------------------

    Conversion. Under the Board's August 2009 Closed-End Proposal, the 
Board proposed to incorporate into Sec.  226.20(c) commentary stating 
that the requirements of Sec.  226.20(c) apply when the interest rate 
and payment adjust following conversion of an ARM subject to Sec.  
226.19(b) to a fixed-rate mortgage.\58\ See comment 20(c)-1. The Board 
now proposes to clarify that Sec.  226.20(c) applies if such a 
conversion is made in accordance with an existing legal obligation. 
Proposed Sec.  226.20(c) states that interest rate adjustments made 
pursuant to the terms of an existing legal obligation include 
adjustments made upon conversion of an ARM to a fixed-rate transaction.
---------------------------------------------------------------------------

    \58\ See id. 43270, 43329-43330.
---------------------------------------------------------------------------

    Proposed comment 20(c)-4 clarifies that Sec.  226.20(c) applies to 
adjustments made when an adjustable-rate mortgage is converted to a 
fixed-rate mortgage if the existing legal obligation provides for such 
conversion and establishes a specific index and margin or formula to be 
used to determine the new interest rate. Proposed comment 20(c)-4 
clarifies further, however, that if the existing legal obligation does 
not provide for conversion or provides for conversion but does not 
state a specific index and margin or formula to be used to determine 
the new interest rate, or if the parties agree to change the index, 
margin, or formula to be used to determine the interest rate upon 
conversion, new disclosures instead may be required under Sec.  
226.20(a). Proposed comment 20(c)-4 clarifies further that disclosures 
may be required under Sec.  226.20(a) if a conversion fee is charged, 
whether or not the legal obligation establishes the amount of the 
conversion fee, or loan terms other than the interest rate and 
corresponding payment are modified. Finally, proposed comment 20(c)-4 
clarifies that if an open-end account is converted to a closed-end 
transaction subject to Sec.  226.19(b), disclosures need not be 
provided under Sec.  226.20(c) until adjustments subject to Sec.  
226.20(c) are made following conversion. This is consistent with 
current comment 20(c)-1.
    The Board solicits comment on whether, when an ARM is converted to 
a fixed-rate transaction as provided in an existing legal obligation, 
new TILA disclosures under Sec.  226.20(a) should be provided instead 
of notice of an interest rate adjustment under Sec.  226.20(c). Would 
new TILA disclosures be more useful to consumers who are deciding 
whether to convert an ARM into a fixed-rate mortgage on terms 
established under an existing legal obligation or to seek a fixed-rate 
mortgage from a different creditor? Would potential liability risk from 
providing new disclosures under Sec.  226.20(a), including rescission 
in rescindable transactions, discourage creditors from providing ARMs 
with a conversion option?
    Previously proposed revisions. The new revisions the Board now 
proposes address the applicability of Sec.  226.20(c) and would be made 
only to the introductory text of Sec.  226.20(c) and commentary 
associated with that introductory text. For ease of reference, however, 
this proposal republishes proposed revisions to disclosure timing, 
content, and format requirements under Sec.  226.20(c)(1) through (5) 
and associated commentary proposed previously under the August 2009 
Closed-End Proposal. The Board requests that interested parties limit 
the scope of their comments to the newly proposed changes to the 
introductory text of Sec.  226.20(c) and proposed comments 20(c)-1 
through -4.

Section 226.22 Determination of Annual Percentage Rate

22(a) Accuracy of Annual Percentage Rate
    The APR is a measure of the cost of credit, expressed as a yearly 
rate, that relates the amount and timing of value received by a 
consumer to the amount and timing of payments made. Sec.  226.22(a)(1). 
The APR must be determined in accordance with either the actuarial 
method or the United States Rule method. Id. TILA Section 107(c) 
provides a general tolerance for the accuracy of a disclosed APR. 15

[[Page 58607]]

U.S.C. 1606(c). TILA Section 106(f) provides special tolerances for 
disclosure of a finance charge ``and other disclosures affected by any 
finance charge'' for a closed-end credit transaction secured by real 
property or a dwelling. 15 U.S.C. 1605(f). TILA Section 107(c) is 
implemented in Sec.  226.22(a)(2) and (3), and TILA Section 106(f) is 
implemented in Sec.  226.22(a)(4) and (5).
    The Board proposes to add examples to illustrate whether the APR 
disclosed for a mortgage transaction is considered accurate where the 
finance charge and APR are overstated. The Board proposes further to 
clarify that the tolerances under proposed Sec.  226.23(a)(5)(ii), 
applicable for purposes of rescission, do not apply in determining 
under Sec.  226.19(a) whether a creditor must provide corrected 
disclosures that a consumer must receive at least three business days 
before consummation. (The Board proposes to redesignate Sec.  226.23(g) 
and (h)(2), as discussed below in the section-by-section analysis of 
proposed Sec.  226.23(a)(5)(ii).) The Board also proposes minor 
clarifying amendments to Sec.  226.22(a).
    In addition, the Board proposes several technical amendments to 
Sec.  226.22(a). The Board proposes to integrate footnote 45d into 
Sec.  226.22(a)(1) and to redesignate existing regulatory text. The 
Board proposes further to revise Sec.  226.22(a) to use the term 
``interest and settlement charges'' instead of ``finance charge'' when 
referring to a disclosed finance charge, consistent with a terminology 
change proposed for closed-end mortgage transactions in proposed Sec.  
226.38(e)(5)(ii) under the August 2009 Closed-End Proposal.\59\ Also, 
the Board proposes to add headings to Sec.  226.22(a)(1), (a)(2), and 
(a)(3), to clarify that those provisions address a closed-end credit 
transaction's actual APR, a tolerance for a regular transaction, and a 
tolerance for an irregular transaction, respectively. Finally, the 
Board proposes conforming amendments to headings for commentary on 
Sec.  226.22(a)(1), (a)(2), and (a)(3).
---------------------------------------------------------------------------

    \59\ For a discussion of the proposed terminology change, see 74 
FR 43232, 43307-43308, Aug. 26, 2009.
---------------------------------------------------------------------------

22(a)(1) Actual Annual Percentage Rate
    Section 226.22(a)(1) states that the APR for a closed-end credit 
transaction is a measure of the cost of credit, expressed as a yearly 
rate, that relates to the amount and timing of value received by the 
consumer to the amount and timing of payments made. Section 
226.22(a)(1) states further that the APR for a closed-end credit 
transaction is to be determined in accordance with the actuarial method 
or the United States Rule method. Footnote 45d to Sec.  226.22(a)(1) 
states that an error in disclosure of an APR or finance charge shall 
not, in itself, be considered a violation of this regulation if: (1) 
The error resulted from a corresponding error in a calculation tool 
used in good faith by the creditor; and (2) upon discovery of the 
error, the creditor promptly discontinues use of that calculation tool 
for disclosure purposes and notifies the Board in writing of the error 
in the calculation tool. The Board has stated that footnote 45d 
protects creditors from administrative enforcement, including 
restitution, for errors in a calculation tool used in good faith. See 
48 FR 14883, Apr. 3, 1983. (TILA Section 130(c) protects creditors from 
civil liability for violations resulting from such errors. 15 U.S.C. 
1640(c).)
    The Board proposes to integrate the text of footnote 45d into Sec.  
226.22(a) and to remove the footnote. First, the Board proposes to 
redesignate the existing text of Sec.  226.22(a)(1) as proposed Sec.  
226.22(a)(1)(i). The Board also proposes to redesignate comment 
22(a)(1)-2 as comment 22(a)(1)(i)-2 and revise the comment to clarify 
that a previously proposed requirement that disclosures for closed-end 
mortgage transactions use the term ``interest and settlement charges'' 
in place of the term ``finance charge,'' discussed above, does not 
affect how an APR is calculated using the actuarial method.
    Next, the Board proposes to add a new Sec.  226.22(a)(1)(ii) that 
contains the text of footnote 45d. However, proposed Sec.  
226.22(a)(1)(ii) omits a statement in footnote 45d that could be read 
to mean that an error in the disclosure of the APR or finance charge 
resulting from an error in a calculation tool used in good faith (but 
no longer used) is a violation of Regulation Z if a creditor does not 
notify the Board in writing of the error in the calculation tool. That 
statement is inconsistent with TILA Section 130(c), which provides that 
a creditor or assignee may not be held liable in any action brought 
under TILA Section 125 or TILA Section 130 if the creditor or assignee 
shows by a preponderance of the evidence that the violation was not 
intentional and resulted from a bona fide error, notwithstanding the 
maintenance of procedures reasonably adapted to avoid any such error. 
15 U.S.C. 1640(c). Examples of a bona fide error include calculation 
errors and computer malfunction and programming errors. Id.
    The Board also proposes to redesignate comment 22(a)(1)-5, 
regarding good faith reliance on faulty calculation tools, as comment 
22(a)(1)(ii)-1, and to revise the comment to clarify that the ``finance 
charge'' is disclosed as ``interest and settlement charges'' for 
purposes of mortgage transaction disclosures. The Board further 
proposes to add a conforming heading, and update a cross-reference to 
footnote 45d.
22(a)(2) Regular Transaction
    Section 226.22(a)(2) provides that, as a general rule, an APR for a 
closed-end credit transaction is considered accurate if the APR is not 
more than \1/8\ of 1 percentage point above or below the APR determined 
in accordance with Sec.  226.22(a)(1). The Board also proposes minor 
revisions to Sec.  226.22(a)(2) for clarity.
22(a)(3) Irregular Transaction
    Section 226.22(a)(3) provides that, in an irregular transaction, a 
disclosed APR is considered accurate if it is not more than \1/4\ of 1 
percentage point above or below the actual APR. Footnote 46 to Sec.  
226.22(a)(3) clarifies that, for purposes Sec.  226.22(a)(3), an 
irregular transaction is one that includes any of the following 
features: Multiple advances, irregular payment periods, or irregular 
payment amounts, other than an irregular first period or an irregular 
first or final payment. The Board proposes to integrate footnote 46 
into proposed Sec.  226.22(a)(3) and to set forth several types of 
``irregular transactions'' currently described in comment 22(a)(3)-1.
    Specifically, proposed Sec.  226.22(a)(3)(i) states that the term 
``irregular transaction'' includes: (1) A construction loan for which 
advances are made as construction progresses; (2) a transaction where 
payments vary to reflect the consumer's seasonal income; (3) a 
transaction where payments vary due to changes in a premium for or 
termination of mortgage insurance; and (4) a transaction with a 
graduated payment schedule where the contract commits the consumer to 
several series of payments in different amounts. Proposed Sec.  
226.22(a)(3)(ii) provides that the term ``irregular transaction'' does 
not include a loan with a variable-rate feature that has regular 
payment periods, however. The Board also proposes minor revisions to 
Sec.  226.22(a)(3) for clarity.
    The examples of transactions that are and are not irregular 
transactions are incorporated from current comment 22(a)(3)-1, with the 
exception of proposed Sec.  226.22(a)(3)(i)(C). Proposed

[[Page 58608]]

Sec.  226.22(a)(3)(i)(C) (currently footnote 45d) provides that an 
irregular transaction includes a transaction where payments vary due to 
changes in a premium for or termination of mortgage insurance. No 
substantive change is intended by incorporating this example of an 
irregular transaction into the regulation text, however.
22(a)(4) Mortgage Loans
    Under TILA Section 106(f), a special tolerance for the disclosed 
finance charge and ``other disclosures affected by any finance charge'' 
applies for closed-end credit transactions secured by real property or 
a dwelling, in addition to the general tolerance for a regular 
transaction under Sec.  226.22(a)(2) or for an irregular transaction 
under Sec.  226.22(a)(3), as applicable. 15 U.S.C. 1605(f). TILA 
Section 106(f)(1) states that, in closed-end credit transactions 
secured by real property or a dwelling, the disclosure of the finance 
charge and other disclosures affected by the finance charge shall be 
treated as accurate if the amount disclosed as the finance charge (1) 
does not vary from the actual finance charge by more than $100; or (2) 
is greater than the amount required to be disclosed. 15 U.S.C. 
1605(f)(1). (TILA Section 106(f) establishes a different tolerance for 
these transactions for purposes of rescission under TILA Section 125, 
as discussed below. 15 U.S.C. 1605(f)(2)). The APR is a disclosure 
``affected by'' the finance charge. When implementing the special 
tolerance for mortgage loans in Sec.  226.22(a)(4), the Board stated 
that if the APR is not considered to be a disclosure affected by the 
finance charge, ``transactions in which the disclosed finance charge is 
misstated but considered accurate under the new tolerance would remain 
subject to legal challenge based on the disclosed APR, which seems 
inconsistent with the legislative intent.'' 61 FR 49237, 49242, Sept. 
19, 1996.
    Under Sec.  226.22(a)(4), if the APR disclosed in a transaction 
secured by real property or a dwelling varies from the actual APR 
determined in accordance with Sec.  226.22(a)(1), the disclosed APR is 
considered accurate if (1) the disclosed APR results from the disclosed 
finance charge, and (2) the disclosed finance charge would be 
considered accurate under Sec.  226.18(d)(1). (Under the August 2009 
Closed-End Proposal, Sec.  226.38(e)(5)(ii) rather than Sec.  
226.18(d)(1) would set forth the accuracy tolerance for a finance 
charge disclosed for a closed-end mortgage transaction.\60\) Comment 
22(a)(4)-1 currently provides an example of the APR tolerance where a 
disclosed APR results from a disclosed finance charge that is 
understated by $100 or less and therefore considered accurate under 
Sec.  226.18(d)(1). The Board proposes to redesignate the current 
comment as comment 22(a)(4)-1.i and add an example that illustrates the 
operation of the APR tolerance where the disclosed finance charge and 
APR are overstated.
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    \60\ Regarding the proposal to change where the finance charge 
tolerance for closed-end mortgage transaction is set forth, see the 
discussion of proposed revisions to Sec.  226.18(d)(1) at 74 FR 
43232, 43256, Aug. 26, 2009.
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    Proposed comment 22(a)(4)-1.ii provides that, if a creditor 
improperly includes a $200 fee in the interest and settlement charges 
on a regular transaction, the overstated interest and settlement 
charges are considered accurate under Sec.  226.38(e)(5)(ii), and the 
APR that results from those overstated interest and settlement charges 
is considered accurate even if it falls outside the tolerance of \1/8\ 
of 1 percentage point provided under Sec.  226.22(a)(2). Proposed 
comment 22(a)(4)-1.ii clarifies that because the interest and 
settlement charges were overstated by $200 in the example, an APR 
corresponding to a $225 overstatement of the interest and settlement 
charges will not be considered accurate. Although the proposed example 
describes a regular transaction to which the \1/8\ of 1 percentage 
point tolerance applies under Sec.  226.22(a)(2), the same principles 
apply for an irregular transaction to which the \1/4\ of 1 percentage 
point tolerance applies under Sec.  226.22(a)(3).
    Special tolerances for rescission. TILA Sections 106(f)(2) and 
125(i)(2) provide special tolerances for the finance charge and all 
related disclosures when a consumer asserts the right to rescind a 
closed-end mortgage transaction under TILA Section 125. 15 U.S.C. 
1605(f)(2), 1635(i)(2). TILA Section 106(f)(2) provides that, for 
purposes of the right to rescind, the finance charge and disclosures 
affected by the finance charge are treated as accurate if the disclosed 
finance charge does not vary from the actual finance charge by more 
than an amount equal to one-half of one percent of the loan amount.\61\ 
TILA Section 125(i)(2) provides a different tolerance if rescission is 
asserted as a defense to foreclosure. In that circumstance, the finance 
charge and all related disclosures are considered accurate if the 
disclosed finance charge does not vary from the actual finance charge 
by more than $35 or is greater than the actual finance charge. TILA 
Sections 106(f)(2) and 125(i)(2) are implemented in Sec.  226.23(g) and 
(h) (proposed to be redesignated as Sec.  226.23(a)(5)(ii)). The 
tolerances under TILA Sections 106(f)(2) and 125(i)(2) are larger than 
the tolerance of \1/8\ of one percentage point provided for a regular 
transaction under TILA Section 107(c). Therefore, those tolerances 
limit the circumstances in which a consumer may rescind a loan based on 
inaccurate TILA disclosures.\62\ 15 U.S.C. 1606(c).
---------------------------------------------------------------------------

    \61\ For rescission of a refinancing of a principal balance made 
without a new consolidation or new advance, TILA Section 106(f)(2) 
provides a tolerance of one percent of the loan amount, provided the 
loan is not a high-cost HOEPA loan under TILA Section 103(aa), 15 
U.S.C. 1602(aa). 15 U.S.C. 1605(f)(2).
    \62\ The tolerance for a regular transaction under TILA Section 
107(c) is implemented in Sec.  226.22(a)(2). TILA Section 107(c) 
provides that the Board may allow a greater tolerance to simplify 
compliance where irregular payments are involved. 15 U.S.C. 1606(c).
---------------------------------------------------------------------------

    With respect to the special APR tolerances for mortgage 
transactions under Sec.  226.22(a)(4), proposed Sec.  
226.22(a)(4)(ii)(B) provides that, for purposes of rescission, the 
finance charge and all related disclosures are accurate if the finance 
charge is accurate under proposed Sec.  226.23(a)(5)(ii), as 
applicable. Some creditors have asked the Board whether the larger 
tolerances under Sec.  226.23(g) and (h) (proposed Sec.  
226.23(a)(5)(ii)) apply under Sec.  226.19(a)(2) in determining whether 
a consumer must receive corrected disclosures at least three business 
days before consummation of a rescindable transaction. Section 
226.19(a)(1)(i) requires creditors to provide good faith estimates of 
the TILA disclosures for all loans secured by a dwelling, within three 
business days of receiving a consumer's application. Section 
226.19(a)(2) provides that if the difference between the actual APR and 
the disclosed APR exceeds the applicable tolerance, the creditor must 
provide corrected TILA disclosures that the consumer must receive at 
least three business days before consummation. In light of that 
requirement, some creditors have asked the Board whether, for a 
rescindable transaction, they need not provide corrected disclosures 
and wait three business days to consummate a transaction if a disclosed 
APR would be considered accurate under Sec.  226.23(g) or (h) (proposed 
Sec.  226.23(a)(5)(ii)) if the consumer tries to rescind in the future.
    Proposed comment 22(a)(4)-2 clarifies that Sec.  
226.22(a)(4)(ii)(B) does not establish a special tolerance for 
determining whether corrected disclosures are required under

[[Page 58609]]

Sec.  226.19(a)(2) for rescindable mortgage transactions. The 
tolerances for the finance charge (interest and settlement charges) 
under Sec.  226.23(g) and (h) (proposed Sec.  226.23(a)(5)(ii)), apply 
only when the consumer actually asserts the right of rescission under 
Sec.  226.23, as discussed above.
    Conforming amendments. The Board proposes certain conforming 
amendments to Sec.  226.22(a)(4). Section 226.22(a)(4) incorporates by 
reference finance charge tolerances under Sec.  226.18(d)(1), as 
discussed above. Under the August 2009 Closed-End Proposal, proposed 
Sec.  226.38(e)(5)(ii) instead of Sec.  226.18(d)(1) would set forth 
the tolerances for the finance charge for a closed-end mortgage 
transaction, as discussed above. The Board proposes to revise Sec.  
226.22(a)(4) and comment 22(a)(4)-1 to replace the references to Sec.  
226.18(d)(1) with references to proposed Sec.  226.38(e)(5)(ii). The 
Board also proposes to revise Sec.  226.22(a)(4) and comment 22(a)(4)-1 
to reflect that the term ``interest and settlement charges'' is used 
instead of the term ``finance charge'' for closed-end mortgage 
disclosures under the August 2009 Closed-End Proposal, as discussed 
above.
22(a)(5) Additional Tolerance for Mortgage Loans
    Section 226.22(a)(5) provides an additional tolerance for 
transactions secured by real property or a dwelling. This additional 
tolerance avoids the anomalous result of imposing liability on a 
creditor for a disclosed APR that is not the actual APR but is closer 
to the actual APR than the APR that would be considered accurate under 
the statutory tolerance in Sec.  226.22(a)(4). See 61 FR 49237, 49243, 
Sept. 19, 1996 (discussing the adoption of Sec.  226.22(a)(5)). Section 
226.22(a)(5), as proposed to be revised, states that if the disclosed 
interest and settlement charges are calculated incorrectly but 
considered accurate under proposed Sec.  226.38(e)(5)(ii) or Sec.  
226.23(g) or (h) (proposed Sec.  226.23(a)(5)(ii)), the disclosed APR 
is considered accurate if: (1) the disclosed interest and settlement 
charges are understated and the disclosed APR also is understated, but 
is closer to the actual APR than the APR that would be considered 
accurate under Sec.  226.22(a)(4); or (2) the disclosed interest and 
settlement charges are overstated and the disclosed APR also is 
overstated but is closer to the actual APR than the rate that would be 
considered accurate under Sec.  226.22(a)(4). Comment 22(a)(5)-1 
illustrates the APR tolerance for mortgage transactions under Sec.  
226.22(a)(5), where a $75 omission from the finance charge for an 
irregular transaction occurs. The Board proposes to revise comment 
22(a)(5)-1 for clarity and to reflect that the term ``interest and 
settlement charges'' is used instead of the term ``finance charge'' for 
closed-end mortgage disclosures under the August 2009 Closed-End 
Proposal.
    New example for overstated APR. The Board also proposes to add an 
example that illustrates the APR tolerance in Sec.  226.22(a)(5) where 
a disclosed APR is based on overstated interest and settlement charges. 
Proposed comment 22(a)(5)-1.ii provides the example of an irregular 
transaction for which the actual APR is 9.00 percent and the interest 
and settlement charges improperly include a $500 fee corresponding to a 
disclosed APR of 9.40 percent. That is, the disclosed APR of 9.40% 
results from disclosed interest and settlement charges that are 
considered accurate under previously proposed Sec.  226.38(e)(5)(ii) 
because they are greater than the interest and settlement charges 
required to be disclosed and therefore are considered accurate under 
Sec.  226.22(a)(4). Proposed Sec.  226.22(a)(5)-1.ii clarifies that, in 
that case, a disclosed APR of 9.30 is within the tolerance in Sec.  
226.22(a)(5) because it is closer to the actual APR of 9.00% than the 
9.40% APR that would be considered accurate under Sec.  226.22(a)(4). 
Proposed comment 22(a)(5)-1.ii clarifies further that, for purposes of 
the example, an APR below 8.75 percent (corresponding to the \1/4\ of 
one percentage point tolerance for an irregular transaction) or above 
9.40 percent (corresponding to the APR that results from the disclosed 
interest and settlement charges) will not be considered accurate.

Section 226.23 Right of Rescission

23(a) Consumer's Right to Rescind
23(a)(1) Coverage
    Section 226.23(a)(1), which implements TILA Section 125(a), 
provides that in a credit transaction in which a security interest is 
or will be retained or acquired in a consumer's principal dwelling, 
each consumer whose ownership interest is or will be subject to the 
security interest shall have the right to rescind the transaction, 
except for transactions exempted under Sec.  226.23(f). 15 U.S.C. 
1635(a). Footnote 47 to Sec.  226.23(a)(1) currently provides that for 
purposes of rescission, the addition to an existing obligation of a 
security interest in a consumer's principal dwelling is a transaction. 
The right of rescission applies only to the addition of the security 
interest and not the existing obligation. When adding a security 
interest, the creditor must deliver the notice of the right of 
rescission required under Sec.  226.23(b), but need not deliver new 
material disclosures. Delivery of the required rescission notice begins 
the rescission period.
    The Board proposes to move the first two sentences of footnote 47 
to the text of Sec.  226.23(a)(1) in order to make clear that the 
addition of a security interest in a consumer's principal dwelling is a 
rescindable transaction. However, the last two sentences of footnote 47 
regarding the creditor's obligation to provide a rescission notice 
would be moved to comment 23(a)(1)-5.
    Currently, comment 23(a)(1)-5 states that the addition of a 
security interest in a consumer's principal dwelling to an existing 
obligation is rescindable even if the existing obligation is not 
satisfied and replaced by a new obligation, and even if the existing 
obligation was previously exempt (because it was credit over $25,000 
not secured by real property or a consumer's principal dwelling). The 
right of rescission applies only to the added security interest, and 
not to the original obligation. In those situations, only the Sec.  
226.23(b) notice need be delivered, not new material disclosures; the 
rescission period begins to run from the delivery of the notice.
    The Board proposes to revise comment 23(a)(1)-5 to reflect changes 
under proposed Sec.  226.20(a). As discussed in more detail in the 
section-by-section analysis for proposed Sec.  226.20 above, proposed 
Sec.  226.20(a)(1) would provide that the addition of new collateral 
that is real property or a dwelling to an existing legal obligation 
secured by real property or a dwelling would be a ``new transaction'' 
requiring new TILA disclosures. Thus, for example, if a creditor adds a 
security interest in the consumer's principal dwelling to an existing 
loan secured by vacant land, then the creditor would have to provide 
the consumer with new TILA disclosures. Accordingly, comment 23(a)(1)-5 
would be revised to state that if the addition of a security interest 
in the consumer's principal dwelling is a new transaction under Sec.  
226.20(a)(1), then the creditor must deliver new material disclosures 
in addition to the Sec.  226.23(b) notice.
    For an existing obligation not secured by real property or a 
dwelling, proposed Sec.  226.20(a)(2) would provide that new TILA 
disclosures are required if the existing obligation is satisfied and 
replaced by a new obligation. Thus, for example, if a creditor 
satisfies and replaces an existing auto loan and adds

[[Page 58610]]

a security interest in the consumer's principal dwelling, then the 
creditor must deliver new material disclosures in addition to the Sec.  
226.23(b) notice. Comment 23(a)(5)-1 would be revised to reflect this 
requirement. As in the current comment, if the existing obligation is 
not satisfied and replaced, then the creditor need only deliver the 
Sec.  226.23(b) notice, not new material disclosures.
    Finally, comment 23(a)(1)-5 would be revised to clarify that the 
rescission period will begin to run from the delivery of the rescission 
notice and, as applicable, the delivery of the material disclosures.
23(a)(2) Exercise of the Right
Background
    TILA permits a consumer to assert rescission against the creditor 
or any assignee of the loan obligation. TILA Sections 125(a), 131(c); 
15 U.S.C. 1635(a), 1641(c). To exercise the right of rescission, the 
consumer must send notification to the creditor or the creditor's agent 
designated on the notice of the right of rescission provided by the 
creditor. TILA Section 125(a); 15 U.S.C. 1635(a); Sec.  226.23(a)(2), 
(b)(iii); comment 23(a)(2)-1. If the creditor fails to provide the 
consumer with a designated address for sending the notification of 
rescission, delivering notification to the person or address to which 
the consumer has been directed to send payments (i.e., the loan 
servicer) constitutes delivery to the creditor or assignee. See comment 
23(a)(2)-1.
    This regulatory framework for asserting the right to rescind is 
applicable to most transactions that are rescinded within the initial 
three-business-day period. TILA and Regulation Z provide that the right 
of rescission expires three business days after the later of (1) 
consummation, (2) delivery of the notice of the right to rescind, or 
(3) delivery of the material disclosures. TILA Section 125(a); 15 
U.S.C. 1635(a); Sec.  226.23(a)(3). The creditor may not, directly or 
through a third party, disburse money, perform services, or deliver 
materials until the initial three-day rescission period has expired and 
the creditor is reasonably satisfied that the consumer has not 
rescinded. Sec.  226.23(c); comment 23(c)-1. Within the three-business-
day period, a consumer normally would send the notice to the creditor 
or the creditor's agent whose address appears on the rescission notice. 
The consumer's notification asserting the right against the 
``creditor'' (as defined in Sec.  226.2(a)(17)) in most cases would be 
effective because, as the Board understands, loans typically are not 
assigned within the three-business-day period. Under current comment 
23(a)(2)-1, if no address were listed for the creditor or the 
creditor's agent on the rescission notice, the consumer could assert 
rescission against the creditor by notifying the servicer.
    The current regulations, however, do not as readily apply to the 
exercise the right of rescission during the extended right to rescind. 
If the creditor fails to deliver the notice of the right to rescind or 
the material disclosures, the right to rescind expires three years from 
the date of consummation (or upon the sale or transfer of the 
property). TILA Section 125(f); 15 U.S.C. 1635(f); Sec.  226.23(a)(3). 
In the case of certain administrative proceedings, the right to rescind 
may be further extended. See id. The principal problem during the 
extended rescission period is that the party against which a consumer 
must assert may no longer be the creditor on the original notice of 
rescission. TILA Section 125 and Sec.  226.23 set forth the steps the 
consumer must take to assert that right only with respect to the 
creditor, yet, during the extended period, a notice to the creditor 
listed on the original rescission notice may be ineffective. The 
original creditor may have transferred the obligation shortly after 
consummation, and, if the loan is securitized, it may have been 
transferred several times. In addition, the original creditor may no 
longer exist because of dissolution, bankruptcy, or merger. Moreover, 
some courts have held that notice is ineffective when the consumer 
notifies the original creditor and the current servicer, but not the 
current holder.\63\ For practical reasons, a consumer that has an 
extended right of rescission should assert the right directly against 
the assignee (the current holder of the loan), because only the 
assignee is in a position to cancel the transaction.
---------------------------------------------------------------------------

    \63\ See, e.g., Roberts v. WMC Mortgage Corp., 173 Fed. Appx. 
575 (9th Cir. 2006) (unpublished); Meyer v. Argent Mortgage Co., 379 
B.R. 529 (Bankr. E.D. Pa. 2007).
---------------------------------------------------------------------------

    Unfortunately, consumers have difficulty identifying the assignee 
that currently holds their loan. Recognizing this problem, Congress 
recently amended TILA to help consumers determine who the current owner 
of their loan is and how to contact the owner.\64\ The amendments, 
which the Board implemented in new Sec.  226.39, require an assignee to 
provide its name and contact information to the consumer within 30 days 
of acquiring the loan. Consumers can also obtain this information under 
TILA Section 131(f)(2), which requires loan servicers, upon request 
from a consumer, to provide the name, address, and telephone number of 
the owner or master servicer of a loan. 15 U.S.C. 1641(f)(2). The Board 
is proposing new Sec.  226.41 to require servicers to provide the 
information the consumer requests under TILA Section 131(f)(2) within a 
reasonable time. 15 U.S.C. 1641(f)(2).
---------------------------------------------------------------------------

    \64\ See Helping Families Save Their Homes Act, Public Law 111-
22, tit. IV, Sec.  404(a), 123 Stat. 1632, 1658 (2009).
---------------------------------------------------------------------------

    Despite these improvements, a consumer may still send notification 
of exercise to the incorrect party because they mistakenly believe that 
the original creditor or an assignee that once held the loan continues 
to hold the loan. This reasonable mistake has the most serious 
consequences for consumers with an extended right that will soon 
expire; they may lose their right to rescind entirely because of a time 
lag in the consumer's receipt of information provided pursuant to Sec.  
226.41 or Sec.  226.39. Some consumers may never be informed of a 
certain transfer of their loan because the Sec.  226.39 notice was lost 
in the mail or the provision of a Sec.  226.39 notice was not required 
(for instance, when a transferee assigns the loan within 30 days of 
acquisition). Other consumers may receive a Sec.  226.39 notice 
identifying the current holder, but fail to read or to keep it, 
possibly because few consumers will recognize the importance of the 
information contained in a Sec.  226.39 notice for exercising the right 
to rescind. Finally, many consumers do not understand the difference 
between the servicer and the owner of a loan, and may attempt to 
exercise their right by notifying the servicer.
The Board's Proposal
    To address some of these problems, the Board proposes to revise 
Sec.  226.23(a)(2) and associated commentary. Revised Sec.  
226.23(a)(2) would describe: (1) How the consumer must exercise the 
right of rescission; (2) whom the consumer must notify during the 
three-business-day period following consummation and after that period 
has expired (the extended right); and (3) when the creditor or current 
owner will be deemed to receive the consumer's notice. Comment 
23(a)(2)-1 would be divided into three comments and the sentence 
regarding the start of the time period for the creditor's performance 
under Sec.  226.23(d)(2) would be moved into new comment 
23(a)(2)(ii)(B)-1.
23(a)(2)(i) Provision of Written Notification
    Proposed Sec.  226.23(a)(2)(i) contains the same requirements as 
current Sec.  226.23(a)(2) with respect to the form of

[[Page 58611]]

and timing for provision of notification. The reference to notices sent 
by telegram would be removed from the listed methods of transmitting 
written communication in the regulation and associated commentary as 
obsolete. No other substantive changes are intended.
23(a)(2)(ii) Party the Consumer Shall Notify
    Proposed Sec.  226.23(a)(2)(ii) provides that the party the 
consumer must notify depends on whether the right of rescission is 
exercised during the three-business-day period following consummation 
of the transaction or after expiration of that period. Proposed Sec.  
226.23(a)(2)(ii)(A) states that, during the three-business-day period 
following consummation of the transaction, the consumer must notify the 
creditor or the creditor's agent designated on the rescission notice. 
Proposed Sec.  226.23(a)(2)(ii)(A) also includes the guidance from 
current comment 23(a)(2)-1, that if the notice does not designate the 
address of the creditor or its agent, the consumer may mail or deliver 
notification to the servicer, as that term is defined in Sec.  
226.36(c)(3). The proposed rule is intended to ensure that the notice 
is sent to the person who most likely still will own the debt 
obligation. Generally, loans are not transferred during the three-
business-day period following consummation.
    Proposed Sec.  226.23(a)(2)(ii)(B) is intended to ensure that 
consumers can exercise the extended right of rescission if the creditor 
has transferred the consumer's debt obligation. Under proposed Sec.  
226.23(a)(2)(ii)(B), the consumer must mail or deliver notification to 
the current owner of the debt obligation; however, notice to the 
servicer would also constitute delivery to the current owner. As 
discussed above, consumers may have difficulty identifying the current 
owner of their loan, and may reasonably be confused as to whom they 
should correspond with about rescinding their loan. In contrast, 
consumers usually know the identity of their servicer. They may 
regularly receive statements or other correspondence from their 
servicer, for example, and many consumers continue to mail monthly 
mortgage payments to the servicer rather than have these payments 
automatically debited from their checking or savings account. For these 
reasons, the Board believes that consumers who exercise the extended 
right of rescission by notifying their servicers should not be deprived 
of this important consumer remedy. Moreover, servicers are generally 
agents of the owner concerning correspondence and other communications 
to and from the consumer. The Board expects that it would not be unduly 
burdensome for the servicer to receive a consumer's notification of 
rescission on behalf of the owner and to inform the owner of the 
rescission. Proposed comment 23(a)(2)(ii)(B)-1 clarifies that when a 
consumer provides the servicer with notification of exercise of the 
extended right of rescission under proposed Sec.  226.23(a)(2)(ii)(B), 
the period for the creditor's or owner's actions in Sec.  226.23(d)(2) 
begins to run from the time the servicer receives the consumer's 
notification.
    The Board requests comment on whether the proposal to permit 
consumers to exercise the right to rescind by notifying the servicer, 
even if the servicer is not the current owner of the loan, could create 
any operational or other compliance issues. In particular, the Board 
seeks comment on whether it is feasible for a servicer to inform the 
creditor or owner of the debt obligation that the consumer has 
rescinded on the same day as the servicer receives the consumer's 
notification, or if the servicer could contractually be responsible for 
handling the rescission process.
23(a)(3) Rescission Period
    Section 226.23(a)(3), which implements TILA Section 125(a), 
provides that a consumer may exercise the right to rescind until 
midnight after the third business day following consummation, delivery 
of all material disclosures, or delivery of the rescission notice, 
whichever occurs last. 15 U.S.C. 1635(a). If the required notice and 
material disclosures are not delivered, Sec.  226.23(a)(3) further 
states that the right of rescission expires three years after the date 
of consummation of the transaction, upon transfer of all of the 
consumer's interest in the property, or upon sale of the property, 
whichever occurs first.
23(a)(3)(i) Three Business Days
    Questions have been raised about when the three-business-day 
rescission period starts if the creditor provided an incorrect or 
incomplete rescission notice or material disclosures. Some courts have 
held that the three-business-day rescission period starts when the 
creditor delivers corrected material disclosures and a new notice of 
the right to rescind.\65\ Some industry representatives, however, 
maintain that delivery of the corrected material disclosures 
retroactively triggers the three-business-day rescission period to 
start when the transaction was consummated. Accordingly, these 
representatives believe that a new notice of the right to rescind is 
unnecessary and that the consumer is not entitled to a ``second'' 
three-business-day rescission period that starts from delivery of the 
corrected material disclosures.
---------------------------------------------------------------------------

    \65\ See, e.g., Smith v. Wells Fargo Credit Corp., 713 F. Supp. 
354 (D. Ariz. 1989); In re Underwood, 66 B.R. 656 (Bankr. W.D. Va. 
1986).
---------------------------------------------------------------------------

    To address these questions, the Board is proposing to add a new 
comment 23(a)(3)(i)-1.iii. The proposed comment explicitly states that 
the provision of incorrect or incomplete material disclosures or an 
incorrect or incomplete notice of the right to rescind does not 
constitute delivery of the material disclosures or notice. The comment 
explains that, if the creditor originally provided incorrect or 
incomplete material disclosures, the three-business-day rescission 
period starts only when the creditor delivers complete, correct 
material disclosures \66\ together with a complete, correct, updated 
notice of the right to rescind. An updated rescission notice is 
required because the notice that the creditor previously provided would 
have contained an incorrect date of expiration of the right, calculated 
from the later of the date that the transaction was consummated, that 
the first notice of the right of rescission was provided, or that the 
incorrect or incomplete material disclosures were provided, instead of 
the date from which the correct, complete material disclosures were 
delivered (which had not yet occurred). Of course, if the creditor 
originally delivered correct, complete material disclosures, but 
provided a defective notice of the right to rescind, the creditor must 
deliver to the consumer a complete, correct, updated notice of the 
right to rescind to commence the three-business-day rescission period.
---------------------------------------------------------------------------

    \66\ In its August 2009 Closed-End Proposal, the Board proposed 
two alternative requirements under Sec.  226.19(a)(2)(iii) for 
creditors to provide corrected disclosures to the consumer three 
business days before consummation when a subsequent event makes the 
final disclosures inaccurate. The Board's final rule under Sec.  
226.19(a)(2)(iii) will determine whether a creditor providing 
corrected material disclosures to comply with this proposed Sec.  
226.23(a)(3)(i) must redisclose just the changed terms or all of the 
terms of the loan.
---------------------------------------------------------------------------

    Proposed comment 23(a)(3)(i)-1.iii also states that the consumer 
would have the right of rescission until midnight after the third 
business day following the date of either (1) delivery of the correct 
and complete material disclosures and correct, complete, updated notice 
of the right of rescission, or (2) delivery of only the correct, 
complete, updated notice of the right of rescission, as appropriate. 
Such delivery

[[Page 58612]]

would also terminate the consumer's extended right to rescind arising 
from the creditor's original provision of defective material 
disclosures and/or notice of the right of rescission.
    The Board is also proposing to move the final sentence of existing 
comment 23(a)(3)-1, which clarifies that the consumer must place the 
rescission notice in the mail or deliver it to the creditor's place of 
business within the three-business-day period, to proposed Sec.  
226.23(a)(2). The Board further proposes to move the remainder of 
existing comment 23(a)(3)-1, explaining the calculation of the three-
business-day period, to proposed comment 23(a)(3)(i)-1.iii. The example 
of a calculation of the three-business-day period where the notice of 
right to rescind was delivered after consummation would be omitted 
because proposed Sec.  226.23(b)(5) requires delivery of the notice of 
right to rescind prior to consummation.
23(a)(3)(ii) Unexpired Right of Rescission
    Implementing TILA Section 125(a), Sec.  226.23(a)(3) currently 
states that if the material disclosures and rescission notice are not 
delivered, the right of rescission expires ``three years after 
consummation, upon transfer of all of the consumer's interest in the 
property, or upon sale of the property, whichever occurs first.'' 15 
U.S.C. 1635(a). Concerns have been raised about whether certain 
occurrences, such as the consumer's death, filing for bankruptcy, 
refinancing the loan, or paying off the loan, would terminate an 
unexpired right to rescind. The Board is proposing to revise Sec.  
226.23(a)(3) and associated commentary to clarify these issues. In 
addition, portions of comment 23(a)(3)-3 would be removed because they 
simply repeat the regulation. Finally, footnote 48 and comment 
23(a)(3)-2 would be moved to the new provision in the proposed Sec.  
226.23(a)(5) addressing material disclosures.
    Consumer's death. Proposed comment 23(a)(3)(ii)(A)-1 clarifies that 
the consumer's death terminates an unexpired right to rescind. Through 
the operation of law, upon the consumer's death all of the consumer's 
interest in the property is transferred to the consumer's heirs or the 
estate. Thus, the consumer's death results in a ``transfer of all of 
the consumer's interest in the property,'' which, as noted above, 
terminates the right to rescind under Sec.  226.23(a)(3).
    Bankruptcy. Proposed comment 23(a)(3)(ii)(A)-1 also clarifies that 
the consumer's filing for bankruptcy generally does not terminate the 
unexpired right to rescind, if the consumer still retains an interest 
in the property after the bankruptcy estate is formed. In a Chapter 7 
bankruptcy, most consumers will claim a homestead or other exemption in 
their residences and, thus, retain an interest in the property. In a 
Chapter 13 bankruptcy, the consumer retains a right of possession of 
all property of the bankruptcy estate.\67\ Upon confirmation of the 
Chapter 13 bankruptcy plan, unless otherwise provided, all of the 
property of the estate is vested in the debtor (consumer).\68\ Thus, in 
those cases, the consumer does not transfer ``all of the consumer's 
interest in the property,'' so the right to rescind should not expire 
under Sec.  226.23(a)(3).
---------------------------------------------------------------------------

    \67\ 11 U.S.C. 1306(b).
    \68\ 11 U.S.C. 1327(b).
---------------------------------------------------------------------------

    Refinancing. Proposed Sec.  226.23(a)(3)(ii)(A) clarifies that a 
refinancing with a creditor other than the current holder of the 
obligation terminates the unexpired right to rescind. Refinancing a 
consumer credit transaction extinguishes the prior creditor's lien on 
the consumer's property, and terminates the consumer's obligation to 
repay the creditor under the promissory note through satisfaction of 
that obligation. These results are the same as those of a ``sale of the 
property,'' which, as noted above, terminates the right of rescission 
under TILA and Regulation Z. TILA Section 125(a); 15 U.S.C. 1635(a); 
Sec.  226.23(a)(3). The Board also believes that continuance of the 
unexpired right is unnecessary when refinancing with a new creditor, 
because the results are substantively similar to those of rescission--
namely, voiding of the prior creditor's security interest, release of 
the borrower from the obligation to make payments to that creditor, and 
return to the creditor of money borrowed.
    Under proposed Sec.  226.23(a)(3)(ii)(A), not all refinancings 
would terminate the extended right to rescind--the right to rescind 
would still apply to refinancings with the current holder of the credit 
obligation. The Board is concerned that if all refinancings terminate 
the extended right to rescind, including refinancings with the same 
creditor, some creditors may abuse the refinancing process to profit 
without benefiting the consumer. In particular, some unscrupulous 
creditors might refinance their own loans on terms that are no better 
for the consumer than the terms of the prior loan to purposely 
terminate the consumer's right to rescind the previous loan in which 
material disclosures or the notice of the right was not delivered. A 
creditor might do this repeatedly, charging fees and stripping the 
consumer's equity. Unless these creditors are subject to the consumer 
remedy of rescission, the Board believes that consumers would not be 
adequately protected.
    Loan pay off. Under proposed Sec.  226.23(a)(3)(ii)(A), paying off 
a loan would also terminate the unexpired right to rescind. Similar to 
a refinancing, paying off a consumer credit transaction extinguishes 
the creditor's prior lien on the consumer's property, and terminates 
the consumer's obligation to repay the creditor under the promissory 
note through satisfaction of that obligation. Again, these results are 
the same as those of a ``sale of the property,'' which, as noted above, 
terminates the right of rescission under TILA and Regulation Z. TILA 
Section 125(a); 15 U.S.C. 1635(a); Sec.  226.23(a)(3). The Board also 
believes that continuance of the unexpired right is unnecessary once a 
loan is paid off, because paying off the loan largely accomplishes the 
results of rescission--namely, voiding of the prior creditor's security 
interest, release of the borrower from the obligation to make payments 
to that creditor, and return to the creditor of money borrowed.
    Proposed comments 23(a)(3)(ii)(A)-2 and -3 regarding the sale or 
transfer of property are adopted from current comment 23(a)(3)-3. No 
substantive change is intended. Proposed Sec.  226.23(a)(3)(ii)(B) 
regarding the extension of the right to rescind in connection with 
certain administrative proceedings is adopted from the current Sec.  
226.23(a)(3). No substantive change is intended. The sentence regarding 
the extension of the right to rescind in connection with certain 
administrative proceedings in current comment 23(a)(3)-3 does not 
appear in a proposed comment because it simply repeats the regulation. 
No substantive change is intended.
    The Board solicits comment on the proposed clarifications that the 
consumer's death, bankruptcy (when the consumer retains an interest in 
the securing property), refinancings (with a new creditor), and paying 
off the loan terminate the unexpired right to rescind.
23(a)(4) Joint owners
    Section 226.23(a)(4) provides that when more than one consumer in a 
transaction has the right to rescind, the exercise of the right by one 
consumer shall be effective as to all consumers. Comment 23(a)(4)-1 
provides that when more than one consumer has the right to rescind a 
transaction, any one of them may exercise that right and cancel the 
transaction on behalf of all. For example, if both a husband and wife

[[Page 58613]]

have the right to rescind a transaction, either spouse acting alone may 
exercise the right and both are bound by the rescission. The Board 
proposes technical edits to these provisions. No substantive change is 
intended.
23(a)(5) Material Disclosures
Background
    TILA and Regulation Z provide that a consumer may exercise the 
right to rescind until midnight of the third business day after the 
latest of (1) Consummation, (2) delivery of the notice of right to 
rescind, or (3) delivery of all material disclosures. TILA Section 
125(a); 15 U.S.C. 1635(a); Sec.  226.23(a)(3). Thus, the right to 
rescind does not expire until the notice of right to rescind and the 
material disclosures are properly delivered. This ensures that 
consumers are notified of their right to rescind, and that they have 
the information they need to decide whether to exercise the right. If 
the rescission notice or the material disclosures are not delivered, a 
consumer's right to rescind may extend for up to three years from 
consummation. TILA Section 125(f); 15 U.S.C. 1635(f); Sec.  
226.23(a)(3).
    TILA defines the following as ``material disclosures'': (1) The 
annual percentage rate, (2) the amount of the finance charge, (3) the 
amount to be financed, (4) the total of payments, (5) the number and 
amount of payments, (6) the due dates or periods of payments scheduled 
to repay the indebtedness, (7) the disclosures required by HOEPA, and 
(8) the inclusion of a provision in a mortgage that is prohibited by 
HOEPA, such as negative amortization. TILA Sections 103(u), 129(j); 15 
U.S.C. 1602(u), 1639(j).
    Congress first added the definition of ``material disclosures'' to 
TILA in 1980 so that creditors would be ``in a better position to know 
whether a consumer may properly rescind a transaction.'' \69\ The 
mortgage market has changed considerably since Congress created this 
definition of ``material disclosures.'' For example, many creditors now 
offer nontraditional mortgage products that contain complex or risky 
features, such as negative amortization or interest-only payments. In 
the August 2009 Closed-End Proposal, the Board proposed comprehensive 
revisions to the disclosures for closed-end mortgages that would 
reflect these changes in the mortgage market. 74 FR 43232, Aug. 26, 
2009. The proposed disclosures and revised model forms were developed 
after extensive consumer testing to determine which credit terms 
consumers find the most useful in evaluating credit transactions. Based 
on consumer testing, the August 2009 Closed-End Proposal would add 
certain new disclosures, such as the interest rate and whether a loan 
has negative amortization or permits interest-only payments, while 
making certain other disclosures less prominent, such as the amount 
financed and the total and number of payments. The proposed rule would 
also add certain formatting requirements, such as font size and tabular 
format, to facilitate consumers' understanding of the disclosures.
---------------------------------------------------------------------------

    \69\ S. Rep. No. 368, 98 Cong. 2d Sess. 29, reprinted in 1980 
U.S.C.A.N.N. 236, 264.
---------------------------------------------------------------------------

The Board's Proposal
    The Board now proposes to revise the definition of material 
disclosures to include the information that is critical to consumers in 
evaluating loan offers, and to remove information that consumers do not 
find to be important. The proposal is intended to ensure that consumers 
have the information they need to decide whether to rescind a loan.
    Proposed Sec.  226.23(a)(5) would retain the following as material 
disclosures:
     The special HOEPA disclosures and the HOEPA prohibitions 
referred to in Sec. Sec.  226.32(c) and (d) and 226.35(b)(2);
     The annual percentage rate;
     The payment summary; and
     The finance charge, renamed the ``interest and settlement 
charges.''
    The following disclosures would be added to the list of material 
disclosures:
     The loan amount;
     The loan term;
     The loan type (such as an adjustable-rate mortgage);
     The loan features (such as negative amortization);
     The total settlement charges;
     The prepayment penalty; and
     The interest rate.
    The following disclosures would be removed from the list of 
material disclosures:
     The amount financed;
     The number of payments; and
     The total of payments.
    Proposed comment 23(a)(5)(i)-1 would state that the right to 
rescind generally does not expire until midnight after the third 
business day following the latest of (1) consummation; (2) delivery of 
the notice of right to rescind, as set forth in Sec.  226.23(b); or (3) 
delivery of all material disclosures, as set forth in Sec.  
226.23(a)(5)(i). A creditor must make the material disclosures clearly 
and conspicuously consistent with the requirements of Sec. Sec.  
226.32(c) and 226.38. The proposed comment would clarify that a 
creditor may satisfy the requirements for Sec.  226.32(c) by using the 
Section 32 Loan Model Clauses in Appendix H-16, or providing 
substantially similar disclosures. In addition, a creditor may satisfy 
the requirements for proposed Sec.  226.38 by providing the appropriate 
model form in Appendix H or, for reverse mortgages, Appendix K, or a 
substantially similar disclosure, which is properly completed with the 
disclosures required by proposed Sec.  226.38. Failure to provide the 
non-material disclosures does not affect the right of rescission, 
although such failure may be a violation subject to the liability 
provisions of TILA Section 130, or administrative sanctions. 15 U.S.C. 
1640.
    A material disclosure that is clear and conspicuous but contains a 
formatting error, such as failure to use bold text, is unlikely to 
impair a consumer's ability to determine whether to exercise the right 
to rescind. Thus, proposed comment 23(a)(5)(i)-2 would clarify that 
failing to satisfy any specific terminology or format requirements set 
forth in proposed Sec.  226.33 or Sec.  226.37 or in the proposed model 
forms in Appendix H or Appendix K is not by itself a failure to provide 
material disclosures. Nonetheless, a creditor must provide the material 
disclosures clearly and conspicuously, as described in proposed Sec.  
226.37 and proposed comments 37(a)-1 and 37(a)(1)-1 and -2.
    Legal authority to add disclosures. The Board proposes to revise 
the definition of material disclosures pursuant to its authority under 
TILA Section 105. 15 U.S.C. 1604. Although Congress specified in TILA 
the disclosures that constitute material disclosures, Congress gave the 
Board broad authority to make adjustments to TILA requirements based on 
its knowledge and understanding of evolving credit practices and 
consumer disclosures. Under TILA Section 105(a), the Board may make 
adjustments to TILA to effectuate the purposes of TILA, to prevent 
circumvention or evasion, or to facilitate compliance. 15 U.S.C. 
1604(a). The purposes of TILA include ensuring the ``meaningful 
disclosure of credit terms'' to help consumers avoid the uninformed use 
of credit. 15 U.S.C. 1601(a), 1604(a).
    The Board has considered the purposes for which it may exercise its 
authority under TILA Section 105(a) and, based on that review, believes 
that the proposed adjustments are appropriate. The Board believes that 
the proposed amendments to the definition of ``material disclosures'' 
are warranted by the complexity of mortgage products offered today and 
the number of

[[Page 58614]]

disclosures that are critical to the consumer's evaluation of a loan 
offer. Some of those features did not exist when Congress created the 
definition of ``material disclosures'' in 1980, and the Board does not 
believe that Congress intended to omit critical mortgage features from 
the definition. Consumer testing has shown that changes in the mortgage 
marketplace have made certain disclosures more important to consumers. 
Defining these disclosures as ``material disclosures'' would ensure the 
``meaningful disclosure of credit terms'' so that consumers would have 
the information they need to make informed decisions about whether to 
rescind the credit transaction. The proposed definition may also 
prevent circumvention or evasion of the disclosure rules set forth in 
proposed Sec.  226.38 because creditors would have a greater incentive 
to ensure that the material disclosures are accurate.
    Legal authority to add tolerances. The Board recognizes that 
increasing the number of material disclosures could increase the 
possibility of errors resulting in extended rescission rights. Although 
the creditor must re-disclose any changed terms before consummation, 
consistent with Sec.  226.17(f), there may still be errors in the final 
TILA disclosure. To ensure that inconsequential disclosure errors do 
not result in extended rescission rights, the Board proposes to add 
tolerances for accuracy of disclosures of the loan amount, the total 
settlement charges, the prepayment penalty, and the payment summary.
    The proposal would retain the existing tolerances for the interest 
and settlement charges (currently referred to as the ``finance 
charge''). The tolerances for disclosure of the finance charge were 
created by Congress in 1995,\70\ and implemented by the Board in 
1996.\71\ Thus, TILA and Regulation Z provide a general tolerance for 
disclosure of the finance charge, a special tolerance for a refinancing 
with no new advance, and a special tolerance for foreclosures. TILA 
Sections 106(f)(2), 125(i)(2); 15 U.S.C. 1605(f)(2), 1635(i)(2); Sec.  
226.23(g), (h). Under the general rule, the finance charge is 
considered accurate if the disclosed finance charge is understated by 
no more than \1/2\ of 1 percent of the face amount of the note or $100, 
whichever is greater; or is greater than the amount required to be 
disclosed. There is a greater tolerance for a refinancing with a new 
creditor if there is no new advance and no consolidation of existing 
loans. In that case, the finance charge is considered accurate if the 
disclosed finance charge is understated by no more than 1 percent of 
the face amount of the note or $100, whichever is greater; or is 
greater than the amount required to be disclosed. Finally, there is a 
stricter tolerance after the initiation of foreclosure on the 
consumer's principal dwelling that secures the credit transaction. In 
that case, the finance charge is considered accurate if it is 
understated by no more than $35; or is greater than the amount required 
to be disclosed. The APR is treated as accurate if the disclosed APR is 
based on a finance charge that would be considered accurate under the 
rule.
---------------------------------------------------------------------------

    \70\ Public Law No. 104-29 Sec. Sec.  3 and 8, 109 Stat. 274, 
272 and 275 (1995), codified at 15 U.S.C. 1605(f)(2) and 1635(i)(2).
    \71\ 61 FR 49237, Sept. 19, 1996; Sec.  226.23(g), (h).
---------------------------------------------------------------------------

    The Board proposes to model the tolerances for the loan amount, the 
total settlement charges, the prepayment penalty, and the payment 
summary on the tolerances provided by Congress in 1995 for the 
disclosure of the finance charge. As discussed in more detail in the 
section-by-section analyses below, the loan amount would be considered 
accurate if the disclosed loan amount is understated by no more than 
\1/2\ of 1 percent of the face amount of the note or $100, whichever is 
greater; or is greater than the amount required to be disclosed. In a 
refinancing with no new advance, the loan amount would be considered 
accurate if the disclosed loan amount is understated by no more than 1 
percent of the face amount of the note or $100, whichever is greater; 
or is greater than the amount required to be disclosed. The total 
settlement charges, the prepayment penalty, and the payment summary 
would be considered accurate if each of the disclosed amounts is 
understated by no more than $100; or is greater than the amount 
required to be disclosed.
    The Board proposes the new tolerances for the loan amount, the 
total settlement charges, the prepayment penalty, and the payment 
summary pursuant to its authority in TILA Section 121(d) to establish 
tolerances for numerical disclosures that the Board determines are 
necessary to facilitate compliance with TILA and that are narrow enough 
to prevent misleading disclosures or disclosures that circumvent the 
purposes of TILA. 15 U.S.C. 1631(d). The Board does not believe that an 
extended right of rescission is appropriate if a creditor overstates or 
slightly understates the loan amount, the total settlement charges, the 
prepayment penalty, or the payment summary. Creditors would incur 
litigation and other costs of unwinding transactions based on the 
extended right of rescission, even though the overstatement or slight 
understatement of the disclosure was not critical to a consumer's 
decision to enter into the credit transaction, and in turn, to rescind 
the transaction. The overstatement or slight understatement is unlikely 
to influence the consumer's decision of whether to rescind the loan. 
The Board believes that the proposed tolerances are broad enough to 
alleviate creditors' compliance concerns regarding minor disclosure 
errors, and narrow enough to prevent misleading disclosures.
    Legal authority to remove disclosures. The proposal would remove 
the following disclosures from the definition of ``material 
disclosures'': the amount financed, the number of payments, and the 
total of payments. The Board proposes to remove these disclosures from 
the definition of ``material disclosures,'' under its exception and 
exemption authority under TILA Section 105. 15 U.S.C. 1604. Although 
Congress specified in TILA the disclosures that constitute material 
disclosures that extend rescission, the Board has broad authority to 
make exceptions to or exemptions from TILA requirements based on its 
knowledge and understanding of evolving credit practices and consumer 
disclosures. Under TILA Section 105(a), the Board may make adjustments 
to TILA to effectuate the purposes of TILA, to prevent circumvention or 
evasion, or to facilitate compliance. 15 U.S.C. 1604(a). The purposes 
of TILA include ensuring ``meaningful disclosure of credit terms'' to 
help consumers avoid the uninformed use of credit. 15 U.S.C. 1601(a), 
1604(a).
    TILA Section 105(f) authorizes the Board to exempt any class of 
transactions from coverage under any part of TILA if the Board 
determines that coverage under that part does not provide a meaningful 
benefit to consumers in the form of useful information or protection. 
15 U.S.C. 1604(f)(1). The Board is proposing to exempt closed-end 
credit transactions secured by real property or a dwelling from the 
part of TILA Section 103(u) that includes the amount financed, the 
number of payments, and the total of payments as material disclosures. 
TILA Section 105(f) directs the Board to make the determination of 
whether coverage of such transactions provides a meaningful benefit to 
consumers in light of specific factors. 15 U.S.C. 1604(f)(2). These 
factors are (1) The amount of the loan and whether the disclosures, 
right of rescission, and other provisions provide a benefit to 
consumers who are parties to the transactions involving a loan of such 
amount; (2) the extent to

[[Page 58615]]

which the requirement complicates, hinders, or makes more expensive the 
credit process; (3) the status of the borrower, including any related 
financial arrangements of the borrower, the financial sophistication of 
the borrower relative to the type of transaction, and the importance to 
the borrower of the credit, related supporting property, and coverage 
under TILA; (4) whether the loan is secured by the principal residence 
of the borrower; and (5) whether the exemption would undermine the goal 
of consumer protection.
    The Board has considered each of these factors and, based on that 
review, believes that the proposed exceptions and exemptions are 
appropriate. Mortgage loans generally are the largest credit obligation 
that most consumers assume. Most of these loans are secured by the 
consumer's principal residence. Consumer testing of borrowers with 
varying levels of financial sophistication shows that certain 
disclosures are not likely to significantly impact a consumer's 
decision to enter into a mortgage transaction or to exercise the right 
to rescind. Treating the amount financed and the number and total of 
payments as ``material disclosures'' would not provide a meaningful 
benefit to consumers in the form of useful information or protection. 
However, retaining these disclosures as material disclosures can 
increase the cost of credit when failure to provide these disclosures 
or technical violations due to calculation errors results in an 
extended right to rescind. Revising the definition of ``material 
disclosures'' to reflect the disclosures that are most critical to the 
consumer's evaluation of credit terms would better ensure that the 
compliance costs are aligned with disclosure requirements that provide 
meaningful benefits for consumers.
    An analysis of the disclosures retained, added, and removed from 
the definition of ``material disclosures'' is set forth below.
23(a)(5)(i) HOEPA and Higher-Priced Mortgage Disclosures and 
Limitations
    In 1994, Congress enacted HOEPA as an amendment to TILA, and added 
to the definition of ``material disclosures'' the special disclosures 
for HOEPA loans.\72\ TILA Section 103(u); 15 U.S.C. 102(u). Congress 
also provided that the inclusion of a provision in a HOEPA loan that is 
prohibited by HOEPA, such as negative amortization, is deemed to be a 
failure to deliver the material disclosures. TILA Section 129(j); 15 
U.S.C. 1639(j). Currently, the following disclosures for HOEPA loans 
are material disclosures: (1) A statement that the consumer is not 
obligated to complete the agreement merely because the consumer has 
received the disclosures or signed an application; (2) a statement that 
the consumer could lose the home if the consumer does not meet the loan 
obligations; (3) the annual percentage rate; (4) the amount of the 
regular payment and any balloon payment; (5) for variable-rate 
transactions, a statement that the interest rate and monthly payment 
may increase, and a disclosure of the maximum monthly payment; and (6) 
the amount borrowed. TILA Sections 103(u), 129(a); 15 U.S.C. 1602(u), 
1639(a); Sec. Sec.  226.23(a)(3) n.48, 226.32(c). In addition, TILA and 
Regulation Z prohibit certain loan terms in connection with mortgage 
loans covered by HOEPA, including some prepayment penalties, balloon 
payments, negative amortization, and rate increases upon default. TILA 
Section 129(c)-(g), (j); 15 U.S.C. 1639(c)-(g), (j); Sec. Sec.  
226.23(a)(3) n.48, 226.32(d), 226.35(b)(2). Because of the importance 
of these disclosures and limitations for high-cost loans, the Board 
proposes to retain their inclusion in the definition of ``material 
disclosures.''
---------------------------------------------------------------------------

    \72\ HOEPA was contained in the Riegle Community Development and 
Regulatory Improvement Act of 1994, Public Law 103-325, 108 Stat. 
2160 (1994). Section 152 of HOEPA added a new section 129 to TILA.
---------------------------------------------------------------------------

23(a)(5)(i)(A) Loan Amount
    Currently, TILA and Regulation Z do not require creditors to 
disclose the loan amount, except in connection with HOEPA loans. For 
those loans, creditors must disclose the amount borrowed, which is a 
material disclosure. TILA Sections 103(u), 129; 15 U.S.C. 1602(u), 
1639; Sec. Sec.  226.23(a)(3) n.48, 226.32(c)(5). The amount borrowed 
is treated as accurate if it is not more than $100 above or below the 
amount required to be disclosed. Section 226.32(c)(5). The Board 
adopted this requirement in December 2001, noting that the disclosure 
responded to concerns that consumers sometimes seek a modest loan 
amount only to discover at closing (or after) that the note amount is 
substantially higher due to fees and insurance premiums that are 
financed along with the requested loan amount. 66 FR 65611, Dec. 20, 
2001.
    For non-HOEPA loans, disclosure of the loan amount is not currently 
required under TILA or Regulation Z. Consumers testing showed, however, 
that participants could not ascertain the loan amount from other 
currently-required disclosures, such as the total of payments or the 
amount financed, which is generally the loan amount less the prepaid 
finance charge. The August 2009 Closed-End Proposal would require 
creditors to disclose the loan amount, defined as the principal amount 
the consumer will borrow as reflected in the loan contract. See 
proposed Sec.  226.38(a)(1). Participants in consumer testing were able 
to identify the exact loan amount based on this disclosure. 74 FR 
43292, Aug. 26, 2009. The Board noted that the loan amount is a core 
loan term that the consumer should be able to verify readily from the 
disclosure. Furthermore, the disclosure would alert the consumer to the 
financing of points and fees.
    Accordingly, the Board proposes Sec.  226.23(a)(5)(i)(A) to include 
the loan amount disclosed under Sec.  226.38(a)(1) in the definition of 
``material disclosures.'' This would not significantly increase 
creditors' burden because this amount presumably is reflected in other 
documents, such as the promissory note. However, to reduce the 
likelihood of rescission claims based on minor discrepancies between 
the disclosure and loan documents that are unlikely to affect a 
consumer's decision-making, the Board proposes to provide a tolerance 
for the disclosure of the loan amount.
    Tolerances. As discussed above, this proposal would provide a 
tolerance for the loan amount modeled after the tolerances for the 
finance charge created by Congress in 1995. Specifically, proposed 
Sec.  226.23(a)(5)(iii)(A) would provide that the loan amount 
disclosure would be considered accurate for purposes of rescission if 
the disclosed loan amount (1) is understated by no more than [frac12] 
of 1 percent of the face amount of the note or $100, whichever is 
greater; or (2) is greater than the amount required to be disclosed. 
Proposed Sec.  226.23(a)(5)(iii)(B) would provide a special tolerance 
for a refinancing with a creditor other than the current holder of the 
debt obligation if there is no new advance and no consolidation of 
existing loans. Under those circumstances, the loan amount would be 
considered accurate if the disclosed loan amount (1) is understated by 
no more than 1 percent of the face amount of the note or $100, 
whichever is greater; or (2) is greater than the amount required to be 
disclosed. These tolerances would be consistent with the tolerances 
applicable to the credit limit disclosed for HELOCs under proposed 
Sec.  226.15(a)(5)(iii).
    Proposed comment 23(a)(5)(iii)-2 would clarify that if there is no 
new advance of money and no consolidation of existing loans, a 
refinancing with the current holder who is not the original creditor is 
subject to the special

[[Page 58616]]

tolerance for the loan amount set forth in Sec.  226.23(a)(5)(iii)(B). 
However, a new transaction under Sec.  226.20(a)(1) with the original 
creditor who is also the current holder is exempt from rescission under 
Sec.  226.23(f)(2). Proposed comment 23(a)(5)(iii)-3 would clarify that 
the term ``new advance'' would have the same meaning as in proposed 
Sec.  226.23(f)(2)(ii).
    Proposed comment 23(a)(5)(iii)-1 would clarify that if the mortgage 
is a HOEPA loan, then the tolerance for the amount borrowed as provided 
in Sec.  226.32(c)(5) would apply to the disclosure of the loan amount 
for purposes of rescission. For example, the loan amount for a HOEPA 
loan would be treated as accurate if it is not more than $100 above or 
below the amount required to be disclosed.
    As stated above, the Board proposes to model the tolerance for the 
loan amount on the tolerances provided by Congress in 1995 for 
disclosure of the finance charge. However, the Board recognizes that 
the loan amount is typically smaller than the finance charge. The Board 
requests comment on whether it should decrease the tolerance in light 
of the difference between the amount of the finance charge and the loan 
amount. On the other hand, the Board recognizes that Congress set the 
$100 in 1995 and a higher dollar figure may be more appropriate at this 
time. Alternatively, it may be more appropriate to link the dollar 
figure to an inflation index, such as the Consumer Price Index. Thus, 
the Board also requests comments on whether the tolerance should be set 
at a higher dollar figure, or linked to an inflation index, such as the 
Consumer Price Index. In addition, due to compliance concerns, the 
Board has not proposed a special tolerance for the loan amount in 
connection with foreclosures as is provided for the finance charge. The 
Board solicits comment on this approach. Finally, the Board solicits 
comment on whether the proposed tolerances should conform to the 
tolerance for HOEPA loans, which would mean that the loan amount would 
be treated as accurate if it is not more than $100 above or below the 
amount required to be disclosed.
23(a)(5)(i)(B) Loan Term
    Currently, TILA and Regulation Z do not require disclosure of the 
loan term, although a consumer could conceivably calculate the loan 
term from the number of payments and the due dates or periods of 
payments, which are material disclosures. TILA Sections 103(u), 
128(a)(6); 15 U.S.C. 1602(u), 1638(a)(6); Sec. Sec.  226.18(g), 
226.23(a)(3) n.48. The loan term is the period of time to repay the 
obligation in full. However, consumer testing showed that consumers 
were not able to readily identify the loan term from the number of 
payments and due dates, particularly for loans such as adjustable-rate 
mortgages that have multiple payment levels. 74 FR 43292, Aug. 26, 
2009. Accordingly, the August 2009 Closed-End Proposal would require 
creditors to disclose prominently the loan term, while making the 
disclosure of the number of payments less prominent than it is under 
the current regulation. See proposed Sec.  226.38(a)(2), (e)(5)(i). The 
disclosure of the loan term would clearly convey the time period for 
repayment, which would help consumers evaluate whether the loan is 
appropriate for them. For example, the loan term would alert consumers 
to a balloon payment. For a 10-year loan with a balloon payment due in 
year 10 and an amortization schedule of 30 years, the proposed 
disclosure would state that the loan term was for 10 years. A consumer 
considering this loan could then evaluate whether that loan term is 
appropriate for his or her situation.
    Therefore, the Board proposes Sec.  226.23(a)(5)(i)(B) to include 
the loan term disclosed under Sec.  226.38(a)(2) in the definition of 
``material disclosures,'' and, for the reasons discussed below, to 
remove the number of payments from the definition. Including the loan 
term as a material disclosure should not expose creditors to increased 
risk, because it is the same concept as the number of payments, which 
is currently a material disclosure. Moreover, the loan term is a fixed 
number that is not dependent on other aspects of the transaction, such 
as the interest rate. The Board does not believe a tolerance for loan 
term is necessary, but seeks comment on this issue.
23(a)(5)(i)(C) Loan Type
    Currently, Sec.  226.18(f) requires creditors to disclose certain 
information about variable-rate features, as applicable. Current 
comment 23(a)(3)-2 provides that the failure to provide information 
about the APR also includes the failure to inform the consumer of the 
existence of a variable-rate feature, which is a material disclosure. 
Consumer testing showed, however, that the current variable-rate 
disclosure did not clearly convey whether the loan had a fixed- or 
variable-rate. 74 FR 43292, Aug. 26, 2009. Accordingly, the August 2009 
Closed-End Proposal would require the creditor to disclose whether a 
loan is a fixed-rate, adjustable-rate, or step-rate loan. See proposed 
Sec.  226.38(a)(3)(i). This proposed loan type disclosure would be 
broader than the current requirement because it would require the 
creditor to identify a loan that has a fixed or step rate, not just a 
loan with a variable rate. Consumer testing showed that whether a 
loan's rate is fixed or adjustable is very important to consumers 
because they want to know whether their loan rate and payments may 
increase. The loan type disclosure would alert consumers to the 
potential for payment shock in an adjustable-rate or step-rate loan.
    Accordingly, the Board proposes Sec.  226.23(a)(5)(i)(C) to include 
the loan type disclosed under Sec.  226.38(a)(3)(i) in the definition 
of ``material disclosures.'' The Board does not believe that correctly 
disclosing the loan type would significantly increase creditors' burden 
because creditors are already required to disclose a variable-rate 
feature. Moreover, the Board believes the risk of incorrectly 
disclosing the loan type is low, as it does not depend on mathematical 
calculations, and is a major feature of the loan agreement, which the 
creditor can easily identify.
23(a)(5)(i)(D) Loan Features
    To inform consumers of risky loan features, the August 2009 Closed-
End Proposal would require creditors to disclose the following loan 
features, as applicable: Step-payments, payment options, negative 
amortization, or interest-only payments. See proposed Sec.  
226.38(a)(3)(ii). Through disclosures of the loan features, 
participants in consumer testing were able to easily identify the type 
of loan being offered. 74 FR 43292, Aug. 26, 2009. To avoid information 
overload, the creditor would be limited to disclosure of two of the 
risky features. The Board noted that disclosures should clearly alert 
consumers to these features before the consumer becomes obligated on 
the loan. 74 FR at 43293, Aug. 26, 2009. Therefore, the Board proposes 
Sec.  226.23(a)(5)(i)(D) to include the loan features disclosed under 
Sec.  226.38(a)(3)(ii) in the definition of ``material disclosures.'' 
The loan features would inform consumers about risky features and help 
consumers decide whether to rescind a loan that might be unsuitable for 
their situation.
23(a)(5)(i)(E) Total Settlement Charges
    Currently, TILA and Regulation Z do not require creditors to 
disclose the total settlement charges, except as part of the disclosure 
of the finance charge. The disclosure of settlement charges is governed 
by RESPA, 12 U.S.C. 2601-2617, and implemented by HUD under Regulation 
X, 24 CFR Part 3500. Under RESPA and Regulation X, creditors must

[[Page 58617]]

provide a Good Faith Estimate (GFE) of settlement costs within three 
business days of application for a mortgage. Creditors must also 
provide a statement of the final settlement costs at loan closing in 
the HUD-1 or HUD-1A settlement statement. The GFE is subject to certain 
tolerances, absent changed circumstances. RESPA and Regulation X do 
not, however, provide any remedies for a violation of the accuracy 
requirements.
    Consumer testing conducted for the Board consistently showed that 
participants wanted information about settlement costs on the TILA 
disclosure to verify the loan costs and to avoid surprise costs at 
closing. 74 FR 43293, Aug. 26, 2009. Accordingly, the August 2009 
Closed-End Proposal would require the creditor to disclose on the final 
TILA the sum of the final settlement charges as disclosed on the HUD-1 
or HUD-1A settlement statement. Alternatively, the creditor could 
provide the consumer with a copy of the final HUD-1 or HUD-1A 
settlement statement. See proposed Sec.  226.38(a)(4). In either case, 
the proposal would require the creditor to provide a disclosure of the 
total settlement charges so that the consumer receives it three days 
before consummation.
    Because of the importance of this disclosure to consumers, the 
Board proposes Sec.  226.23(a)(5)(i)(E) to include the total settlement 
charges disclosed under Sec.  226.38(a)(4) in the definition of 
``material disclosures.'' Correctly disclosing total settlement charges 
may impose a burden on creditors, but the Board believes that any 
burden on creditors would be outweighed by the benefit to consumers of 
knowing their total final settlement charges before deciding whether to 
rescind the transaction.
    Tolerances. To reduce the likelihood that rescission claims would 
arise because of minor discrepancies in the disclosure of the total 
settlement charges, the Board proposes a tolerance in Sec.  
226.23(a)(5)(iv). As discussed above, this tolerance would be modeled 
after the tolerance for the finance charge created by Congress in 1995. 
Specifically, proposed Sec.  226.23(a)(5)(iv) would provide that the 
total settlement charges reflected on the TILA disclosure would be 
considered accurate for purposes of rescission if the total settlement 
charges disclosed are understated by no more than $100, or are greater 
than the amount required to be disclosed. These tolerances would be 
consistent with the proposed tolerances applicable to the disclosure of 
the total of all one-time fees imposed by the creditor and any third 
parties for opening a HELOC plan under proposed Sec.  226.15(a)(5)(ii).
    The Board proposes to model the tolerance for the disclosure of the 
total settlement charges on the narrow tolerances provided by Congress 
in 1995. However, due to compliance concerns, the Board has not 
proposed a special tolerance for foreclosures as is provided for the 
finance charge. The Board solicits comment on this approach. Moreover, 
the Board recognizes that the total settlement charges are typically 
much smaller than the finance charge, and for this reason has proposed 
a tolerance based on a dollar figure, rather than a percentage of the 
loan amount. The Board requests comment on whether it should increase 
or decrease the dollar figure. The Board also requests comment on 
whether the tolerance should be linked to an inflation index, such as 
the Consumer Price Index.
    The Board recognizes that Regulation X contains tolerances that 
limit creditors' and settlement service providers' ability to impose 
charges at closing that exceed the amounts previously disclosed on the 
GFE. Regulation X generally provides that certain charges may not 
exceed the amount disclosed on the GFE, the sum of other charges may 
not be greater than 10 percent above the sum of the amounts disclosed 
on the GFE, and certain other charges are permitted to change at 
settlement. See 12 CFR 3500.7(e). However, the Board does not believe 
that it would be feasible to adopt this approach for the TILA 
disclosure. First, the Regulation X and Regulation Z tolerances serve 
different purposes. The Regulation X tolerances determine the extent to 
which the amounts charged at closing can vary from the amounts 
disclosed on the GFE. The Regulation Z tolerances would determine the 
extent to which the total settlement charges actually disclosed can 
vary from the total settlement charges required to be disclosed. 
Second, the tolerances differ in the level of detail required for 
analysis. The Regulation X tolerances require an analysis of specific 
line items on the HUD-1, whereas the proposed Regulation Z tolerance 
would be based on the total of all settlement charges as provided on 
the TILA disclosure. This proposal does not currently contemplate that 
the creditor or consumer would need to review the itemized list of 
charges on the HUD-1 to determine whether the disclosure of the total 
settlement charges is accurate for purposes of rescission under TILA. 
The Board solicits comment on whether the Regulation X tolerances, or 
some other tolerance based on a percentage, would be appropriate for 
the disclosure of the total settlement charges on the TILA disclosure 
for purposes of rescission.
23(a)(5)(i)(F) Prepayment Penalty
    For HOEPA loans and higher-priced mortgage loans, prepayment 
penalties are subject to certain restrictions, and the inclusion in a 
HOEPA loan of a prohibited prepayment penalty is deemed a failure to 
deliver a material disclosure. TILA Section 129(c), (j); 15 U.S.C. 
1639(c), (j); Sec. Sec.  226.23(a)(3) n.48, 226.32(d)(3), 226.35(b)(2). 
For all other mortgages, TILA and Regulation Z require disclosure of 
whether or not the consumer may pay a penalty if the obligation is 
prepaid in full, but this is not a material disclosure. TILA Section 
128(a)(11); 15 U.S.C. 1638(a)(11); Sec.  226.18(k)(1).
    Consumer testing showed that the current prepayment penalty 
disclosure does not adequately inform consumers of the existence of a 
penalty, the magnitude of the penalty, and under what circumstances it 
would apply. 74 FR 43294, Aug. 26, 2009. Consumers with adjustable-rate 
mortgages, in particular, need to be informed of the potential payment 
shock of a prepayment penalty before they accept a loan, as they may be 
planning to refinance the loan before the rate and payment adjust. The 
August 2009 Closed-End Proposal would require all mortgage loans to 
indicate the amount of the maximum prepayment penalty and the 
circumstances and period in which the creditor may impose the penalty. 
See proposed Sec.  226.38(a)(5). Therefore, the Board proposes Sec.  
226.23(a)(5)(i)(F) to include the prepayment penalty disclosed under 
Sec.  226.38(a)(5) in the definition of ``material disclosures.''
    Tolerances. The Board recognizes that there is some risk of error 
in disclosing the maximum penalty amount. Moreover, it does not appear 
consumers need to know the exact amount of the prepayment penalty to 
make a decision about whether to rescind the loan. To reduce the 
likelihood that rescission claims would arise because of minor 
discrepancies in the disclosure of the prepayment penalty, the Board 
proposes a tolerance in Sec.  226.23(a)(5)(iv). As discussed above, 
this tolerance would be modeled after the tolerances for the finance 
charge created by Congress in 1995. Specifically, proposed Sec.  
226.23(a)(5)(iv) would provide that the prepayment penalty would be 
considered accurate for purposes of rescission if the disclosed 
prepayment penalty: (1) Is understated by no more

[[Page 58618]]

than $100; or (2) is greater than the amount required to be disclosed.
    The Board proposes to model the tolerance for the disclosure of the 
prepayment penalty on the narrow tolerances provided by Congress in 
1995 for disclosure of the finance charge. However, due to compliance 
concerns, the Board has not proposed a special tolerance for 
foreclosures as is provided for the finance charge. The Board solicits 
comment on this approach. Moreover, the Board recognizes that the 
prepayment penalty is typically much smaller than the finance charge, 
and for this reason has proposed a tolerance based on a dollar figure, 
rather than a percentage of the loan amount. The Board requests comment 
on whether it should increase or decrease the dollar figure. The Board 
also requests comment on whether the tolerance should be linked to an 
inflation index, such as the Consumer Price Index.
23(a)(5)(i)(G) Annual Percentage Rate
    Currently, TILA and Regulation Z require disclosure of the finance 
charge expressed as an ``annual percentage rate,'' which is a material 
disclosure. TILA Sections 103(u), 128(a)(4); 15 U.S.C. 1602(u), 
1638(a)(4); Sec. Sec.  226.18(e), 226.23(a)(3) n.48. Sections 226.23(g) 
and (h) provide tolerances for disclosure of the APR.
    The APR is the only disclosure that combines interest and fees to 
express the overall cost of the credit in a single number that 
consumers can use to compare different terms. Consumer testing showed 
that consumers did not understand the current APR disclosure, and did 
not use it to evaluate loan offers. 74 FR 43296, Aug. 26, 2009. The 
August 2009 Closed-End Proposal, however, would improve the disclosure 
of the APR by making it a more inclusive measure of the cost of credit. 
See proposed Sec.  226.38(b). The proposal would also improve the 
manner in which the APR is disclosed on the TILA statement by showing 
the APR in the context of other rates being offered in the market for 
similar loan products. Accordingly, the Board proposes Sec.  
226.23(a)(5)(i)(G) to retain the APR disclosed under Sec.  226.38(b)(1) 
as a material disclosure.
    The Board proposes to move the tolerances applicable to finance 
charges (now called interest and settlement charges) and the APR in 
current Sec.  226.23(g) and (h)(2) to proposed Sec.  226.23(a)(5)(ii) 
and to make technical revisions. Specifically, proposed Sec.  
226.23(a)(5)(ii) would provide a general tolerance for disclosure of 
the interest and settlement charges and the APR, a special tolerance 
for a refinancing with no new advance, and a special tolerance for 
foreclosures. Under the general rule, the interest and settlement 
charges and the APR would be considered accurate if the disclosed 
interest and settlement charges are understated by no more than \1/2\ 
of 1 percent of the face amount of the note or $100, whichever is 
greater; or are greater than the amount required to be disclosed. There 
is a greater tolerance for a refinancing with a new creditor if there 
is no new advance and no consolidation of existing loans. In that case, 
the interest and settlement charges and the APR would be considered 
accurate if the disclosed interest and settlement charges are 
understated by no more than 1 percent of the face amount of the note or 
$100, whichever is greater; or are greater than the amount required to 
be disclosed. Finally, there is a stricter tolerance after the 
initiation of foreclosure on the consumer's principal dwelling that 
secures the credit transaction. In that case, the interest and 
settlement charges and the APR would be considered accurate if the 
disclosed interest and settlement charges are understated by no more 
than $35; or are greater than the amount required to be disclosed. 
Thus, the APR is treated as accurate if the disclosed APR is based on 
interest and settlement charges that would be considered accurate under 
the rule.
23(a)(5)(i)(H) Interest Rate and Payment Summary
    Currently, TILA and Regulation Z do not require disclosure of the 
interest rate, but do require disclosure of the number, amount, and due 
dates or period of payments scheduled to repay the total of payments, 
which are material disclosures. TILA Sections 103(u), 128(a)(6); 15 
U.S.C. 1602(u), 1638(a)(6); Sec. Sec.  226.18(g), 226.23(a)(3) n.48. 
The recent MDIA amendments to TILA also provide that, for ``adjustable-
rate or payment loans,'' creditors must disclose examples of the 
interest rates and payments, including the maximum possible interest 
rate and payment under the loan's terms. TILA Section 128(b)(2)(C); 15 
U.S.C. 1638(b)(2)(C). HOEPA loans are subject to additional payment 
disclosures, which are material disclosures. TILA Sections 103(u), 
129(a)(2)(A); 15 U.S.C. 1602(u), 1639(a)(2)(A); Sec. Sec.  226.23(a)(3) 
n.48, 226.32(c)(3), (4). For HOEPA loans, the creditor must disclose 
the amount of the regular monthly (or other periodic) payment and the 
amount of any balloon payment. The regular payment disclosed is 
accurate if it is based on an amount borrowed that is not more than 
$100 above or below the amount required to be disclosed. Section 
226.32(c)(3) and (5). In addition, for HOEPA loans that are variable-
rate transactions, the creditor must disclose a statement that the 
interest rate and monthly payment may increase, and the amount of the 
maximum monthly payment.
    Consumer testing consistently showed that consumers shop for and 
evaluate a mortgage based on the interest rate and monthly payment. 74 
FR 43299, Aug. 26, 2009. Consumer testing also indicated that the 
current TILA payment schedule is ineffective at communicating to 
consumers what could happen to their interest rate and payments for an 
adjustable-rate mortgage. Thus, the August 2009 Closed-End Proposal 
would add the interest rate to the TILA statement and revise the 
disclosure of the payment. See proposed Sec.  226.38(c). For 
adjustable-rate or step-rate loans, the proposal would require 
disclosure of the interest rate and payment at consummation, the 
maximum interest rate and payment at first adjustment, and the highest 
possible maximum interest rate and payment. Special disclosures would 
be required for loans with negatively-amortizing payment options, 
introductory interest rates, interest-only payments, and balloon 
payments.
    Accordingly, the Board proposes Sec.  226.23(a)(5)(i)(H) to include 
the interest rate and payment summary disclosed under Sec.  226.38(c) 
in the definition of ``material disclosures.'' The Board believes that 
adding the interest rate to the definition of material disclosures 
would not unduly increase creditor burden, as the interest rate is a 
key term of the loan agreement. In addition, payment information, 
particularly for adjustable-rate transactions, is critical to the 
consumer's evaluation of the affordability of the loan and decision of 
whether to rescind.
    Tolerances. Although creditors may face some risk for incorrectly 
disclosing payments, the Board believes such risk is outweighed by the 
benefit to consumers of knowing the payment or payments due over the 
life of the loan. However, to mitigate the risk that insignificant 
errors in the payment disclosures would result in an extended right to 
rescind, the Board proposes a tolerance for the payments. As discussed 
above, this tolerance would be modeled after the tolerance for the 
finance charge created by Congress in 1995. Specifically, proposed 
Sec.  226.23(a)(5)(iv) would provide that the payment summary would be 
considered accurate for purposes of rescission if the

[[Page 58619]]

disclosed payment is understated by not more than $100, or is greater 
than the amount required to be disclosed.
    Proposed comment 23(a)(5)(iv)-1 would clarify that if the mortgage 
is a HOEPA loan, then the tolerance for the regular payment as provided 
in Sec.  226.32(c)(3) would apply. In a HOEPA loan, there is no 
tolerance for a payment other than the regular payment. Thus, the 
disclosure of the regular payment in the payment summary for a HOEPA 
loan is accurate if it is based on a loan amount that is not more than 
$100 above or below the amount required to be disclosed. The disclosure 
of any other payment, such as the maximum monthly payment, is not 
subject to a tolerance.
    The Board proposes to model the tolerance for the disclosure of the 
payment summary on the narrow tolerances for the finance charge 
provided by Congress in 1995. However, due to compliance concerns, the 
Board has not proposed a special tolerance for foreclosures as is 
provided for the finance charge. The Board solicits comment on this 
approach. Moreover, the Board recognizes that the payments are 
typically much smaller than the finance charge, and for this reason has 
proposed a tolerance based on a dollar figure, rather than a percentage 
of the loan amount. The Board requests comment on whether it should 
increase or decrease the dollar figure. The Board also requests comment 
on whether the tolerance should be linked to an inflation index, such 
as the Consumer Price Index.
23(a)(5)(i)(I) Finance Charge; Interest and Settlement Charges
    TILA Section 106(a) provides that the finance charge is the sum of 
all charges, payable by the consumer and imposed by the creditor as a 
condition of or incident to the extension of credit. 15 U.S.C. 105(a). 
The finance charge is meant to represent the cost of credit in dollar 
terms, and is used to calculate the APR. Currently, TILA and Regulation 
Z require disclosure of the finance charge, which is a material 
disclosure. TILA Sections 103(u), 128(a)(3); 15 U.S.C. 1602(u), 
1638(a)(3); Sec. Sec.  226.18(d), 226.23(a)(3) n.48. In 1995, Congress 
amended TILA to provide tolerances for disclosure of the finance charge 
in connection with a rescission claim.\73\ Sections 226.23(g) and (h) 
currently implement these tolerances.
---------------------------------------------------------------------------

    \73\ Public Law 104-29 Sec. Sec.  3 and 8, 109 Stat. 274, 272 
and 275 (1995), codified at 15 U.S.C. 1605(f)(2) and 1635(i)(2).
---------------------------------------------------------------------------

    The August 2009 Closed-End Proposal makes the disclosure less 
prominent, but would revise the disclosure to aid consumer 
understanding. See proposed Sec.  226.38(e)(5)(ii). Consumer testing 
showed that participants did not understand the term ``finance 
charge,'' so the finance charge would be referred to as ``interest and 
settlement charges.'' 74 FR 43307, Aug. 26, 2009. The proposal would 
also require a brief statement that the interest and settlement charges 
represent part of the total payments amount. Consumer testing suggests 
that providing the interest and settlement charges in the context of 
the total payments improves consumers' comprehension of the total cost 
of credit.
    Therefore, the Board proposes Sec.  226.23(a)(5)(i)(I) to retain 
the finance charge (interest and settlement charges) disclosed under 
Sec.  226.38(e)(5)(ii) as a material disclosure. Although consumer 
testing suggested that the interest and settlement charges disclosure 
is not as important to consumers as certain other information, the 
disclosure is still important to understanding the total cost of 
credit.
    The Board proposes to move the tolerances applicable to finance 
charges (now called interest and settlement charges) and the APR in 
current Sec.  226.23(g) and (h)(2) to proposed Sec.  226.23(a)(5)(ii) 
and to make technical revisions. Specifically, proposed Sec.  
226.23(a)(5)(ii) would provide a general tolerance for disclosure of 
the interest and settlement charges and the APR, a special tolerance 
for a refinancing with no new advance, and a special tolerance for 
foreclosures. Under the general rule, the interest and settlement 
charges and the APR would be considered accurate if the disclosed 
interest and settlement charges are understated by no more than \1/2\ 
of 1 percent of the face amount of the note or $100, whichever is 
greater; or are greater than the amount required to be disclosed. There 
is a greater tolerance for a refinancing with a new creditor if there 
is no new advance and no consolidation of existing loans. In that case, 
the interest and settlement charges and the APR would be considered 
accurate if the disclosed interest and settlement charges are 
understated by no more than 1 percent of the face amount of the note or 
$100, whichever is greater; or are greater than the amount required to 
be disclosed. Finally, there is a stricter tolerance after the 
initiation of foreclosure on the consumer's principal dwelling that 
secures the credit transaction. In that case, the interest and 
settlement charges and the APR would be considered accurate if the 
disclosed interest and settlement charges are understated by no more 
than $35; or are greater than the amount required to be disclosed.
    The Board believes these tolerances should mitigate any risk 
resulting from insignificant disclosure errors related to the finance 
charges (interest and settlement charges) and the APR. In the August 
2009 Closed-End Proposal, the Board proposed to require more third-
party charges be included in the finance charge. See proposed Sec.  
226.4(g). In light of that proposal, the Board solicits comment on 
whether it should increase the finance charge tolerance, or whether the 
tolerance should be linked to an inflation index, such as the Consumer 
Price Index. Disclosures That Would Be Removed from the Definition of 
``Material Disclosures''
    As discussed above, the Board proposes to remove the following 
disclosures from the definition of ``material disclosures:'' the amount 
financed, the total of payments, and the number of payments. Consumer 
testing has shown that these disclosures are not likely to 
significantly impact a consumer's decision to enter into a mortgage 
transaction. Thus, these disclosures are not likely to influence a 
consumer's decision of whether to rescind.
    Amount financed. Currently, TILA and Regulation Z require 
disclosure of the ``amount financed,'' which is a material disclosure. 
TILA Sections 103(u), 128(a)(2); 15 U.S.C. 1602(u), 1638(a)(2); 
Sec. Sec.  226.18(b), 226.23(a)(3) n.48. The August 2009 Closed-End 
Proposal would require disclosure of the amount financed, but the 
disclosure would be less prominent than it is under the current 
regulation. See proposed Sec.  226.38(e)(5)(iii). During consumer 
testing, participants had difficulty understanding the disclosure of 
the amount financed and some mistook it for the loan amount (thereby 
under-estimating the loan amount). 74 FR 43308, Aug. 26, 2009. 
Consumers stated that they would not be likely to use the disclosure to 
shop for loans or to understand their loan terms. For these reasons, 
the Board proposes to remove the amount financed from the definition of 
``material disclosures.'' The Board believes that requiring the loan 
amount as a material disclosure provides better protection for 
consumers.
    Total of payments. Currently, TILA and Regulation Z require 
disclosure of the total of payments, which is a material disclosure. 
TILA Section 103(u), 128(a)(5); 15 U.S.C. 1602(u), 1638(a)(5); 
Sec. Sec.  226.18(h), 226.23(a)(3) n.48. The August 2009 Closed-End 
Proposal would require disclosure of the number and total of payments, 
but the

[[Page 58620]]

disclosures would be less prominent than they are under the current 
regulation. Consumer testing showed that most participants did not find 
the total of payments to be helpful in evaluating a loan offer. 74 FR 
43306, Aug. 26, 2009. For this reason, the Board proposes to remove the 
total of payments from the definition of ``material disclosures.''
    Number of payments. Currently, TILA and Regulation Z require 
disclosure of the number of payments, which is a material disclosure. 
TILA Sections 103(u), 128(a)(6); 15 U.S.C. 1602(u), 1638(a)(6); 
Sec. Sec.  226.18(g), 226.23(a)(3) n.48. The August 2009 Closed-End 
Proposal would require disclosure of the number and total of payments, 
but the disclosures would be less prominent than they are under the 
current regulation. Consumer testing showed that most consumers did not 
use the number and total of payments to evaluate a loan offer. 74 FR 
43306, Aug. 26, 2009. Moreover, consumers were not able to readily 
identify the loan term from the number of payments, particularly for 
loans that had multiple payment levels. 74 FR 43292, Aug. 26, 2009. For 
these reasons, the Board proposes to remove the number of payments from 
the definition of ``material disclosures.'' As discussed above, the 
Board believes that the addition of the loan term to the definition of 
``material disclosures'' would provide a more meaningful benefit to 
consumers.
Material Disclosures for Reverse Mortgages
    The Board is proposing disclosures for open-end reverse mortgages 
in Sec.  226.33 that would incorporate many of the disclosures required 
by proposed Sec.  226.38 for all closed-end mortgages into the reverse 
mortgage specific disclosures. Proposed Sec.  226.23(a)(5)(i) would 
contain cross-references to analogous provisions in proposed Sec.  
226.33. In addition, as discussed in the section-by-section analysis to 
Sec.  226.33, some of the proposed new material disclosures for closed-
end mortgages do not apply to reverse mortgages and would not be 
required. Thus, for reverse mortgages, the loan amount, loan term, loan 
features, and payment summary would not be material disclosures because 
the disclosures do not apply to, and would not be required for, reverse 
mortgages. The Board requests comment on whether any of these, or 
other, disclosures should be material disclosures for reverse 
mortgages.
23(b) Notice of Right to Rescind
    TILA Section 125(a) requires the creditor to disclose clearly and 
conspicuously the right of rescission to the consumer, and requires the 
creditor to provide appropriate forms for the consumer to exercise the 
right to rescind. 15 U.S.C. 1635(a). Section 226.23(b) implements TILA 
Section 125(a) by setting forth format, content, and timing of delivery 
standards for the notice of the right to rescind for closed-end 
mortgage transactions subject to the right. Section 226.23(b) also 
states that the creditor must deliver two copies of the notice of the 
right to rescind to each consumer entitled to rescind (one copy if the 
notice is delivered in electronic form in accordance with the E-Sign 
Act). The right to rescind generally does not expire until midnight 
after the third business day following the latest of: (1) Consummation 
of the transaction, (2) delivery of the rescission notice, or (3) 
delivery of the material disclosures. TILA Section 125(a); 15 U.S.C. 
1635(f); Sec.  226.23(a)(3). If the rescission notice or the material 
disclosures are not delivered, a consumer's right to rescind may extend 
for up to three years from consummation. TILA Section 125(f); 15 U.S.C. 
1635(f); Sec.  226.23(a)(3).
    As part of the 1980 Truth in Lending Simplification and Reform Act, 
Congress added TILA Section 105(b), requiring the Board to publish 
model disclosure forms and clauses for common transactions to 
facilitate creditor compliance with the disclosure obligations and to 
aid borrowers in understanding the transaction by using readily 
understandable language. 12 U.S.C. 1615(b). The Board issued its first 
model forms for the notice of the right to rescind certain closed-end 
transactions in 1981. 46 FR 20848, Apr. 7, 1981. While the Board has 
made some changes to the content of the model forms over the years, the 
current Model Forms H-8 and H-9 in Appendix H to part 226 are generally 
the same as when they were adopted in 1981.
    The Board has been presented with a number of questions and 
concerns regarding the notice requirements and the model forms. 
Creditors have raised concerns about the two-copy rule (as described in 
the section-by-section analysis for 15(b) above), indicating this rule 
can impose litigation risks when a consumer alleges an extended right 
to rescind based on the creditor's failure to deliver two copies of the 
notice. In addition, particular problems with the format, content, and 
timing of delivery of the notice were highlighted during the Board's 
outreach and consumer testing conducted for this proposal. To address 
these problems and concerns, the Board proposes to revise Sec.  
226.23(b) and the related commentary. As discussed in more detail 
below, the Board proposes to revise Sec.  226.23(b) to require 
creditors to provide one notice of the right to rescind to each 
consumer entitled to rescind. In addition, the Board proposes to revise 
significantly the content of the rescission notice by setting forth new 
mandatory and optional disclosures for the notice. The Board also 
proposes new format and timing requirements for the notice. Moreover, 
as discussed in more detail in the section-by-section analysis to 
Appendix H to part 226, the Board proposes to revise significantly 
Model Forms H-8 (redesignated as proposed H-8(A)) and H-9, and to add 
Sample H-8(B).
23(b)(1) Who Receives Notice
    TILA Section 125(a) provides that the creditor must notify ``any 
obligor in a transaction subject to this section [of] the rights of the 
obligor under this section.'' 15 U.S.C. 1635(a). Section 226.23(b)(1) 
currently states that the creditor must deliver two copies of the 
notice of the right to rescind to each consumer entitled to rescind 
(one copy if the notice is delivered in electronic form in accordance 
with the E-Sign Act). Obtaining from the consumer a written 
acknowledgment of receipt of the notice creates a rebuttable 
presumption of delivery. See 15 U.S.C. 1635(c). Comment 23(b)-1 states 
that in a transaction involving joint owners, both of whom are entitled 
to rescind, both must receive two copies of the notice of the right of 
rescission.
    The Board originally issued the two-copy rule in 1968, and opted to 
retain the rule in 1981 to ensure that consumers would be able to use 
one copy to rescind the loan and retain the other copy with information 
about their rights. See 34 FR 2002, 2010, Feb. 11, 1969; 46 FR 20848, 
20884, Apr. 7, 1981. The Board continues to believe that consumers who 
rescind should be able to keep the written explanation of their rights. 
However, since 1981, the need for the two-copy rule seems to have 
diminished while litigation involving the two-copy rule has increased. 
First, technological advances have made it easier for consumers to 
retain a copy of the notice of right to rescind, which discloses their 
rights. Today, consumers generally have greater access to copy 
machines, scanners, and electronic mail. In consumer testing conducted 
for the Board, almost all participants said that they would make and 
keep a copy of the form if they decided to exercise the right. 
Moreover, the two-copy rule can

[[Page 58621]]

impose litigation risks when a consumer alleges an extended right to 
rescind based on the creditor's failure to deliver two copies of the 
notice.\74\ Creditors have expressed concern that it is difficult to 
prove, if challenged, that the consumer received two copies of the 
notice at loan closing. Such case-by-case determinations consume 
judicial resources and increase credit costs. Finally, the two-copy 
rule would be less necessary because the Board is proposing a model 
rescission notice that would include a notification of rescission at 
the bottom, which the consumer could separate and deliver to the 
creditor while retaining the top portion of the notice containing the 
description of the consumer's rights.
---------------------------------------------------------------------------

    \74\ See, e.g., Smith v. Argent Mortgage Co., LLC, 2009 U.S. 
App. LEXIS 10702 at *4 (10th Cir. 2009); American Mortgage Network, 
Inc. v. Shelton, 486 F.3d 815, 817 (4th Cir. 2007); Wells Fargo 
Bank, N.A. v. Jaaskelainen, 407 B.R. 449, 452 (D. Mass. 2009); Singh 
v. Washington Mutual Bank, 2009 U.S. Dist. LEXIS 73315 at *3 (N.D. 
Cal. 2009); Jobe v. Argent Mortgage Co, LLC, 2009 U.S. Dist. LEXIS 
70311 at *1 (M.D. Pa. 2009); Lippner v. Deutsche Bank National Trust 
Co., 544 F. Supp. 2d 695, 697 (N.D. Ill. 2008); In re Merriman, 329 
B.R. 710, 714 (D. Kan. 2005).
---------------------------------------------------------------------------

    For these reasons, the Board proposes to revise Sec.  226.23(b)(1) 
to require creditors to provide one notice of the right to rescind to 
each consumer entitled to rescind. Comment 23(b)-1 would be revised to 
delete references to the two-copy requirement. The Board further 
proposes to remove the references to the E-Sign Act from Sec.  
226.23(b)(1) and comment 23(b)-1. The requirement to provide one notice 
of the right to rescind would be the same for electronic and non-
electronic disclosures. Requirements related to the E-Sign Act appear 
elsewhere in Regulation Z. See Sec. Sec.  226.5(a), 226.17(a), 
226.31(b).
23(b)(2) Format of Notice
    The current formatting requirements for the notice of the right of 
rescission appear in Sec.  226.23(b)(1) and are elaborated upon in 
comment 23(b)-2. Section 226.23(b)(1) states that the notice shall be 
on a separate document and the required information shall be disclosed 
clearly and conspicuously. Comment 23(b)-2 provides that the notice 
must be on a separate piece of paper, but may appear with other 
information such as the itemization of the amount financed. Comment 
23(b)-2 additionally states that the required information must be clear 
and conspicuous, but no minimum type size or other technical 
requirements are imposed. Comment 23(b)-2 also refers to the forms in 
Appendix H to part 226 as models that the creditor may use in giving 
the notice.
    For the reasons discussed in the section-by-section analysis to 
proposed Sec.  226.15(b), the Board proposes new format rules in Sec.  
226.23(b)(2) and related commentary intended to (1) Improve consumers' 
ability to identify disclosed information more readily; (2) emphasize 
information that is most important to consumers who wish to exercise 
the right of rescission; and (3) simplify the organization and 
structure of required disclosures to reduce complexity and 
``information overload.'' The Board proposes these format requirements 
pursuant to its authority under TILA Section 105(a). 15 U.S.C. 1604(a). 
Section 105(a) authorizes the Board to make exceptions and adjustments 
to TILA to effectuate the statute's purpose, which include facilitating 
consumers' ability to compare credit terms and helping consumers avoid 
the uninformed use of credit. 15 U.S.C. 1601(a), 1604(a). The Board 
believes that the proposed formatting rules described below would 
facilitate consumers' ability to understand the rescission right and 
avoid the uninformed use of credit.
    Specifically, proposed Sec.  226.23(b)(2) requires the mandatory 
and optional disclosures to appear on the front side of a one-page 
document, separate from all other unrelated material, and to be given 
in a minimum 10-point font. Proposed Sec.  226.23(b)(2) also requires 
that most of the mandatory disclosures appear in a tabular format. 
Moreover, the notice would contain a ``tear off'' section at the bottom 
of the page, which the consumer could use to exercise the right of 
rescission. Information unrelated to the mandatory disclosures would 
not be permitted to appear on the notice.
    Proposed comment 23(b)(2)-1 states that the creditor's failure to 
comply with the format requirements set forth in Sec.  226.23(b)(2) 
does not by itself constitute a failure to deliver the notice to the 
consumer. However, to deliver the notice properly for purposes of Sec.  
226.23(a)(3), the creditor must provide the mandatory disclosures 
appearing in the notice clearly and conspicuously, as described in 
proposed Sec.  226.23(b)(3) and proposed comment 23(b)(3)-1.
    Section 226.17(a) generally requires that creditors must make the 
disclosures required by subpart C regarding closed-end credit 
(including the rescission notice) in writing in a form that the 
consumer may keep. Proposed comment 23(b)(2)-2 cross references these 
requirements in Sec.  226.17(a) to clarify that they apply to the 
rescission notice.
23(b)(2)(i) Grouped and Segregated
    Current Sec.  226.23(b)(1) states that the notice shall be on a 
separate document. Comment 23(b)-2 provides that the notice must be on 
a separate piece of paper, but may appear with other information such 
as the itemization of the amount financed. The Board is concerned that 
allowing creditors to combine the right of rescission disclosures with 
other unrelated information, in any format, will diminish the clarity 
of this key material, potentially cause ``information overload,'' and 
increase the likelihood that consumers may not read the notice of the 
right of rescission.
    To address these concerns, proposed Sec.  226.23(b)(2)(i) requires 
the mandatory and any optional rescission disclosures to appear on the 
front side of a one-page document, separate from any unrelated 
information. Only information directly related to the mandatory 
disclosures may be added.
    The proposal also requires that certain information be grouped 
together. Proposed Sec.  226.23(b)(2)(i) requires that disclosure of 
the security interest, the right to cancel, the refund of fees upon 
cancellation, the effect of cancellation on the previous loan with the 
same creditor, how to cancel, and the deadline for cancelling be 
grouped together in the notice. This information was grouped together 
in forms the Board tested, and participants generally found the 
information easy to identify and understand. In addition, this proposed 
grouping ensures that the information about the consumer's rights would 
be separated from information at the bottom of the notice, which is 
designed for the consumer to detach and use to exercise the right of 
rescission.
23(b)(2)(ii) Specific Format
    Current comment 23(b)-2 states that the information disclosed in 
the notice must be clear and conspicuous, but no minimum type size or 
other technical requirements are imposed. The Board proposes to impose 
formatting requirements for this information, to improve consumers' 
comprehension of the required disclosures. See proposed Sec.  
226.23(b)(2)(i) and (ii). For example, some information would be 
required to be in tabular format. The current model forms for the 
rescission notice provide information in narrative form, which consumer 
testing participants found difficult to read and understand. However, 
consumer testing showed that when rescission information was presented 
in a tabular format, participants found the information

[[Page 58622]]

easier to locate and their comprehension of the disclosures improved.
    The proposal requires the title of the notice to appear at the top 
of the notice. Certain mandatory disclosures (i.e., the security 
interest, the right to cancel, the refund of fees upon cancellation, 
the effect of cancellation on the previous loan with the same creditor, 
how to cancel, and the deadline for cancelling in proposed Sec.  
226.23(b)(3)(i)-(vi)) must appear beneath the title and be in the form 
of a table. If the creditor chooses to place in the notice one or both 
of the optional disclosures (e.g., regarding joint owners and 
acknowledgement of receipt as permitted in proposed Sec.  
226.23(b)(4)), the text must appear after the disclosures required by 
proposed Sec.  226.23(b)(3)(i)-(vi), but before the portion of the 
notice that the consumer may use to exercise the right of rescission 
required by proposed Sec.  226.23(b)(3)(vii). If both optional 
disclosures are inserted, the statement regarding joint owners must 
appear before the statement acknowledging receipt. If the creditor 
chooses to insert an acknowledgement as described in Sec.  
226.23(b)(4)(ii), the acknowledgement must appear in a format 
substantially similar to the format used in proposed Forms H-8(A) or H-
9 in Appendix H to part 226. Proposed Sec.  226.23(b)(2)(ii) also 
requires the mandatory disclosures required under proposed Sec.  
226.23(b)(3) and the optional disclosures permitted under Sec.  
226.23(b)(4) to be given in a minimum 10-point font.
23(b)(3) Required Content of Notice
    TILA Section 125(a) and current Sec.  226.23(b)(1) require that all 
disclosures of the right to rescind be made clearly and conspicuously. 
15 U.S.C. 1635(a). Proposed comment 23(b)(3)-1 clarifies that, to meet 
the clear and conspicuous standard, disclosures must be in a reasonably 
understandable form and readily noticeable to the consumer.
    Current Sec.  226.23(b)(1) provides the list of disclosures that 
must appear in the notice: (i) An identification of the transaction; 
(ii) the retention or acquisition of a security interest in the 
consumer's principal dwelling; (iii) the consumer's right to rescind 
the transaction; (iv) how to exercise the right to rescind, with a form 
for that purpose, designating the address of the creditor's (or it's 
agent's) place of business; (v) the effects of rescission, as described 
in current Sec.  226.23(d); and (vi) the date the rescission period 
expires. Current comment 23(b)-3 states that the notice must include 
all of the information described in Sec.  226.23(b)(1)(i)-(v). It also 
provides that the requirement to identify the transaction may be met by 
providing the date of the transaction. Current Model Forms H-8 and H-9 
contain these disclosures. However, consumer testing of the model forms 
conducted by the Board for this proposal suggests that the amount and 
complexity of the information currently required to be disclosed in the 
notice would result in information overload and discourage consumers 
from reading the notice carefully. The Board also is concerned that 
certain terminology in the current model forms would impede consumer 
comprehension of the information.
    To address these concerns, the Board proposes to revise the 
requirements for the notice in new Sec.  226.23(b)(3). Proposed Sec.  
226.23(b)(3) removes information required under current Sec.  
226.23(b)(1)(i)-(v) that consumer testing indicated is unnecessary for 
the consumer's comprehension and exercise of the right of rescission. 
The proposed section also simplifies the information disclosed and 
presents key information in plain language instead of legalistic terms. 
The Board proposes these revisions pursuant to its authority in TILA 
Section 125(a) which provides that creditors shall clearly and 
conspicuously disclose, in accordance with regulations of the Board, to 
any obligator in a transaction subject to rescission the rights of the 
obligor. 15 U.S.C. 1635(a).
    Identification of transaction. Current Sec.  226.23(b)(1) requires 
a creditor to identify the transaction in the rescission notice; 
current comment 23(b)-3 provides that the requirement that the 
transaction be identified may be met by providing the date of the 
transaction. As discussed in more detail in the section-by-section 
analysis to proposed Sec.  226.15(b)(3)(vii), creditors, servicers and 
their trade associations noted that creditors might be unable to 
provide an accurate transaction date when a transaction is conducted by 
mail or through an escrow agent, as is customary in some states. They 
noted that in these cases, the date of the transaction cannot be 
identified accurately before it actually occurs. For example, for a 
transaction by mail, the creditor cannot know at the time of mailing 
the rescission notice when the consumer will sign the loan documents 
(i.e., the date of the transaction).
    To address these concerns, the Board proposes not to require that 
the transaction be identified in the rescission notice for closed-end 
mortgages. Accordingly, the provision in current comment 23(b)-3 about 
the date of the transaction satisfying this requirement would be 
deleted as obsolete. Unlike rescission rights for HELOCs, which may 
often arise for events occurring after account opening such as 
increasing the credit limit, the right of rescission for closed-end 
mortgages normally arises only at consummation. See section-by-section 
analysis to proposed Sec.  226.15(b). In addition, as discussed in more 
detail in the section-by-section analysis to proposed Sec.  
226.23(b)(5), the Board proposes to require creditors to provide the 
notice of the right to rescind before consummation of the transaction, 
which would tie the creditor's provision of the rescission notice to 
consummation of the transaction. See proposed Sec.  226.23(b)(5)(i). As 
a result, the Board believes that consumers are likely to understand 
from the context in which the notice is given that it is the closed-end 
mortgage transaction that is giving rise to the right of rescission, 
even if this is not explicitly stated in the notice.
    Addition of a security interest to an existing obligation. Section 
226.23(a)(1) describes two situations where a right to rescind 
generally arises under Sec.  226.23: (1) a credit transaction in which 
a security interest is or will be retained or acquired in a consumer's 
principal dwelling; and (2) the addition to an existing obligation of a 
security interest in a consumer's principal dwelling. Where a security 
interest is being added to an existing obligation, consumers only have 
the right to rescind the addition of the security interest and not the 
existing obligation. See proposed Sec.  226.23(a)(1). The Board 
believes that the right to rescind typically arises because of a credit 
transaction, not because the creditor adds a security interest to an 
existing obligation. Thus, for simplicity, the proposed content of the 
required disclosures reference the right to cancel ``the loan.'' See 
proposed Sec.  226.23(b)(3) and proposed Model Form H-8(A). The Board 
solicits comment, however, on how often the right of rescission arises 
from the addition to an existing obligation of a security interest in a 
consumer's principal dwelling, and whether the Board should issue an 
additional model form to address this situation.
23(b)(3)(i) Security Interest
    Current Sec.  226.23(b)(1)(i) requires the creditor to disclose 
that a security interest will be retained or acquired in the consumer's 
principal dwelling. Model Forms H-8 and H-9 currently disclose the 
retention or acquisition of a security interest by stating that ``[the] 
transaction will result in a [mortgage/lien/security interest] [on/in] 
your home'' and ``[y]our home is the security for this new 
transaction,'' respectively.

[[Page 58623]]

    The Board's consumer testing of a similar statement regarding a 
security interest for its August 2009 Closed-End Proposal showed that 
very few participants understood the statement. 74 FR 43232, Aug. 26, 
2009. The Board is concerned that the current language in Model Forms 
H-8 and H-9 for disclosure of the retention or acquisition of a 
security interest might not alert consumers that the creditor has the 
right to take the consumer's home if the consumer defaults. To clarify 
the significance of the security interest, proposed Sec.  
226.23(b)(3)(i) requires a creditor to provide a statement that the 
consumer could lose his or her home if the consumer does not make 
payments on the loan. Consumer testing of this plain-language version 
of the security interest disclosure showed high comprehension by 
participants.
23(b)(3)(ii) Right to Cancel
    Current Sec.  226.23(b)(1)(ii) requires the creditor to disclose 
the consumer's right to rescind the transaction. In a section entitled 
``Your Right to Cancel,'' current Model Forms H-8 and H-9 disclose the 
right by stating that the consumer has a legal right under Federal law 
to cancel the transaction, without costs, within three business days 
from the latest of the date of the transaction (followed by a blank to 
be completed by the creditor with a date), the date the consumer 
received the Truth in Lending disclosures, or the date the consumer 
received the notice of the right to cancel. Consumer testing of 
language similar to the disclosure in current Model Forms H-8 and H-9 
showed that the current description of the right was unnecessarily 
wordy and too complex for most consumers to understand and use.
    In addition, during outreach regarding this proposal, industry 
representatives remarked that consumers often overlook the disclosure 
that the right of rescission is provided by Federal law. They also 
noted that the rule requiring creditors to delay remitting funds to the 
consumer until the rescission period has ended, also imposed by Federal 
law, is not a required disclosure and not included in the current model 
forms. See Sec.  226.23(c). Industry representatives indicated that 
consumers should be notified of this delay in funding so they are not 
surprised when they must wait for at least three business days after 
signing the loan documents to receive any funds. To address these 
problems and concerns, proposed Sec.  226.23(b)(3)(ii) requires two 
statements: (1) a statement that the consumer has the right under 
Federal law to cancel the loan on or before the date provided in the 
notice; and (2) a statement that Federal law prohibits the creditor 
from making any funds available to the consumer until after the stated 
date.
23(b)(3)(iii) Fees
    Current Sec.  226.23(b)(1)(iv) requires the creditor to disclose 
the effects of rescission, as described in current Sec.  226.23(d). The 
disclosure of the effects of rescission in current Model Forms H-8 and 
H-9 is essentially a restatement of the rescission process set forth in 
current Sec.  226.23(d)(1)-(3). This information consumes one-third of 
the space in the model forms, is dense, and uses legalistic phrases. 
Moreover, in most cases, this information is unnecessary to understand 
or exercise the right of rescission.
    In addition, consumer testing showed that the current model forms 
do not adequately communicate that the consumer would not be charged a 
cancellation fee for exercising the right of rescission. Also, the 
language of the current model forms did not convey that all fees the 
consumer had paid in connection with obtaining the loan (such as fees 
charged by the creditor to obtain a credit report and appraisal of the 
home) would be refunded to the consumer.
    To clarify the results of rescission for the consumer, the Board 
proposes in Sec.  226.23(b)(3)(iii) to require a plain-English 
statement regarding fees, instead of restating the rescission process 
in current Sec.  226.23(d). Proposed Sec.  226.23(b)(3)(iii) requires a 
statement that if the consumer cancels, the creditor will not charge 
the consumer a cancellation fee and will refund any fees the consumer 
paid to obtain the loan. Most participants in the Board's consumer 
testing of these proposed statements understood that the creditor had 
to return all fees to the consumer, and could not charge fees for 
rescission. The Board believes that the statement about the refund of 
fees communicates important information to consumers about their rights 
if they choose to cancel the transaction. In addition, the Board is 
concerned that without this disclosure, consumers might believe that 
they would not be entitled to a refund of fees. This mistaken belief 
might discourage consumers from exercising the right to rescind where a 
consumer has paid a significant amount of fees in connection with the 
loan.
23(b)(3)(iv) New Advance of Money With the Same Creditor Under Sec.  
226.23(f)(2)
    As discussed in more detail above in the section-by-section 
analysis to proposed Sec.  226.23(b)(3)(iii), current Sec.  
226.23(b)(1)(iv) requires the creditor to disclose the effects of 
rescission, as described in current Sec.  226.23(d). Currently, 
Regulation Z provides that a consumer may rescind a refinancing with 
the same creditor only to the extent of any new advance of money. Sec.  
226.23(f)(2); comment 23(f)-4. If the consumer has a valid right to 
rescind, the creditor must return costs made by the consumer for the 
refinancing, and take any action necessary to terminate the security 
interest. Sec.  226.23(d)(2); comment 23(f)-4. Then the consumer must 
tender back the amount of the new advance. Sec.  226.23(d)(3); comment 
23(f)-4. The consumer remains obligated to repay the previous balance 
under the terms of the previous note. Accordingly, as part of 
satisfying the requirement to disclose the effects of rescission, 
current Model Form H-9 includes a statement that if the consumer 
cancels the new loan, it will not affect the amount the consumer 
presently owes, and the consumer's home is the security for that 
amount.
    The proposal retains a special disclosure for a new advance of 
money with the same creditor (as defined in Sec.  226.23(f)(2)). 
Specifically, proposed Sec.  226.23(b)(3)(iv) requires creditors to 
disclose that if the consumer cancels the new loan, all of the terms of 
the previous loan will still apply, the consumer will still owe the 
creditor the previous balance, and the consumer could lose his or her 
home if the consumer does not make payments on the previous loan.
    Proposed comment 23(b)(3)-6 cross-references Sec.  226.23(f)(2) for 
an explanation of when there is a new advance of money with the same 
creditor, as discussed in the section-by-section analysis to proposed 
Sec.  226.23(f)(2) below. In addition, proposed comment 23(b)(3)-6 
clarifies that the transaction is rescindable only to the extent of the 
new advance and the creditor must provide the consumer with the 
information in proposed Sec.  226.23(b)(3)(iv). Finally, the proposed 
comment clarifies that proposed Model Form H-9 is designed for a new 
advance of money with the same creditor. See proposed Model Form H-9 in 
Appendix H.
23(b)(3)(v) How to Cancel
    Current Sec.  226.23(b)(1)(iii) requires the creditor to disclose 
how to exercise the right to rescind, with a form for that purpose, 
designating the address of the creditor's (or its agent's) place of 
business. Current Model Forms H-8 and H-9 contain a statement that the 
consumer may cancel by notifying the

[[Page 58624]]

creditor in writing; the form contains a blank for the creditor to 
insert its name and business address. The current model forms state 
that if the consumer wishes to cancel by mail or telegram, the notice 
must be sent ``no later than midnight of,'' followed by a blank for the 
creditor to insert a date, followed in turn by the language ``(or 
midnight of the third business day following the latest of the three 
events listed above).'' If the consumer wishes to cancel by another 
means of communication, the notice must be delivered to the creditor's 
business address listed in the notice ``no later than that time.''
    Current comment 23(a)(2)-1 states that the creditor may designate 
an agent to receive the rescission notification as long as the agent's 
name and address appear on the notice. The Board proposes to remove 
this comment, but insert similar language into proposed Sec.  
226.23(b)(3)(v) and proposed comment 23(b)(3)-3. Specifically, proposed 
Sec.  226.23(b)(3)(v) requires a creditor to disclose the name and 
address of the creditor or of the agent chosen by the creditor to 
receive the consumer's notice of rescission and a statement that the 
consumer may cancel by submitting the form located at the bottom 
portion of the notice to the address provided. Proposed comment 
23(b)(3)-3 states that if a creditor designates an agent to receive the 
consumer's rescission notice, the creditor may include its name along 
with the agent's name and address in the notice.
    Proposed comment 23(b)(3)-2 clarifies that the creditor may, at its 
option, in addition to providing a postal address for regular mail, 
describe other methods the consumer may use to send or deliver written 
notification of exercise of the right, such as overnight courier, fax, 
e-mail, or in-person. The Board requires the notice to include a postal 
address to ensure that an easy and accessible method of sending 
notification of rescission is provided to all consumers. Nonetheless, 
the Board would provide flexibility to creditors to provide in the 
notice additional methods of sending or delivering notification, such 
as fax and e-mail, which consumers might find convenient.
23(b)(3)(vi) Deadline to Cancel
    Current Sec.  226.23(b)(1)(v) requires the creditor to disclose the 
date on which the rescission period expires. Current Model Forms H-8 
and H-9 disclose the expiration date in the section of the notice 
entitled ``How to Cancel.'' The current model forms provide a blank for 
the creditor to insert a date followed by the language ``(or midnight 
of the third business day following the latest of the three events 
listed above)'' as the deadline by which the consumer must exercise the 
right. The three events referenced are the date of the transaction, the 
date the consumer received the Truth in Lending disclosures, and the 
date the consumer received the notice of the right to cancel.
    For the reasons set forth in the section-by-section analysis to 
proposed Sec.  226.15(b), the Board proposes to eliminate the 
statements about the three events and require instead that the creditor 
provide the calendar date on which the three-business-day period for 
rescission expires. See proposed Sec.  226.23(b)(3)(vi). Many 
participants in the Board's consumer testing had difficulty using the 
three events to calculate the deadline for rescission. Moreover, 
participants in the Board's consumer testing strongly preferred forms 
that provided a specific date over those that required them to 
calculate the deadline themselves. Also, parties consulted during the 
Board's outreach on this proposal stated that the model forms should 
provide a date certain for the expiration of the three-business-day 
period.
    To ensure that consumers can readily identify the deadline for 
rescinding a loan, proposed Sec.  226.23(b)(3)(vi) specifies that a 
creditor must disclose in the rescission notice the calendar date on 
which the three-business-day rescission period expires. If the creditor 
cannot provide an accurate calendar date on which the three-business-
day rescission period expires, the creditor must provide the calendar 
date on which it reasonably and in good faith expects the three-
business-day period for rescission to expire. If the creditor provides 
a date in the notice that gives the consumer a longer period within 
which to rescind than the actual period for rescission, the notice 
shall be deemed to comply with proposed Sec.  226.23(b)(3)(vi), as long 
as the creditor permits the consumer to rescind through the end of the 
date in the notice. If the creditor provides a date in the notice that 
gives the consumer a shorter period within which to rescind than the 
actual period for rescission, the creditor shall be deemed to comply 
with the requirement in proposed Sec.  226.23(b)(3)(vi) if the creditor 
notifies the consumer that the deadline in the first notice of the 
right of rescission has changed and provides a second notice to the 
consumer stating that the consumer's right to rescind expires on a 
calendar date which is three business days from the date the consumer 
receives the second notice. Proposed comment 23(b)(3)-4 provides 
further guidance on these proposed provisions.
    The proposed approach is intended to provide consumers with 
accurate notice of the date on which their right to rescind expires 
while ensuring that creditors do not face liability for providing a 
deadline in good faith, that later turns out to be incorrect. The Board 
recognizes that this approach will further delay access to funds for 
consumers in certain cases where the creditor must provide a corrected 
notice. Nonetheless, the Board believes that a corrected notice is 
appropriate; otherwise consumers would believe based on the first 
notice that the rescission period ends earlier than the actual date of 
expiration. The Board, however, solicits comment on the proposed 
approach and on alternative approaches for addressing situations where 
the transaction date is not known at the time the rescission notice is 
provided.
    Extended right to rescind. Under TILA and Regulation Z, the right 
to rescind generally does not expire until midnight after the third 
business day following the latest of: (1) Consummation of the 
transaction, (2) delivery of the rescission notice, or (3) delivery of 
the material disclosures. If the rescission notice or the material 
disclosures are not delivered, a consumer's right to rescind may extend 
for up to three years from consummation. TILA Section 125(f); 15 U.S.C. 
1635(f); Sec.  226.23(a)(3).
    For the reasons set forth in the section-by-section analysis to 
proposed Sec.  226.15(b), the Board proposes a disclosure regarding the 
extended right to rescind. Specifically, proposed Sec.  
226.23(b)(3)(vi) requires creditors to include a statement that the 
right to cancel the loan may extend beyond the date disclosed in the 
notice, and in such a case, a consumer wishing to exercise the right 
must submit the form located at the bottom of the notice to either the 
current owner of the loan or the person to whom the consumer sends his 
or her payments. A creditor may meet these disclosure requirements by 
placing an asterisk after the sentence disclosing the calendar date on 
which the right of rescission expires along with a sentence starting 
with an asterisk that states ``In certain circumstances, your right to 
cancel this loan may extend beyond this date. In that case, you must 
submit the bottom portion of this notice to either the current owner of 
your loan or the person to whom you send payments.'' See proposed Model 
Forms H-8(A) and H-9. Without this statement, the notice would imply 
that the period for exercising the right is always three business days. 
In addition, this

[[Page 58625]]

statement would inform consumers to whom they should submit 
notification of exercise when they have this extended right to rescind. 
See proposed Sec.  226.23(a)(2). The Board requests comment on the 
proposed approach to making the consumer aware of the extended right.
23(b)(3)(vii) Form for Consumer's Exercise of Right
    Current Sec.  226.23(b)(1)(iii) requires the creditor to disclose 
how to exercise the right to rescind, and to provide a form that the 
consumer can use to rescind. Current comment 23(b)-3 permits the 
creditor to provide a separate form that the consumer may use to 
exercise the right or to combine that form with the other rescission 
disclosures, as illustrated by the model forms in Appendix H. Current 
Model Forms H-8 and H-9 explain a consumer may cancel by using any 
signed and dated written statement or may use the notice by signing and 
dating below the statement, ``I WISH TO CANCEL.'' Section 226.23(b)(1) 
currently requires a creditor to provide two copies of the notice of 
the right (one copy if delivered in electronic form in accordance with 
the E-Sign Act) to each consumer entitled to rescind. The current Model 
Forms contain an instruction to the consumer to keep one copy of the 
two notices because it contains important information regarding the 
right of rescission.
    For the reasons set forth in the section-by-section analysis to 
proposed Sec.  226.15(b), proposed Sec.  226.23(b)(2)(ii) and (3)(vii) 
require creditors to provide a form at the bottom of the notice that 
the consumer may use to exercise the right to rescind. Current comment 
23(b)-3, which permits the creditor to provide a form for exercising 
the right that is separate from the other rescission disclosures, would 
be deleted. The creditor would be required to provide two lines on the 
form for entry of the consumer's name and property address. The 
creditor would have the option to pre-print on the form the consumer's 
name and property address. Proposed comment 23(b)(3)-5 elaborates that 
creditors are not obligated to complete the lines in the form for the 
consumer's name and property address, but may wish to do so to identify 
accurately a consumer who uses the form to exercise the right. Proposed 
comment 23(b)(3)-5 further explains that at its option, a creditor may 
include the loan number on the form. A creditor would not, however, be 
allowed to request or to require that the consumer provide the loan 
number on the form, such as by providing a space for the consumer to 
fill in the loan number. A consumer might not be able to locate the 
loan number easily and the Board is concerned that allowing creditors 
to request a consumer to provide the loan number might mislead the 
consumer into thinking that he or she must provide the loan number to 
rescind.
    Current Model Forms H-8 and H-9 contain a statement that the 
consumer may use any signed and dated written statement to exercise the 
right to rescind. The Board does not propose to retain such a statement 
on the rescission notice because consumer testing showed that this 
disclosure is unnecessary. In fact, the Board's consumer testing 
results suggested that the statement might cause some consumers to 
believe that they must prepare a second statement of cancellation. 
Moreover, the Board believes it is unlikely that consumers who misplace 
the form, and later decide to rescind, would remember the statement 
about preparing their own documents. Based on consumer testing, the 
Board expects that consumers would use the form provided at the bottom 
of the notice to exercise the right of rescission. Participants in the 
Board's testing said that if they lost the form, they would contact the 
creditor to get another copy.
    In addition, current Model Forms H-8 and H-9 contain a statement 
that the consumer should ``keep one copy'' of the notice because it 
contains information regarding the consumer's rescission rights. This 
statement would be deleted as obsolete. As discussed in the section-by-
section analysis to proposed Sec.  226.23(b)(1), the proposal requires 
creditors to provide only a single copy of the notice to each consumer 
entitled to rescind. The notice would be revised to permit a consumer 
to detach the bottom part of the notice to use as a form for exercising 
the right of rescission while retaining the top portion of the notice 
containing the explanation of the consumer's rights.
23(b)(4) Optional Content of Notice
    Current comment 23(b)-3 states that the notice of the right of 
rescission may include information related to the required information, 
such as: a description of the property subject to the security 
interest; a statement that joint owners may have the right to rescind 
and that a rescission by one is effective for all; and the name and 
address of an agent of the creditor to receive notification of 
rescission.
    The Board proposes to continue to allow creditors to include 
additional information in the rescission notice that is directly 
related to the required disclosures. Proposed Sec.  226.23(b)(4) sets 
forth two optional disclosures that are directly related to the 
mandatory rescission disclosures: (1) a statement that joint owners may 
have the right to rescind and that a rescission by one owner is 
effective for all owners; and (2) a statement acknowledging the 
consumer's receipt of the notice for the consumer to initial and date. 
In addition, proposed comment 23(b)(4)-1 clarifies that, at the 
creditor's option, other information directly related to the 
disclosures required by Sec.  226.23(b)(3) may be included in the 
notice. For instance, an explanation of the use of pronouns or other 
references to the parties to the transaction is directly related 
information that the creditor may choose to add to the notice.
    The Board notes, however, that under the proposal, only information 
directly related to the disclosures may be added to the notice. See 
proposed Sec.  226.23(b)(2)(i). The Board is concerned that allowing 
creditors to combine disclosures regarding the right of rescission with 
other unrelated information, in any format, will diminish the clarity 
of this key material, potentially cause ``information overload,'' and 
increase the likelihood that consumers may not read the rescission 
notice.
23(b)(5) Time of Providing Notice
    TILA and Regulation Z currently do not specify when the consumer 
must receive the notice of the right to rescind. Current comment 23(b)-
4 states that the creditor need not give the notice to the consumer 
before consummation of the transaction, but notes, however, that the 
rescission period will not begin to run until the notice is given to 
the consumer. As a practical matter, most creditors provide the notice 
to the consumer along with the Truth in Lending disclosures and other 
loan documents at loan closing.
    The Board proposes to require creditors to provide the notice of 
the right of rescission before consummation of the transaction. See 
proposed Sec.  226.23(b)(5). The Board proposes this new timing 
requirement pursuant to the Board's authority under TILA Section 
105(a), which authorizes the Board to make exceptions and adjustments 
to TILA to effectuate the statute's purposes which include facilitating 
consumers' ability to compare credit terms and helping consumers avoid 
the uninformed use of credit. 15 U.S.C. 1601(a), 1604(a). The Board 
believes that the proposed timing rule would facilitate consumers' 
ability to consider the rescission right and avoid the uninformed use 
of credit.

[[Page 58626]]

    General timing rule. Except as discussed below, the Board proposes 
to require creditors generally to provide the notice of the right to 
rescind before consummation of the transaction. See proposed Sec.  
226.23(b)(5)(i). TILA and Regulation Z provide that a consumer may 
exercise the right to rescind until midnight after the third business 
day following the latest of (1) consummation, (2) delivery of the 
notice of right to rescind, or (3) delivery of all material 
disclosures. TILA Section 125(a); 15 U.S.C. 1635(a); Sec.  
226.23(a)(3). Creditors typically use the final TILA disclosures to 
satisfy the requirement to provide material disclosures, and under the 
August 2009 Closed-End Proposal, the final TILA disclosures must be 
provided no later than three business days before consummation. 
Requiring that the rescission notice be given prior to consummation 
would better ensure that consummation will be the latest of the three 
events that trigger the three-business-day rescission period (assuming 
that the TILA disclosures were given no later than three business days 
prior to consummation). In this way, the three-business-day period 
would occur directly after consummation of the transaction, a time 
during which the consumer may be most focused on the transaction and 
most concerned about the right to rescind it. By tying a creditor's 
provision of the rescission notice to an event in the lending process 
of primary importance to the consumer--consummation--this rule might 
lead consumers to assess the TILA disclosures and other loan documents 
with a more critical eye.
    The proposal should not significantly increase compliance burden 
because, as noted, currently most creditors provide the rescission 
notice at loan closing, along with the TILA disclosures. As noted 
above, under the August 2009 Closed-End Proposal, a creditor would be 
required to provide the final TILA disclosures no later than three 
business days prior to consummation. Under this proposal, a creditor 
could provide the rescission notice with the final TILA disclosures, 
but would not be required to do so. The creditor could provide the 
notice at any time before consummation, separately from the final TILA 
disclosures. The Board solicits comment on whether the rescission 
notice should be required to be provided with the final TILA 
disclosures. The Board also invites comment on any compliance or other 
operational difficulties the proposal might cause.
    Comment 23(b)-4 would be removed as inconsistent with the proposed 
timing requirement. Proposed comment 23(b)(5)-1 clarifies that delivery 
of the notice after consummation would violate the timing requirement 
of Sec.  226.23(b)(5)(i), and that the right of rescission does not 
expire until three business days after the day of late delivery if the 
notice was complete and correct.
    Addition of a security interest. If the right to rescind arises 
from the addition of a security interest to an existing obligation as 
described in proposed Sec.  226.23(a)(1), a creditor would be required 
to provide the rescission notice prior to the addition of the security 
interest. See proposed Sec.  226.23(b)(5)(ii). Tying a creditor's 
provision of the rescission notice to the event that gives rise to the 
right of rescission--the addition of the security interest--might lead 
consumers to consider more closely the right to rescind. The Board 
solicits comment on any compliance or other operational difficulties 
this proposed rule might cause.
23(b)(6) Proper Form of Notice
    Current Sec.  226.23(b)(2) states that to satisfy the disclosure 
requirements of current Sec.  226.23(b)(1), the creditor must provide 
the appropriate model form in current Appendix H or a substantially 
similar notice. As discussed above, Appendix H currently provides Model 
Form H-8 for most rescindable transactions, and Model Form H-9 for a 
new advance of money by the same creditor with a new advance of money. 
Before 1995, there was uncertainty about which model form to use. One 
court held that a creditor could create its own nonstandard notice 
form, if neither of the Board's two model forms fit the 
transaction.\75\ In 1995, Congress amended TILA to provide that a 
consumer would not have rescission rights based solely on the form of 
written notice used by the creditor, if the creditor provided the 
appropriate form published by the Board, or a comparable written 
notice, that was properly completed by the creditor, and otherwise 
complied with all other requirements regarding the notice. TILA Section 
125(h); 15 U.S.C. 1635(h). When the Board implemented these amendments 
to TILA, it revised Model Form H-9 to ease compliance and clarify that 
it may be used in loan refinancings with the original creditor, without 
regard to whether the creditor is the holder of the note at the time of 
the refinancing. As discussed in the section-by-section analysis to 
Sec.  226.23(b)(3)(iv) above, the Board now proposes to rename Model 
Form H-9 as ``Rescission Model Form (New Advance of Money with the Same 
Creditor)'' to further clarify the purpose of the form and ease 
compliance.
---------------------------------------------------------------------------

    \75\ See, e.g., In re Porter, 961 F.2d 1066, 1076 (3d Cir. 
1992).
---------------------------------------------------------------------------

    Consumer advocates have expressed concern about creditors failing 
to complete the model forms properly. For example, some courts have 
held that notices with incorrect or omitted dates for the 
identification of the transaction and the expiration of the right are 
nevertheless adequate to meet the requirement of delivery of notice of 
the right to the consumer.\76\
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    \76\ See, e.g., Melfi v. WMC Mortgage Corp. 568 F.3d 309 (1st 
Cir. 2009).
---------------------------------------------------------------------------

    To address these concerns, proposed Sec.  226.23(b)(6) provides 
that a creditor satisfies Sec.  226.23(b)(3) if it provides the 
appropriate model form in Appendix H, or a substantially similar 
notice, which is properly completed with the disclosures required by 
Sec.  226.23(b)(3). Proposed comment 23(b)(6)-1 explicitly states that 
a notice is not properly completed if it lacks a calendar date or has 
an incorrectly calculated calendar date for the expiration of the 
rescission period. Such a notice would not fulfill the requirement to 
deliver the notice of the right to rescind. As discussed in the 
section-by-section analysis to proposed Sec.  226.23(b)(3)(vi) above, 
however, a creditor who provides a date reasonably and in good faith 
that later turns out to be incorrect would be deemed to have complied 
with the requirement to provide the notice if the creditor provides a 
corrected notice as described in proposed Sec.  226.23(b)(3)(vi) and 
comment 23(b)-4.
23(c) Delay of Creditor's Performance
    Section 226.23(c) provides that, unless the consumer has waived the 
right of rescission under Sec.  226.23(e), no money may be disbursed 
other than in escrow, no services may be performed, and no materials 
delivered until the rescission period has expired and the creditor is 
reasonably satisfied that the consumer has not rescinded. Comment 
23(c)-4 states that a creditor may satisfy itself that the consumer has 
not rescinded by obtaining a written statement from the consumer that 
the right has not been exercised. The comment does not address the 
timing of providing or signing the written statement.
    Concerns have been raised that some creditors provide the consumer 
with a certificate of nonrescission at closing, which is the same time 
at which the consumer receives the notice of right to rescind and signs 
all of the closing documents. In some cases, the consumer

[[Page 58627]]

mistakenly signs the nonrescission certificate in the rush to complete 
closing. In other cases, creditors may specifically require or 
encourage the consumer to sign the nonrescission certificate at 
closing, rather than after the expiration of the right of rescission. 
This may cause the consumer to believe that the right to rescind has 
been waived or the rescission period has expired. During outreach 
conducted by the Board for this proposal, industry representatives 
stated that the majority of creditors have abandoned the practice of 
providing a nonrescission certificate at closing. In addition, the 
majority of courts to consider this issue have held that having a 
consumer sign a nonrescission certificate at closing violates the 
requirement under TILA and Regulation Z that the creditor provide the 
notice of right to rescind ``clearly and conspicuously.'' \77\ TILA 
Section 125(b); 15 U.S.C. 1635(b); Sec.  226.23(b)(1). On the other 
hand, some consumers have advised the Board that their creditors 
provided a nonrescission certificate at closing, which the consumers 
have signed. Also, a few courts have held that having the consumer sign 
a nonrescission certificate at closing is permissible under TILA and 
Regulation Z.\78\ The Board is concerned that permitting consumers to 
sign and date a nonrescission certificate at closing will undermine 
consumers' understanding of their right to rescind.
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    \77\ See, e.g., Rand Corp. v. Moua, 449 F.3d 842, 847 (8th Cir. 
2009) (``Requiring borrowers to sign statements which are 
contradictory and demonstrably false is a paradigm for 
confusion.''); Rodash v. AIB Mortgage Co., 16 F.3d 1142, 1146 (11th 
Cir. 1994), abrogated on other grounds by Veale v. Citibank, 85 F.3d 
557 (11th Cir. 1996) (holding that the ``primary effect'' of 
providing a nonrescission certificate at closing was to confuse the 
consumer about her right to rescind).
    \78\ See, e.g., ContiMortgage Corp. v. Delawder, 2001 Ohio App. 
LEXIS 3410 at *12 (Ohio Ct. App. July 30, 2001) (holding that 
``nothing in the statute or administrative regulations expressly 
prohibits the signing of a post-dated waiver of the right of 
rescission'').
---------------------------------------------------------------------------

    To address these concerns, the Board proposes to revise comment 
23(c)-4 to state that a creditor may satisfy itself that the consumer 
has not rescinded by obtaining a written statement from the consumer 
that the right has not been exercised. The statement must be signed and 
dated by the consumer only at the end of the three-day period. The 
Board acknowledges that some creditors and consumers may be 
inconvenienced by waiting three days after consummation to provide a 
nonrescission certificate, but believes that this burden is outweighed 
by the benefit to consumers of a better understanding of the right to 
rescind.
23(d) Effects of Rescission
Background
    TILA and Regulation Z provide that the right of rescission expires 
three business days after the later of (1) consummation, (2) delivery 
of the notice of the right to rescind, or (3) delivery of the material 
disclosures. TILA Section 125(a); 15 U.S.C. 1635(a); Sec.  
226.23(a)(3). During the initial three-day rescission period, the 
creditor may not, directly or through a third party, disburse money, 
perform services, or deliver materials. Section 226.23(c); comment 
23(c)-1. If the creditor fails to deliver the notice of the right to 
rescind or the material disclosures, a consumer's right to rescind may 
extend for up to three years from the date of consummation. TILA 
Section 125(f); 15 U.S.C. 1635(f); Sec.  226.23(a)(3).
    TILA Section 125(b) and Sec.  226.23(d) set out the process for 
rescission. 15 U.S.C. 1635(b). The regulation specifies that ``[w]hen a 
consumer rescinds a transaction, the security interest giving rise to 
the right of rescission becomes void and the consumer shall not be 
liable for any amount, including any finance charge.'' Section 
226.23(d)(1). The regulation also states that ``[w]ithin 20 calendar 
days after receipt of a notice of rescission, the creditor shall return 
any money or property that has been given to anyone in connection with 
the transaction and shall take any action necessary to reflect the 
termination of the security interest.'' Section 226.23(d)(2). Finally, 
the regulation provides that when the creditor has complied with its 
obligations, ``the consumer shall tender the money or property to the 
creditor * * *.'' Section 226.23(d)(3).
    TILA and Regulation Z allow a court to modify the process for 
rescission. TILA Section 125(b); 15 U.S.C. 1635(b); Sec.  226.23(d)(4). 
After passage of TILA in 1968, courts began to use their equitable 
powers to modify the rescission procedures so that a creditor would be 
assured of the consumer's valid right to rescind and ability to tender 
before the creditor was required to refund costs and release its 
security interest and lien position.\79\ In 1980, Congress codified 
this judicial authority in the Truth in Lending Simplification and 
Reform Act by providing that the rescission procedures ``shall apply 
except when otherwise ordered by a court.'' \80\ Regulation Z states 
that ``[t]he procedures outlined in paragraphs (d)(2) and (3) of this 
section may be modified by court order.'' Section 226.23(d)(4).
---------------------------------------------------------------------------

    \79\ See Williams v. Homestake Mortgage Co., 968 F.2d 1137, 1140 
(11th Cir. 1992) (citing cases from the Fourth, Sixth, Ninth and 
Tenth Circuits permitting judicial modification prior to Congress 
enacting the judicial modification provisions of TILA).
    \80\ Truth in Lending Simplification and Reform Act, Public Law 
96-221, tit. VI, Sec.  612(a)(4), 94 Stat. 168, 172 (1980).
---------------------------------------------------------------------------

Concerns with the Rescission Process
    The rescission process is straightforward if the consumer exercises 
the right to rescind within three business days of consummation. During 
this three-day period, the creditor is prohibited from disbursing any 
money or property and, in most cases, the creditor has not yet recorded 
its lien. Section 226.23(c). Thus, if the creditor receives a 
rescission notice from the consumer, the creditor simply returns any 
money paid by the consumer, such as a document preparation fee.
    If the consumer exercises the right to rescind after the initial 
three-day post-consummation period, however, the process is 
problematic. The parties may not agree that the consumer still has a 
right to rescind. For example, the creditor may believe that the 
consumer's right to rescind has expired or that the creditor properly 
delivered the notice of right to cancel and material disclosures. 
Typically, the creditor will not release the lien or return interest 
and fees to the consumer until the consumer establishes that the right 
to rescind has not expired and that the consumer can tender the amount 
provided to the consumer. Both consumer advocates and creditors have 
urged the Board to clarify the operation of the rescission process in 
the extended right context. Following is a discussion of the issues 
that arise when the right to rescind is asserted after the initial 
three-day period, including the effect of the consumer's notice, the 
creditor's obligations upon receipt of a consumer's notice, judicial 
modification, and the form of the consumer's tender.
    Effect of the consumer's notice. Consumer advocates and creditors 
have asked the Board to clarify the effect of the provision of the 
consumer's notice of rescission on the security interest once the 
initial three-day period has passed. Some consumer advocates maintain 
that when a consumer sends a notice to the creditor exercising the 
right to rescind, the creditor's security interest is automatically 
void. A few courts have held that the security interest is void as soon 
as the creditor receives the notice of rescission, regardless of the 
consumer's ability to tender. However, these courts have still

[[Page 58628]]

required the consumer to repay the obligation in full.\81\
---------------------------------------------------------------------------

    \81\ See, e.g., Bell v. Parkway Mortgage, Inc., 309 B.R. 139 
(Bankr. E.D. Pa. 2004) (holding that the court cannot modify the 
automatic voiding of the security interest, but ordering the 
consumer to file an amended bankruptcy plan to classify the 
creditor's unsecured claim separately and provide payment in full 
over the life of the plan); Williams v. BankOne, N.A., 291 B.R. 636 
(Bankr. E.D. Pa. 2003) (same). Cf. Williams v. Homestake Mortgage 
Co., 968 F.2d 1137, 1140 (11th Cir. 1992) (holding that rescission 
of the security interest is automatic but may be conditioned on the 
consumer's tender).
---------------------------------------------------------------------------

    Industry representatives, on the other hand, state that courts may 
condition the release of the security interest upon the consumer's 
tender. Several courts have held that the creditor's receipt of a valid 
notice of rescission does not automatically void the creditor's 
security interest and terminate the consumer's liability for 
charges.\82\ In addition, the majority of Federal circuit courts hold 
that a court may condition the creditor's release of the security 
interest on proof of the consumer's ability to tender.\83\
---------------------------------------------------------------------------

    \82\ See, e.g., American Mortgage Network v. Shelton, 486 F.3d 
815, 821 (4th Cir. 2007) (``This Court adopts the majority view of 
reviewing courts that unilateral notification of cancellation does 
not automatically void the loan contract.''); Yamamoto v. Bank of 
New York, 329 F.3d 1167, 1172 (9th Cir. 2003) (``[I]t cannot be that 
the security interest vanishes immediately upon the giving of 
notice. Otherwise, a borrower could get out from under a secured 
loan simply by claiming TILA violations, whether or not the lender 
had actually committed any.''); Large v. Conseco Fin. Servicing 
Corp., 292 F.3d 49, 54-55 (1st Cir. 2002) (``The natural reading of 
[15 U.S.C. 1635(b)] is that the security interest becomes void when 
the obligor exercises a right to rescind that is available in a 
particular case, either because the creditor acknowledges that the 
right of rescission is available, or because the appropriate 
decision maker has so determined.'').
    \83\ See American Mortgage Network v. Shelton, 486 F.3d 815, 820 
(4th Cir. 2007); Yamamoto v. Bank of New York, 329 F.3d 1167, 1172 
(9th Cir. 2003); Williams v. Homestake Mortgage Co., 968 F.2d 1137, 
1140 (11th Cir. 1992); FDIC v. Hughes Development Co., 938 F.2d 889, 
890 (8th Cir. 1991); Brown v. Nat'l Perm. Fed. Sav. and Loan Ass'n, 
683 F.2d 444, 447 (D.C. Cir. 1982); Rudisell v. Fifth Third Bank, 
622 F.2d 243, 254 (6th Cir. 1980).
---------------------------------------------------------------------------

    Creditor's obligations upon receipt of notice. Consumer advocates 
and creditors have expressed confusion about the creditor's obligations 
upon receiving the consumer's notice of rescission once the initial 
three-day period has passed. Some creditors use the judicial process to 
resolve rescission issues. For example, some creditors seek a 
declaratory judgment whether the consumer's right to rescind has 
expired. Other creditors concede the consumer has a right to rescind, 
but tender the refunded costs and the release of the lien to the court 
with a request that the court release the funds and the lien after the 
consumer tenders. Although these approaches follow the text of the 
statute, they increase costs for creditors and consumers. Other 
creditors do not use the judicial process. For example, some creditors 
notify the consumer that the refunded costs and release of the lien 
will be held in escrow until the consumer is prepared to tender. If the 
consumer tenders, the creditor refunds the costs and releases the lien. 
Although this process saves the parties the time and expense of a court 
proceeding, concerns have been raised about creditors conditioning 
rescission on tender.\84\ Finally, some creditors do not respond to the 
notice of rescission, requiring consumers to go to court to enforce 
their rights. Courts are divided on whether use of this approach 
violates of TILA.\85\
---------------------------------------------------------------------------

    \84\ Compare Personias v. HomeAmerican Credit, Inc., 234 F. 
Supp. 2d 817 (N.D. Ill. 2002) (upholding the creditor's rescission 
offer conditioned on the consumer's tender), with Velazquez v. 
HomeAmerican Credit, Inc., 254 F. supp. 2d 1043 (N.D. Ill. 2003) 
(holding that neither TILA nor Regulation Z permitted the creditor 
to condition rescission on the consumer's tender).
    \85\ Compare Garcia v. HSBC Bank USA, N.A., 2009 U.S. Dist. 
LEXIS 114299 at *15 (N.D. Ill. 2009) (holding an assignee liable 
under TILA for failing to respond to a notice of rescission within 
20 days), with Rudisell v. Fifth Third Bank, 622 F.2d 243, 254 (6th 
Cir. 1980) (``The statute does not say what should happen if the 
creditor does not tender back the property within ten days as 
required under the statute due to a good faith belief that the 
debtor has no right to rescind.'').
---------------------------------------------------------------------------

    Judicial modification. As noted above, when the consumer provides a 
notice of rescission after the initial three-day period, the consumer 
and creditor typically dispute whether the consumer has a right to 
rescind. The parties often seek to resolve the issue in court. It 
appears that most courts determine first whether the consumer's right 
to rescind has expired. If the consumer's right has not expired, then 
the court determines the amounts owed by the consumer and creditor, and 
then the procedures for the consumer to tender.\86\ However, a minority 
of courts have dismissed the case if the consumer does not first 
establish the ability to tender.\87\ Courts may seek to conserve 
judicial resources in cases where the consumer would not be able to 
tender any amount. As a practical matter, a court might determine under 
certain circumstances that a consumer would be unable to tender even 
after the loan balance is reduced.
---------------------------------------------------------------------------

    \86\ See, e.g., Dawson v. Thomas, 411 B.R. 1, 43 (Bankr. D.C. 
2008) (determining that the consumer had an extended right to 
rescind because the creditor failed to deliver the material 
disclosures and notice of right to rescind, then determining the 
amount of consumer's tender based on the loan amount less any 
amounts paid by the consumer, and permitting the consumer to tender 
after the sale of the house).
    \87\ See, e.g., Yamamoto v. Bank of New York, 329 F.3d 1167, 
1173 (9th Cir. 2003) (affirming the district court's decision to 
dismiss a case prior to determination of the merits of the 
rescission claim because the consumer could not tender).
---------------------------------------------------------------------------

    Consumer advocates have expressed concern that conditioning the 
determination of the right to rescind on the consumer's tender can 
impose a hardship on consumers. Consumers may have trouble obtaining a 
refinancing for the entire outstanding loan balance, rather than a 
reduced amount based on the loan balance less any interest, fees or 
damages. Moreover, consumers often assert the right to rescind in 
foreclosure or bankruptcy proceedings, when it is difficult for them to 
obtain a refinancing.
    To address these concerns, the Board in 2004 amended the Official 
Staff Commentary to provide that ``[t]he sequence of procedures under 
Sec.  226.23(d)(2) and (3) or a court's modification of those 
procedures under Sec.  226.23(d)(4), does not affect a consumer's 
substantive right to rescind and to have the loan amount adjusted 
accordingly. Where the consumer's right to rescind is contested by the 
creditor, a court would normally determine whether the consumer has a 
right to rescind and determine the amounts owed before establishing the 
procedures for the parties to tender any money or property.'' See 
comment 23(d)(4)-1; 69 FR 16769, March 31, 2004. Notwithstanding this 
comment, some courts have stated that the court may condition its 
determination of the consumer's rescission claim on proof of the 
consumer's ability to tender.\88\
---------------------------------------------------------------------------

    \88\ See, e.g., Mangindin v. Washington Mutual Bank, 637 F. 
Supp. 2d 700 (N.D. Cal. 2009) (granting the creditor's motion to 
dismiss in a rescission claim because the consumer failed to plead 
the ability to tender); ING Bank v. Korn, 2009 U.S. Dist. LEXIS 
73329 at *4 (W.D. Wash. May 22, 2009) (same).
---------------------------------------------------------------------------

    Consumer tender. As noted, consumers often assert the right to 
rescind in foreclosure or bankruptcy proceedings. These consumers may 
have difficulty tendering because most creditors will not refinance a 
loan in such circumstances. Consumer advocates report that this problem 
has worsened due to the drop in home values in the last few years. A 
consumer may, however, be able to tender in installments or through 
other means, such as a modification, deed-in-lieu of foreclosure, or 
short sale of the property. Industry representatives, on the other 
hand, have expressed concern about consumers tendering less than the 
full amount due and note that these alternatives are not contained in 
the statutory provisions. Several courts have permitted consumers to 
tender in

[[Page 58629]]

installments,\89\ but other courts have held that a consumer must 
tender the full amount due in a lump sum.\90\ Consumer advocates have 
urged the Board to address whether a court may modify the consumer's 
obligation to tender.
---------------------------------------------------------------------------

    \89\ See, e.g., Sterten v. OptionOne Mortgage Co., 352 B.R. 380 
(Bankr. E.D. Pa. 2006) (permitting tender in installments); Shepeard 
v. Quality Siding & Window Factory, Inc., 730 F. Supp. 1295 (D.Del. 
1990) (same); Smith v. Capital Roofing, 622 F. Supp. 191 (S.D. Miss. 
1985) (same).
    \90\ See, e.g., Bustamante v. First Fed. Sav. & Loan Ass'n, 619 
F.2d 360 (5th Cir. 1980) (holding that tender of installments into 
escrow is not proper tender). Cf. American Mortgage Network, Inc. v. 
Shelton, 486 F. 3d 815, 820 n.5 (4th Cir. 2007) (``This Court does 
not believes that the [consumers'] offer to sell their residence to 
[the creditor] for an amount determined by a non-independent 
appraiser constituted `reasonable value.' '').
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The Board's Proposal
    To address the problems that arise when the consumer asserts the 
right to rescind after the initial three-day period has passed and to 
facilitate compliance, the Board proposes to revise Sec.  226.23(d) to 
provide two processes for rescission. Proposed Sec.  226.23(d)(1) would 
apply only if the creditor has not, directly or indirectly through a 
third party, disbursed money or delivered property, and the consumer's 
right to rescind has not expired. Generally, this process would apply 
during the initial three-day waiting period. Rescission in these 
circumstances is self-effectuating.
    Proposed Sec.  226.23(d)(2) would apply in all other cases, when 
the consumer asserts the right to rescind after the initial three-day 
period has expired and the loan proceeds have been disbursed or 
property has been delivered. In these cases, the consumer's ability to 
rescind depends on certain facts that may be disputed by the parties. 
Proposed Sec.  226.23(d)(2)(i) would address how the parties may agree 
to resolve a rescission claim outside of a court proceeding. The Board 
believes that the parties should have flexibility to resolve a 
rescission claim. As noted above, some creditors do not respond to a 
consumer's notice of rescission. Thus, the proposal would require that 
the creditor provide an acknowledgment of receipt within 20 calendar 
days after receiving the consumer's notice of rescission and a written 
statement of whether the creditor will agree to cancel the transaction. 
The proposal would also set forth a process for the consumer to tender 
and the creditor to release its security interest.
    Proposed Sec.  226.23(d)(2)(ii) would address the effects of 
rescission if the parties are in a court proceeding that has 
jurisdiction over the disputed rescission claim. Consistent with the 
holding of the majority of courts that have addressed this issue, the 
proposal would require the consumer to tender before the creditor 
releases its security interest. As in TILA and the current regulation, 
the court may modify these procedures.
    Legal authority. The Board proposes Sec.  226.23(d)(2) pursuant to 
its authority in TILA Section 105(a). Section 105(a) authorizes the 
Board to prescribe regulations to effectuate the statute's purposes and 
facilitate compliance. 15 U.S.C. 1601(a), 1604(a). TILA's purposes 
include facilitating consumers' ability to compare credit terms and 
helping consumers avoid the uninformed use of credit. Section 105(a) 
also authorizes the Board to make adjustments to the statute for any 
class of transactions as in the judgment of the Board are necessary or 
proper to effectuate the purposes of the statute, prevent circumvention 
or evasion of the statute, or facilitate compliance with the statute.
    As discussed above, the process for rescission functions well when 
rescission is asserted within three days of consummation. 15 U.S.C. 
1635. The Board believes TILA Section 125 was designed for consumers to 
use primarily during the initial three-day period. The process set out 
in TILA Section 125 does not work well, however, after the initial 
three-day period when the creditor has disbursed funds and perfected 
its lien, and the consumer's right to rescind may have expired. Most 
creditors are reluctant to release a lien under these conditions, 
particularly if the consumer is in default or in bankruptcy and would 
have difficulty tendering. Thus, when a creditor receives a consumer's 
notice after the initial three-day period, the rescission process is 
unclear and courts are frequently called upon to resolve rescission 
claims.
    To address issues that arise when rescission is asserted after the 
initial three-day period, the Board is proposing rules to effectuate 
the statutory purpose and facilitate compliance using its authority 
under TILA Section 105(a). 15 U.S.C. 1604(a). First, if the parties are 
not in a court proceeding, the proposal would require the creditor to 
acknowledge receipt of a notice of rescission and would provide a clear 
process for the parties to resolve the rescission claim. The Board 
believes that requiring creditors to acknowledge receipt of the 
consumer's notice of rescission would effectuate the consumer 
protection purpose of TILA. Currently, it is not clear whether a 
creditor must take action upon receipt of a consumer's notice because 
there may be a good faith dispute as to whether the consumer's right to 
rescind has expired. The proposal would clarify that a creditor must 
send a written acknowledgement within 20 calendar days of receipt of 
the notice. In addition, under the proposal, the creditor must provide 
the consumer with a written statement that indicates whether the 
creditor will agree to cancel the transaction and, if so, the amount 
the consumer must tender. This statement should assist the consumer in 
deciding whether to seek to resolve the matter with the creditor or to 
take other action, such as initiating a court action. Also, if the 
creditor agrees to cancel the transaction, under the proposal the 
creditor must release its security interest upon the consumer's tender 
of the amount provided in the creditor's written statement. Thus, the 
proposal would facilitate compliance with, and prevent circumvention of 
TILA. Consumers would be promptly and clearly informed about the status 
of their notice of rescission, and better prepared to take appropriate 
action.
    Second, the proposal would adjust the procedures described in TILA 
Section 125 to ensure a clearer and more equitable process for 
resolving rescission claims that are raised in court proceedings after 
the initial three-day period has passed. 15 U.S.C. 1635. The proposal 
would provide that when the parties are in a court proceeding, the 
creditor's release of the security interest is not required until the 
consumer tenders the principal balance less interest and fees, and any 
damages and costs, as determined by the court. The Board believes that 
this adjustment for transactions subject to rescission after the 
initial three-day period has passed would facilitate compliance. The 
sequence of procedures set forth in TILA Section 125 would seem to 
require the creditor to release its security interest whether or not 
the consumer can tender the funds provided to the consumer after the 
initial three-day period has passed. The Board does not believe that 
Congress intended for the creditor to lose its status as a secured 
creditor if the consumer does not return the amount of money provided 
or the property delivered. Indeed, the majority of courts that have 
considered the issue condition the creditor's release of the security 
interest on the consumer's proof of tender. The proposal would provide 
clear rules regarding the consumer's obligation to tender before the 
creditor releases its security interest.
23(d)(1) Effects of Rescission prior to the Creditor Disbursing Funds
    Proposed Sec.  226.23(d)(1) would apply only if the creditor has 
not, directly or

[[Page 58630]]

indirectly through a third party, disbursed money or delivered 
property, and the consumer's right to rescind has not expired. The 
Board believes that rescission is self-effectuating in these 
circumstances. Accordingly, under proposed Sec.  226.23(d)(1)(i), when 
a consumer provides a notice of rescission to a creditor, the security 
interest would become void and the consumer would not be liable for any 
amount, including any finance charge. Proposed comment 23(d)(1)(i)-1, 
adopted from current comment 23(d)(1)-1, would emphasize that ``[t]he 
security interest is automatically negated regardless of its status and 
whether or not it was recorded or perfected.''
    As in the current regulation, the creditor would be required to 
return money paid by the consumer and take whatever steps are necessary 
to terminate its security interest within 20 calendar days after 
receipt of the consumer's notice. Accordingly, current Sec.  
226.23(d)(2), and existing commentary would be retained and re-numbered 
as proposed Sec.  226.23(d)(1)(ii). Proposed comment 23(d)(1)(ii)-3 is 
adopted from current comment 23(d)(2)-3 and revised for clarity. The 
proposed comment would state that the necessary steps include the 
cancellation of documents creating the security interest, and the 
filing of release or termination statements in the public record. If a 
mechanic's or materialman's lien is retained by a subcontractor or 
supplier of a creditor-contractor, the creditor-contractor must ensure 
that the termination of that security interest is also reflected. The 
20-calendar-day period for the creditor's action refers to the time 
within which the creditor must begin the process. It does not require 
all necessary steps to have been completed within that time, but the 
creditor is responsible for ensuring that the process is completed.
    Proposed comment 23(d)(1)(ii)-4 would clarify that the 20-calendar-
day period begins to run from the date the creditor receives the 
consumer's notice. The comment would also clarify that, consistent with 
proposed Sec.  226.23(a)(2)(ii)(A), the creditor is deemed to have 
received the consumer's notice of rescission if the consumer provides 
the notice to the creditor or the creditor's agent designated on the 
notice. Where no designation is provided, the creditor is deemed to 
have received the notice if the consumer provides it to the servicer.
    Finally, current Sec.  226.23(d)(3) and (d)(4) and associated 
commentary would be deleted to remove references to the consumer's 
obligations and judicial modification, which are not applicable in the 
initial three-day rescission period.
23(d)(2) Effects of Rescission After the Creditor Disburses Funds
    Proposed Sec.  226.23(d)(2) would apply if the creditor has, 
directly or indirectly through a third party, disbursed money or 
delivered property, and the consumer's right to rescind has not expired 
under Sec.  226.23(a)(3)(ii). Generally, this process would apply after 
the initial three-day period has expired.
23(d)(2)(i) Effects of Rescission if the Parties Are Not in a Court 
Proceeding
23(d)(2)(i)(A) Creditor's Acknowledgment of Receipt
    Proposed Sec.  226.23(d)(2)(i) would address the effects of 
rescission if the parties are not in a court proceeding. Proposed 
comment 23(d)(2)(i)-1 would clarify that the process set forth in Sec.  
226.23(d)(2)(i) does not affect the consumer's ability to seek a remedy 
in court, such as an action to recover damages under section 130 of the 
act, and/or an action to tender in installments. In addition, a 
creditor's written statement, as described in Sec.  226.23(d)(2)(i)(B), 
is not an admission by the creditor that the consumer's claim is a 
valid exercise of the right to rescind.
    As noted above, some creditors do not respond to the consumer's 
notice of rescission. To address this issue, proposed Sec.  
226.23(d)(2)(i)(A) would require that within 20 calendar days after 
receiving a consumer's notice of rescission, the creditor must mail or 
deliver to the consumer a written acknowledgment of receipt of the 
consumer's notice. The acknowledgment must include a written statement 
of whether the creditor will agree to cancel the transaction.
    Proposed comment 23(d)(2)(i)(A)-1 would clarify that the 20-
calendar-day period begins to run from the date the creditor receives 
the consumer's notice. The comment would also cross-reference comment 
23(a)(2)(ii)(B)-1 to further clarify that the creditor is deemed to 
have received the consumer's notice of rescission if the consumer 
provides the notice to the servicer. TILA's legislative history 
indicates that Congress intended for creditors to promptly respond to a 
consumer's notice of rescission. Originally, Congress provided the 
creditor with 10 days to address these matters.\91\ As part of the 
Truth in Lending Simplification and Reform Act of 1980, however, 
Congress increased this time period from 10 to 20 days.\92\ The 
legislative history states: ``This section also increases from 10 to 20 
days the time in which the creditor must refund the consumer's money 
and take possession of property sold after a consumer exercises his 
right to rescind. This will give creditors a better opportunity to 
determine whether the right of rescission is available to the consumer 
and whether it was properly exercised.'' \93\ Nonetheless, the Board 
recognizes the complexities of evaluating the creditor's course of 
action after receiving the consumer's notice of rescission, and 
solicits comments as to whether a period greater than 20 calendar days 
should be provided to the creditor particularly because the proposal 
would require the creditor to provide a written statement of whether it 
will agree to cancel the transaction.
---------------------------------------------------------------------------

    \91\ Truth in Lending Act, Public Law 90-321, tit. I, Sec.  
125(b), 82 Stat. 146, 153 (1968).
    \92\ Truth in Lending Simplification and Reform Act, Public Law 
96-221, tit. VI, Sec.  612(a)(3), 94 Stat. 168, 175 (1980).
    \93\ See S. Rep. No. 96-368, at 29 (1979), as reprinted in 1980 
U.S.C.A.N.N. 236, 264.
---------------------------------------------------------------------------

23(d)(2)(i)(B) Creditor's Written Statement
    Proposed Sec.  226.23(d)(2)(i)(B) would set forth the requirements 
for creditors who agree to cancel the transaction. The proposal would 
state that if the creditor agrees to cancel the transaction, the 
acknowledgment of receipt must contain a written statement, which 
provides: (1) As applicable, the amount of money or a description of 
the property that the creditor will accept as the consumer's tender, 
(2) a reasonable date by which the consumer may tender, and (3) that 
within 20 calendar days after receipt of the consumer's tender, the 
creditor will take whatever steps are necessary to terminate its 
security interest. Proposed comment 23(d)(2)(i)(B)-1 would clarify that 
if the creditor disbursed money to the consumer, then the creditor's 
written statement must state the amount of money that the creditor will 
accept as the consumer's tender. For example, suppose the principal 
balance owed at the time the creditor received the consumer's notice of 
rescission was $165,000, the costs paid directly by the consumer at 
closing were $8,000, and the consumer made interest payments totaling 
$20,000 from the date of consummation to the date of the creditor's 
receipt of the consumer's notice of rescission. The creditor's written 
statement could provide that the acceptable amount of tender is 
$137,000, or some amount higher or lower than that amount.

[[Page 58631]]

    Proposed comment 23(d)(2)(i)(B)-2 would provide an example that it 
would be reasonable under most circumstances to require the consumer's 
tender within 60 days of the creditor mailing or delivering the written 
statement. The Board seeks to balance the consumer's need for 
sufficient time to seek a refinancing or other means of securing 
tender, with the creditor's need to resolve the matter and possibly 
resume interest charges. The Board seeks comment on whether such a time 
period should be provided and, if so, whether it should be shorter or 
longer.
23(d)(2)(i)(C) Consumer's Response
    Proposed Sec.  226.23(d)(2)(i)(C) would set forth the requirements 
for the consumer's actions in response to the creditor's written 
statement described in Sec.  226.23(d)(2)(i)(B). If the creditor 
disbursed money to the consumer in connection with the credit 
transaction, proposed Sec.  226.23(d)(2)(i)(C)(1) would provide that 
the consumer may respond by tendering to the creditor the money 
described in the written statement by the date stated in the written 
statement. Currently, Regulation Z requires the consumer to tender 
money at the creditor's designated place of business. Section 
226.23(d)(3). However, the proposal would permit the consumer to tender 
money at the creditor's place of business, or any reasonable location 
specified in the creditor's written statement. The Board does not 
believe that the consumer's tender of money must be limited to the 
creditor's place of business if tender can be accomplished at another 
reasonable location, such as a settlement office.
    If the creditor delivered property to the consumer, proposed Sec.  
226.23(d)(2)(i)(C)(2) would provide that the consumer may respond by 
tendering to the creditor the property described in the written 
statement by the date stated in the written statement. As provided in 
TILA and Regulation Z, the proposal would state that where this tender 
would be impracticable or inequitable, the consumer may tender its 
reasonable value. TILA Section 125(b); 15 U.S.C. 1635(b); Sec.  
226.23(d)(3). Proposed comment 23(d)(2)(i)(C)-1, adopted from current 
comment 23(d)(3)-2, would clarify that if returning the property would 
be extremely burdensome to the consumer, the consumer may offer the 
creditor its reasonable value rather than returning the property 
itself. For example, if aluminum siding has already been incorporated 
into the consumer's dwelling, the consumer may pay its reasonable 
value. As provided in TILA and Regulation Z, the proposal would further 
provide that at the consumer's option, tender of property may be made 
at the location of the property or at the consumer's residence. TILA 
Section 125(b); 15 U.S.C. 1635(b); Sec.  226.23(d)(3). Proposed comment 
23(d)(2)(i)(C)-2, adopted from current comment 23(d)(3)-1, would 
provide an example that if aluminum siding or windows have been 
delivered to the consumer's home, the consumer may tender them to the 
creditor by making them available for pick-up at the home, rather than 
physically returning them to the creditor's premises.
    TILA and Regulation Z provide that if the creditor does not take 
possession of the money or property within 20 calendar days after the 
consumer's tender, the consumer may keep it without further obligation. 
TILA Section 125(b); 15 U.S.C. 1635(b); Sec.  226.23(d)(3). The Board 
does not believe that this situation is likely to arise in the context 
of resolving a claim outside a court proceeding and therefore, is not 
proposing to include this provision. That is, the Board believes that 
if the consumer provides the creditor with the amount of money or 
property described in the written statement by the date requested, it 
seems unlikely that the creditor would choose not to accept it. The 
Board seeks comment on this approach.
23(d)(2)(i)(D) Creditor's Security Interest
    Proposed Sec.  226.23(d)(2)(i)(D) would require that within 20 
calendar days after receipt of the consumer's tender, the creditor must 
take whatever steps are necessary to terminate its security interest. 
Proposed comment 23(d)(2)(i)(D)-1 would cross-reference comment 
23(d)(1)(ii)-3, described above, regarding reflection of the security 
interest termination.
23(d)(2)(ii) Effect of Rescission in a Court Proceeding
23(d)(2)(ii)(A) Consumer's Obligation
    Proposed Sec.  226.23(d)(2)(ii) would address the effects of 
rescission if the creditor and consumer are in a court proceeding, and 
the consumer's right to rescind has not expired as provided in Sec.  
226.23(a)(3)(ii). With respect to the validity of the right to rescind, 
proposed comment 23(d)(2)(ii)-1 would clarify that the procedures set 
forth in Sec.  226.23(d)(2)(ii) assume that the consumer's right to 
rescind has not expired as provided in Sec.  226.23(a)(3)(ii). Thus, if 
the consumer provides a notice of rescission more than three years 
after consummation of the transaction, then the consumer's right to 
rescind has expired and these procedures do not apply.
    Proposed Sec.  226.23(d)(2)(ii)(A) would set forth the requirements 
for the consumer's obligation to tender. The consumer would be required 
to tender after the creditor receives the consumer's valid notice of 
rescission, but before the creditor releases its security interest. If 
the creditor disbursed money to the consumer, proposed Sec.  
226.23(d)(2)(ii)(A)(1) would require the consumer to tender to the 
creditor the principal balance then owed less any amounts the consumer 
has given to the creditor or a third party in connection with the 
transaction. Tender of money may be made at the creditor's designated 
place of business, or other reasonable location.
    Proposed comment 23(d)(2)(ii)(A)-1 would clarify that the consumer 
must tender to the creditor the principal balance owed at the time the 
creditor received the consumer's notice of rescission less any amounts 
the consumer has given to the creditor or a third party in connection 
with the transaction. For example, suppose the principal balance owed 
at the time the creditor received the consumer's notice of rescission 
was $165,000, the costs paid directly by the consumer at closing were 
$8,000, and the consumer has made interest payments totaling $20,000 
from the date of consummation to the date the creditor received the 
consumer's notice of rescission. The amount of the consumer's tender 
would be $137,000. This amount may be reduced by any amounts for 
damages, attorney's fees or costs, as the court may determine. Proposed 
comments 23(d)(2)(ii)(A)-2 and -3 are adopted from current comments 
23(d)(2)-1 and -2 regarding the creditor's obligations to refund money. 
The comments are revised for clarity; no substantive change is 
intended.
    Proposed comment 23(d)(2)(ii)(A)-4 would clarify that there may be 
circumstances where the consumer has no obligation to tender and 
therefore, the creditor's obligations would not be conditioned on the 
consumer's tender. For example, in the case of a new transaction with 
the same creditor and a new advance of money, the new transaction is 
rescindable only to the extent of the new advance. See Sec.  
226.23(f)(2)(ii). Suppose the amount of the new advance was $3,000, but 
the costs paid directly by the consumer at closing were $5,000. The 
creditor would need to provide $2,000 to the consumer. In that case, 
within 20 calendar days after the creditor's receipt of the consumer's 
notice of rescission, the

[[Page 58632]]

creditor would refund the $2,000 and terminate the security interest.
    As stated above, if the creditor delivered property to the 
consumer, proposed Sec.  226.23(d)(2)(ii)(A)(2) would require the 
consumer to tender the property to the creditor, or where this tender 
would be impracticable or inequitable, tender its reasonable value. At 
the consumer's option, tender of property may be made at the location 
of the property or at the consumer's residence. Proposed comments 
23(d)(2)(ii)(A)-5 and -6 would cross-reference comments 23(d)(2)(i)(C)-
1 and -2, described above, regarding the reasonable value and location 
of property. Proposed Sec.  226.23(d)(2)(ii)(A)(3) would state that if 
the creditor does not take possession of the money or property within 
20 calendar days after the consumer's tender, the consumer may keep it 
without further obligation.
23(d)(2)(ii)(B) Creditor's Obligation
    Proposed Sec.  226.23(d)(2)(ii)(B) would require that within 20 
calendar days after receipt of the consumer's tender, the creditor must 
take whatever steps are necessary to terminate its security interest. 
If the consumer tendered property, the creditor must return to the 
consumer any amounts the consumer has given to the creditor or a third 
party in connection with the transaction. Proposed comment 
23(d)(2)(ii)(B)-1 would cross-reference comment 23(d)(1)(ii)-3, 
described above, regarding the reflection of the security interest 
termination.
23(d)(2)(ii)(C) Judicial Modification
    As in the current regulation, proposed Sec.  226.23(d)(2)(ii)(C) 
would recognize that a court has the authority to modify the creditor's 
or consumer's obligations under the rescission procedures. Existing 
comment 23(d)(4)-1 would be re-numbered as proposed comment 
23(d)(2)(ii)(C)-1, and revised to clarify that the comment is meant to 
address concerns about conditioning the determination of the rescission 
claim on proof of the consumer's ability to tender. The comment would 
clarify, consistent with the holding of the majority of courts, that 
where the consumer's right to rescind is contested by the creditor, a 
court would normally determine first whether the consumer's right to 
rescind has expired, then the amounts owed by the consumer and the 
creditor, and then the procedures for the consumer to tender any money 
or property.
    Proposed comment 23(d)(2)(ii)(C)-2 would provide examples of ways 
the court might modify the rescission procedures. To address concerns 
about whether a court may modify the consumer's obligation to tender, 
the proposed comment would provide an example that a court may modify 
the consumer's form or manner of tender, such as by ordering payment in 
installments or by approving the parties' agreement to an alternative 
form of tender.
23(e) Consumer's Waiver of Right to Rescind
Background
    TILA Section 125(d) provides that the Board may authorize the 
modification or waiver of any rights created under TILA's rescission 
provisions, if the Board finds such action necessary to permit 
homeowners to meet bona fide personal financial emergencies. 15 U.S.C. 
1635(d). The Board exercised that authority under Sec. Sec.  226.15(e) 
and 226.23(e), for open-end and closed-end mortgage transactions, 
respectively. Those provisions state that to modify or waive the right 
to rescind, a consumer must give a creditor a dated, written statement 
that describes the emergency, specifically modifies or waives the right 
to rescind, and bears the signature of all the consumers entitled to 
rescind.\94\ Printed forms are prohibited.\95\
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    \94\ Waiver of the right to rescind is more common than 
modification of that right, but a consumer may modify the right to 
rescind to shorten the rescission period. References in this 
SUPPLEMENTARY INFORMATION and in commentary on Sec. Sec.  226.15(e) 
and 226.23(e) to waiver of the right to rescind also refer to 
modification of that right.
    \95\ The Board authorized the use of printed waiver forms for 
certain natural disasters occurring in 1993 and 1994. See Sec.  
226.23(e)(2)-(4).
---------------------------------------------------------------------------

    Congress also has used the bona fide personal financial emergency 
standard for the consumer's waiver of pre-consummation waiting periods 
in HOEPA and recently in the MDIA. Sections 226.19(a) and 
226.31(c)(1)(iii) implement the waiver provisions under the MDIA and 
HOEPA, respectively.
    Over the years, creditors have asked the Board to clarify the 
procedures for waiver of rescission rights and to provide additional 
examples of a bona fide personal financial emergency. Currently, the 
only example of a bona fide personal financial emergency is provided in 
the commentary to the waiver provisions for the pre-consummation 
waiting periods required by the MDIA and HOEPA. See comments 19(a)(3)-1 
and 31(c)(1)(iii)-1. The example states that the imminent sale of a 
consumer's home at foreclosure is a bona fide personal financial 
emergency.
    Creditors have expressed concerns that consumers may have other 
types of bona fide personal financial emergencies, but, given the 
potential liability for failure to comply with rescission rules, 
creditors are reluctant to accept waivers that do not conform to the 
foreclosure example provided in the commentary. During the MDIA 
rulemaking, creditors asked for additional guidance and examples of 
bona fide personal financial emergencies that would allow a consumer to 
waive the MDIA's pre-consummation waiting periods. Creditors offered 
several examples, including the need to pay for college tuition, an 
emergency medical expense, home repairs after a natural disaster, and 
avoidance of late charges or an interest rate increase on an existing 
home mortgage. Consumer advocates, by contrast, stated that the 
definition of a bona fide personal financial emergency should be 
narrowly construed, to avoid routine waivers of the right to rescind. 
Consumer advocates stated that pre-consummation waiting periods should 
be waived only in the case of imminent foreclosure, tax, or 
condemnation sale.
    When the Board finalized the MDIA rule, it stated that whether a 
bona fide personal financial emergency exists is determined based on 
the facts associated with individual circumstances, and that ``waivers 
should not be used routinely to expedite consummation for reasons of 
convenience.'' 74 FR 23289, 23296, May 19, 2009. The Board did not 
adopt new examples or guidance in the final MDIA rule.
The Board's Proposal
    The Board proposes to provide additional guidance regarding when a 
consumer may waive the right to rescind. The proposed revisions clarify 
the procedure to be used for a waiver. In addition, new examples of a 
bona fide personal financial emergency would be added to the current 
example of an imminent foreclosure sale. The Board proposes these new 
examples as non-exclusive illustrations of other bona fide personal 
financial emergencies that may justify a waiver of the right to 
rescind. The Board also proposes new examples of circumstances that are 
not bona fide personal financial emergencies.
    Procedures. Proposed Sec.  226.23(e) and the associated commentary 
clarify that the consumer may modify or waive the right to rescind if: 
(1) The creditor delivers to each consumer entitled to rescind the 
rescission notice required by Sec.  226.23(b), the credit term 
disclosures required by Sec.  226.38 and, if applicable, the special 
disclosures required by Sec.  226.32(c) for high-cost mortgage

[[Page 58633]]

transactions under HOEPA; and (2) each consumer entitled to rescind 
signs and gives the creditor a dated, written statement that describes 
the bona fide personal financial emergency and specifically modifies or 
waives the right to rescind. Currently, comment 23(e)-1 clarifies that 
the bona fide personal financial emergency must be such that loan 
proceeds are needed before the rescission period ends. Proposed Sec.  
226.23(e) incorporates that requirement into the regulation.
    Proposed Sec.  226.23(e) provides that delivery of the disclosures 
required by Sec.  226.38 and, if applicable, 226.32(c), must occur 
before a consumer may waive the right to rescind. This change is 
proposed for clarity and to conform Sec.  226.23(e) with waiver 
provisions under Sec. Sec.  226.19(a)(3) and 226.31(c)(1)(iii). 
Proposed Sec.  226.23(e) also provides that delivery of the notice of 
the right of rescission required by Sec.  226.23(b) must occur before a 
consumer may waive the right to rescind. This ensures that consumers 
are properly informed of the right, so they can make an informed 
decision whether to waive the right. Other proposed revisions to Sec.  
226.23(e) clarify that each consumer entitled to rescind need not sign 
the same waiver statement; a proposed conforming revision to comment 
23(e)-2 is discussed below. Obsolete references in the regulation to 
the use of printed forms for natural disasters occurring in 1993 and 
1994 are deleted.
    The Board proposes to revise comment 23(e)-2 to clarify that where 
multiple consumers are entitled to rescind, the consumers may, but need 
not, sign the same waiver statement. The Board proposes further to 
revise a discussion in existing comment 23(e)-2 of waiver by multiple 
consumers to refer to Sec.  226.2(a)(11), which establishes which 
natural persons are consumers with the right to rescind. (Disclosure 
requirements for closed-end credit transactions that involve multiple 
consumers are discussed above in the section-by-section analysis of 
proposed Sec.  226.17(d).) In addition, the Board proposes to revise 
comment 23(e)-2 to conform the comment with proposed Sec.  226.23(e) 
and for clarity and to redesignate the comment as comment 23(e)-1.
    Bona fide personal financial emergency. Proposed comment 23(e)-2 
provides additional clarification regarding bona fide personal 
financial emergencies. The proposed comment contains the current 
guidance under existing comments 19(a)(3)-1 and 31(c)(1)(iii)-1, that 
whether the conditions for a bona fide personal financial emergency are 
met is determined by the facts surrounding individual circumstances. 
Proposed comment 23(e)-2 incorporates existing comment 23(e)-1 but 
omits the last sentence of existing comment 23(e)-1 (``The existence of 
the consumer's waiver will not, of itself, automatically insulate the 
creditor from liability for failing to provide the right of 
rescission.''). The Board believes this general statement regarding 
liability is not helpful in determining what constitutes a bona fide 
personal financial emergency.
    To provide more guidance and ensure that waivers do not become 
routine, proposed comment 23(e)-2 provides that a bona fide personal 
financial emergency is most likely to arise in situations that involve 
imminent loss of or harm to a dwelling or imminent harm to the health 
or safety of a natural person. The proposal does not limit a bona fide 
personal financial emergency to situations involving property damage, 
health, or safety, however. Instead, the proposal is intended to 
provide creditors with a general standard to use in determining whether 
a particular circumstance constitutes a bona fide personal financial 
emergency. Other circumstances that are similar to those described in 
the proposed comment might be bona fide personal financial emergencies 
under the facts presented. The proposal provides, however, that the 
conditions for a waiver are not met where the consumer's statement is 
inconsistent with facts known to the creditor.
    Proposed comments 23(e)-2.i and -2.ii provide examples of what may 
or may not constitute a bona fide personal financial emergency. 
Proposed comment 23(e)-2.i provides the following as examples of a bona 
fide personal financial emergency: (1) The imminent sale of the 
consumer's home at foreclosure; (2) the need to fund immediate repairs 
to ensure that a dwelling is habitable, such as structural repairs 
needed due to storm damage; and (3) the imminent need for health care 
services, such as in-home nursing care for a patient recently 
discharged from the hospital. Each example assumes that the emergency 
cannot be addressed unless the loan proceeds are disbursed during the 
rescission period, consistent with existing comment 23(e)-1 and 
proposed comment 23(e)-2. Proposed comment 23(e)-2.ii provides the 
following as examples of what would not constitute a bona fide personal 
financial emergency: (1) The consumer's desire to purchase goods or 
services not needed on an emergency basis, even though the price may 
increase if purchased after the rescission period ends; and (2) the 
consumer's desire to invest immediately in a financial product, such as 
purchasing securities.
    In addition, proposed comment 23(e)-2.iii provides an example of a 
case where the waiver conditions are not met because a waiver statement 
is inconsistent with facts known to the creditor. The example provides 
that, where the waiver statement claims that loan proceeds are needed 
during the rescission period to abate flooding in a consumer's basement 
but the creditor is aware that there is no flooding, the conditions for 
waiver are not met. This example is not an exhaustive statement of 
situations in which a waiver would not be valid. The comment is not 
intended to impose a duty to investigate consumer claims.
    The Board solicits comment regarding the proposed revisions to 
Sec.  226.23(e) and accompanying commentary. In particular, the Board 
requests comment on then proposed examples of circumstances that are 
and are not a bona fide personal financial emergency and then proposed 
an example of a case where the conditions for waiver are not met under 
the proposal.
23(f) Exempt Transactions
23(f)(2)
    Currently, the right of rescission does not apply to a refinancing 
or consolidation by the same creditor of an extension of credit already 
secured by the consumer's principal dwelling. TILA Section 125(e)(2); 
15 U.S.C. 1635(e)(2); Sec.  226.23(f)(2). The ``same creditor'' means 
the original creditor to whom the written agreement was initially made 
payable. Comment 23(f)-4. The right of rescission applies, however, to 
the extent the new amount financed exceeds the unpaid principal 
balance, any earned unpaid finance charge on the existing debt, and 
amounts attributed solely to the costs of the refinancing or 
consolidation.
    Definition of ``refinancing.'' Concerns have been raised about the 
scope of the exemption because the term ``refinancing'' is not defined 
and the term ``same creditor'' needs clarification. Congress added the 
exemption for a same-creditor refinancing as part of the 1980 Truth in 
Lending Simplification and Reform Act,\96\ but did not define 
``refinancing'' or the ``same creditor.'' Regulation Z contains a 
definition of ``refinancing'' for purposes of disclosures required 
subsequent to consummation under Sec.  226.20(a), but does not state

[[Page 58634]]

whether this definition should be applied for purpose of the exemption 
from rescission in Sec.  226.23(f). In addition, under new proposed 
Sec.  226.20(a)(1), a same-creditor refinancing of a mortgage would now 
be referred to as a ``new transaction.'' This change may make it more 
difficult for practitioners to determine where to locate a definition 
of same-creditor ``refinancing.''
---------------------------------------------------------------------------

    \96\ Public Law 96-221, tit. VI, Sec.  6, 94 Stat. 145, 176 
(1980).
---------------------------------------------------------------------------

    To address this problem, the Board proposes to specifically 
reference in Sec.  226.23(f)(2) the term ``new transaction'' that would 
be used in proposed Sec.  226.20(a)(1). That is, instead of 
``refinancing or consolidation,'' proposed Sec.  226.23(f)(2) would 
reference ``a new transaction under Sec.  226.20(a)(1).'' The Board 
believes that these proposed revisions to Sec. Sec.  226.20(a) and 
226.23(f)(2) will clarify the scope of the rescission exemption for 
consumers and creditors.
    Definition of ``same creditor.'' The Board also proposes to revise 
the definition of the ``same creditor'' to clarify that the exemption 
applies to the original creditor who is also the current holder of the 
debt obligation. Over time, the definition of the ``same creditor'' as 
the ``original creditor'' has become less meaningful as fewer creditors 
originate and hold mortgage loans. The Board believes that when the 
exemption for a refinancing by the ``same creditor'' was written in 
1980, Congress likely intended for the exemption to apply to a 
portfolio lender who originated the existing mortgage with the consumer 
and retained the risk for the mortgage. Presumably, in that situation, 
the consumer would have developed some trust in, or at least 
familiarity with, the practices of the creditor. In addition, the 
current definition does little to reduce creditors' risk of rescission. 
During outreach conducted by the Board for this proposal, the Board was 
informed that few creditors use this exemption because they are not 
certain that they were the ``original creditor'' for the transaction. 
Creditors can incur liability for mistakenly using Model Form H-9 for a 
new advance of money with the same creditor when they were not the 
``original creditor.''
    To address this problem, the Board proposes Sec.  226.23(f)(2)(i) 
to define the term ``same creditor'' to mean ``the original creditor 
that is also the current holder of the debt obligation.'' The proposal 
would also move the definition of ``original creditor'' from the 
commentary to the regulatory text. The Board believes that this 
proposal would benefit consumers by limiting the exemption to only the 
creditor who holds the loan's risk and with whom the consumer has an 
existing relationship. Furthermore, the proposal may ease the 
compliance burden and litigation risk for creditors by providing clear 
guidance on the definition of the ``same creditor.''
    Definition of ``new advance of money.'' The Board also proposes to 
simplify the definition of a ``new advance of money.'' Currently, the 
right of rescission applies to a same-creditor refinancing to the 
extent the new amount financed exceeds the unpaid principal balance, 
any earned unpaid finance charge on the existing debt, and amounts 
attributed solely to the costs of the refinancing or consolidation. 
TILA Section 125(e)(2); 15 U.S.C. 1635(e)(2); Sec.  226.23(f)(2). 
Proposed Sec.  226.23(f)(2)(ii) would substitute the ``loan amount'' 
for the ``amount financed.'' As stated in the August 2009 Closed-End 
Proposal, the Board believes that this change would simplify the 
determination of the new advance; no substantive change is intended. 
Proposed comment 23(f)(2)-1 would cross-reference Sec.  226.38(a)(1) 
for a definition of the ``loan amount.'' As stated in the August 2009 
Closed-End Proposal, proposed Sec.  226.38(a)(1) would define the 
``loan amount'' as the principal amount the consumer will borrow as 
reflected in the loan contract. The proposal would also clarify in the 
regulation, rather than in the commentary, that if the new transaction 
with the same creditor involves a new advance of money, the new 
transaction is rescindable only to the extent of the new advance.
    The proposal contains two changes to the commentary to clarify the 
meaning of a ``new advance.'' Currently, comment 23(f)-4 states that a 
new advance does not include amounts attributed solely to the costs of 
the refinancing, and refers to amounts included under Sec.  
226.4(c)(7), such as attorney's fees and title examination and 
insurance fees, if bona fide and reasonable in amount. Under the August 
2009 Closed-End Proposal, Sec.  226.4(c)(7) would no longer apply to 
closed-end mortgages. Thus, proposed comment 23(f)(2)-2 would clarify 
that a new advance does not includes amounts attributed solely to ``any 
bona fide and reasonable'' cost of the new transaction. In addition, 
proposed comment 23(f)(2)-4 would clarify that amounts that are 
financed to fund an existing or newly-established escrow account do not 
constitute a new advance. The term ``escrow amount'' would have the 
same meaning as in 24 CFR 3500.17.
    To address compliance concerns regarding use of the model forms, as 
discussed in the section-by-section analysis for Sec.  226.23(b)(e)(iv) 
above, Model Form H-9 would be renamed ``Rescission Model Form (New 
Advance of Money with the Same Creditor).'' Proposed comment 23(f)(2)-
5, adopted from current comment 23(f)-4, would clarify that Model Form 
H-9 should be used for a new advance of money with the same creditor. 
Otherwise, the general rescission notice (Model Form H-8) is the 
appropriate form for use by creditors.
    The proposal also contains a number of revisions to the regulation 
and commentary to improve clarity, but no substantive change is 
intended. In particular, the commentary is revised and re-numbered to 
correspond to the specific exemption.
23(f)(5)
    Currently, Sec.  226.23(f)(5) provides that the right of rescission 
does not apply to ``[a] renewal of optional insurance premiums that is 
not considered a refinancing under Sec.  226.20(a)(5).'' Under section 
226.20(a)(5), a ``refinancing'' does not include ``[t]he renewal of 
optional insurance purchased by the consumer and added to an existing 
transaction, if disclosures relating to the initial purchase were 
provided as required by this subpart.'' The Board proposes to move this 
definition to the text of proposed Sec.  226.23(f)(5). In addition, the 
Board proposes to treat the renewal of optional debt cancellation 
coverage and debt suspension coverage the same as the renewal of 
optional insurance premiums. The Board has recently proposed to revise 
and update several sections of Regulation Z to extend its provisions to 
debt cancellation and debt suspension products.\97\ Thus, proposed 
Sec.  226.23(f)(5) would provide that the right of rescission does not 
apply to ``[a] renewal of optional credit insurance premiums, debt 
cancellation coverage or debt suspension coverage, provided that the 
disclosures relating to the initial purchase were provided as required 
under Sec.  226.38(h).''
---------------------------------------------------------------------------

    \97\ See, e.g., August 2009 Closed-End Proposal, 74 FR 43232, 
43278, Aug. 26, 2009 (treating debt suspension coverage in the same 
manner as debt cancellation coverage for purposes of disclosing the 
amount borrowed for a HOEPA loan).
---------------------------------------------------------------------------

23(g) and (h)
    Section 226.23(g) and (h)(2) currently provide tolerances for 
disclosure of the finance charge and the APR for purposes of 
rescission. As discussed in the section-by-section analysis to proposed 
Sec.  226.23(a)(5), these tolerances would be moved to Sec.  
226.23(a)(5)(ii).
    Section 226.23(h)(1) currently provides that after the initiation 
of foreclosure on the consumer's principal dwelling that secures the 
credit obligation, the consumer shall have the

[[Page 58635]]

right to rescind the transaction if: (1) a mortgage broker fee that 
should have been included in the finance charge was not included; or 
(2) the creditor did not provide the properly completed appropriate 
model form in appendix H of this part, or a substantially similar 
notice of rescission. The Board proposes to move this provision and 
associated commentary to proposed Sec.  226.23(g) and make technical 
revisions. No substantive change is intended.

Section 226.24 Advertising

24(f) Disclosure of Rates and Payments in Advertisements for Credit 
Secured by a Dwelling
24(f)(3) Disclosure of Payments
    The Board is proposing to amend Sec.  226.24(f)(3) to remove an 
erroneous cross reference to Sec.  226.24(c). Section 226.24(f)(3) 
imposes certain requirements on advertisements for credit secured by a 
dwelling that state the amount of any payment.\98\ Section 
226.24(f)(3)(i) contains the introductory language, ``In addition to 
the requirements of paragraph (c) of this section,'' before prescribing 
the applicable requirements. Section 226.24(c), however, imposes 
certain requirements on advertisements that state a rate of finance 
charge, not the amount of any payment. Accordingly, proposed Sec.  
226.24(f)(3)(i) would omit the inappropriate reference to ``paragraph 
(c) of this section.'' No substantive change is intended.
---------------------------------------------------------------------------

    \98\ The Board added Sec.  226.24(f) as part of the July 2008 
HOEPA Final Rule. See 73 FR 44522, 44601-44602; Jul. 30, 2008.
---------------------------------------------------------------------------

Section 226.31 General Rules

    Section 226.31 provides general rules that relate to the 
disclosures for reverse mortgages under Sec.  226.33 and for high-cost 
mortgages under Sec.  226.32.
31(b) Form of Disclosures
    Under Sec.  226.31(b), a creditor may give a consumer the 
disclosures required by Sec. Sec.  226.32 and 226.33 in electronic 
form, as long as the creditor complies with the consumer notice and 
consent procedures and other applicable provisions of the Electronic 
Signatures in Global and National Commerce Act (E-Sign Act) (15 U.S.C. 
7001 et seq.). The proposal would revise Sec.  226.31(b) to permit, 
under certain circumstances, the proposed disclosures required for 
reverse mortgage under Sec.  226.33(b) (the ``Key Questions'' document) 
to be provided to a consumer in electronic form without regard to the 
requirements of the E-Sign Act.
    Current Sec. Sec.  226.5(a)(1) and 226.17(a)(1) contain similar 
exceptions to the E-Sign Act's notice and consent requirements for 
(among others) the application disclosures required by Sec. Sec.  
226.5b and 226.19(b), respectively. The Board also proposed similar 
exceptions for the ``Key Questions'' disclosures in the August 2009 
Closed-End and HELOC Proposals. See 74 FR 43232, 43323, Aug. 26, 2009; 
74 FR 43428, 43442, Aug. 26, 2009. The purpose of this exception from 
the E-Sign Act's notice and consent requirements is to facilitate 
credit shopping. When proposing the current exceptions, the Board 
stated its belief that the exceptions would eliminate a potentially 
significant burden on electronic commerce without increasing the risk 
of harm to consumers: requiring consumers to follow the notice and 
consent procedures of the E-Sign Act to access an online application, 
solicitation, or advertisement is potentially burdensome and could 
discourage consumers from shopping for credit online; at the same time, 
there appears to be little, if any, risk that the consumer will be 
unable to view the disclosures online when they are already able to 
view the application, solicitation, or advertisement online. 72 FR 
63462, Nov. 9, 2007.
    This exception would not be extended to the disclosures that would 
be provided within three business days after application under proposed 
Sec.  226.33(d)(1) and (d)(3). The credit shopping process takes place 
primarily when a consumer reviews applications and associated 
disclosures and decides whether to submit an application. Three 
business days after the consumer has submitted an application, the 
consumer may have completed the credit shopping process. Requiring 
compliance with the E-Sign Act's notice and consent procedures for 
disclosures at this point would not likely hinder credit shopping, and 
would ensure that the consumer is able and willing to receive 
disclosures in electronic form. In addition, compliance with the E-Sign 
Act for disclosures three business days after application should not be 
unduly burdensome, because the time between application and three days 
later should be sufficient for the creditor to carry out the E-Sign Act 
notice and consent procedures.
31(c) Timing of Disclosure
31(c)(1) Disclosures for Certain Closed-End Home Mortgages
31(c)(1)(iii) Consumer's Waiver of Waiting Period Before Consummation
Background
    TILA Section 103(aa) establishes a category of high-cost, closed-
end mortgage loans generally referred to as ``HOEPA loans''. 15 U.S.C. 
1602(aa). TILA Section 129(b)(1) provides that a creditors must make 
special disclosures required for HOEPA loans at least three business 
days before consummation. 15 U.S.C. 1639(b)(1). The Board implemented 
that requirement in Sec.  226.31(c)(1).
    TILA Section 129(b)(3) provides that the Board may authorize the 
modification of or waiver of rights provided for HOEPA loans if the 
Board finds such action necessary to permit homeowners to meet bona 
fide personal financial emergencies. 15 U.S.C. 1639(b)(3). The Board 
exercised that authority to allow a consumer to modify or waive the 
requirement under Sec.  226.31(c)(1) that consumers receive special 
disclosures for HOEPA loans at least three business days before 
consummation. Sec.  226.31(c)(1)(iii). To waive the right, the consumer 
must give the creditor a dated, written statement that describes the 
bona fide personal financial emergency, specifically modifies or waives 
the waiting period, and bears the signature of all the consumers 
entitled to the waiting period.\99\ Printed forms are prohibited.\100\
---------------------------------------------------------------------------

    \99\ A consumer need not waive a waiting period entirely and may 
modify--that is, shorten--a waiting period. References to waiver of 
a waiting period in this Supplementary Information and in commentary 
Sec.  226.31(c)(1)(iii) also refer to modification of a waiting 
period.
    \100\ The Board authorized the use of printed waiver forms for 
certain natural disasters occurring in 1993 and 1994. See Sec. Sec.  
226.23(e)(2)-(4) and Sec.  226.31(c)(1)(iii).
---------------------------------------------------------------------------

    The requirements for modifying or waiving a pre-consummation 
waiting period under Sec.  226.31(c)(1)(iii) are substantially similar 
to the requirements for waiving a pre-consummation waiting period under 
Sec.  226.19(a)(3) and the right to rescind under Sec. Sec.  226.15(e) 
and 226.23(e). Over the years, creditors have asked the Board to 
clarify the procedures for waiver and provide additional examples of a 
bona fide personal financial emergency, as discussed in detail above in 
the section-by-section analysis of Sec.  226.23(e).
The Board's Proposal
    For the reasons discussed above in the section-by-section analysis 
of proposed

[[Page 58636]]

Sec.  226.23(e), the Board proposes to clarify the procedure to be used 
for a waiver. The Board also proposes to provide new examples of 
circumstances that are a bona fide personal financial emergency (in 
addition to the current example of an imminent foreclosure sale, see 
comment 31(c)(1)(iii)-1) and circumstances that are not a bona fide 
personal financial emergency.
    Procedures. Proposed Sec.  226.31(c)(1)(iii) and the associated 
commentary clarify that the consumer may modify or waive a waiting 
period, after the consumer receives the HOEPA loan disclosures required 
by Sec.  226.31(c)(1), if each consumer primarily liable on the legal 
obligation signs and gives the creditor a dated, written statement that 
describes the bona fide personal financial emergency, specifically 
modifies or waives the waiting period, and bears the consumer's 
signature. Proposed Sec.  226.31(c)(1)(iii) provides that loan proceeds 
must be needed during the waiting period. This is consistent with 
comment 31(c)(1)(iii)-1, which incorporates by reference a 
substantially similar requirement under Sec.  226.23(e).
    The Board proposes to revise Sec.  226.31(c)(1)(iii) and comment 
31(c)(1)(iii)-1 to state that each consumer primarily liable on the 
obligation (rather than ``each consumer entitled to the waiting 
period'') must sign a waiver statement for a waiver to be effective, 
for clarity and conformity with Sec.  226.19(a)(3). Other proposed 
revisions to Sec.  226.31(c)(1)(iii) and comment 31(c)(1)(iii)-1 
clarify that each consumer primarily liable on the obligation may sign 
a separate waiver statement.
    The Board also proposes to move the discussion of circumstances 
that are a bona fide personal financial emergency in comment 
31(c)(1)(iii)-1 to a new comment 31(c)(1)(iii)-2, to conform the waiver 
commentary under Sec.  226.31(c)(1)(iii) with the waiver commentary 
under Sec. Sec.  226.15(e) and 226.23(e). Proposed comment 
31(c)(1)(iii)-2 is discussed below.
    Bona fide personal financial emergency. Proposed comment 
31(c)(1)(iii)-2 provides clarification regarding bona fide personal 
financial emergencies. The comment contains the current guidance under 
existing comment 31(c)(1)(iii)-1, that whether the conditions for a 
bona fide personal financial emergency are met is determined by the 
facts surrounding individual circumstances.
    To provide additional guidance, proposed comment 31(c)(1)(iii)-2 
also states that a bona fide personal financial emergency typically, 
but not always, will involve imminent loss of or harm to a dwelling or 
harm to the health or safety of a natural person. Proposed comment 
31(c)(1)(iii)-2 also states that a waiver is not effective if a 
consumer's waiver statement is inconsistent with facts known to the 
creditor. Further, proposed comment 31(c)(1)(iii)-2 states that 
creditors may rely on the examples and other commentary provided in 
comment 23(e)-2 to determine whether circumstances are or are not a 
bona fide personal financial emergency. Those examples are discussed 
above in the section-by-section analysis of proposed Sec.  226.23(e).
    Written waiver statement. The Board also proposes to revise comment 
31(c)(1)(iii)-1 to state that a waiver statement must be ``written'' 
rather than ``handwritten''. Since the time comment 31(c)(1)(iii)-1 was 
adopted, use of personal computers and printers has increased 
significantly. The commentary on other waiver provisions under 
Regulation Z uses the term ``written'' rather than ``handwritten'', 
moreover. See comments 15(e)-2, 19(a)(3)-1, and 23(e)-2. Using the term 
``written'' would promote consistency among the waiver comments. A 
consumer (or a consumer's designee, such as a housing counselor, 
unrelated to the creditor or loan originator) may write a waiver 
statement by hand, typewriter, computer, or some other means. 
Nevertheless, Sec.  226.31(c)(1)(iii) and the other waiver provisions 
continue to prohibit the use of printed forms.
    The Board solicits comment regarding the proposed revisions to 
Sec.  226.31(c)(1)(iii). In particular, the Board requests comment 
regarding the proposed commentary stating that creditors may rely on 
commentary on Sec.  226.23(e) for proposed examples of circumstances 
that are and are not a bona fide personal financial emergency.
31(c)(2) Disclosures for Reverse Mortgages
    The proposed rule would remove the timing rules for reverse 
mortgage disclosures from Sec.  226.31(c)(2) and instead cross-
reference the timing rules in proposed Sec.  226.33(d), discussed in 
the section-by-section analysis of that section.
31(d) Basis of Disclosures and Use of Estimates
31(d)(2) Estimates
    Section 226.31(d)(2) provides for the use of estimates in 
disclosures. Under this section, if any information necessary for an 
accurate disclosure is unknown to the creditor, the creditor must make 
the disclosure based on the best information reasonably available at 
the time the disclosure is provided, and state clearly that the 
disclosure is an estimate. Proposed Sec.  226.19(a)(2) in the Board's 
August 2009 Closed-End Proposal would limit a creditors' use of 
estimates in certain closed-end mortgage disclosures. Under the 
proposal, the rules in Sec.  228.19(a), including the limits on using 
estimated disclosures in Sec.  226.19(a)(2), would apply to the 
disclosures for closed-end reverse mortgages, as discussed in the 
section-by-section analysis to Sec.  226.33(d)(3). Accordingly, Sec.  
226.31(d)(2) would be revised and comment 31(d)(2)-2 added to clarify 
that the use of estimates would be subject to the restrictions in 
proposed Sec.  226.19(a)(2). The Board requests comment on whether 
there are specific terms required to be disclosed for reverse mortgages 
in Sec.  226.33(c) that a creditor may need to estimate in final 
closed-end reverse mortgage disclosures.

Section 226.32 Requirements for Certain Closed-End Mortgages

32(a) Coverage
32(a)(1)
32(a)(1)(ii)
    As discussed in detail below, the Board is proposing to revise the 
definition of ``points and fees'' for purposes of HOEPA coverage, in 
Sec.  226.32(b)(1). Under the points and fees test in Sec.  
226.32(a)(1)(ii), HOEPA coverage is determined by calculating whether 
the total points and fees exceeds 8 percent of the total loan amount 
(or a fixed-dollar alternative). Comment 32(a)(1)(ii)-1 explains how to 
determine the total loan amount for this purpose and provides several 
examples. The Board is proposing to revise the comment to be consistent 
with the proposed revisions to Sec.  226.32(b)(1). Proposed comment 
32(a)(1)(ii)-1 would state that, for purposes of determining the total 
loan amount, a transaction's prepaid finance charge and amount financed 
are determined without applying Sec.  226.4(g).
32(a)(2)
32(a)(2)(ii)
    Section 226.32 implements TILA Section 129 by providing rules for 
certain high-cost mortgages. TILA Section 129 exempts reverse mortgage 
transactions as defined in TILA Section 103(bb). 15 U.S.C. 1639. Among 
the restrictions on high-cost mortgage loans are restrictions on 
balloon payments and negative amortization. In reverse mortgages, 
consumers do not make

[[Page 58637]]

regular periodic payments. Instead, interest charges and fees are added 
to the consumer's loan balance, causing negative amortization. In 
addition, consumers repay a reverse mortgage in a single payment when 
the loan becomes due. For these reasons, a closed-end reverse mortgage 
that meets the definition of a high-cost mortgage loan (because the 
annual percentage rate or points and fees exceed those specified in 
Sec.  226.32(a)(1)) would be prohibited by Section 129 of TILA. 
Consequently, Congress exempted reverse mortgages from Section 129 and 
instead imposed the disclosure requirements in TILA Section 138. (In 
addition, open-end reverse mortgages are covered by TILA Section 138 
even though open-end credit plans are exempt from TILA Section 129.)
    TILA Section 103(bb) defines the term ``reverse mortgage 
transaction'' to mean, among other things, a nonrecourse transaction. 
15 U.S.C. 1602(bb). That is, the reverse mortgage must limit the 
homeowner's liability under the contract to the proceeds of the sale of 
the home (or a lesser amount specified in the contract). Consequently, 
if a closed-end reverse mortgage allows recourse against the consumer, 
and the transaction is a high-cost mortgage loan under Sec.  226.32, 
the transaction is subject to all the requirements of Sec.  226.32 
including the limitations concerning balloon payments and negative 
amortization.
    As discussed in the section-by-section analysis to Sec.  226.33 
below, the proposed rule would modify the definition of a reverse 
mortgage for the purposes of disclosures and other substantive 
protections to include reverse mortgages that allow recourse against 
the consumer (that is, that do not limit the consumer's liability under 
the contract to the proceeds from the sale of the home or a lesser 
specified amount). Reverse mortgages that allow for recourse against 
the consumer present even greater consumer protection concerns than 
nonrecourse reverse mortgages because the consumer or consumer's estate 
could be liable for significantly more than the home is worth when such 
a reverse mortgage becomes due. In addition, for these same reasons, 
the proposed rule would preserve the narrow exemption for nonrecourse 
reverse mortgages from the high-cost loan provisions in Sec.  
226.32(a)(2)(ii). Current comment 33(a)-1, which discusses the 
nonrecourse limitation, would be moved to comment 32(a)(2)(ii)-1.
32(b) Definitions
32(b)(1)
    In the August 2009 Closed-End Proposal, the Board proposed to 
expand the definition of the finance charge and APR to include most 
closing costs, including third-party closing costs. 74 FR 43232, 43241, 
Aug. 26, 2009. The Board also proposed to include these costs in the 
``points and fees'' definition for purposes of HOEPA coverage. The 
Board is now proposing to amend Sec.  226.32(b)(1) to preserve the 
existing treatment of certain closing costs in the ``points and fees'' 
definition for HOEPA coverage purposes, which does not cover most 
third-party charges. Under proposed Sec.  226.32(b)(1), points and fees 
would include all items included in the finance charge pursuant to 
Sec.  226.4 (other than interest or time-price differential), except 
that, for purposes of this definition, Sec.  226.4(g) would not apply.
Background
    Under Sec.  226.32(b)(1), ``points and fees'' includes (i) Items 
required to be disclosed under Sec. Sec.  226.4(a) and 226.4(b), except 
interest or the time-price differential; (ii) all compensation paid to 
mortgage brokers; (iii) all items listed in Sec.  226.4(c)(7) (other 
than amounts held for future payment of taxes) unless the charge is 
reasonable, the creditor receives no direct or indirect compensation in 
connection with the charge, and the charge is not paid to an affiliate 
of the creditor; and (iv) premiums or other charges for credit life, 
accident, health, or loss-of-income insurance, or debt-cancellation 
coverage (whether or not the debt-cancellation coverage is insurance 
under applicable law) that provides for cancellation of all or part of 
the consumer's liability in the event of the loss of life, health, or 
income or in the case of accident, written in connection with the 
credit transaction.
    In the August 2009 Closed-End Proposal, the Board proposed to amend 
Sec.  226.4 to provide a simpler, more inclusive definition of the 
finance charge. See 74 FR 43232, 43321-23, Aug. 26, 2009. The Board's 
objective was to improve the utility of the APR as a single number that 
consumers can use to compare the costs of loan offers, and to 
facilitate compliance and reduce litigation costs for creditors. Under 
the August 2009 Closed-End Proposal, the finance charge and APR would 
include most closing costs, including many third-party costs such as 
appraisal fees and premiums for title insurance. The Board also 
proposed to amend the definition of ``points and fees'' in Sec.  
226.32(b)(1) to conform to the more inclusive finance charge 
definition. The Board noted that, as a result of the more inclusive 
finance charge, APRs and points and fees would increase, and more loans 
would potentially qualify as higher-priced mortgage loans, HOEPA loans 
covered by Sec. Sec.  226.32 and 226.34, and loans subject to certain 
State anti-predatory lending laws. 74 FR 43344-45, Aug. 26, 2009. 
Nevertheless, the Board concluded, based on the limited data it had, 
that the proposal to improve the APR would be in consumers' interests. 
Comment was solicited on the potential impact of the proposed rule.
    Numerous mortgage creditors and their trade associations commented 
on the proposal to make the finance charge and APR more inclusive. Most 
expressed agreement in principle with the proposed finance charge 
definition. Nevertheless, most industry commenters opposed the 
proposal, stating that it would cause many prime loans to be 
incorrectly classified as higher-priced mortgage loans under Sec.  
226.35 and that it would inappropriately expand the coverage of HOEPA 
and similar State laws. These commenters indicated that the more 
inclusive finance charge would have a much more significant impact 
under the points and fees tests than under the APR tests. One creditor 
estimated that 30 to 50 percent of its subprime loans, which currently 
are higher-priced mortgage loans but not HOEPA loans, would become 
HOEPA (or state ``high-cost'') loans under the proposal.
    Consumer advocates uniformly supported the proposal to make the 
finance charge and APR more inclusive. They recognized the resulting 
expansion of coverage under Sec. Sec.  226.32 and 226.35, and under 
similar State laws, but they argued that any such expanded coverage 
would be appropriate. Consumer advocates stated that the more inclusive 
finance charge and APR only would reveal newly covered loans for what 
they have always been, namely, HOEPA loans and higher-priced mortgage 
loans. Accordingly, they argued, the increase in the coverage of 
Sec. Sec.  226.32 and 226.35, as well as affected State laws, would be 
warranted.
The Board's Proposal
    The Board is proposing to amend Sec.  226.32(b)(1) to retain the 
existing treatment of third-party charges in the points and fees 
definition. Under proposed Sec.  226.32(b)(1)(i), points and fees would 
include all items included in the finance charge pursuant to Sec.  
226.4, except interest or the time-price differential and except that 
Sec.  226.4(g) would not apply. Thus, Sec.  226.4(g), as

[[Page 58638]]

proposed in the August 2009 Closed-End Proposal, still would include 
most third-party charges in the finance charge, but proposed Sec.  
226.32(b)(1)(i) would preserve the existing treatment of such charges 
for purposes of points and fees. As discussed above, the Board is also 
proposing to amend comment 32(a)(1)(ii)-1 to make the determination of 
the total loan amount consistent with this proposal.
    As discussed above, the Board recognized when it issued the August 
2009 Closed-End Proposal that the more inclusive finance charge would 
have some impact on HOEPA coverage. At the time, the Board lacked 
adequate data to quantify the impact, but believed that the more 
inclusive finance charge would benefit consumers. Based on the 
comments, the Board now believes that the changes to Sec.  226.32(b)(1) 
in the August 2009 Closed-End Proposal would have a substantial impact 
on HOEPA coverage. The objectives of the more inclusive finance charge 
are to enhance the APR's utility to consumers as a comparison shopping 
tool, as well as to eliminate compliance burden and legal risk for 
industry. See 74 FR 43232, 43243, Aug. 26, 2009. The Board does not 
believe those objectives support an expansion of HOEPA coverage under 
the points and fees test.
    Relatively few loans are made that meet HOEPA's coverage tests. The 
lack of lending activity above HOEPA's thresholds may be attributable 
to HOEPA's substantive restrictions on loan terms, additional liability 
for violations under TILA Section 130(a)(4), 15 U.S.C. 1640(a)(4), and 
concerns about HOEPA's assignee liability provision. The Board is 
concerned that significantly expanding the loans covered by HOEPA would 
result in reduced access to credit. Accordingly, the Board now proposes 
to amend Sec.  226.32(b)(1) to retain the existing treatment of certain 
charges in the definition of points and fees.\101\ Charges that would 
be excluded from points and fees under proposed Sec.  226.32(b)(1) 
include closing agent charges under Sec.  226.4(a)(2); miscellaneous 
charges under Sec.  226.4(c), including application fees charged to all 
applicants under Sec.  226.4(c)(1), and the real estate related fees 
listed in Sec.  226.4(c)(7) when reasonable and paid to third parties; 
and certain government recording and related charges and insurance 
premiums incurred in lieu of such charges under Sec.  226.4(e).\102\
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    \101\ The Board notes that this proposal is consistent with the 
recently enacted Dodd-Frank Wall Street Reform and Consumer 
Protection Act, Public Law 111-203, 124 Stat. 1376 (July 21, 2010), 
which amends TILA Section 103(aa)(1) to exclude all ``bona fide 
third party charges'' from points and fees. The Dodd-Frank Act makes 
numerous other changes to HOEPA, including changes to the definition 
of points and fees and to the points and fees test itself. This 
proposal is intended only to preserve the existing treatment under 
the points and fees test of third-party charges, virtually all of 
which generally are excluded, notwithstanding the Board's proposal 
to include those charges in the finance charge. The Board expects to 
propose for comment additional revisions to Regulation Z in a future 
rulemaking to implement the amendments to HOEPA under the Dodd-Frank 
Act.
    \102\ Credit insurance premiums and similar charges that are 
disclosed in accordance with Sec.  226.4(d)(1) or (d)(3), as 
applicable, would be added to the finance charge under the Board's 
proposal, but those charges already are included in points and fees 
under Sec.  226.32(b)(1)(iv).
---------------------------------------------------------------------------

    Although this proposal would avoid improper coverage of certain 
loans under HOEPA, many such loans nevertheless would remain higher-
priced mortgage loans under Sec.  226.35. As a result, they still would 
be subject to the Board's substantive protections for such loans, 
including the prohibition of lending based on the value of the 
collateral without regard to the consumer's repayment ability, 
significant restrictions on prepayment penalties, and the requirement 
that an escrow account for taxes and insurance be established. The 
Board believes that the mortgage industry's reluctance to make HOEPA 
loans does not extend to the same degree to higher-priced mortgage 
loans. Nevertheless, the Board also is concerned that the coverage of 
Sec.  226.35 not be unduly expanded by the more inclusive finance 
charge and annual percentage rate and is therefore proposing revisions 
to Sec.  226.35(a), discussed below.
    This proposal would reorganize and revise the staff commentary 
under Sec.  226.32(b)(1) to conform to the proposed changes to the 
regulation. The commentary's substantive guidance would be retained to 
the extent it remains pertinent. Proposed comment 32(b)(1)(i)-1 would 
clarify that loans that are secured by a consumer's principal dwelling 
and therefore potentially subject to Sec.  226.32 are subject to the 
special rules for the finance charge calculation for transactions 
secured by real property or a dwelling. The comment also would explain, 
however, that the special rules in Sec.  226.4(g) govern only a 
transaction's finance charge and have no effect on the transaction's 
points and fees, and it would illustrate the difference with an 
example. Proposed comment 32(b)(1)(ii)-1 would note that points and 
fees always includes mortgage broker compensation paid by the consumer, 
but the comment would clarify that compensation that is not paid by the 
consumer is excluded. For example, compensation paid to a mortgage 
broker by a creditor, including a yield spread premium, is not included 
in points and fees.
    The August 2009 Closed-End Proposal also would have amended Sec.  
226.32(b)(1)(i) to follow more closely the provision of TILA that it 
implements, TILA Section 103(aa)(4)(A), 15 U.S.C. 1602(aa)(4)(A). The 
proposed changes were for clarity, with no substantive effect intended. 
For ease of reference, this proposal republishes those proposed 
changes. The Board requests that interested parties limit the scope of 
their comments to the newly proposed changes to Sec.  226.32(b)(1) and 
associated commentary discussed in the SUPPLEMENTARY INFORMATION to 
this proposed rule.

Section 226.33 Requirements for Reverse Mortgages

Introduction
    Reverse mortgage products enable eligible borrowers to exchange the 
equity in their homes for cash without requiring borrowers to repay the 
loan while they live in their homes. Reverse mortgage proceeds may used 
for a variety of purposes. According to a recent GAO study, the most 
common uses of reverse mortgage proceeds are for paying off an existing 
mortgage, home repairs or improvements, or improving quality of 
life.\103\ For many borrowers, a reverse mortgage may provide the only 
funds available to pay for health care needs and other living expenses. 
As a result, reverse mortgages, if offered appropriately, could become 
an increasingly important mechanism for financial institutions to 
address the credit needs of an aging population.
---------------------------------------------------------------------------

    \103\ U.S. Government Accountability Office, Reverse Mortgages: 
Product Complexity and Consumer Protection Issues Underscore Need 
for Improved Controls Over Counseling for Borrowers, GAO-09-606, 7-8 
(June 2009) (citing AARP, Reverse Mortgages: Niche Product or 
Mainstream Solution? Report on the 2006 AARP Nat'l Survey of Reverse 
Mortgage Shoppers (Washington, DC: Dec. 2007)).
---------------------------------------------------------------------------

    The need to provide consumers with adequate information about 
reverse mortgages and to ensure appropriate consumer protections is 
high. Reverse mortgages are complex loan products that present a wide 
range of complicated options to borrowers. Moreover, they are typically 
secured by the borrower's primary asset--his or her home.
    Reverse mortgage products. The reverse mortgage market currently 
consists of two types of products: proprietary products offered by 
individual lenders and FHA-insured reverse mortgages offered under 
HUD's HECM program. A HECM loan is subject

[[Page 58639]]

to HUD regulations that establish a range of consumer protections and 
other requirements.
    Reverse mortgages generally are nonrecourse, home-secured loans 
that provide one or more cash advances to borrowers and require no 
repayments until a future event. Both HECMs and proprietary reverse 
mortgages generally must be repaid only when the last surviving 
borrower dies, all borrowers permanently move to a new principal 
residence, or the loan is in default. For example, repayment would be 
required when the borrower sells the home or has not resided in the 
home for a year. A borrower may be in default on a reverse mortgage 
when the borrower fails to pay property taxes, fails to maintain hazard 
insurance, or lets the property fall into disrepair.
    When a reverse mortgage becomes due, the home must be sold or, 
alternatively, the borrower (or surviving heirs) may repay the full 
amount of the loan including accrued interest. If the home is sold, 
however, the borrower or estate generally is not liable to the lender 
for any amounts in excess of the value of the home.
    To obtain a reverse mortgage, the borrower must occupy the home as 
a principal residence and generally be at least 62 years of age. 
Reverse mortgages are typically structured as first lien mortgages and 
require that any prior mortgage be paid off either before obtaining the 
reverse mortgage or with the funds from the reverse mortgage. The funds 
from a reverse mortgage may be disbursed in several different ways:
     A single lump sum that distributes up to the full amount 
of the principal credit limit in one payment;
     A credit line that permits the borrower to decide the 
timing and amount of the loan advances;
     A monthly cash advance, either for a fixed number of years 
selected by the borrower or for as long as the borrower lives in the 
home; or
     Any combination of the above selected by the borrower.
    Generally, the amount of money the consumer may borrow will be 
larger when the consumer is older, the home is more valuable, or 
interest rates are lower. Interest rates on a reverse mortgage may be 
fixed or variable.
    Most reverse mortgages have been structured as open-end lines of 
credit. For example, in fiscal year 2008, 89 percent of HECM borrowers 
chose to receive money solely as a line of credit and another 6 percent 
chose to receive a line of credit combined with a monthly payment. 
Generally, those choosing a line of credit withdrew about 60 percent of 
their funds at account opening.\104\ In addition, most HECMs have had 
variable interest rates.\105\ However, in 2008 HUD issued a mortgagee 
letter regarding the availability of fixed-rate HECMs.\106\ Since then, 
originations of fixed-rate HECMs have grown and in recent months have 
been the majority of HECM originations.\107\ Fixed-rate HECMs are 
generally structured as closed-end credit and borrowers usually may 
receive loan proceeds only as a lump sum of the full principal amount 
at closing.
---------------------------------------------------------------------------

    \104\ Id. at 8.
    \105\ HUD Single Family Portfolio Snap Shot--HECM Loans, data 
for Inception 1989-Dec. 2008 http://www.hud.gov/offices/hsg/comp/rpts/hecmsfsnap/hecmsfsnap.cfm.
    \106\ HUD Mortgagee Letter 2008-08, March 28, 2008.
    \107\ HUD Single Family Portfolio Snap Shot--HECM Loans, data 
for Jan. 2010-May 2010 http://www.hud.gov/offices/hsg/comp/rpts/hecmsfsnap/hecmsfsnap.cfm.
---------------------------------------------------------------------------

    Reverse mortgage market trends. The volume of reverse mortgages has 
grown considerably over the years. HECM originations, which account for 
over 90 percent of the market, have grown from 157 loans in fiscal year 
1990 to more than 112,000 loans in fiscal year 2008.\108\ A substantial 
portion of this growth has occurred in recent years, with HECM 
originations nearly tripling between 2005 and 2008.\109\ A secondary 
market for HECMs exists, with Fannie Mae having purchased 90 percent of 
HECM loans as of 2008.\110\ In addition, in 2007 Ginnie Mae developed 
and implemented a HECM mortgage-backed security with issuance growing 
to $1.5 billion for 2009.\111\
---------------------------------------------------------------------------

    \108\ U.S. Government Accountability Office, Reverse Mortgages: 
Policy Changes Have Had Mostly Positive Effects on Lenders and 
Borrowers, but These Changes and Market Developments Have Increased 
HUD's Risk, GAO-09-836, 4-5 (July 2009).
    \109\ Id.
    \110\ Id at 7.
    \111\ Ginnie Mae, Ginnie Mae Finishes 2009 Strong, January 22, 
2010, http://www.ginniemae.gov/news2010/01-22presshud.pdf.
---------------------------------------------------------------------------

    Proprietary reverse mortgages have also experienced growth, but 
that growth has stalled in the last few years due to market 
conditions.\112\ A key feature of proprietary reverse mortgages is that 
they generally offer loans in amounts greater than the HECM loan 
limits.\113\ The Housing and Economic Recovery Act of 2008 raised the 
HECM loan limit.\114\ As a result, at least one lender, Fannie Mae, 
discontinued its proprietary reverse mortgage product in 2008.\115\ 
However, a report by the GAO in 2009 found that most lenders with 
proprietary products planned to offer them again, depending on the 
availability of funding in the secondary market.\116\
---------------------------------------------------------------------------

    \112\ U.S. Government Accountability Office, GAO-09-836 at 18.
    \113\ Id.
    \114\ Housing and Economic Recovery Act of 2008 (HERA), Public 
Law 110-289 (July 30, 2008), Sec.  2122(a)(5) (amending Section 255 
of the National Housing Act, 12 U.S.C. 1715z-20(g)).
    \115\ Fannie Mae Reverse Mortgage Lender Letter 2008-3: 
Announcement to Terminate Purchase of Home Keeper[reg] Reverse 
Mortgages (Sept. 3, 2008).
    \116\ U.S. Government Accountability Office, GAO-09-836 at 18.
---------------------------------------------------------------------------

    Interagency supervisory guidance. In December 2009, the Federal 
banking agencies, through the Federal Financial Institutions 
Examination Council (FFIEC), published proposed supervisory guidance on 
reverse mortgage products (Proposed Reverse Mortgage Guidance).\117\ 
The FFIEC finalized this Guidance in August 2010 (Final Reverse 
Mortgage Guidance or Guidance).\118\ The Final Reverse Mortgage 
Guidance is designed to help financial institutions ensure that their 
risk management and consumer protection practices adequately address 
the compliance and reputation risks raised by reverse mortgage lending. 
The Guidance addresses the consumer protection concerns raised by 
reverse mortgages, and focuses on the need for banks, thrifts, and 
credit unions to provide clear and balanced information to consumers 
about the risks and benefits of reverse mortgages while consumers are 
shopping for these products.
---------------------------------------------------------------------------

    \117\ Reverse Mortgage Products: Guidance for Managing 
Compliance and Reputation Risks, 74 FR 66652, Dec. 16, 2009 
(Proposed Reverse Mortgage Guidance).
    \118\ Reverse Mortgage Products: Guidance for Managing 
Compliance and Reputation Risks, 75 FR 50801, Aug. 17, 2010 (Final 
Reverse Mortgage Guidance).
---------------------------------------------------------------------------

    Specifically, the Final Reverse Mortgage Guidance states that 
lenders offering proprietary products should require counseling from 
``qualified independent counselors'' before a consumer submits an 
application or pays an application fee for a reverse mortgage product. 
The Guidance also states that institutions should take steps to avoid 
any appearance of a conflict of interest. Accordingly, the Guidance 
advises institutions to adopt clear policies stating that borrowers are 
not required to purchase other financial products to obtain a reverse 
mortgage. Institutions are also advised to guard against inappropriate 
compensation or incentive policies that encourage loan originators to 
link reverse mortgage products to other financial products.\119\
---------------------------------------------------------------------------

    \119\ Id. at 50811.
---------------------------------------------------------------------------

Current Reverse Mortgage Disclosures
    TILA Section 103(bb) defines the term ``reverse mortgage 
transaction'' as a

[[Page 58640]]

nonrecourse transaction in which a mortgage, deed of trust, or 
equivalent consensual security interest is created against the 
consumer's principal dwelling securing one or more advances. 15 U.S.C. 
1602(bb). In addition, the payment of any principal, interest and 
shared appreciation or equity is due and payable (other than in the 
case of default) only after the transfer of the dwelling, the consumer 
ceases to occupy the dwelling as a principal dwelling, or the death of 
the consumer.
    TILA Section 138 requires disclosures for reverse mortgages in 
addition to the other disclosures required by TILA. 15 U.S.C. 1648. 
Specifically, TILA Section 138 requires disclosure of a good faith 
estimate of the projected total cost of the reverse mortgage to the 
consumer expressed as a table of annual interest rates, to be provided 
at least three business days before consummation. Each annual interest 
rate in the table is to be based on a projected total future credit 
balance under a projected appreciation rate for the dwelling and a term 
for the mortgage. The statute calls for at least three projected 
appreciation rates and at least three credit transaction periods as 
determined by the Board. The periods are to include a short-term 
reverse mortgage, a term equaling the consumer's life expectancy, and a 
longer term as the Board deems appropriate. The disclosure must also 
include a statement that the consumer is not obligated to complete the 
reverse mortgage transaction merely because the consumer has received 
the disclosure or signed an application.
    Under TILA Section 138, the projected total cost of the reverse 
mortgage used to calculate the table of annual interest rates includes 
all costs and charges to the consumer, including the costs of any 
associated annuity that the consumer will or is required to purchase as 
part of the reverse mortgage. The projected total costs also includes 
any shared appreciation or equity that the legal obligation entitles 
the lender to receive, and any limitation on the liability of the 
consumer under the reverse mortgage, such as nonrecourse limits and 
equity conversion agreements. In addition, the total cost projection 
also reflects all payments to and for the benefit of the consumer. If 
the consumer purchases an annuity (whether or not required by the 
lender as a condition of making a reverse mortgage), any annuity 
payments received by the consumer and financed from the proceeds of the 
loan are considered the payments to the consumer, rather than the 
reverse mortgage proceeds that were used to finance the annuity.
    Sections 103(bb) and 138 of TILA are implemented in Sec. Sec.  
226.31(c)(2) and 226.33. Section 226.31(c)(2) requires the creditor to 
furnish the disclosures for reverse mortgages at least three business 
days before consummating a closed-end credit transaction or the first 
transaction under an open-end credit plan. Section 226.33 contains the 
statutory definition of ``reverse mortgage transaction'' and the 
content of the reverse mortgage disclosures. Under Section 226.33, the 
reverse mortgage disclosures must include a statement that the consumer 
is not obligated to complete the transaction, a good-faith projection 
of the total cost of credit expressed as a table of ``total-annual-
loan-cost rates'' (TALC rates) and an explanation of the table. The 
disclosures must also include an itemization of loan terms, charges, 
the age of the youngest borrower, and the appraised property value. 
Appendix K to Regulation Z provides instructions on how to calculate 
the TALC rates required to be disclosed, based on the calculation 
method used in Appendix J for the closed-end APR, and provides a model 
and sample disclosure form. Appendix L to Regulation Z contains the 
loan periods creditors must use in disclosing the TALC rates and a 
table of life expectancies that must be used to determine loan periods 
based on the consumer's life expectancy.
    Section 226.33 requires that the table show TALC rates for assumed 
annual appreciation rates of 0%, 4%, and 8%. It also requires that TALC 
rates be provided for the assumed loan periods of: two years; the 
consumer's actuarial life expectancy; and the consumer's actuarial life 
expectancy multiplied by a factor of 1.4. In addition, at the 
creditor's option, the table may contain a fourth assumed loan period 
based on the consumer's actuarial life expectancy multiplied by 0.5.
    The commentary to Sec.  226.33 contains a number of clarifications. 
Comment 33(a)-1 clarifies that a transaction must be nonrecourse to 
meet the definition of a reverse mortgage in section 226.33(a). That 
is, the consumer's liability must be limited to the proceeds from the 
sale of the home. Comment 33(a)-1 clarifies, however, that if a closed-
end reverse mortgage does not limit the consumer's liability to the 
proceeds of the sale of the home, and the transaction meets the 
definition of a high-cost mortgage loan under Sec.  226.32, the 
transaction is subject to all the requirements of Sec. Sec.  226.32 and 
226.34. Comment 33(a)(2)-1 clarifies that the term ``default'' is not 
defined by the statute or regulation, but rather by the legal 
obligation and state or other applicable law. Comment 33(a)(2)-2 
clarifies that to meet the definition of a reverse mortgage 
transaction, a creditor cannot require principal, interest, or shared 
appreciation or equity to be due and payable (other than in the case of 
a default) until after the consumer's death, transfer of the dwelling, 
or the consumer ceases to occupy the dwelling as a principal dwelling. 
This comment further clarifies that the reverse mortgage obligation may 
state a specific maturity date or term of repayment and still meet the 
definition of a reverse mortgage, as long as the maturity date or term 
will not cause maturity prior to the occurrence of any of the maturity 
events recognized in the regulation. For example, the obligation could 
state a term but automatically extend the term for consecutive periods 
if no recognized maturity event has occurred.
    Comment 33(c)(1)-1 clarifies that all costs and charges the 
consumer incurs in a reverse mortgage are included in the projected 
total cost whether or not the cost or charge is a finance charge under 
Sec.  226.4. Current comment 33(c)(1)-2 clarifies that the amount paid 
by the consumer for an annuity is a cost to the consumer. Comment 
33(c)(1)-3 clarifies that costs incurred in connection with the sale or 
transfer of the property subject to the reverse mortgage are not 
included in the cost to the consumer.
    Comment 33(c)(2)-1 clarifies that certain contingent payments to 
the consumer are excluded from the total cost projection. Comments 
33(c)(3)-1 and 33(c)(4)-1 clarify that shared appreciation or shared 
equity, and limitations on the consumer's liability, respectively, are 
included in the projected total cost. Comment 33(c)(4)-2 provides a 
uniform assumption that, if the consumer's liability is limited to the 
``net proceeds'' from the sale of the home, the costs associated with 
selling the dwelling should be assumed to be 7 percent of the projected 
total sale price, unless another amount is specified in the legal 
obligation.
    Commentary to Appendix K and Appendix L provides further guidance 
on calculating TALC rates and on the clear and conspicuous standard for 
the model disclosure form.
Current Open-End and Closed-End Disclosures
    Reverse mortgages are subject to the disclosure requirements for 
other home-secured credit. Sec.  226.31(a). Reverse mortgages 
structured as open-end credit are subject to the provisions in Subpart 
B of Regulation Z, including the provisions in Sec. Sec.  226.5b and 
226.6

[[Page 58641]]

applicable to HELOCs. Closed-end reverse mortgages are subject to 
Subpart C of Regulation Z.
    The current disclosures required for HELOCs and closed-end 
mortgages require creditors to provide information about costs and 
repayment amounts that must be calculated using a specific loan term. 
For example, even though reverse mortgages are single-payment 
transactions, they are currently subject to the requirements to 
disclose the payment schedule for closed-end loans under Sec.  
226.18(g), or the repayment example for a $10,000 HELOC draw under 
Sec.  226.5b(d)(5)(iii). To disclose the single payment amount, the 
creditor must know when the loan will become due in order to calculate 
the amount of interest that will be charged. Yet reverse mortgage 
creditors must base these disclosures on an assumed repayment period, 
because the exact date that a reverse mortgage will become due and 
payable is unknown. The current commentary provides guidance on 
assumptions creditors must use. See comments 5b(d)(5)(iii)-4, 
5b(d)(12)(xi)-10 and 17(c)(1)-14. For instance, creditors are 
instructed to base disclosures on the term of the reverse mortgage if a 
definite term exists, even though the consumer may not actually repay 
the loan at the end of the term. If no term exists, the disclosures 
must be based on the consumer's life expectancy.
The August 2009 Proposals
    The Board's August 2009 proposals on closed-end mortgages and 
HELOCs were developed based on consumer testing that focused on the 
more common (forward) versions of those products. As a result, the 
proposed disclosures focus on terms, such as monthly payment amounts 
that are not as relevant or useful to reverse mortgage consumers. Yet 
these disclosures contain information about other terms that are 
relevant to reverse mortgage consumers. The Board requested comment in 
the August 2009 HELOC Proposal about how the proposed disclosures could 
be modified for reverse mortgages. Commenters who addressed the issue 
suggested that the Board develop a single disclosure form for reverse 
mortgages that would combine the disclosures under Sec.  226.33 with 
those under Sec. Sec.  226.5b and 226.6 for HELOCs, or Sec.  226.18 for 
closed-end credit, as appropriate.
Proposed Reverse Mortgage Disclosures
    The Board is proposing three consolidated reverse mortgage 
disclosure forms: an early disclosure for open-end reverse mortgages, 
an account-opening disclosure for open-end reverse mortgages, and a 
closed-end reverse mortgage disclosure. The Board's proposal would 
ensure that consumers receive meaningful information in an 
understandable format using forms that are designed, and have been 
consumer tested, for reverse mortgage consumers. Rather than receive 
two or more disclosures under TILA that come at different times and 
have different formats, consumers would receive all the disclosures in 
a single format that is similar regardless of whether the reverse 
mortgage is structured as open-end or closed-end credit. The Board's 
proposal would also facilitate compliance with TILA by providing 
creditors with a single set of forms that are specific to and designed 
for reverse mortgages, rather than requiring creditors to modify and 
adapt disclosures designed for forward mortgages.
33(a) Definition
    As discussed above in the section-by-section analysis to Sec.  
226.32, TILA section 103(bb), implemented by current Sec.  226.33(a), 
defines a ``reverse mortgage transaction'' as, among other things, a 
nonrecourse transaction. See 15 U.S.C.1602(bb). The proposal would 
simplify the defined term from ``reverse mortgage transaction'' to 
``reverse mortgage.'' The proposed rule would also modify the 
definition of a reverse mortgage to include both nonrecourse and 
recourse transactions whether structured as open-end or closed-end 
credit. Currently, any reverse mortgage that allows recourse against 
the consumer (that is, that does not limit the consumer's liability to 
the proceeds from the sale of the home) is not covered by Sec.  226.33. 
The proposal would ensure that the disclosures and other substantive 
protections apply to all reverse mortgages regardless of whether or not 
they contain a nonrecourse provision.
    The Board proposes this rule pursuant to its authority in TILA 
Section 105(a) to make adjustments and exceptions to the requirements 
in TILA to effectuate the statute's purposes, which include 
facilitating consumers' ability to compare credit terms and helping 
consumers avoid the uniformed use of credit. 15 U.S.C. 1601(a), 
1604(a). As discussed above in the section-by-section analysis to Sec.  
226.32, TILA's definition of a ``reverse mortgage transaction'' was 
added in the context of a excluding reverse mortgages from coverage 
under TILA Section 129's high-cost loan provisions. TILA Section 129 
prohibits high-cost loans with negative amortization and balloon 
payments, both of which are features of reverse mortgages. 15 U.S.C. 
1639. Thus, by defining a ``reverse mortgage transaction'' as only a 
nonrecourse reverse mortgage, the statute prohibits making high-cost 
reverse mortgages that do not limit recourse against the consumer. 
However, reverse mortgages that allow for recourse against the consumer 
and are not prohibited by TILA Section 129 (either because they are 
open-end or because they are not high-cost reverse mortgages) present 
even greater consumer protection concerns than nonrecourse reverse 
mortgages. The consumer or the consumer's estate could be liable for 
significantly more than the home is worth when a reverse mortgage that 
allows for recourse against the consumer becomes due. (For this reason 
the proposal would modify Sec.  226.32 to preserve the current narrow 
exemption for only reverse mortgages that are nonrecourse.) As 
discussed in the section-by-section analysis to Sec.  226.33(c) below, 
the proposed reverse mortgage disclosures would require specific 
statements about the consumer's liability under a reverse mortgage that 
allows recourse against the consumer. The Board believes this 
information, and the other proposed consumer protections for reverse 
mortgages, are appropriate for all reverse mortgages.
33(b) Reverse Mortgage Document Provided On or With the Application
    Based on the results of consumer testing and similar to the Board's 
August 2009 Closed-End Mortgage and HELOC Proposals, this proposal 
would require creditors to provide consumers with a Board publication, 
or a substantially similar document, for reverse mortgages. The 
publication, entitled ``Key Questions to Ask about Reverse Mortgage 
Loans,'' discusses how a reverse mortgage works and describes loan 
terms and conditions that are important for consumers to consider when 
deciding whether to pursue a reverse mortgage.
    In addition, the document would disclose to consumer that they are 
not obligated to purchase any other financial product or service, along 
with explanatory information. Proposed Sec.  226.40(a), discussed in 
the section-by-section analysis to that section below, would prohibit a 
creditor or loan originator from requiring a consumer to purchase any 
financial or insurance product as a condition of obtaining a reverse 
mortgage. The Board believes that providing information to consumers 
about this protection will help them avoid potential deception or 
misunderstanding about whether the

[[Page 58642]]

purchase of an offered financial or insurance product is required. The 
Board proposes this rule pursuant to its authority in TILA Section 
105(a) to make adjustments and exceptions to the requirements in TILA 
to effectuate the statute's purposes, which include facilitating 
consumers' ability to compare credit terms and helping consumers avoid 
the uniformed use of credit. 15 U.S.C. 1601(a), 1604(a).
    The Board proposes to require creditors to provide this publication 
at the time a consumer is given an application form or before the 
consumer pays a nonrefundable fee (except a fee for reverse mortgage 
counseling), whichever is earlier. Special rules under proposed Sec.  
226.33(b)(2)-(4) for when the consumer accesses an application form 
electronically and when the creditor receives a consumer's application 
from an intermediary agent or broker are modeled after the Board's TILA 
proposals for HELOCs and closed-end mortgages. See 74 FR 43428, 43446-
43450, Aug. 26, 2009; 74 FR 43232, 43268-43269, Aug. 26, 2009.
33(c) Content of Disclosures for Reverse Mortgages
    Current Sec.  226.33(b) details the content of disclosures for 
reverse mortgages. It requires a notice that the consumer is not 
obligated to complete the reverse mortgage merely because the consumer 
has received the disclosures or has signed an application as required 
by TILA Section 138(a)(2). 15 U.S.C. 1648(a)(2). It also requires an 
itemization of loan terms and charges, and disclosure of the age of the 
youngest borrower and the appraised property value. Finally, it 
requires a good faith projection of the total cost of credit in the 
form of a table of ``total-annual-loan-cost rates'' and an explanation 
of the table.
    Under the proposed rule, the content of the reverse mortgage 
disclosures would be moved to Sec.  226.33(c). The proposed rule would 
retain the no-obligation notice in Sec.  226.33(c)(1) and would add a 
requirement that if the creditor provides space for the consumer's 
signature, the creditor must state that the signature only confirms 
receipt of the disclosure statement. Section 226.33(c)(2) would require 
certain identification information for the creditor and loan 
originator. Section 226.33(c)(3) would require the itemization of the 
consumer's name, address, account number, the age of each borrower, and 
the appraised property value. As discussed in the section-by-section 
analysis below, the proposed rule would also require a number of new 
disclosures about reverse mortgages. The Board proposes these new 
disclosures pursuant to its authority in TILA Section 105(a) to make 
adjustments and exceptions to the requirements in TILA to effectuate 
the statute's purposes, which include facilitating consumers' ability 
to compare credit terms and helping consumers avoid the uniformed use 
of credit.
Table of Total-Annual-Loan-Cost Rates
    Based on consumer testing the Board is proposing to replace the 
disclosure of the table of total-annual-loan-cost (TALC) rates with 
other information that is likely to be more meaningful to and better 
understood by consumers.
    The table of TALC rates is designed to show consumers how the cost 
of the reverse mortgage varies over time and with house price 
appreciation. Generally, the longer a consumer keeps a reverse mortgage 
the lower the relative cost will be because the upfront costs of the 
reverse mortgage will be amortized over a longer period of time. In 
addition, home-value appreciation can lower the total cost of the 
reverse mortgage if the consumer eventually benefits from a limitation 
on the consumer's liability, such as a nonrecourse limit.
    In order to show the effect of time and home-value appreciation on 
the cost of the reverse mortgage, current Sec.  226.33(c) requires a 
disclosure for three periods: two years; the consumer's life 
expectancy; and the consumer's life expectancy multiplied by 1.4. In 
addition, creditors have the option of including a loan period based on 
the consumer's life expectancy multiplied by 0.5. Creditors must also 
show TALC rates for assumed annual appreciation rates of 0%, 4%, and 
8%. As a result, the table of TALC rates must show at least nine TALC 
rates and may show twelve TALC rates. Usually, the TALC rates will 
decline over time even though the total dollar cost of the reverse 
mortgage is rising due to interest and fees being charged and added to 
an increasing loan balance.
    In the consumer testing conducted for the Board on reverse mortgage 
disclosures, participants were shown a disclosure with the table of 
TALC rates that is currently required. Very few consumers understood 
the table of TALC rates.\120\ Although participants seemed to 
understand the paragraphs explaining the TALC table, the vast majority 
could not explain how the description related to the percentages shown 
in the TALC table. A number of participants could not even attempt to 
explain what the TALC table was showing. Those consumers who attempted 
to explain the TALC table could not explain why the TALC rates were 
declining over time even though the reverse mortgage's loan balance was 
rising. Most participants thought the TALC rates shown were interest 
rates, and interpreted the table as showing that their interest rate 
would decrease if they held their reverse mortgage for a longer period 
of time. When asked whether the information in the TALC table would 
make a reverse mortgage easier or more difficult to understand, the 
vast majority of participants stated that this information would make 
their reverse mortgage more difficult to understand. Consumers, 
including those who currently have a reverse mortgage (and thus 
presumably received the TALC disclosure), consistently stated that they 
would not use the disclosure to decide whether to obtain a reverse 
mortgage.
---------------------------------------------------------------------------

    \120\ See ICF Macro International, Inc., Design and Testing of 
Truth in Lending Disclosures for Reverse Mortgages, 11, 18, 27, 35-
26 (July 2010) available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20100816_Reverse_Mortgage_Report_(7-
28)--(FINAL).pdf.
---------------------------------------------------------------------------

    These results are consistent with the Board's consumer testing of 
the APR for closed-end mortgages and student loans. The TALC rates 
express loan costs as annualized percentage rates, similar to the 
closed-end APR. Yet consumer testing conducted by the Board has found 
that the closed-end APR--the cost of credit expressed as a single 
percentage rate--is difficult for many consumers to understand even 
when an explanation is provided. To understand the table of TALC rates, 
not only must consumers understand the concept of expressing total loan 
costs as an annualized rate, they must further be able to evaluate the 
TALC rates along two other dimensions (time and home-value 
appreciation). The consumer testing conducted for the Board does not 
indicate that simplifying the table of TALC rates, such as by removing 
the dimension of home-value appreciation, would materially improve 
consumers' understanding of the disclosure. Instead, consumers 
consistently expressed a preference for a disclosure providing total 
costs as a dollar amount.
    For these reasons, the proposed rule would remove the table of TALC 
rates from the reverse mortgage disclosure. Under the Board's exception 
and exemption authorities under TILA Sections 105(a) and 105(f) the 
Board is proposing to make an exception to the requirement in TILA 
Section 138 that the table of TALC rates be provided. The Board 
believes that by removing a disclosure that almost all consumers found 
to be unhelpful, and that appeared to be misleading to some, will

[[Page 58643]]

effectuate the purposes of TILA by providing meaningful disclosure of 
credit terms to the consumer and assisting consumers in avoiding the 
uninformed use of credit. The Board has considered that reverse 
mortgages are secured by the consumer's principal dwelling and are 
likely to be made for relatively large amounts. The Board also 
considered that reverse mortgage borrowers may lack financial 
sophistication relative to the complexity of the reverse mortgage 
transaction, the importance of the credit and supporting property to 
the borrower, and whether the goal of consumer protection would be 
undermined by an exception. In addition, the Board considered the 
extent to which the requirement to provide the table of TALC rates 
complicates, hinders, or makes more expensive the credit process for 
reverse mortgages. Given the importance of the reverse mortgage to the 
borrower and the fact that the table of TALC rates provides no 
meaningful benefit in the form of useful information or protection, the 
Board believes that an exemption is warranted. As discussed below, the 
Board is proposing new disclosures to explain the total cost of a 
reverse mortgage more effectively pursuant to its authority in TILA 
Section 105(a) to effectuate the statute's purposes, which include 
facilitating consumers' ability to compare credit terms and helping 
consumers avoid the uniformed use of credit.
33(c)(4) Information about the Reverse Mortgage
    Proposed Sec.  226.33(c)(4) requires a statement that the consumer 
does not have to repay the reverse mortgage while remaining in the 
home. It would also require a description of the types of payments the 
consumer may receive, such as an initial advance, a monthly payment, or 
discretionary cash advances in which the consumer controls the timing 
of advances. This section would require a statement that the consumer 
will retain title to the home and must pay property taxes and insurance 
and maintain the property. The proposal also requires a statement that 
the consumer will have access to the loan funds and continue to receive 
any payments even if the loan's principal balance exceeds the value of 
the home, as long as the consumer does not default. Finally, it would 
require a description of the events that cause the reverse mortgage to 
become due and payable, and a statement that the consumer must repay 
the loan including interest and fees once such an event occurs. In the 
consumer testing conducted for the Board, many consumers indicated that 
this information was new to them, and that they found it to be 
important. The Board proposes this rule pursuant to its authority in 
TILA Section 105(a) to make adjustments and exceptions to the 
requirements in TILA to effectuate the statute's purposes, which 
include facilitating consumers' ability to compare credit terms and 
helping consumers avoid the uniformed use of credit.
33(c)(5) Payment of Loan Funds
    Proposed Sec.  226.33(c)(5) requires an itemization of the types of 
payments the creditor will make to the consumer. The disclosure must 
include the label ``Initial Advance'' along with the amount of any 
initial advance made to the consumer at consummation or, in the case of 
an open-end reverse mortgage, once the consumer becomes obligated on 
the plan. See proposed Sec.  226.33(c)(5)(i)(A). The disclosure must 
also include a statement that the funds will be paid to the consumer 
after the consumer accepts the reverse mortgage. In addition, the 
creditor must disclose the amount of any monthly or other regular 
periodic payment of funds labeled ``Monthly Advance,'' and include a 
statement that the funds will be paid to the consumer each month while 
the consumer remains in the home. See proposed Sec.  
226.33(c)(5)(i)(B). Finally, the creditor must disclose any amount made 
available to the consumer as discretionary cash advances in which the 
consumer controls the timing of advances. Comment 33(c)(5)-1 clarifies 
that the creditor must label this type of payment as a ``Line of 
Credit,'' regardless of whether the reverse mortgage is structured as 
open-end or closed-end credit. See proposed Sec.  226.33(c)(5)(i)(C). 
The disclosure must also include a statement that the funds will be 
available to the consumer at any time while the consumer remains in the 
home. The creditor must also disclose that the consumer may change the 
type of payments, if applicable. See proposed Sec.  226.33(c)(5)(iii).
    In some cases, the consumer may not have chosen the types of 
payments he wishes to receive at the time the disclosures are provided. 
In these cases, the creditor must follow the rules in Sec.  
226.33(c)(5)(ii) as discussed in comment 33(c)(5)-2. The creditor must 
disclose the maximum amount the consumer could receive in discretionary 
cash advances. The creditor must also state that the consumer may 
choose to take some or all of the funds in an initial advance or as a 
monthly or periodic payment, as applicable.
    If the creditor does not provide the consumer with the option to 
receive funds as discretionary cash advances, the creditor must 
disclose the total amount the consumer may receive as an initial 
advance and state that the consumer may choose to take some or all of 
the funds in the form of a monthly or other periodic payment, if 
applicable. As discussed above in the Introduction to the section-by-
section analysis to Sec.  226.33, historically consumers have tended to 
take reverse mortgage proceeds as a line of credit. Because this has 
tended to be the most common consumer choice, the proposal would 
require creditors to disclose how much the consumer could get through 
discretionary advances. If a discretionary advance option is not 
available to the consumer, a disclosure of the total amount the 
consumer could get in an initial advance would provide the closest 
substitute. The Board requests comment on other approaches for 
disclosing how much the consumer could receive if the consumer has not 
chosen a payment type.
33(c)(6) Annual Percentage Rate
33(c)(6)(i) Open-End Annual Percentage Rate
    Proposed Sec.  226.33(c)(6)(i) is modeled after Sec. Sec.  
226.5b(c)(10) and 226.6(a)(2)(vi) and the associated commentary in the 
Board's August 2009 HELOC Proposal, which would implement TILA Section 
127A(a)(1). See 74 FR 43428, 43472-43478 and 43501-43502, Aug. 26, 
2009; 15 U.S.C. 1637a(a)(1). Accordingly, proposed Sec.  
226.33(c)(6)(i) would require disclosure of each periodic interest rate 
applicable to the reverse mortgage that may be used to compute the 
finance charge on an outstanding balance, expressed as an annual 
percentage rate (as determined by Sec.  226.14(b)). The annual 
percentage rates would be required to be in at least 16-point type, 
except for: (1) any minimum or maximum annual percentage rates that may 
apply; and (2) any disclosure of rate changes set forth in the initial 
agreement that would not generally apply after the expiration of an 
introductory rate, such as a rate that would apply when an employee 
preferred rate is terminated because the borrower-employee leaves the 
creditor's employ.
    For variable rate open-end reverse mortgages, proposed Sec.  
226.33(c)(6)(i)(A) would require disclosure of the fact that the annual 
percentage rate may change due to the variable-rate feature, using the 
term ``variable rate.'' It would require an explanation of how the 
annual percentage rate will be determined by

[[Page 58644]]

identifying the type of index used and the amount of any margin, and 
the frequency of changes in the annual percentage rate. It would also 
require disclosure of any rules relating to changes in the index value 
and the annual percentage rate and a statement of any limitations on 
changes in the annual percentage rate, including the minimum and 
maximum annual percentage rate that may be imposed. If no annual or 
other periodic limitations apply to changes in the annual percentage 
rate, the creditor would be required to disclose a statement that no 
annual limitation exists. In addition, the proposed provision specifies 
that a variable rate is considered accurate if it is a rate as of a 
specified date, and was in effect within the last 30 days before the 
disclosures are provided.
    Finally, this proposed provision in Sec.  226.33(c)(6)(i)(A) would 
require disclosure of the lowest and highest value of the index and 
margin in the past 15 years. The Board's August 2009 HELOC Proposal 
would require a disclosure of only the lowest and highest value of the 
index, not the index and margin. See 74 FR 43428, 43477, Aug. 26, 2009. 
The Board requests comment on whether the proposed reverse mortgage 
disclosure should show only the range of the index value.
    If the initial rate is an introductory rate, proposed Sec.  
226.33(c)(6)(i)(B) would require the creditor to disclose the 
introductory rate along with the rate that would otherwise apply to the 
plan, and use the term ``introductory'' or ``intro'' in immediate 
proximity to the introductory rate. The creditor would also be required 
to disclose the time period during which the introductory rate will 
remain in effect and the rate that will apply after the introductory 
rate expires.
33(c)(6)(ii) Closed-End Annual Percentage Rate
    Proposed Sec.  226.33(c)(6)(ii)(A) is modeled after the annual 
percentage rate disclosure proposed by the Board in Sec.  226.38(b) in 
the August 2009 Closed-End Mortgage Proposal, which would implement 
TILA Section 128(a)(4). See 74 FR 43232, 43296-43298, Aug. 26, 2009; 15 
U.S.C. 1638(a)(4). It would require disclosure of the annual percentage 
rate, using that term, along with the description, ``overall cost of 
this loan including interest and fees.'' The Board is not proposing to 
include the APR graph under proposed Sec.  226.38(b)(2), the statement 
of the average prime offer rate under proposed Sec.  226.38(b)(3) or 
the average per-period savings from a 1 percentage point reduction in 
the APR under Sec.  226.38(b)(4). Comparisons to the average prime 
offer rate are not likely to be meaningful to consumers because reverse 
mortgages may have different pricing structures than closed-end 
mortgages. In addition, a statement about the per-period savings from a 
1 percentage point reduction in the APR would not likely be meaningful 
because the consumer does not make regular monthly payments on a 
reverse mortgage.
    In consumer testing conducted for the Board, a common question that 
consumers had was whether reverse mortgage interest rates were fixed or 
variable.\121\ For this reason, proposed Sec.  226.33(c)(6)(ii)(B) 
would require a disclosure of whether the rate is fixed, adjustable, or 
a step-rate. This proposal is based on proposed Sec.  226.38(a)(3)(i) 
in the Board's August 2009 Closed-End Mortgage Proposal which would 
require a similar disclosure of a closed-end mortgage loan's rate type. 
Proposed comment 33(c)(6)(ii)(B)-1 would refer to proposed Sec.  
226.38(a)(3) for guidance on determining the rate type of the reverse 
mortgage.
---------------------------------------------------------------------------

    \121\ See ICF Macro International, Inc., Design and Testing of 
Truth in Lending Disclosures for Reverse Mortgages, 9 (July 2010) 
available at <http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20100816_Reverse_Mortgage_Report_(7-28)--(FINAL).pdf >.
---------------------------------------------------------------------------

    Proposed Sec.  226.33(c)(6)(ii)(C) is modeled after proposed 
Sec. Sec.  226.38(e)(1) and (e)(2) in the August 2009 Closed-End 
Mortgage Proposal and would require, if the interest rate may increase 
after consummation, a description of the method used to calculate the 
interest rate and the frequency of interest rate adjustments. If the 
interest rate that applies at consummation is not based on the index 
and margin that will be used to make later interest rate adjustments, 
the description must include the time period when the initial interest 
rate expires. For a variable-rate mortgage, any limitations on the 
increase in the interest rate would have to be disclosed together with 
a statement of the maximum rate that may apply pursuant to such 
limitations during the transaction's term to maturity. To maintain 
consistency with the disclosures for open-end reverse mortgages, Sec.  
226.33(c)(6)(ii)(C) would require disclosure of the lowest and highest 
value of the index in the past 15 years. The Board proposes this rule 
pursuant to its authority in TILA Section 105(a) to make adjustments 
and exceptions to the requirements in TILA to effectuate the statute's 
purposes, which include facilitating consumers' ability to compare 
credit terms and helping consumers avoid the uniformed use of credit.
33(c)(6)(iii) Statement About Interest Accrual
    Proposed Sec.  226.33(c)(6)(iii) would require a statement that 
interest charges will be added to the loan balance each month (or other 
applicable period) and collected when the loan is due. In the consumer 
testing conducted for the Board, some consumers were initially unsure 
as to whether interest charges must be paid each month or are added to 
the loan balance. The proposed disclosure would clarify that interest 
charges accrue but are not payable until the reverse mortgage becomes 
due and payable. The Board proposes this rule pursuant to its authority 
in TILA Section 105(a) to make adjustments and exceptions to the 
requirements in TILA to effectuate the statute's purposes, which 
include facilitating consumers' ability to compare credit terms and 
helping consumers avoid the uniformed use of credit.
33(c)(7) Fees and Transactions Costs
    The Board's August 2009 HELOC Proposal requires disclosure of a 
number of different fees and transaction costs that would apply to 
open-end reverse mortgages in the proposed disclosure table. However, 
for closed-end mortgages, the current rules do not require an 
itemization of fees in the segregated disclosures. In addition, the 
Board's August 2009 closed-end mortgage proposal would require only 
disclosure of the total settlement charges, but not an itemization, in 
the required disclosure table.
    For reverse mortgages, however, current Sec.  226.33(b)(3) requires 
an itemization of charges to the borrower. For this reason, and to 
maintain consistency between the closed-end and open-end reverse 
mortgage disclosures, proposed Sec.  226.33(c)(7) would require 
disclosure of fees and transactions costs for all types of reverse 
mortgages. The Board proposes this rule pursuant to its authority in 
TILA Section 105(a) to make adjustments and exceptions to the 
requirements in TILA to effectuate the statute's purposes, which 
include facilitating consumers' ability to compare credit terms and 
helping consumers avoid the uniformed use of credit.
33(c)(7)(i) Fees Imposed by the Creditor and Third Parties to 
Consummate the Transaction or Open the Plan
    Proposed Sec.  226.33(c)(7)(i) is modeled after Sec. Sec.  
226.5b(c)(11) and 226.6(a)(2)(vii) and the associated commentary in the 
Board's August 2009 HELOC Proposal,

[[Page 58645]]

which would implement TILA Sections 127A(a)(3) and (a)(4). See 74 FR 
43428, 43478-43480 and 43502, Aug. 26, 2009; 15 U.S.C. 1637a(a)(3) and 
(a)(4). It would apply to open-end and closed-end reverse mortgages.
    Proposed Sec.  226.33(c)(7)(i)(A) would require a disclosure of the 
total of all one-time fees imposed by the creditor and any third 
parties to open the plan, stated as a dollar amount. For the open-end 
early disclosures only, if the exact total of one-time fees for account 
opening is not known at the time the disclosures are provided, a 
creditor would be required to provide the highest total of one-time 
account opening fees possible for the plan and that the costs may be 
``up to'' that amount.
    Proposed Sec.  226.33(c)(7)(i)(B) would require an itemization of 
all one-time fees imposed by the creditor and any third parties to open 
the plan, stated as a dollar amount, and when such fees are payable. 
For the open-end early disclosures only, if the dollar amount of a fee 
is not known at the time the disclosures are provided, the creditor 
would be required to provide a range for the fee. For the open-end 
account-opening disclosures, the creditor would be required to provide 
the exact amounts of such fees. See proposed comment 33(c)(7)(i)-1.ii. 
(Creditors will know the amount of the fees at the time they make the 
open-end account-opening disclosures.) For the closed-end disclosures, 
creditors must make good faith estimates of the disclosures as required 
by Sec.  226.19(a)(1) and must provide a final disclosure before 
consummation. See proposed Sec.  226.33(d)(3).
33(c)(7)(ii) Fees Imposed by the Creditor for Availability of the 
Reverse Mortgage
    Proposed Sec.  226.33(c)(7)(ii) is modeled after Sec. Sec.  
226.5b(c)(12) and 226.6(a)(2)(viii) and the associated commentary in 
the Board's August 2009 HELOC Proposal. See 74 FR 43428, 43480-43481, 
43499, Aug. 26, 2009. This proposed provision would apply to open-end 
and closed-end reverse mortgages. It would require disclosure of all 
monthly or other periodic fees that may be imposed by the creditor for 
the availability of the reverse mortgage, including any fee based on 
activity or inactivity; how frequently the fee will be imposed; and the 
annualized amount of the fee. It would also require disclosure of all 
costs and charges to the consumer that may be imposed by the creditor 
on a regular periodic basis as part of the reverse mortgage, such as a 
servicing fee or mortgage insurance premium. The proposed section would 
also require a disclosure labeled ``Monthly Interest Charges'' (or 
other applicable period) of the interest rate. In consumer testing 
conducted for the Board some consumers believed that interest charges 
would be payable on a monthly basis.\122\ Therefore, the proposal would 
include monthly interest charges with other monthly charges to 
emphasize that interest charges, like other monthly fees, are added to 
the loan balance along with other charges.
---------------------------------------------------------------------------

    \122\ See ICF Macro International, Inc., Design and Testing of 
Truth in Lending Disclosures for Reverse Mortgages, 25, 33 (July 
2010) available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20100816_Reverse_Mortgage_Report_(7-28)--(FINAL).pdf.
---------------------------------------------------------------------------

33(e)(7)(iii) Fees Imposed by the Creditor for Early Termination of the 
Reverse Mortgage
    Proposed Sec.  226.33(c)(7)(iii) is modeled after Sec. Sec.  
226.5b(c)(13) and 226.6(a)(2)(ix) and the associated commentary in the 
Board's August 2009 HELOC Proposal. See 74 FR 43428, 43481, 43499, Aug. 
26, 2009. This proposed provision would apply to open-end and closed-
end reverse mortgages. It would require disclosure of any fee that may 
be imposed by the creditor if the consumer terminates the reverse 
mortgage, or prepays the obligation in full, prior to the scheduled 
maturity.
33(c)(7)(iv) Statement About Other Fees
    Proposed Sec.  226.33(c)(7)(iv) is modeled after Sec. Sec.  
226.5b(c)(14) and 226.6(a)(2)(xv) and the associated commentary in the 
Board's August 2009 HELOC Proposal. See 74 FR 43428, 43481-43482 and 
43503, Aug. 26, 2009. This proposed provision would apply to open-end 
and closed-end reverse mortgages. It would require a statement that 
other fees may apply. For the early open-end disclosures, the creditor 
would be required to disclose either a statement that the consumer may 
receive, upon request, additional information about fees applicable to 
the plan, or if the additional information about fees is provided with 
the table, reference that the information is enclosed with the table. 
For closed-end and account-opening disclosures the creditor would be 
required to provide a reference to the reverse mortgage agreement.
33(c)(7)(v) Transaction Requirements
    Proposed Sec.  226.33(c)(7)(v) is modeled after Sec. Sec.  
226.5b(c)(16) and 226.6(a)(2)(xvii) and the associated commentary in 
the Board's August 2009 HELOC Proposal. See 74 FR 43428, 43482 and 
43503, Aug. 26, 2009. It would require a disclosure of any limitations 
on the number of extensions of credit and the amount of credit that may 
be attained during any time period, as well as any minimum draw 
requirements. This proposed provision would apply to open-end and 
closed-end reverse mortgages. Proposed Sec.  226.33(c)(7)(v) would not 
require the disclosure of any minimum outstanding balance because such 
a requirement is unlikely to apply to reverse mortgages. The Board 
requests comment on whether such requirements may apply to reverse 
mortgages and therefore should be disclosed.
33(c)(8) Loan Balance Growth
    In place of the table of TALC rates currently required by Sec.  
226.33, proposed Sec.  226.33(c)(8) requires a table that demonstrates 
how the reverse mortgage balance grows over time. For the reasons 
discussed above in this section-by-section analysis, this information 
is expressed as dollar amounts rather than as annualized loan cost 
rates. The creditor must provide three items of information: (1) The 
sum of all advances to and for the benefit of the consumer, including 
any payments that the consumer will receive from an annuity that the 
consumer purchases along with the reverse mortgage; (2) the sum of all 
costs and charges owed by the consumer, including the costs of any 
annuity the consumer purchases along with the reverse mortgage; and (3) 
the total amount the consumer would be required to repay. See proposed 
Sec.  226.33(c)(8)(ii)(A)-(C). This information must be provided for 
each of three assumed loan periods of 1 year, 5 years, and 10 years.
    The current TALC disclosure requires TALC rates based on three 
different property-value appreciation assumptions, but consumers in the 
Board's consumer testing found these disclosures confusing and 
unhelpful. Thus, the proposed loan balance table would not require 
disclosure based on varying appreciation rates (with the exception of 
reverse mortgages that include a shared equity or shared appreciation 
feature discussed below). The Board tested various alternatives in both 
dollar amount and graphical forms to attempt to show the impact that 
home price appreciation had on the cost of the reverse mortgage. Many 
consumers did not understand those disclosures and those who did found 
them not to be useful. In addition, many consumers did not understand 
that the time periods used on the TALC form were based on assumptions 
about their life expectancy. Consumers expressed a preference for 
figures based on standardized time

[[Page 58646]]

periods such as one year, five years and ten years. The Board requests 
comment on whether other time periods would be more appropriate.
    Annuities. Under TILA Section 138, the projected total cost of a 
reverse mortgage used to calculate the TALC rates includes ``the costs 
of any associated annuity that the consumer elects or is required to 
purchase as part of the reverse mortgage transaction.'' 15 U.S.C. 1648. 
In addition, the payments to the consumer include ``the annuity 
payments received by the consumer and financed from the proceeds of the 
loan, instead of the proceeds used to finance the annuity.'' 15 U.S.C. 
1648. Proposed Sec.  226.40(a) prohibits a creditor from requiring a 
consumer to purchase any financial or insurance product, including an 
annuity, as a condition of obtaining a reverse mortgage. Under the safe 
harbor for compliance in proposed Sec.  226.40(a)(2), a creditor is 
deemed to comply with the prohibition on required purchases of 
financial or insurance products if, among other things, the reverse 
mortgage transaction is completed at least 10 calendar days before the 
purchase of another product. Accordingly, comment 33(c)(1)-2, which 
clarifies that annuity costs are a cost to the consumer, would be 
redesignated as comment 33(c)(8)-2 and revised to remove references to 
``required'' purchases of an annuity. It would also clarify that the 
cost of an annuity purchased after the reverse mortgage transaction is 
complete, in accordance with the safe harbor in Sec.  226.40(a)(2), 
would not be considered a cost to the consumer.
    Similarly, payments from an annuity that the consumer purchases 
after the reverse mortgage transaction is complete, in accordance with 
the safe harbor, would not be required to be disclosed as the advances 
to the consumer. The Board believes that requiring disclosure of the 
cost of an annuity that the consumer will not be obligated to purchase 
until at least 10 days after the reverse mortgage transaction is 
complete would be impractical. A creditor may not know whether the 
consumer plans to purchase the annuity, and even if the consumer 
indicates intent to purchase an annuity, the consumer may decide not to 
do so. In addition, a disclosure that includes the cost of an annuity 
that the consumer is not obligated to purchase may confuse the consumer 
about whether the purchase is, in fact, optional and about the amount 
of the reverse mortgage payments the consumer will receive.
    Conversely, if the consumer voluntarily purchases an annuity along 
with a reverse mortgage, and the creditor does not follow the safe 
harbor in Sec.  226.40(a)(2), the amount paid by the consumer to 
purchase the annuity would be included as a cost to the consumer 
regardless of whether the annuity is purchased from the creditor or a 
third party. The examples used in the current commentary would be 
retained to clarify that this includes the cost of an annuity the 
creditor offers, arranges, or assists the consumer in purchasing, or 
that the creditor is aware that the consumer is purchasing as part of 
the transaction. In addition, the advances that the consumer will 
receive from the annuity must be disclosed as the advances to the 
consumer, rather than the proceeds used to finance the annuity. The 
Board requests comment on the circumstances under which the cost of, 
and payments from, an annuity should be included in the loan balance 
table in Sec.  226.33(c)(8).
    All costs and charges. Comment 33(c)(1)-1 would be redesignated as 
comment 33(c)(8)-1. This comment clarifies that all costs and charges 
to the consumer that are incurred in a reverse mortgage are included in 
the loan balance table whether or not the cost or charges are finance 
charges under Sec.  226.4. Comment 33(c)(1)-3 would be redesignated as 
comment 33(c)(8)-3 and would clarify that costs incurred in connection 
with the sale or transfer of the property subject to the reverse 
mortgage are not included in the costs to the consumer. Comment 
33(c)(2)-1 would be redesignated as comment 33(c)(8)-4 and would 
clarify that the disclosure of the amount advanced to the consumer 
should not reflect contingent payments in which a credit to the 
outstanding loan balance or payment to the consumer's estate is made 
upon the occurrence of an event, such as a ``death benefit'' payable if 
the consumer's death occurs within a certain period of time.
    Limits on liability. Comment 33(c)(4)-1 would be redesignated as 
comment 33(c)(8)-7 and would clarify that a creditor would have to 
include any limitation on the consumer's liability, such as a 
nonrecourse limit or equity conservation agreement, in the disclosure 
of the amount owed by the consumer. The Board requests comment on 
whether the amount owed by the consumer should reflect such limitations 
on the consumer's liability since the proposed disclosures would not be 
based on any assumed home-value appreciation and thus may understate 
the consumer's eventual liability.
    Net proceeds from sale of home. Comment 33(c)(4)-2 would be 
redesignated as comment 33(c)(8)-8 and would clarify that if the 
contract specifies that the consumer's liability will be limited to the 
``net proceeds'' of the sale of the home, but does not specify a 
percentage for the ``net proceeds'' liability, for purposes of the 
disclosure of the amount the consumer will be required to repay under 
Sec.  226.33(c)(8)(ii)(C), a creditor must assume that the costs 
associated with selling the property will equal 7 percent of the 
projected sale price. The Board requests comment on whether the 7 
percent assumption is still appropriate. The Board also requests 
comment on whether any assumption for the ``net proceeds'' amount 
should be used, or whether, for simplicity, the total amount owed by 
the borrower should be shown as limited by the appraised value of the 
home.
    Set-asides. Comment 33(c)(8)-9 would clarify that if the creditor 
sets aside a portion of the loan amount for the benefit of the 
consumer, such as for making required repairs to the dwelling, the 
creditor must treat the entire amount of the set-aside as advanced to 
the consumer. For example, if the creditor estimates of repairs will 
cost $1000 but sets aside $1500 (150% of the estimated cost of 
repairs), the entire $1500 amount of the repair set-aside is considered 
an advance for the benefit of the consumer. The Board requests comment 
on whether a different assumption should be used when disclosing the 
amount advanced to the consumer under a repair set-aside.
    Assumptions used to calculate loan balance growth. Proposed Sec.  
226.33(c)(8)(i) requires creditors to base the disclosures of the loan 
balance growth on a number of assumptions. First, the creditor would 
have to base the loan balance growth table on the initial interest rate 
in effect at the time the disclosures are provided and assume that the 
consumer does not make any repayments during the term of the reverse 
mortgage. The creditor would also have to assume that all closing and 
other consumer costs are financed by the creditor unless the creditor 
and consumer have agreed otherwise. The Board requests comment on 
whether these or other assumptions should be used.
    Amount the consumer will owe--shared equity or appreciation. In 
reverse mortgages without a shared appreciation or equity feature, the 
creditor would have to assume that the dwelling's value does not 
change. However, if the creditor is entitled by contract to any shared 
appreciation or equity, the creditor must assume the dwelling's value 
increases by 4 percent per year and include the shared appreciation in

[[Page 58647]]

the disclosure of the total amount the consumer would be required to 
repay. Comment 33(c)(3)-1 would be redesignated as comment 33(c)(8)-5 
and revised to clarify that any shared appreciation or equity that the 
creditor is entitled to receive pursuant to the legal obligation must 
be included in the amount the consumer will owe. Comment 33(c)(8)-6 
clarifies that because the cost to the consumer must reflect the shared 
appreciation, the creditor must use the 4 percent appreciation 
assumption. The 4 percent appreciation assumption is currently used as 
the middle appreciation assumption in the TALC disclosure. The Board 
requests comment on whether a different appreciation assumption should 
be used, whether a uniform appreciation assumption should be used 
regardless of whether the reverse mortgage has a shared appreciation 
feature, or whether the shared appreciation feature should not be 
reflected in the total amount the consumer will owe and disclosed only 
under the separate disclosure proposed in Sec.  226.33(c)(8)(iv).
    Type of payments selected by consumer. The loan balance growth 
table would also be based on the type of payments selected by the 
consumer as disclosed in Sec.  226.33(c)(5). In some cases, the 
consumer may have a portion of the loan amount available for 
discretionary cash advances, such for a line of credit. In these 
instances the creditor must make an assumption about how much the 
consumer will draw over time. Under the proposal, if the consumer has 
elected to receive an initial advance, periodic payments, or some 
combination of the two that accounts for 50 percent or more of the 
principal loan amount available to the consumer, the creditor must 
assume that the consumer takes no further advances. Otherwise, the 
creditor must assume that the entire available principal loan amount is 
advanced to the consumer at closing, or in the case of an open-end 
reverse mortgage when the consumer becomes obligated under the plan.
    Comment 33(c)(8)-10.ii provides two examples. The first example 
assumes a reverse mortgage with a principal loan amount of $105,000 and 
creditor-finance closing costs of $5,000, leaving an available loan 
amount of $100,000. The consumer elects to take $25,000 in an initial 
advance and have $25,000 paid out in the form of regular monthly 
advances, for a total of $50,000. The consumer chooses to leave the 
remaining $50,000 in the line of credit. Because the initial advance 
and the monthly payments accounts for 50 percent of the available 
principal amount the creditor must assume that the consumer takes no 
advances from the line of credit. The second example assumes that the 
consumer elects to take $24,000 in an initial advance, have $25,000 
paid in the form of regular monthly advances, and leave $51,000 in a 
line of credit. Because the initial advance and the monthly payments 
account for less than 50 percent of the principal loan amount, the 
creditor must assume that the consumer draws all $51,000 from the line 
of credit at closing.
    In the consumer testing conducted for the Board, consumers were 
shown reverse mortgage disclosures that included an initial advance, 
monthly payments, and a line of credit. Consumers were shown 
disclosures that assumed hypothetical periodic advances from the line 
of credit and disclosures that assumed no advances from the line of 
credit. Consumers initially found a disclosure with a hypothetical line 
of credit draw to be confusing. They understood that the costs of the 
reverse mortgage would be higher if the consumer drew funds from the 
line of credit and did not find the hypothetical amounts to be 
meaningful.
    In some cases however, the consumer may choose to have most of the 
reverse mortgage principal amount remain in a line of credit and take 
only a small initial advance or monthly payment. In these instances, a 
disclosure of total cost of the reverse mortgage may not provide the 
consumer with sufficient information to judge the eventual costs of 
future draws from a line of credit. The current disclosure of the table 
of TALC rates requires the creditor to assume in all cases that the 
consumer draws 50 percent of the line of credit at closing and obtains 
no additional extensions of credit. See Appendix K(b)(9). The Board's 
August 2009 HELOC Proposal would require the creditor to assume that 
the consumer draws the full credit line at account opening and does not 
obtain any additional extension of credit. 74 FR 43428, 43534, Aug. 26, 
2009. In addition, under some reverse mortgages, including HECMs, the 
credit limit on the unused portion of a consumer's line of credit grows 
over time. The current disclosures do not take such as feature into 
account because they assume that the consumer takes only an initial 
line of credit draw. The proposed disclosures also would not reflect a 
credit line growth feature because consumers in consumer testing found 
a relatively simple hypothetical disclosure that assumed yearly $1500 
draws on a line of credit to be confusing. The Board requests comment 
on whether a different assumption should be used for reverse mortgages 
that allows the consumer to take discretionary cash advances. For 
example, the Board requests comment on whether the creditor should 
assume that the consumer draws the entire amount at closing or at 
account opening in all cases, or whether the creditor should 
demonstrate a credit line growth feature.
    Additional disclosures for shared equity or shared appreciation. 
Proposed Sec.  226.33(c)(8) would also require additional disclosures 
for reverse mortgages with shared equity or shared appreciation 
features. The creditor would be required to disclose a statement and a 
numerical example based on a hypothetical $100,000 increase in the 
home's value under the heading, ``Shared Equity'' or ``Shared 
Appreciation.'' Comment 33(c)(8)-11 provides an example. For example, 
if the creditor is entitled by contract to 25 percent of any 
appreciation in the value of the dwelling, the creditor may state, 
``This loan includes the Shared Appreciation Agreement, which means 
that we will be entitled to 25 percent of any profit made between when 
you accept the loan and the sale or refinance your home. For example, 
if your home were worth $100,000 more when the loan becomes due than it 
is worth today, you would owe us an additional $25,000 on the loan.'' 
Proposed comment 33(c)(8)-11, emphasis added. In the consumer testing 
conducted for the Board, the numerical example based on a $100,000 
hypothetical increase in the home's value clearly explained the 
potential costs to consumers. The Board requests comment on whether 
another hypothetical amount should be used that could better help 
consumers to understand the percentage calculation.
33(c)(9) Statements About Repayment Options
    The proposed rule requires statements explaining the consumer's 
repayment options. Under proposed Sec.  226.33(c)(9)(i), the creditor 
would be required to state that once the loan becomes due and payable, 
the consumer or consumer's heirs may pay the loan balance in full and 
keep the home, or sell the home and use the proceeds to pay off the 
loan. For nonrecourse transactions, the creditor would also be required 
to state that if the home sells for less than the consumer owes, the 
consumer will not be required to pay the difference and that if the 
home sells for more than the consumer owes, the difference will be 
given to the consumer or the consumer's heirs. See proposed Sec.  
226.33(c)(9)(ii)(A) and (B). If the

[[Page 58648]]

reverse mortgage includes a shared equity or shared appreciation 
feature, the creditor must state that the creditor will deduct any 
shared appreciation or equity before paying the remaining funds to the 
consumer or the consumer's heirs. For transactions that allow recourse 
against the borrower, the creditor would be required to state that the 
consumer or the consumer's estate will be required to repay the entire 
amount of the loan, even if the home sells for less than the consumer 
owes. See proposed Sec.  226.33(c)(9)(iii).
33(c)(10) Statements About Risks
    Proposed Sec.  226.33(c)(10) requires the creditor to provide a 
number of disclosures about risks and possible actions by the creditor. 
Under this provision, the creditor would have to state that the reverse 
mortgage will be secured by the consumer's home, implementing TILA 
Sections 127A(a)(5) (for open-end credit) and 128(a)(9) (for closed-end 
credit). 15 U.S.C. 1637a(a)(5); 15 U.S.C. 1638(a)(9). The creditor 
would also have to state the possible actions it could take, including 
foreclosing on the home and requiring the consumer to leave the home; 
stop making periodic payments to the consumer, if applicable; prohibit 
additional extensions of credit, if applicable; terminate the reverse 
mortgage and require payment of the outstanding balance in a single 
payment and impose fees on termination; and implement changes in the 
reverse mortgage.
    The creditor would also be required to describe the conditions 
under which it could take these actions including, as applicable, if 
the consumer fails to maintain the collateral; if the consumer ceases 
to use the dwelling as his principal dwelling (including any residency 
time period that will be used to determine whether the dwelling is the 
consumer's principal dwelling, such as if the consumer is not in the 
home for 12 consecutive months); and the consumer's failure to pay 
property taxes or maintain homeowner's insurance. Comment 33(c)(10)-1 
would clarify for open-end reverse mortgages that if changes may occur 
under Sec.  226.5b(f)(3)(i)-(v) as proposed in the Board's August 2009 
HELOC Proposal, a creditor must state that the creditor can make 
changes to the plan.\123\
---------------------------------------------------------------------------

    \123\ See 74 FR 43428, 43487-43489, Aug. 26, 2009.
---------------------------------------------------------------------------

33(c)(11) Additional Information and Web Site
    Under proposed Sec.  226.33(c)(11), creditors would be required to 
state that if the consumer does not understand any disclosure, the 
consumer should ask questions and include a statement that the consumer 
may obtain additional information at the Web site of the Federal 
Reserve Board and a reference to that Web site. The August 2009 
Proposals for Closed-End Mortgages and HELOCs contain similar 
requirements. The Board proposes this rule pursuant to its authority in 
TILA Section 105(a) to effectuate the statute's purposes, which include 
facilitating consumers' ability to compare credit terms and helping 
consumers avoid the uniformed use of credit.
33(c)(12) Additional Early Disclosures for Open-End Reverse Mortgages
    As discussed above, TILA Section 138, implemented by current Sec.  
226.31(a), requires HELOC or closed-end mortgage TILA disclosures to be 
provided for reverse mortgages, including the early HELOC disclosures 
(required by Sec.  226.5b), the account-opening HELOC disclosures 
(required by Sec.  226.6), and the closed-end disclosures (required by 
Sec. Sec.  226.18 and 19). 15 U.S.C. 1648. While the Board is proposing 
to consolidate the disclosure content for reverse mortgages as much as 
possible into proposed Sec.  226.33(c)(1) through (11), some of the 
content for each of the disclosures differs. Accordingly, proposed 
Sec.  226.33(c)(12) through (14) would require specific disclosures for 
the open-end early reverse mortgage disclosures, the open-end account-
opening disclosures, and the closed-end disclosures, respectively.

Comparison to the August 2009 HELOC Proposal

    A number of disclosures applicable to HELOCs do not apply to, or 
are not meaningful for, reverse mortgages. A number of other required 
disclosures, however, are applicable to and meaningful for reverse 
mortgages and therefore are included in proposed Sec.  226.33(c), which 
sets forth the required content for all reverse mortgage disclosures.
    Disclosures required in Sec.  226.33(c). First, the identification 
information and no-obligation statement in proposed Sec.  226.5b(c)(1), 
(2), and (3) would be required by proposed Sec.  226.33(c)(1), (2) and 
(4)(i) for reverse mortgages. Second, TILA Section 127A(a)(5) requires 
the creditor to disclose that the creditor will acquire a security 
interest in the consumer's dwelling and that loss of the dwelling may 
occur in the event of default. Proposed Sec.  226.33(c)(4) and (c)(10) 
would implement this provision. 15 U.S.C. 1637a(a)(5).
    TILA Section 127A(a)(8) requires a disclosure of HELOC repayment 
options and would be implemented by proposed Sec.  226.5b(c)(9) under 
the Board's August 2009 HELOC Proposal. 15 U.S.C. 1637a(a)(8). The 
HELOC proposal contains a number of disclosures related to minimum 
payments during a draw period and repayment period for HELOCs that 
would not be applicable or meaningful to reverse mortgage consumers. 
For reverse mortgages, proposed Sec.  226.33(c)(4), (c)(8), and (c)(9) 
would implement TILA Section 127A(a)(8). These provisions would require 
disclosures of reverse mortgage repayment options by describing the 
circumstances under which the reverse mortgage may become due and 
payable and providing the consumer with a table showing how much the 
consumer would be required to repay under different assumed loan terms.
    TILA Section 127A(a)(9), implemented by current Sec.  
226.5b(d)(5)(iii), requires an example based on a $10,000 outstanding 
balance and a recent APR, showing the minimum periodic payments, the 
amount of any balloon payment, and the time it would take to repay the 
$10,000 outstanding balance if the consumer made only those payments 
and obtained no additional extensions of credit. 15 U.S.C. 1637a(a)(9). 
Proposed Sec.  226.33(c)(8) would implement this provision with some 
modifications. Consumers make only one payment on a reverse mortgage 
and the timing of that single payment is generally unknown. Thus, for 
reverse mortgages, the disclosure contemplated by TILA Section 
127A(a)(9) requires using not only a hypothetical balance of $10,000, 
but also an assumed loan period. Consequently, the information provided 
to consumers is likely to be less useful because it may not accurately 
reflect either the timing or the amounts of their eventual repayment on 
a reverse mortgage. Proposed Sec.  226.33(c)(8) would require a 
disclosure of the loan balance growth over different assumed periods 
using the consumer's actual reverse mortgage rather than a hypothetical 
$10,000 balance. The Board proposes this rule pursuant to its authority 
in TILA Section 105(a) to make adjustments and exceptions to the 
requirements in TILA to effectuate the statute's purposes, which 
include facilitating consumers' ability to compare credit terms and 
helping consumers avoid the uniformed use of credit.
    TILA Section 127A(a)(7)(A) provides that a creditor must disclose 
as part of the application disclosures a statement that, under certain 
conditions, the creditor may terminate the plan and require payment of 
the outstanding

[[Page 58649]]

balance in full in a single payment, prohibit additional extensions of 
credit and reduce the credit limit. 15 U.S.C. 1637a(a)(7)(A). In 
addition, current Sec.  226.5b(d)(4)(i) requires that a creditor 
disclose as part of the application disclosures a statement that under 
certain conditions the creditor may impose fees upon termination or may 
implement certain changes in the plan as specified in the initial 
agreement. Proposed Sec.  226.33(c)(10) would implement these 
provisions for reverse mortgages.
    TILA Section 127A(a)(11) provides that if applicable, a creditor 
must provide as part of the application disclosures a statement that 
negative amortization may occur and that negative amortization 
increases the principal balance and reduces the consumer's equity in 
the dwelling. 15 U.S.C. 1637a(a)(11). Negative amortization is a key 
feature of a reverse mortgage, and TILA Section 127(A)(a)(11) would be 
implemented in proposed Sec.  226.33(c)(4), (c)(8), and (c)(9) which 
explain the terms of the reverse mortgage, provide a table of the loan 
balance growth, and describe the consumer's repayment options, 
including the consequences for the consumer if the loan balance is 
greater than the home's value.
    Proposed Sec.  226.5b(c)(17) in the Board's August 2009 HELOC 
Proposal requires a disclosure of the credit limit. Under an open-end 
reverse mortgage, the overall credit limit, which will be based on the 
value of the dwelling, is not likely to be meaningful to the consumer 
as a standalone disclosure. Instead, proposed Sec.  226.33(c)(5) would 
require a disclosure of the amounts and types of payments that the 
consumer may receive under the reverse mortgage.
    Proposed Sec.  226.5b(c)(20) and 5b(c)(21) in the Board's August 
2009 HELOC Proposal requires statements about asking questions and a 
reference to the Board's Web site. These disclosures would be required 
for reverse mortgages by proposed Sec.  226.33(c)(11).
    Disclosures not applicable to reverse mortgages. For open-end 
credit secured by the consumer's principal dwelling in which the 
extension of credit may exceed the fair market value of the dwelling, 
TILA Section 127A(a)(13) requires a disclosure that the interest on the 
portion of the credit extension that is greater than the fair market 
value of the dwelling is not tax deductible for Federal income tax 
purposes; and that the consumer should consult a tax adviser for 
further information regarding the deductibility of interest and 
charges. 15 U.S.C. 1637a(a)(13). Section 226.5b(c)(8) of the August 
2009 HELOC Proposal would implement this section. The disclosure about 
the tax deductibility of interest is likely to be confusing to reverse 
mortgage consumers and accordingly the Board proposes to use its 
authority under TILA Sections 105(a) and 105(f) to exempt reverse 
mortgages from the requirements of TILA Section 127A(a)(13). For 
reverse mortgages, interest accrues over time but the consumer does not 
make regular payments of interest or principal. The consumer generally 
would not be able to deduct interest payments until the reverse 
mortgage terminates and the consumer makes the single payment. In 
addition, in many cases neither the consumer nor the lender can be sure 
whether extensions of credit greater than the fair market value of the 
dwelling will eventually be made. The Board has considered that reverse 
mortgages are secured by the consumer's principal dwelling and are 
likely to be made for relatively large amounts, and in most cases the 
consumer will have the right of rescission. The Board also considered 
that reverse mortgage borrowers may lack financial sophistication 
relative to the complexity of the reverse mortgage, the importance of 
the credit and supporting property to the borrower, and whether the 
goal of consumer protection would be undermined by an exception. In 
addition, the Board considered the extent to which the requirement to 
provide the tax deductibility disclosure complicates, hinders, or makes 
more expensive the credit process for reverse mortgages. The Board 
believes that an exemption is warranted because the tax deductibility 
disclosure is unlikely to provide a meaningful benefit to reverse 
mortgage consumers.
    Proposed Sec.  226.5b(c)(18) in the Board's August 2009 HELOC 
Proposal requires disclosures regarding fixed-rate and fixed-term 
payment plans. Reverse mortgages may have either fixed or variable 
rates, and may have fixed-term options for making payments to the 
borrower, such as providing a monthly payment for a period of 10 years. 
However, the Board is unaware of any reverse mortgage plans that have 
fixed-rate or -term repayment plans, which, for example, would allow 
the consumer to draw funds that would accrue interest at a fixed rate 
for a period of time. Therefore the Board is not proposing to require 
such a disclosure for reverse mortgages, but the Board requests comment 
on whether reverse mortgages may have fixed-rate and -term payment 
plans.
    Proposed Sec.  226.5b(c)(19) in the Board's August 2009 HELOC 
Proposal requires disclosures about required credit insurance and debt 
cancellation and debt suspension coverage. As discussed below in the 
section-by-section analysis to Sec.  226.40, the Board is proposing to 
prohibit creditors from conditioning a reverse mortgage on the purchase 
of any other financial or insurance product. Accordingly, the Board 
does not propose to require the disclosures about required credit 
insurance and debt cancellation and debt suspension coverage.
33(c)(12)(i) Statement Regarding Refund of Fees Under Sec.  226.5b(e)
    Proposed Sec.  226.33(c)(12)(i), modeled on proposed Sec.  
226.5b(c)(5), requires a creditor to disclose in the table as part of 
the early open-end reverse mortgage disclosures a statement that the 
consumer may receive a refund of all fees paid, if the consumer 
notifies the creditor within three business days of receiving the early 
disclosures that the consumer does not want to open the plan. The 
proposed disclosure would be required if a creditor will impose fees on 
the plan prior to the expiration of the three-day period. See 74 FR 
43428, 43461, August 26, 2009.
33(c)(12)(ii) Refund of Fees Under Sec.  226.40(b)
    As discussed in the section-by-section analysis to Sec.  226.40(b) 
below, the Board is proposing to prohibit creditors from making a 
reverse mortgage unless the consumer has received independent 
counseling. In addition, the proposal would require creditors to refund 
all fees paid (except for the fee for counseling itself) if the 
consumer notifies the creditor within three business days of receiving 
the counseling that the consumer does not want the reverse mortgage. 
Proposed Sec.  226.33(c)(12)(ii) requires a creditor to disclose in the 
table as part of the early open-end reverse mortgage disclosures a 
statement regarding the consumer's refund right after counseling.
33(c)(12)(iii) Changes to Disclosed Terms
    TILA Section 127A(a)(6)(A) provides that creditors must disclose as 
part of the application disclosures a statement of the time by which 
the consumer must submit an application to obtain specific terms 
disclosed in the application disclosures and an identification of any 
disclosed term that is subject to change prior to opening the plan. 15 
U.S.C. 1637a(a)(6)(A).
    The Board's August 2009 HELOC Proposal implements this provision in 
proposed Sec.  226.5b(c)(4). Proposed Sec.  226.5b(c)(4)(i) requires an

[[Page 58650]]

identification of any disclosed term subject to change prior to opening 
the plan. This statement would be required to be placed below the 
proposed early HELOC disclosure table. Proposed Sec.  226.5b(c)(4)(ii) 
requires a statement that the consumer may receive a refund of all fees 
paid if a disclosed term changes (other than changes due to 
fluctuations in the index in a variable-rate plan) and the consumer 
elects not to open the account. This statement would be required to be 
inside the proposed early HELOC disclosure table. See 74 FR 43428, 
43460-43461, August 26, 2009.
    Proposed Sec.  226.33(c)(12)(iii) requires the disclosure required 
by proposed Sec.  226.5b(c)(4)(ii)--the statement regarding the 
consumer's right to a refund of fees if a disclosed term changes. For 
clarity, proposed Sec.  226.33(c)(12)(i) through (c)(12)(iii) require 
disclosures that must be placed inside the proposed early open-end 
reverse mortgage table. Proposed Sec.  226.33(c)(12)(iv), discussed 
below, would require disclosures that must be placed directly beneath 
the table.
33(c)(12)(iv) Statement About Refundability of Fees
    Proposed Sec.  226.33(c)(12)(iii) is modeled after Sec.  
226.5b(c)(4)(i) and (c)(22) and the associated commentary in the 
Board's August 2009 HELOC Proposal. See 74 FR 43428, 43460-43461, 
43483-43484, August 26, 2009. It would require an identification of any 
disclosed term subject to change prior to opening the plan, a statement 
that the consumer may be entitled to a refund of all fees paid if the 
consumer decides not to open the plan, and a cross reference to the 
``Fees'' section in the disclosure statement. Each of these disclosures 
would be required to be placed directly beneath the early open-end 
reverse mortgage disclosure table. See proposed Sec.  226.33(d)(4)(vi).
33(c)(13) Additional Disclosures Before the First Transaction Under an 
Open-End Reverse Mortgage
    Proposed Sec.  226.33(c)(13) would require additional disclosures 
before the first transaction for open-end reverse mortgages. Its 
provisions are modeled after those in proposed Sec.  226.6(a)(2) in the 
Board's August 2009 HELOC Proposal.
    As discussed above in the section-by-section analysis under Sec.  
226.33(c)(12), a number of disclosures applicable to HELOCs are not 
applicable to, or are not meaningful for, reverse mortgages. A number 
of other required disclosures, however, are applicable to and 
meaningful for reverse mortgages and thus are included in proposed 
Sec.  226.33(c), which sets forth the required content for all reverse 
mortgage disclosures.
    Disclosures required in Sec.  226.33(c). As discussed above in the 
section-by-section analysis to Sec.  226.33(c)(12), the proposed 
disclosures required by Sec.  226.33(c) include the disclosures that 
would be required by proposed Sec.  226.6(a)(2)(i) (identification 
information); (a)(2)(ii) (security interest and risk to home); 
(a)(2)(iii) (possible actions by creditor); (a)(2)(v) (payment terms); 
(a)(2)(xvi) (negative amortization); (a)(2)(xviii) (credit limit); 
(a)(2)(xxiv) (no obligation statement); (a)(2)(xxv) (statement about 
asking questions); and (a)(2)(xxvi) (statement about Board's Web site).
    Disclosure required by Sec.  226.6. TILA Section 127(a)(2) provides 
that creditors must explain as part of the account-opening disclosures 
the method used to determine the balance to which rates are applied. 15 
U.S.C. 1637(a)(2). Under the Board's 2009 HELOC Proposal, a creditor 
would be required to disclose below the account-opening table the name 
of the balance computation method used by the creditor for each feature 
of the account, along with a statement that an explanation of the 
method(s) is provided in the account agreement or disclosure statement. 
See 74 FR 43428, 43539, August 26, 2009 (proposed Sec.  
226.6(a)(2)(xxii)). In addition, proposed Sec.  226.6(a)(4)(i)(D) would 
require creditors to explain the balance computation method in the 
account-opening agreement or other disclosure statement. See 74 FR 
43428, 43506, August 26, 2009.
    For reverse mortgages, the Board is not proposing to include a 
disclosure below the account-opening table of the name of the balance 
computation method along with a statement that an explanation of the 
method is provided in the account agreement or disclosure statement. 
Under the Board's HELOC proposal, however, reverse mortgage creditors 
would be required to explain the balance computation method in the 
account-opening agreement or other disclosure statement. The Board 
believes that because reverse mortgage consumers do not make regular 
payments to the lender, a disclosure of the balance computation method 
below the account-opening table would be unnecessary and could result 
in information overload for consumers. However, creditors would still 
be required to provide the information in the account-opening agreement 
or other disclosure statement.
    Disclosures not applicable to reverse mortgages. Proposed Sec.  
226.33(c)(13) does not include the disclosures that would be required 
by Sec.  226.6(a)(2)(iv) (tax implications); (a)(2)(xix) (statements 
about fixed-rate and -term payment plans); and (a)(2)(xx) (required 
insurance, debt cancellation or debt suspension coverage). For the 
reasons discussed in the section-by-section analysis to Sec.  
226.33(c)(12), these disclosures do not apply to, or are not meaningful 
for, reverse mortgages.
    In addition, a number of other required account-opening disclosures 
for HELOCs are not relevant or meaningful in the reverse mortgage 
context. Proposed Sec.  226.6(a)(2)(x), which requires disclosure of 
any late-payment fee, and proposed Sec.  226.6(a)(2)(xiii), which 
requires disclosure of any returned-payment fee, do not apply to 
reverse mortgages because the consumer does not make regular payments. 
Also, TILA Section 127(a)(1), implemented by proposed Sec.  
226.6(a)(2)(xxi), provides that a creditor must disclose as part of the 
account-opening disclosures a statement of when finance charges begin 
to accrue, including an explanation of whether any time period exists 
within which any credit extended may be repaid without incurring a 
finance charge. 15 U.S.C. 1637(a)(1). However, disclosure of a grace 
period for reverse mortgages is not relevant or meaningful to consumers 
who are not making regular payments. For this reason the Board proposes 
to exercise its authority under TILA Sections 105(a) and 105(f) to 
exempt reverse mortgages from the requirement to state whether or not 
any time period exists within which any credit extended may be repaid 
without incurring a finance charge. The Board has considered that 
reverse mortgages are secured by the consumer's principal dwelling and 
are likely to be made for relatively large amounts, and in most cases 
the consumer will have the right of rescission. The Board also 
considered that reverse mortgage borrowers may lack financial 
sophistication relative to the complexity of the reverse mortgage 
transaction, the importance of the credit and supporting property to 
the borrower and whether the goal of consumer protection would be 
undermined by an exception. The Board also considered the extent to 
which the requirement to provide the grace period disclosure 
complicates, hinders, or makes more expensive the credit process for 
reverse mortgages. The Board believes that an exemption is warranted 
because the grace period disclosure may be confusing to reverse 
mortgage consumers who are not making regular payments.

[[Page 58651]]

    Disclosures required by Sec.  226.33(c)(13). Proposed Sec.  
226.33(c)(13)(i) and (ii), modeled on proposed Sec.  226.6(a)(2)(xii) 
and (a)(2)(xiv) in the Board's August 2009 HELOC Proposal, requires 
disclosure of transaction charges imposed for use of the reverse 
mortgage and any fees for failure to comply with transaction 
limitations. Proposed Sec.  226.33(c)(13)(iii), modeled on proposed 
Sec.  226.6(a)(2)(xxiii), implements TILA Section 127(a)(7) which 
requires creditors offering credit subject to Sec.  226.5b to provide 
notices of billing rights at account opening. 15 U.S.C. 1637(a)(7). 
Proposed Sec.  226.33(c)(13)(iv), modeled on proposed Sec.  
226.6(a)(2)(xxiv)(B) in the Board's August 2009 HELOC Proposal, 
requires a statement that the consumer should confirm the terms in the 
disclosure statement. The Board proposes this rule pursuant to its 
authority in TILA Section 105(a) to effectuate the statute's purposes, 
which include facilitating consumers' ability to compare credit terms 
and helping consumers avoid the uniformed use of credit.
33(c)(14) Additional Disclosures for Closed-End Reverse Mortgages
    Proposed Sec.  226.33(c)(14) would require additional disclosures 
for closed-end reverse mortgages. The proposed provisions are modeled 
on those in the Board's August 2009 Closed-End Mortgage Proposal.
Comparison to the August 2009 Closed-End Mortgage Proposal
    The Board's August 2009 Closed-End Mortgage Proposal would create a 
new Sec.  226.38 setting forth the content for closed-end mortgage 
disclosures, replacing the disclosures currently required by Sec.  
226.18. Many of the new and revised disclosures in proposed Sec.  
226.38 focus on disclosing possible changes to the consumer's monthly 
payment amount and thus would not apply to or be meaningful for reverse 
mortgage consumers. Accordingly, proposed Sec.  226.33(c)(14) would not 
require some the disclosures required by proposed Sec.  226.38. Other 
disclosures required by proposed Sec.  226.38 would be required 
elsewhere in Sec.  226.33(c) for reverse mortgages.
    Disclosures required in Sec.  226.33. Proposed Sec.  226.38(a) 
would require a loan summary disclosure including information about the 
loan amount, term, type, and features. Some, but not all, of the items 
in the loan summary disclosure would be required (or would have 
parallel provisions) elsewhere under proposed Sec.  226.33(c). For 
example, the loan amount, term, and type would be disclosed for all 
reverse mortgages under proposed Sec.  226.33(c)(4), (c)(5), and 
(c)(6)(ii)(B). Proposed Sec.  226.38(a) would also require a disclosure 
of total settlement charges. As discussed more fully above, proposed 
Sec.  226.33(c)(7) would require a disclosure of costs to the consumer 
modeled more closely after the fee disclosure requirements for HELOCs.
    Proposed Sec.  226.38(c) would require an interest rate and payment 
summary for closed-end mortgages. Proposed Sec.  226.33(c)(14) would 
not require the interest rate and payment summary, because for reverse 
mortgages there is only a single final payment and the timing of that 
payment is unknown and would have to be estimated. Instead, other 
provisions in proposed Sec.  226.33(c) would require disclosure of the 
types of payments the consumer could receive (Sec.  226.33(c)(5)), a 
summary of the loan balance over time (Sec.  226.33(c)(8)), and 
descriptions of the consumer's repayment options (Sec.  226.33(c)(9)). 
These disclosures would give a reverse mortgage consumer relevant and 
meaningful information about the cost of the loan and the options for 
repaying the loan. In addition, proposed Sec.  226.33(c)(6)(ii)(C), 
discussed above, would require information about the interest rate 
calculation.
    Proposed Sec.  226.38(d) would require disclosure of a section 
labeled, ``Key Questions About Risk.'' This section would include 
information about rate increases, payment increases, prepayment 
penalties and other potentially risky features, such as disclosures 
about shared equity or shared appreciation features. The disclosures in 
proposed Sec.  226.38(d) regarding payment increases, interest-only 
payments, negative amortization, balloon payments, demand features and 
no- or low-documentation loans either do not apply to reverse mortgages 
or would be more meaningful if disclosed in a different way. For 
example, the proposed disclosures of the loan balance growth in Sec.  
226.33(c)(8) and the consumer's repayment options in proposed Sec.  
226.33(c)(9) provide information about the negative amortization and 
balloon payment features of reverse mortgages that is tailored 
specifically for the reverse mortgage context. In addition, proposed 
Sec.  226.33(c)(4) and (c)(10) would require disclosures about certain 
risks applicable to reverse mortgages. Proposed Sec.  226.33(c)(8) 
would require disclosures about features such as shared equity or 
shared appreciation.
    Proposed Sec.  226.38(e) in the August 2009 Closed-End Mortgage 
Proposal would require disclosure of information about payments for 
closed-end mortgages. Proposed Sec.  226.33(c) would include some, but 
not all of these disclosures. Proposed Sec.  226.33(c) would not 
require disclosures of escrows for taxes and insurance or disclosures 
about mortgage insurance premiums; instead, Sec.  226.33(c)(4)(iii) and 
(c)(10)(iii)(C) would require disclosures that the reverse mortgage 
consumer remains responsible for taxes and insurance.
    Disclosures not required. Proposed Sec.  226.38(f) and (g) in the 
August 2009 Closed-End Mortgage Proposal would require disclosures of 
additional information, most of which would be required for reverse 
mortgages by Sec.  226.33(c). However, as discussed below, disclosures 
about tax deductibility of interest, and a statement that there is no 
guarantee the consumer may refinance, would not be required for reverse 
mortgages.
    For closed-end credit secured by the consumer's principal dwelling 
in which the extension of credit may exceed the fair market value of 
the dwelling, TILA Section 128(a)(15) requires a disclosure that the 
interest on the portion of the credit extension that is greater than 
the fair market value of the dwelling is not tax deductible for Federal 
income tax purposes; and the consumer should consult a tax adviser for 
further information regarding the deductibility of interest and 
charges. 15 U.S.C. 1638(a)(15). The disclosure about the tax 
deductibility of interest is likely to be confusing to reverse mortgage 
consumers and accordingly the Board proposes to use its authority under 
TILA Sections 105(a) and 105(f) to exempt reverse mortgages from the 
requirements of TILA Section 128(a)(15).
    Although reverse mortgages accrue interest over time, because the 
consumer does not make regular payments on a reverse mortgage, the 
consumer generally would not be able to deduct interest payments until 
the reverse mortgage terminates and the consumer makes the single 
payment. In addition, in many cases neither the consumer nor the lender 
will know whether or not extensions of credit greater than the fair 
market value of the dwelling will eventually be made. The Board has 
considered that reverse mortgages are secured by the consumer's 
principal dwelling and are likely to be made for relatively large 
amounts, and in most cases the consumer will have the right of 
rescission. The Board also considered that reverse mortgage borrowers 
may lack financial sophistication relative to the complexity of the 
reverse mortgage transaction, the importance of the credit

[[Page 58652]]

and supporting property to the borrower and whether the goal of 
consumer protection would be undermined by an exception. In addition, 
the Board considered the extent to which the requirement to provide the 
tax deductibility disclosure complicates, hinders, or makes more 
expensive the credit process for reverse mortgages. The Board believes 
that an exemption is warranted because the potential the tax 
deductibility disclosure is unlikely to provide a meaningful benefit to 
reverse mortgage consumers.
    Proposed Sec.  226.38(h) in the August 2009 Closed-End Proposal 
requires disclosures about credit insurance and debt cancellation and 
debt suspension coverage. Reverse mortgage consumers do not make 
regular payments and the death of the consumer is one of the events 
that causes a reverse mortgage to become due and payable. Reverse 
mortgage consumers do not appear to be offered credit insurance or debt 
cancellation or debt suspension coverage. Accordingly, the disclosures 
about credit insurance and debt cancellation and debt suspension 
coverage are not applicable and would not be required. The Board 
requests comment on whether credit insurance and debt cancellation and 
debt suspension coverage may be offered for reverse mortgages.
    TILA Section 128(b)(2)(C) requires additional disclosures for loans 
secured by a dwelling in which the interest rate or payments may vary. 
15 U.S.C. 1638(b)(2)(C). Specifically, creditors must provide 
``examples of adjustments to the regular required payment on the 
extension of credit based on the change in the interest rates specified 
by the contract for such extension of credit. Among the examples 
required is an example that reflects the maximum payment amount of the 
regular required payments on the extension of credit, based on the 
maximum interest rate allowed under the contract.'' TILA Section 
128(b)(2)(C), 15 U.S.C. 1638(b)(2)(C). Creditors must provide these 
disclosures within three business days of receipt of the consumer's 
written application, as provided in TILA Section 128(b)(2)(A), 
implemented in Sec.  226.19(a)(1)(i). TILA Section 128(b)(2)(C) 
provides that these examples must be in conspicuous type size and 
format and that the payment schedule be labeled ``Payment Schedule: 
Payments Will Vary Based on Interest Rate Changes.'' Section 
128(b)(2)(C) requires the Board to conduct consumer testing to 
determine the appropriate format for providing the disclosures to 
consumers so that the disclosures can be easily understood, including 
the fact that the initial regular payments are for a specific time 
period that will end on a certain date, that payments will adjust 
afterwards potentially to a higher amount, and that there is no 
guarantee that the borrower will be able to refinance to a lower 
amount. 15 U.S.C. 1638(b)(2)(C). The Board is implementing these 
requirements in an interim rule published elsewhere in today's Federal 
Register.
    The requirements of TILA Section 128(b)(2)(C) are designed to 
ensure that consumers understand the potential for changes in their 
regular payment amount under a variable-rate mortgage and are aware 
that the borrower may not be able to refinance to a lower amount once 
such a change occurs. Armed with this information, consumers can 
determine whether payments on a variable-rate mortgage could become 
unaffordable. For reverse mortgages, however, these disclosures are 
unlikely to be meaningful and may cause confusion because consumers do 
not make regular payments to the lender. A disclosure that there is no 
guarantee that a consumer can refinance to lower their payment may be 
confusing to someone who is not making regular payments. Similarly, 
``examples of adjustments to the regular required payment'' based on 
changes in the interest rate provides information that is less useful 
to reverse mortgage consumers than to consumers with traditional 
mortgages. This is because reverse mortgage consumers do not make a 
``regular required payment,'' but rather only a single final payment.
    In addition, other factors, such as the consumer's longevity and 
changes to the home's value, may have significant effects on the total 
payment amount. In most cases, the total repayment amount will be 
subject to a nonrecourse limit, meaning that the consumer's maximum 
possible payment will be limited to the proceeds from the sale of the 
home (unless the consumer wishes to retain the home). Thus, even if a 
variable interest rate were to climb to its maximum possible amount, 
the effect may not be to increase the maximum amount the consumer could 
owe, but rather how quickly the consumer's loan balance reached an 
amount subject to the nonrecourse limit.
    For these reasons, the proposed rule would not require disclosures 
of examples of changes to a reverse mortgage's final payment amount 
based on changes in the interest rate, or a statement that there is no 
guarantee the consumer can refinance to a lower payment. Under the 
Board's exception and exemption authorities under TILA Sections 105(a) 
and 105(f) the Board is proposing to make an exception to these 
requirements in TILA Section 128(b)(2)(C) for reverse mortgages. The 
Board believes that there is a potential for confusion or information 
overload from these disclosures and that an exception for reverse 
mortgages will effectuate the purposes of TILA of providing meaningful 
disclosure of credit terms to the consumer and assisting consumers in 
avoiding the uninformed use of credit. The Board has considered that 
reverse mortgages are secured by the consumer's principal dwelling and 
are likely to be made for relatively large amounts. The Board also 
considered that reverse mortgage borrowers may lack financial 
sophistication relative to the complexity of the reverse mortgage 
transaction, the importance of the credit and supporting property to 
the borrower, and whether the goal of consumer protection would be 
undermined by an exception.
    In addition, the Board considered the extent to which the 
requirements complicate, hinder, or make more expensive the credit 
process for reverse mortgages. Given the importance of the reverse 
mortgage to the borrower and the fact that the disclosures would not 
provide a meaningful benefit in the form of useful information or 
protection, the Board believes that an exemption is warranted. As 
discussed below, the Board is proposing new disclosures to explain the 
total cost of a reverse mortgage more effectively pursuant to its 
authority in TILA Section 105(a) to effectuate the statute's purposes, 
which include facilitating consumers' ability to compare credit terms 
and helping consumers avoid the uniformed use of credit.
    Disclosures required by Sec.  226.33(c)(14). TILA Section 128 
requires disclosure of the ``finance charge,'' using that term; the 
``amount financed,'' using that term; the sum of the amount financed 
and the finance charge, termed the ``total of payments;'' and the 
number, amount, and due dates or periods of payments scheduled to repay 
the total of payments. 15 U.S.C. 1638(a)(2)(A), (a)(3), (a)(5), (a)(6), 
and (a)(8). Proposed Sec.  226.33(c)(4)(v) and (c)(9) would implement 
the requirement to disclose the number and due dates of payments by 
requiring disclosure of when the reverse mortgage becomes due and 
payable and that the consumer must make a single payment to repay the 
reverse mortgage.
    Proposed Sec.  226.33(c)(14), modeled on proposed Sec.  
226.38(e)(5) in the August 2009 Closed-End Mortgage Proposal, would 
implement TILA Section 128 by requiring disclosure of the total 
payments, the finance charge, and the amount financed for all closed-
end

[[Page 58653]]

reverse mortgages. In the August 2009 Closed-End Mortgage Proposal, the 
Board proposed to use its exception authorities to make certain changes 
to the disclosures required by TILA Section 128. See 74 FR 43232, 
43305-43309, Aug. 26, 2009; 15 U.S.C. 1638(a)(2)(A), (a)(3), (a)(5). 
The creditor would be required to disclose the total payments amount 
calculated based on the number and amount of scheduled payments in 
accordance with the requirements of Sec.  226.18(g), together with a 
statement that the total payments is calculated on the assumption that 
market rates will not change, if applicable, and a statement of the 
estimated loan term. The creditor would be required to disclose the 
interest and settlement charges, using that term, calculated as the 
finance charge as required by Sec.  226.4, expressed as a dollar 
figure, together with a brief statement that the interest and 
settlement charges amount represents part of the total payments amount. 
The interest and settlement charges would be treated as accurate if the 
amount disclosed is understated by no more than $100 or is greater than 
the amount required to be disclosed. The creditor would also be 
required to disclose the amount financed, using that term and expressed 
as a dollar figure, together with a brief statement that the interest 
and settlement charges and the amount financed are used to calculate 
the APR.
33(c)(15) Disclosures Provided Outside the Table
    For closed-end reverse mortgages, proposed Sec.  226.33(c)(15) 
would also require the creditor to comply with proposed Sec.  
226.38(j), which requires separate disclosures of the itemization of 
the amount financed, a statement of whether the consumer is entitled to 
a rebate of any finance charge in certain circumstances, late payment 
charges, a statement that the consumer may obtain property insurance 
from any insurer that is acceptable to the creditor, a statement of the 
consumer should refer to the contract for certain other information, 
and the statements whether or not a subsequent purchaser may be 
permitted to assume the obligation. Creditors would only need to 
provide these statements as applicable. As under the August 2009 
Closed-End Mortgage Proposal, these disclosures would be required to be 
outside the reverse-mortgage disclosure table required by Sec.  
226.33(d).
    For open-end credit, Sec.  226.6(a)(3) through (a)(5) require 
certain disclosures to be provided at account-opening. Under the 
Board's August 2009 proposal, these disclosures would be required to be 
outside the table containing the disclosures under Sec.  226.6.(a)(2). 
For reverse mortgages, proposed Sec.  226.33(c)(15) would require the 
disclosures under Sec.  226.6(a)(3) (disclosure of charges imposed as 
part of a home-equity plan), (a)(4) (disclosure of rates for home-
equity plans), and (a)(5)(ii) through (iv) (disclosure of security 
interests, statement of billing rights, and possible creditor actions) 
as applicable. As under the August 2009 HELOC Proposal, these 
disclosures would be required to be outside the reverse-mortgage 
disclosure table required by Sec.  226.33(d). As discussed above, the 
proposed reverse mortgage disclosures would not include disclosures 
regarding voluntary credit insurance, debt cancellation, or debt 
suspension, or additional information about fixed-rate and -term 
payment plans.
33(c)(16) Assumptions for Closed-End Disclosures
    For creditors to calculate the total of payments, finance charge, 
and annual percentage rate for closed-end credit, they must use an 
assumed loan term. Current comment 17(c)(1)-14 provides guidance on 
assumptions creditors must use in making these disclosures for closed-
end reverse mortgages. For clarity, the current comment would be moved 
into the regulation as proposed Sec.  226.33(c)(16). The proposed 
provision and comment 33(c)(16)-1 would also clarify that the use of 
these rules does not, by itself, make the disclosures estimates. Thus, 
creditors using these rules for the disclosures required by proposed 
Sec.  226.19(a)(2) would be able to comply with that section's 
limitation on using estimated disclosures.
    Under proposed Sec.  226.33(c)(16), if the reverse mortgage has a 
specified period for disbursements but repayment is due only upon the 
occurrence of a future event such as the death of the consumer, the 
creditor must assume that disbursements will be made until they are 
scheduled to end. The creditor must assume repayment will occur when 
disbursements end (or within a period following the final disbursement 
which is not longer than the regular interval between disbursements). 
This assumption should be used even though repayment may occur before 
or after the disbursements are scheduled to end.
    For example, if the reverse mortgage will provide the consumer with 
monthly payments for a period of 10 years, the creditor must assume 
that payments continue for 10 years and that repayment occurs at the 
end of that time. This assumption must be used even though the consumer 
may still be living in the home at the end of 10 years and may not 
actually repay the reverse mortgage at that time.
    If the reverse mortgage has neither a specified period for 
disbursements nor a specified repayment date, and these terms will be 
determined solely by reference to future events including the 
consumer's death, the creditor may assume that the disbursements will 
end upon the consumer's death (estimated by using actuarial tables, for 
example). The creditor may assume that repayment will be required at 
the same time as the consumer's death (or within a period following the 
date of the final disbursement which is not longer than the regular 
interval for disbursements). Alternatively, the creditor may base the 
disclosures upon another future event it estimates will be most likely 
to occur first. (If terms will be determined by reference to future 
events which do not include the consumer's death, the creditor must 
base the disclosures upon the occurrence of the event estimated to be 
most likely to occur first.) For example, if the consumer is scheduled 
to receive monthly payments for as long as the consumer remains in the 
home, the creditor must assume that disbursements end and repayment 
occurs either at the consumer's life expectancy, or another future 
event the creditor estimates will be most likely to occur first.
    In making the disclosures, the creditor must assume that all 
disbursements and accrued interest will be paid by the consumer. For 
example, if the note has a nonrecourse provision providing that the 
consumer is not obligated for an amount greater than the value of the 
house, the creditor must nonetheless assume that the full amount to be 
disbursed will be repaid. The Board requests comment on whether other 
assumptions should be used in making the disclosures required by Sec.  
226.33(c)(14), or whether other clarifications about how to make these 
disclosures for reverse mortgages would be beneficial. As discussed 
below, the Board also requests comment on whether retaining the table 
of life expectancies (updated to current figures) in Appendix L would 
be useful in determining the total of payments, annual percentage rate, 
and finance charge under proposed Sec.  226.33(c)(14). In addition, a 
borrower's age may be calculated in different ways. In some cases, the 
borrower's age is based on the borrower's nearest birthday (even if 
that birthday is in the future) rather than on the borrower's last 
birthday. For example, under the first method someone born on January 
1, 1930 would be considered to be 81 years old on

[[Page 58654]]

September 1, 2010 because the borrower is nearer to his next birthday 
than his last birthday. Under the second method, the borrower would not 
be considered to be 81 years old until January 1, 2011. The Board 
requests comment on whether to adopt a uniform assumption for 
determining the consumer's age and, if so, which method to use.
33(d) Special Disclosure Requirements for Reverse Mortgages
    Proposed Sec.  226.33(d) would provide special disclosure 
requirements for reverse mortgages in addition to those in Sec.  
226.31. Proposed Sec.  226.33(d)(1) would require the open-end early 
reverse-mortgage disclosures be provided at the earlier of three 
business days after application or three business days before the first 
transaction under the plan. The timing requirement for the open-end 
early reverse mortgage disclosures would differ slightly from the 
timing for the early HELOC disclosures under the Board's August 2009 
HELOC Proposal. Under the HELOC Proposal, creditors would be required 
to provide the parallel disclosures under Sec.  226.5b not later than 
account opening or three business days following receipt of the 
consumer's application, whichever is earlier. However, for reverse 
mortgages, TILA Section 138 requires that the open-end reverse-
mortgage-specific disclosures be provided at least three business days 
before the first transaction under the plan. See current Sec.  
226.31(c)(2); 15 U.S.C. 1648.
    For the account-opening open-end reverse mortgage disclosures, 
proposed Sec.  226.33(d)(2) would require that the disclosures be 
provided to the consumer at least three business days before the first 
transaction under the plan. As discussed above, TILA Section 127(a) and 
current Sec.  226.5(b)(1) require the HELOC account-opening disclosures 
be provided before the first transaction under the plan. 15 U.S.C. 
1637. For reverse mortgages however, TILA Section 138 requires 
disclosures be provided at least three business days before the first 
transaction under an open-end reverse mortgage plan. 15 U.S.C. 1648. 
Because the proposal combines the HELOC disclosures with the reverse 
mortgage specific disclosures, only one timing rule may apply. The 
proposal follows the timing requirements that are specific to reverse 
mortgages. Reverse mortgages are complex transactions and the Board 
believes that consumers would benefit from receiving open-end 
disclosures at least three business days before becoming obligated on 
the plan so that they have sufficient time to review and contemplate 
the disclosures. The Board proposes this rule pursuant to its authority 
in TILA Section 105(a) to make adjustments and exceptions to the 
requirements in TILA to effectuate the statute's purposes, which 
include facilitating consumers' ability to compare credit terms and 
helping consumers avoid the uniformed use of credit. 15 U.S.C. 1604(a).
    For closed-end reverse mortgages, TILA Section 128(b)(2) requires 
creditors to provide good faith estimates of the closed-end TILA 
disclosure within three business days after application and at least 
seven business days before consummation, and before the consumer has 
paid a fee other than a fee for obtaining a credit history. If 
subsequent events cause changes to the APR that exceed certain 
tolerances, the creditor must provide a corrected disclosure that the 
consumer must receive at least three business days before consummation. 
15 U.S.C. 1638(b)(2). TILA Section 138 requires that reverse mortgage 
disclosures be provided at least three business days before closing. 15 
U.S.C. 1648. Proposed Sec.  226.33(d)(3) would require creditors to 
provide the disclosures required by Sec.  226.33(c) for closed-end 
reverse mortgages in accordance with the rules in Sec.  226.19(a). 
Since Sec.  226.19(a), as proposed in the 2009 Closed-End Mortgage 
Proposal, requires the TILA good faith estimates to be provided at 
least 7 business days before closing, and any required re-disclosures 
to be provided at least three business days before closing, the timing 
requirements in proposed Sec.  226.19(a) would satisfy the timing 
requirements of both TILA Section 128 and Section 138.
    In addition, Sec.  226.19(a) permits consumers to waive the seven- 
and three-day waiting periods for a bona fide personal financial 
emergency, implementing TILA Section 128(b)(2)(F). 15 U.S.C. 
1638(b)(2)(F). These waiver provisions would also apply to the closed-
end reverse mortgage disclosures required by proposed Sec.  
226.33(d)(3). TILA Section 138 does not explicitly provide for such a 
waiver for the reverse-mortgage-specific disclosures. However, the 
Board believes that it would be impractical for creditors and consumers 
to allow waivers for the waiting periods for some parts of the reverse 
mortgages disclosures and not others, or to allow only partial waivers 
of the waiting periods. The Board also believes that the benefits to 
reverse mortgage consumers of allowing them to waive the disclosure 
waiting periods for bona fide personal financial emergencies outweigh 
the need to have the extra time to review the disclosures in those 
cases. Accordingly, the Board proposes to apply the waiver rules in 
Sec.  226.19(a) to the closed-end reverse mortgage disclosures. The 
Board proposes this rule pursuant to its authority in TILA Section 
105(a) to make adjustments to the statute to carry out its purposes and 
facilitate compliance with TILA. 15 U.S.C. 1604(a).
    Section 226.19(a), as proposed in the Board's 2009 Closed-End 
Mortgage proposal, would also limit creditors' use of estimates in 
making final TILA disclosures. As a result of applying the rules in 
proposed Sec.  226.19(a) to closed-end reverse mortgage disclosures, 
this proposal would also limit the use of estimates in the same manner. 
As discussed in the section-by-section analysis to Sec.  226.33(c)(16) 
above, while creditors must use certain assumptions in Sec.  
226.33(c)(16) in making closed-end reverse mortgage disclosures, use of 
those assumptions would not, by themselves, make the disclosures 
estimates. See proposed comment 33(c)(16)-1. Thus, creditors would be 
able to comply with proposed Sec.  226.19(a). The Board requests 
comment, however, on whether there are other disclosures that creditors 
would need to estimate in final closed-end reverse mortgage 
disclosures.
    Proposed Sec.  226.33(d)(4) would require the disclosures in 
Sec. Sec.  226.33(c)(3) through (c)(10), (c)(12)(i), (c)(12)(ii), 
(c)(12)(iii), (c)(13)(i), (c)(13)(ii), and (c)(14) be provided in the 
form of a table with headings, content and format substantially similar 
to the model forms in Appendix K. It would also require certain 
information to be placed directly above the table, other information to 
be placed directly below the table and limit the information that could 
be within the table. It would also require that certain information be 
disclosed in bold text. For closed-end reverse mortgages it would also 
require that the APR be more conspicuous than other required 
disclosures, as required by TILA Section 122, and be in at least 16 
point font. 15 U.S.C. 1632. Proposed Sec.  226.33(d)(5), modeled after 
proposed Sec. Sec.  226.5b(b)(3) and 6(a)(1)(iv), would provide rules 
for disclosure of fees based on a percentage of another amount.
33(e) Reverse Mortgage Advertising
Overview
    Currently, advertisements for reverse mortgages are subject to 
general advertising requirements under Sec.  226.16, for open-end 
credit, or Sec.  226.24, for closed-end credit. Board staff extensively 
reviewed reverse mortgage advertisements, which

[[Page 58655]]

generally focused on special features of reverse mortgages, such as the 
fact that payments of principal and interest are not required. As a 
result, the Board proposes additional advertising requirements for 
reverse mortgages.
    The Board proposes to require that a reverse mortgage advertisement 
disclose clarifying information if the advertisement contains one or 
more of the seven following types of statements: (1) A reverse mortgage 
is a ``government benefit''; (2) a reverse mortgage provides payments 
``for life'' or a consumer need not repay a reverse mortgage ``during 
your lifetime''; (3) a consumer ``cannot lose'' or there is ``no risk'' 
to a consumer's home with a reverse mortgage; (4) a consumer or a 
consumer's heirs ``cannot owe'' or will ``never repay'' more than the 
value of the consumer's home; (5) payments are not required for a 
reverse mortgage; (6) government fee limits apply to a reverse 
mortgage; or (7) a reverse mortgage does not affect a consumer's 
eligibility for or benefits under a government program. The Board also 
proposes to require that a reverse mortgage advertisement that refers 
to housing or credit counseling state a telephone number and Internet 
Web site for housing counseling resources maintained by HUD. The 
proposed requirements apply to advertisements for both open-end and 
closed-end reverse mortgages.
Authority
    TILA Section 105(a) provides the Board with general authority to 
prescribe regulations to carry out TILA's purposes, which include 
ensuring meaningful disclosure of credit terms so that consumers will 
be able to compare available credit terms and avoid the uninformed use 
of credit. 15 U.S.C. 1601(a), 1604(a). TILA Section 147(a) authorizes 
the Board to require by regulation that an advertisement for open-end 
credit secured by a consumer's principal dwelling that sets forth a 
specific plan term clearly and conspicuously disclose any information 
the Board prescribes, in addition to the credit term information set 
forth in TILA Section 147(a)(1)-(3) (as implemented in Sec.  
226.16(d)). 15 U.S.C. 1665b(a).
    The Board proposes to use its general authority under TILA Section 
105(a) and, for open-end reverse mortgage advertisements, its authority 
under TILA Section 147 to require that a reverse mortgage advertisement 
disclose clarifying information if the advertisement contains any of 
seven types of statements.\124\ The Board also proposes to use its 
authority under TILA Sections 105(a) and 147 to require that an 
advertisement provide a telephone number and Internet Web site for 
HUD's housing counseling resources if the advertisement contains a 
reference to housing or credit counseling. The foregoing information 
would be helpful to consumers considering a reverse mortgage, and 
requiring its inclusion would promote the informed use of credit.
---------------------------------------------------------------------------

    \124\ Most reverse mortgages are lines of credit, which are 
open-end credit transactions. See U.S. Government Accountability 
Office, GAO-09-606 at 8.
---------------------------------------------------------------------------

    TILA Section 122 authorizes the Board to require that information 
be disclosed in a clear and conspicuous manner. 15 U.S.C. 1632. 
Pursuant to the Board's authority under TILA Section 122, information 
required to accompany a statement that triggers the disclosure 
requirement (a triggering statement) must be clearly and conspicuously 
disclosed.
Research and Outreach
    The Board's staff extensively reviewed reverse mortgage advertising 
copy in developing the proposed provisions regarding reverse mortgage 
advertising. Board staff also considered a report by the GAO regarding 
its review of reverse mortgage marketing materials and related 
consultations with Federal and state banking regulators and other 
parties.\125\ In addition, Board staff considered the Proposed Reverse 
Mortgage Guidance published by the FFIEC, and the comments received on 
this proposed guidance, as well as the FFIEC's Final Reverse Mortgage 
Guidance.\126\ Board staff also consulted with Federal Trade Commission 
staff to identify problems connected with advertisements for reverse 
mortgages, as well as areas where reverse mortgage advertising 
disclosures could be improved.
---------------------------------------------------------------------------

    \125\ Id.
    \126\ See Proposed Reverse Mortgage Guidance, 74 FR 66652, Dec. 
16, 2009; Final Reverse Mortgage Guidance, 75 FR 50801. Aug. 17, 
2010.
---------------------------------------------------------------------------

    Through this research and outreach effort, Board staff identified 
eight types of statements that warrant a requirement to provide 
clarifying information. These statements are discussed in detail below. 
The Board solicits comment on the proposed requirements for reverse 
mortgage advertisements.
33(e)(1) Scope
    Proposed Sec.  226.33(e) applies to all advertisements for reverse 
mortgages. The Board's consumer testing has found that consumers find 
it difficult to understand reverse mortgages. The reverse mortgage 
advertisements Board staff reviewed generally focused on special 
features of reverse mortgages, such as the fact that payments of 
principal and interest are not required.
    The proposed requirements supplement, rather than replace, general 
advertising requirements for open-end or closed-end credit transactions 
under Subpart B or Subpart C of Regulation Z, respectively. This 
approach is consistent with Sec.  226.31(a), which provides that the 
requirements and limitations of Subpart E of Regulation Z, including 
requirements and limitations for reverse mortgages, are in addition to 
requirements contained in other subparts of Part 226.
    Proposed Sec.  226.33(e)(1) provides that the requirements of 
proposed Sec.  226.33(e) apply to any advertisement for a reverse 
mortgage, including promotional materials that accompany applications. 
Proposed comment 33(e)(1)-1 states that the requirements of proposed 
Sec.  226.33(e) apply to both open-end and closed-end reverse 
mortgages. Proposed comment 33(e)(1)-1 also states that the 
requirements and limitations of proposed Sec.  226.33(e) are in 
addition to those contained in other subparts, including advertising 
requirements under Sec.  226.16 in Subpart B or Sec.  226.24 in Subpart 
C, as applicable, and contains a cross-reference to Sec.  226.31(a).
33(e)(2) Clear and Conspicuous Standard
    Reverse mortgage advertisements currently are subject to the clear 
and conspicuous standard for open-end or closed-end advertisements set 
forth in Sec.  226.16 in Subpart B or Sec.  226.24 in Subpart C, 
respectively. Proposed Sec.  226.33(e)(2) provides that disclosures 
required for reverse mortgage advertisements must be made clearly and 
conspicuously. Proposed comment 33(e)(2)-1 clarifies that 
advertisements for reverse mortgages are subject to the general ``clear 
and conspicuous'' standard for Subpart B or Subpart C, as applicable. 
Proposed comment 33(e)(2)-1 contains a cross-reference to proposed 
comment 33(e)(1)-1, which in turn refers to Sec.  226.31(a), discussed 
above.
    Proposed comment 33(e)(2)-1 clarifies that proposed Sec.  226.33(e) 
prescribes no specific rules for the format of required disclosures, 
other than the following requirements: (1) the disclosures required by 
proposed Sec.  226.33(e)(3)-(9) must be made with equal prominence and 
in close proximity to each triggering statement; and (2) the disclosure 
required by proposed Sec.  226.33(e)(10) must be at least as 
conspicuous as any

[[Page 58656]]

use of the triggering statement. Proposed comment 33(e)(2)-1 clarifies 
further that required statements need not be printed in a certain type 
size and need not appear in any particular place in the advertisement, 
except as necessary to comply with the foregoing requirements regarding 
prominence, proximity, and conspicuousness.
    Proposed comment 33(e)(2)-2 states that information required to be 
disclosed under proposed Sec.  226.33(e) that is in the same type size 
as the triggering statement is deemed to be equally prominent with such 
statement. Proposed comment 33(e)(2)-2 states further that if a 
disclosure required by proposed Sec.  226.33(e) is made with greater 
prominence than the triggering statement, the equal prominence 
requirement is satisfied. In addition, proposed comment 33(e)(2)-2 
states that information required to be disclosed under proposed Sec.  
226.33(e) that is immediately next to or directly above or below a 
triggering statement, without any intervening text or graphical 
displays and not in a footnote, is deemed to be closely proximate to 
such statement. Proposed comments 33(e)(2)-3, -4, and -5 clarify that, 
in determining whether required disclosures in an Internet, televised, 
or oral advertisement for a reverse mortgage are made clearly and 
conspicuously for purposes of proposed Sec.  226.33(e)(2), creditors 
may rely on comments 16-3, -4, and -5 for open-end reverse mortgages, 
and comments 24(b)-3, -4, and -5 for closed-end reverse mortgages.
33(e)(3) Need To Repay Loan
    Some advertisements state that a reverse mortgage is a ``government 
benefit'' or other government aid, without indicating that a reverse 
mortgage is a loan that must be repaid. Reverse mortgages are complex 
transactions, and consumers do not necessarily know how a reverse 
mortgage can enable a consumer to receive, rather than make, periodic 
payments. For example, some of the consumers who participated in the 
Board's consumer testing did not know at the outset that a reverse 
mortgage is a loan that must be repaid. A reference to government aid 
may compound many consumers' confusion regarding how reverse mortgages 
operate.
    The Board believes that a statement that a reverse mortgage is a 
``government benefit'' or other aid from a government entity may 
mislead a consumer to believe that a reverse mortgage is government 
assistance that the consumer need not repay. Therefore, the Board 
proposes to provide that such a statement in a reverse mortgage 
advertisement triggers a requirement to disclose clarifying 
information.
    Proposed Sec.  226.33(e)(3) provides that if an advertisement 
states that a reverse mortgage is a ``government benefit'' or other aid 
provided by any Federal, state, or local government entity, each such 
statement must be accompanied by an equally prominent and closely 
proximate statement of the fact that a reverse mortgage is a loan that 
must be repaid. The proposed disclosures would reduce consumers' 
confusion regarding the nature of a reverse mortgage likely to result 
from a statement that a reverse mortgage is government aid.
    Proposed comment 33(e)(3)-1 provides examples illustrating how an 
advertisement that states that a reverse mortgage is aid provided by a 
government entity may clearly and conspicuously disclose that a reverse 
mortgage is a loan that must be repaid. One such example is the 
following statement: ``You are eligible for benefits under the 
government's Home Equity Conversion Mortgage program. A reverse 
mortgage under the program is a loan that you must repay.''
    Proposed comment 33(e)(3)-2 clarifies that an advertisement may not 
state that a reverse mortgage is a ``government benefit'' unless the 
reverse mortgage is associated with a government program, such as HUD's 
HECM program. The comment further clarifies that if a reverse mortgage 
is associated with a government program, then an advertisement may 
contain a statement that a reverse mortgage is a government benefit; 
however, the statement must be accompanied by a statement that a 
reverse mortgage is a loan that must be repaid, as illustrated in the 
examples provided in comment 33(e)(3)-1. Finally, proposed comment 
33(e)(3)-2 notes that reverse mortgage advertisements are subject to 
the prohibitions in proposed Sec.  226.16(d)(9), for open-end reverse 
mortgages, and Sec.  226.24(i)(3), for closed-end reverse mortgages, on 
misrepresentations that a mortgage is endorsed or sponsored by the 
government. The comment clarifies that an advertisement with this type 
of misrepresentation will violate TILA regardless of whether a 
statement that the reverse mortgage is a loan that must be repaid 
accompanies the misrepresentation.
    Proposed comment 33(e)(3)-3 clarifies that a statement that a 
reverse mortgage is a ``government-supported loan'' or a ``government 
loan program'' or is a loan insured, authorized, developed, created, or 
otherwise sponsored or endorsed by a government entity does not trigger 
a requirement to disclose clarifying information. Such statements make 
clear that a reverse mortgage is a loan. Proposed comment 33(e)(3)-3 is 
consistent with Sec.  226.24(i)(3), which allows statements regarding 
government endorsement or sponsorship if an advertised loan program in 
fact is endorsed or sponsored by a government entity. Proposed comment 
33(e)(3)-3 also provides examples of statements that do not trigger a 
requirement to disclose clarifying information under proposed Sec.  
226.33(e)(3), including the following example: ``A Home Equity 
Conversion Mortgage is a loan insured by the U.S. Department of Housing 
and Urban Development.''
    Proposed comment 33(e)(3)-4 clarifies that a reference to benefits 
or other aid through a government program unrelated to reverse 
mortgages does not trigger the requirement to disclose clarifying 
information. Proposed comment 33(e)(3)-4 clarifies further that using 
the term ``benefit'' to mean ``advantage'' does not trigger the 
requirement to disclose clarifying information. The proposed comment 
also provides examples that illustrate uses of the term ``benefit'' 
that do not trigger a requirement to disclose clarifying information 
under proposed Sec.  226.33(e)(3), including the following: ``A reverse 
mortgage does not affect your Social Security benefits.'' (Proposed 
comment 33(e)(3)-4 clarifies, however, that the foregoing statement 
regarding Social Security benefits triggers a requirement under 
proposed Sec.  226.33(e)(9) to disclose that a reverse mortgage may 
affect a consumer's benefits under some other government programs, as 
discussed below in the section-by-section analysis of Sec.  
226.33(e)(9).)
33(e)(4) Events That End Loan Term
    Some advertisements state that a reverse mortgage provides payments 
or access to a line of credit throughout a consumer's lifetime. 
However, a consumer may outlive a credit line if home equity is 
exhausted and payments under the term option do not continue beyond a 
specified term. A statement that a reverse mortgage provides payments 
throughout a consumer's lifetime is partially true where a consumer 
chooses a HECM program that provides payments as long as a consumer 
lives in the home (tenure option), but relatively few HECM consumers 
choose the tenure option.\127\ And even with the tenure option, an

[[Page 58657]]

event other than a consumer's death may cause a reverse mortgage to 
become due, including sale of the home and failure by the consumer to 
use the home as a principal residence, to maintain the home in good 
repair, or to pay property taxes or insurance premiums. Many 
participants in the Board's consumer testing were surprised to learn 
that such events may cause a reverse mortgage to become due.
---------------------------------------------------------------------------

    \127\ In 2008, 89% of consumers with a HECM chose the line of 
credit option and an additional 6% chose the line of credit option 
combined with either the tenure option or the option for a specified 
term. See U.S. Government Accountability Office, GAO-09-606 at 8.
---------------------------------------------------------------------------

    Other advertisements state that a consumer need not repay a reverse 
mortgage during the consumer's lifetime. As discussed above, however, 
several events other than a consumer's death may cause a reverse 
mortgage to become due.
    The Board believes that the foregoing statements in an 
advertisement may mislead a consumer to believe that he or she will 
receive payments or have access to a line of credit, or need not repay, 
a reverse mortgage until death. The Board therefore proposes to require 
that such statements be accompanied by a clarifying disclosure of 
circumstances that may result in the termination of payments or of 
access to a line of credit, or repayment being required, for a reverse 
mortgage.
    Proposed Sec.  226.33(e)(4) requires that equally prominent and 
closely proximate clarifying information accompany each statement in an 
advertisement that a reverse mortgage provides payments ``for life'' or 
that a consumer need not repay a reverse mortgage ``during your 
lifetime'' or another statement that payments or access to a line of 
credit for a reverse mortgage or the term of a reverse mortgage will 
continue throughout a consumer's lifetime. Specifically, proposed Sec.  
226.33(e)(4) provides that the advertisement must disclose that in the 
following cases, payments or access to a line of credit may end or 
repayment may be required during the consumer's lifetime: If the 
consumer (1) sells the home or (2) lives elsewhere for longer than 
allowed by the loan agreement. The foregoing disclosure is intended to 
address the potentially misleading effects of a statement that payments 
or access to a line of credit continue throughout a consumer's lifetime 
or that a consumer need not repay a reverse mortgage during the 
consumer's lifetime.
    A reverse mortgage may become due in other circumstances, such as 
if a consumer does not pay property taxes or insurance premiums or does 
not maintain the home. The Board is concerned that requiring 
advertisements to include many examples of such circumstances could 
contribute to information overload, however. For that reason, the Board 
proposes to limit the required disclosure of clarifying information to 
the two circumstances of selling the home and living elsewhere for 
longer than a specified period of time. At the same time, the Board 
believes that clearly and conspicuously disclosing more than two events 
that cause a reverse mortgage to end may be possible. Therefore, 
reverse mortgage advertisements may state more than two such examples 
under the Board's proposal, as discussed below.
    The examples of selling of the home and living elsewhere for longer 
than a specified period of time are particularly relevant to the 
consumers to whom reverse mortgages typically are advertised. Generally 
aged 62 or older, these consumers may be more likely than younger 
consumers to need to live in an assisted living facility, with 
relatives, or someplace other than their home for health reasons. 
Consequently, proposed Sec.  226.33(e)(4) requires that an 
advertisement include these specific examples, if applicable, in the 
disclosure triggered by a statement that a reverse mortgage provides 
payments ``for life'' or that a consumer need not repay a reverse 
mortgage ``during your lifetime'' or by another statement that a 
reverse mortgage will continue throughout a consumer's lifetime.
    Proposed comment 33(e)(4)-1 provides examples that illustrate how 
an advertisement may disclose the clarifying information required by 
proposed Sec.  226.33(e)(4), including the following example: ``You get 
payments for as long as you live, except that payments may end sooner 
in some circumstances. For example, you do not get payments for as long 
as you live if you sell your home or live somewhere else for longer 
than the loan agreement allows.'' Proposed comment 33(e)(4)-2 states 
that the disclosures required by proposed Sec.  226.33(e)(4)(A) and (B) 
need be made only if applicable.
    Proposed comment 33(e)(4)-3 states that proposed Sec.  226.33(e)(4) 
does not require the use of a particular format in providing the 
required disclosures, other than requiring that they be equally 
prominent with and in close proximity to each triggering statement. 
Proposed comment 33(e)(4)-3 also clarifies that an advertisement need 
not make the required disclosures in a single sentence and may make the 
required disclosures, for example, using a list format. Further, 
proposed comment 33(e)(4)-3 states that an advertisement may provide 
the required disclosures in any order. Proposed comment 33(e)(4)-4 
states that an advertisement for a reverse mortgage may state 
additional circumstances in which a reverse mortgage will end during a 
consumer's lifetime (for example, where a consumer chooses to receive 
payments for a specific time period), but must not obscure the required 
disclosures.
33(e)(5) Risk of Foreclosure
    Some advertisements state that, with a reverse mortgage, a consumer 
cannot lose his or her home or that there is no risk to a consumer's 
home. Principal and interest payments are not required with a reverse 
mortgage, but foreclosure nevertheless may occur. Some participants in 
the Board's consumer testing were surprised that a consumer's home is 
at risk with a reverse mortgage. Statements that a reverse mortgage 
poses no risk to a consumer's home compounds some consumers' lack of 
understanding that a reverse mortgage is a loan secured by a consumer's 
home.
    The Board believes that a statement that a consumer cannot lose his 
or her home or that there is no risk to a consumer's home may mislead a 
consumer to believe that foreclosure of a reverse mortgage cannot 
occur. The Board therefore proposes to provide that such statement 
triggers a requirement to disclose clarifying information. Proposed 
Sec.  226.33(e)(5) provides that if an advertisement states that a 
consumer ``cannot lose'' or that there is ``no risk'' to the consumer's 
home or otherwise states that foreclosure cannot occur if the consumer 
(1) lives somewhere other than the dwelling longer than allowed by the 
loan agreement or (2) does not pay property taxes or insurance 
premiums. The foregoing disclosures clarify a statement that a reverse 
mortgage poses no risk to a consumer's home.
    Of course, foreclosure may result from other circumstances, such as 
not maintaining the home in good repair. However, the Board is 
concerned that requiring that advertisements include many examples of 
circumstances that may result in foreclosure could contribute to 
information overload. For that reason, the Board proposes to limit the 
required disclosure of clarifying information to the consumer living 
somewhere other than the dwelling longer than allowed by the loan 
agreement or not paying property taxes or insurance premiums. At the 
same time, the Board believes that clearly and conspicuously disclosing 
more than two events that cause a reverse mortgage to end may be 
possible. Therefore, reverse mortgage advertisements may state more 
than two such examples under the Board's proposal, as discussed below.
    Proposed comment 33(e)(5)-1 provides examples that illustrate how 
an advertisement may disclose the

[[Page 58658]]

clarifying information required by proposed Sec.  226.33(e)(5). One 
such example is the following: ``You cannot lose your home except in 
certain circumstances, including if you live somewhere else for longer 
than allowed by the loan agreement or you do not pay taxes or 
insurance.'' Proposed comment 33(e)(5)-2 clarifies that the disclosures 
required by proposed Sec.  226.33(e)(5)(A) and (B) need be made only if 
applicable.
    Proposed comment 33(e)(5)-3 states that proposed Sec.  226.33(e)(5) 
does not require the use of a particular format in providing the 
required disclosures, other than requiring that they be equally 
prominent with and in close proximity to each triggering statement. 
Proposed comment 33(e)(5)-3 also clarifies that an advertisement need 
not make the required disclosures in a single sentence and may make the 
required disclosures, for example, using a list format. Further, 
proposed comment 33(e)(5)-3 states that an advertisement may provide 
the required disclosures in any order. Proposed comment 33(e)(5)-4 
states that an advertisement for a reverse mortgage may state 
additional circumstances in which foreclosure may occur, but must not 
obscure the required disclosures.
33(e)(6) Amount Owed
    Some advertisements state that a consumer or a consumer's heirs or 
estate cannot owe more than the consumer's home is worth with a reverse 
mortgage. Although a creditor's recourse in the event of a HECM default 
is limited to the value of a consumer's home, the loan balance can 
exceed the value of the home. A consumer or the consumer's heirs or 
estate must pay the entire loan balance to retain a home when a reverse 
mortgage becomes due.
    In the past, some HECM creditors themselves mistakenly believed 
that a consumer or a consumer's heirs could retain the consumer's home 
by paying the home's value rather than the outstanding loan balance, 
leading HUD to issue a clarifying statement.\128\ Given evidence of 
creditors' confusion in this regard, the Board believes that a 
statement in a reverse mortgage advertisement that a consumer or a 
consumer's heirs cannot owe more than the consumer's home is worth may 
mislead consumers. This type of assertion may give a consumer false 
comfort about the consumer's ability, or the ability of the consumer's 
heirs, to retain the home when a reverse mortgage's term ends. The 
Board therefore proposes to require that clarifying information 
accompany a statement that the consumer or a consumer's heirs or estate 
cannot owe more than the consumer's home is worth.
---------------------------------------------------------------------------

    \128\ See HUD Mortgagee Letter 2008-38 (Dec. 8, 2008).
---------------------------------------------------------------------------

    Proposed Sec.  226.33(e)(6) provides that if an advertisement 
states that a consumer or a consumer's heirs or estate ``cannot owe'' 
or will ``never repay'' more than, or otherwise states that repayment 
is limited to, the value of the consumer's dwelling, each such 
statement must be accompanied by an equally prominent and closely 
proximate statement of the fact that (1) to retain the dwelling when 
the reverse mortgage becomes due the consumer or the consumer's heirs 
or estate must pay the entire loan balance and (2) the balance may be 
greater than the value of the consumer's dwelling. The proposed 
disclosures would reduce the risk that consumers will underestimate the 
likelihood that they or their heirs will lose a home they may want to 
keep.
    Proposed comment 33(e)(6)-1 provides examples that illustrate how 
an advertisement for a reverse mortgage may disclose the clarifying 
information required by proposed Sec.  226.33(e)(6). One such example 
is the following: ``Your heirs cannot owe more than the value of your 
house, unless they want to keep the house when the reverse mortgage is 
due. To keep the house, they must pay the entire loan balance, which 
may be higher than the house's value.''
33(e)(7) Payments for Taxes and Insurance
    Many advertisements state that a reverse mortgage will enable a 
consumer to make no payments. A statement that there are no payments 
with a reverse mortgage may cause a consumer to overlook the need to 
pay property taxes or insurance. Many consumers are used to making a 
single payment to a creditor each month that includes payment for 
principal, interest, and property taxes and insurance. Such consumers 
may misconstrue a statement that a reverse mortgage will eliminate 
their payments to mean that the creditor will make taxes and insurance 
payments on their behalf out of home equity and that the consumer need 
not make those payments directly. To reduce the likelihood of consumer 
confusion, the Board proposes to require that a statement regarding the 
obligation to make property tax and insurance payments accompany a 
statement that a consumer is not required to make payments for a 
reverse mortgage.
    Specifically, proposed Sec.  226.33(e)(7) provides that, if an 
advertisement states that payments are not required for a reverse 
mortgage, each such statement must be accompanied by an equally 
prominent and closely proximate statement that a consumer must make 
payments for property taxes or insurance premiums, if applicable. 
Proposed Sec.  226.33(e)(7) is consistent with Sec.  226.24(f)(3), 
which provides that in an advertisement for a first-lien, closed-end 
mortgage, a statement of the amount of any payment triggers a 
requirement to disclose the fact that the stated payments do not 
include amounts payable for taxes and insurance premiums. Proposed 
comment 33(e)(7)-1 provides examples that illustrate how an 
advertisement for a reverse mortgage may disclose the clarifying 
information required by Sec.  226.33(e)(7). One such example is the 
following: ``There are no loan payments for a reverse mortgage. You 
continue to pay for property taxes and insurance.''
33(e)(8) Government Fee Limitation
    Some advertisements state that government limits on HECM fees 
minimize consumers' costs. This and similar statements may obscure the 
fact that HECM fees can be substantial, notwithstanding statutory or 
regulatory limits. A statement that the government restricts reverse 
mortgage fees may cause a consumer to think that HECMs are less 
expensive than ``forward'' mortgages or other financial products. In 
fact, reverse mortgages often have higher up-front costs than 
``forward'' mortgages.\129\
---------------------------------------------------------------------------

    \129\ See, e.g., U.S. Government Accountability Office, GAO-09-
606 at 10-11 (describing typical reverse mortgage costs).
---------------------------------------------------------------------------

    Further, consumers may misconstrue a statement that the government 
caps HECM fees to mean that the government sets the amount of such 
fees. Fees charged may vary, however, because creditors need not charge 
the maximum fees permissible for a HECM. Also, pricing discretion 
exists despite HECM fee caps, because interest rates for HECMs are not 
prescribed. To address concern that consumers will misunderstand the 
effect government caps have on reverse mortgage costs, the Board 
proposes to provide that a statement regarding government limitations 
on fees or other costs triggers a requirement to provide specified 
clarifying information.
    Proposed Sec.  226.33(e)(8) provides that if an advertisement 
states that a Federal, state, or local government limits or regulates 
fees or other costs for a reverse mortgage, each such statement must be 
accompanied by an equally prominent and closely proximate statement 
that costs may vary among creditors and loan types and that less 
expensive

[[Page 58659]]

options may be available. Proposed comment 33(e)(8)-1 provides examples 
of how an advertisement may disclose the required clarifying 
information. One such example is the following: ``The government has 
capped fees for HECMs. Costs may vary by lender or loan type, and 
cheaper alternatives may be available.''
33(e)(9) Eligibility for Government Programs
    Many reverse mortgage advertisements state that a reverse mortgage 
will not affect a consumer's Social Security or Medicare benefits. 
Although a reverse mortgage generally does not affect a consumer's 
benefits from or eligibility for Social Security or Medicare, reverse 
mortgage proceeds may affect a consumer's benefits from or eligibility 
for means-tested programs such as Supplemental Security Income (SSI) 
and Medicaid. Concerns have been raised that consumers may 
misunderstand a statement that a reverse mortgage does not affect 
certain government benefits to mean that a reverse mortgage does not 
affect government benefits generally.\130\ Concerns also have been 
raised that some housing counselors do not mention that a reverse 
mortgage may affect benefits from and eligibility for government 
assistance, even though provision of this information is required.\131\
---------------------------------------------------------------------------

    \130\ See, e.g., Proposed Reverse Mortgage Guidance, 74 FR at 
66658; Final Reverse Mortgage Guidance, 75 FR at ------------------
--.
    \131\ See U.S. Government Accountability Office, GAO-09-606 at 
37.
---------------------------------------------------------------------------

    With careful planning, some consumers may avoid having a reverse 
mortgage adversely affect eligibility for or benefits from a means-
tested government program. Consumers would benefit from clarification 
in an advertisement that, although a reverse mortgage may not affect 
eligibility for or benefits from a particular government program, a 
reverse mortgage may affect eligibility for and benefits from other 
government programs. Such clarification would identify an issue about 
which many consumers should seek additional information.
    Proposed Sec.  226.33(e)(9) provides that if an advertisement 
states that a reverse mortgage does not affect a consumer's eligibility 
for or benefits from a government program, each such statement must be 
accompanied by an equally prominent and closely proximate statement of 
the fact that a reverse mortgage may affect a consumer's eligibility 
for benefits through some government programs, such as SSI or Medicaid. 
Such advertisement must mention SSI and Medicaid specifically, so that 
consumers have concrete examples of means-tested programs to discuss 
with a housing counselor or other person. Proposed comment 33(e)(9)-1 
provides examples that illustrate how an advertisement may disclose the 
clarifying information required by proposed Sec.  226.33(e)(9).
33(e)(10) Credit Counseling Information
    Some advertisements discuss the availability of housing counseling 
in connection with reverse mortgages. Requiring that an advertisement 
that refers to housing or credit counseling include a telephone number 
and Internet Web site for housing counseling resources maintained by 
HUD would help consumers to consult with a housing counselor early in 
the lending process. The Board proposes such requirement to promote the 
informed use of credit, consistent with TILA's goals.
    Proposed Sec.  226.33(e)(10) provides that if an advertisement 
contains a reference to housing or credit counseling, the advertisement 
must disclose a telephone number and Internet Web site for housing 
counseling resources maintained by HUD. Proposed comment 33(e)(10)-1 
clarifies that disclosure of HUD's counseling telephone number and Web 
site must be at least as conspicuous as any reference to housing or 
credit counseling in the advertisement. The comment further clarifies 
that the telephone number and Web site information does not have to be 
included with every reference to counseling resources. Proposed comment 
33(e)(10)-1 also clarifies that language identifying the purpose of the 
telephone number and Web site must accompany the disclosure, and 
provides the following illustrative statement: ``For information about 
housing counseling options, call [telephone number] or go to [Internet 
Web site].''

Section 226.34 Prohibited Acts or Practices in Connection With Credit 
Subject to Sec.  226.32

34(a) Prohibited Acts or Practices for Loans Subject to Sec.  226.32
34(a)(4) Repayment Ability
    The Board is proposing to remove and reserve a comment under Sec.  
226.34(a)(4). Section 226.34(a)(4) prohibits creditors from making a 
higher-priced mortgage loan without regard to the consumer's repayment 
ability as of consummation of the transaction. Comment 34(a)(4)-4 
contains an erroneous cross reference to Sec.  226.34(a)(4)(iv). 
Accordingly, the Board proposes to remove the comment. No substantive 
change is intended.
34(a)(4)(iv) Exclusions From Presumption of Compliance
    The Board is proposing to add a new comment 34(a)(4)(iv)-3 to 
provide guidance on compliance with the repayment ability requirements 
of Sec.  226.34(a)(4) for certain balloon loans with terms of less than 
seven years (``short-term balloon loans''). Section 226.34(a)(4)(iii) 
provides a presumption of compliance with the repayment ability 
requirements if the creditor follows certain procedures, including 
verifying the borrower's income. Under Sec.  226.34(a)(4)(iv), however, 
the presumption of compliance is not available for certain loan 
products, such as short-term balloon loans. Exclusion of short-term 
balloon loans from the presumption of compliance has led creditors to 
ask the Board whether they can make such loans and how to comply with 
the repayment ability rule.
    Proposed comment 34(a)(4)(iv)-3 states that the exclusion of short-
term balloon loans from the presumption of compliance does not prohibit 
creditors from making short-term balloon loans that are higher-priced 
mortgage loans. The proposed comment would clarify, however, that the 
creditor must use prudent underwriting standards and determine that the 
value of the collateral (the home) is not the basis for repaying the 
obligation (including the balloon payment). The proposed comment 
clarifies that the creditor need not verify that the consumer has 
assets and/or income at the time of consummation that would be 
sufficient to pay the balloon payment when it comes due. Proposed 
comment 34(a)(4)(iv)-3 states that, in addition to verifying the 
consumer's ability to make regular monthly payments, the creditor 
should verify that the consumer would likely be able to satisfy the 
balloon payment obligation by refinancing the loan or through income or 
assets other than the collateral.
    Proposed comment 34(a)(4)(iv)-3 contains the same guidance 
concerning short-term balloon loans as was previously provided in a 
Consumer Affairs Letter issued by Board staff in response to the 
inquiries from creditors noted above. See Short-Term Balloon Loans and 
Regulation Z Repayment Ability Requirement for Higher-Priced Mortgage 
Loans, CA 09-12 (Nov. 9, 2009). The Board is proposing to add new 
comment 34(a)(4)(iv)-3 to the staff commentary to make this existing 
guidance available to all creditors that are subject to Regulation Z's 
requirements. The Board seeks

[[Page 58660]]

comment, however, on whether the guidance can be improved as part of 
this rulemaking. For instance, would the addition of examples, 
illustrating when a consumer would and would not be considered able to 
satisfy the balloon payment by refinancing, provide greater assurance 
to creditors that consumers obtaining short-term balloon loans in 
similar circumstances would be deemed able to repay the obligation, as 
required by Sec.  226.34(a)(4)? Should there be more concrete guidance 
regarding the use of assumptions for the terms on which the consumer 
might refinance in the future, and should the guidance vary depending 
on the current transaction's terms? For example, should guidance 
regarding the treatment of a two-year balloon loan with interest-only 
payments over the whole term differ from that regarding the treatment 
of a six-year balloon loan with amortizing payments?

Section 226.35 Prohibited Acts or Practices in Connection With Higher-
Priced Mortgage Loans

35(a) Higher-Priced Mortgage Loans
    The Board is proposing to amend Sec.  226.35(a) to provide that a 
creditor determines whether a transaction is a higher-priced mortgage 
loan subject to Sec.  226.35 by comparing the ``transaction coverage 
rate,'' rather than the annual percentage rate, to the average prime 
offer rate. Under the proposal, the transaction coverage rate is a 
transaction-specific rate that would be used solely for coverage 
determinations; it would not be disclosed to consumers. A creditor 
would calculate the transaction coverage rate based on the rules in 
Regulation Z for calculation of the annual percentage rate, with one 
exception: The creditor would make the calculation using a modified 
value for the prepaid finance charge, as discussed below. The Board 
also is proposing to add new staff commentary clarifying when Sec.  
226.35 would apply to construction loans in which the creditor 
permanently finances the acquisition of a dwelling as well as the 
initial construction of the dwelling.
Background
    In the 2008 HOEPA Final Rule, the Board adopted special consumer 
protections for ``higher-priced mortgage loans.'' 73 FR 44522, 44603, 
July 30, 2008. These protections include: A requirement that creditors 
assess borrowers' ability to repay loans without regard to collateral 
and verify the borrower's income and assets; restrictions on a 
creditor's imposition of prepayment penalties; and a requirement to 
establish an escrow account for taxes and insurance for first-lien 
loans (``the 2008 HOEPA protections''). The Board defined a higher-
priced mortgage loan as a transaction secured by a consumer's principal 
dwelling for which the annual percentage rate exceeds the ``average 
prime offer rate'' by 1.5 percentage points or more, for a first-lien 
transaction, or by 3.5 percentage points or more, for a subordinate-
lien transaction.
    The Board's objective in adopting these rules was to extend the 
2008 HOEPA protections to the entire subprime market and generally to 
exclude the prime market from their coverage. The 2008 HOEPA 
protections were designed to address unfair and deceptive practices 
that were widespread in the subprime market. The prime market, however, 
did not show evidence that the same practices were as pervasive or were 
as clearly likely to injure consumers as in the subprime market. Thus, 
the Board did not apply the 2008 HOEPA protections to the prime market, 
stating that the protections should be applied broadly, ``but not so 
broadly that the costs, including the always present risk of unintended 
consequences, would clearly outweigh the benefits.'' 73 FR 43522, 
44532, July 30, 2008. The Board believed that, in the prime market, a 
case-by-case approach to determining whether practices are unfair or 
deceptive is more appropriate. The Board recognized, at the same time, 
that there is uncertainty as to what coverage metric would best achieve 
the objectives of covering the subprime market and generally excluding 
the prime market. The Board stated that it is appropriate to err on the 
side of covering somewhat more than the subprime market. 73 FR 43522, 
43533, July 30, 2008.
    In the August 2009 Closed-End Proposal, the Board proposed to amend 
Sec.  226.4 to provide a simpler, more inclusive definition of the 
finance charge. See 74 FR 43232, 43321-23, Aug. 26, 2009. Under the 
proposal, most closing costs, including many third-party costs such as 
appraisal fees and premiums for lender's title insurance, would be 
included in the finance charge and APR. Thus, APRs would be greater 
than they are under the current rule. The Board noted that because APRs 
generally would increase, more loans would potentially qualify as 
higher-priced mortgage loans and HOEPA loans covered by Sec. Sec.  
226.32 and 226.34 and trigger state anti-predatory lending laws. 74 FR 
43232, 43344-45, Aug. 26, 2009. The Board concluded, based on the 
limited data it had, that the proposal to improve the APR would be in 
consumers' interests. Comment was solicited on the potential impact of 
the proposed rule.
    Problems with potential over-inclusive coverage of Sec.  226.35. 
There are currently some differences between the APR and the average 
prime offer rate. Section 226.35(a)(2) defines ``average prime offer 
rate'' as an APR that is derived from average interest rates, points, 
and other loan pricing terms currently offered to consumers by a 
representative sample of creditors for mortgage transactions that have 
low-risk pricing characteristics. These average terms currently are 
obtained from the Primary Mortgage Market Survey[reg] (PMMS) published 
by Freddie Mac. Freddie Mac surveys mortgage creditors weekly on the 
loan pricing, consisting of interest rate and points, that they 
currently offer consumers with low-risk transaction terms and credit 
profiles. Thus, the average prime offer rate is calculated using data 
that includes only contract interest rates and points.
    Because average prime offer rates are based on points but not other 
origination fees, they are generally comparable to the current APR 
under Regulation Z, but not perfectly so. The PMMS does not define 
``points,'' and it is likely that survey respondents generally consider 
``points'' to include only discount points and, possibly, origination 
fees, which often are calculated as points (i.e., as a percentage of 
the loan amount). An APR includes not only discount points and 
origination fees but also other charges the creditor retains, such as 
underwriting and processing fees. Such charges are not commonly thought 
of as ``points'' because they are not calculated as percentages of the 
loan amount. Thus, survey respondents most likely do not include such 
charges in their points when they respond to the PMMS. The Board's 
August 2009 Closed-End Proposal would widen the disparity between the 
APR and the average prime offer rate. Under that proposal, APRs would 
be calculated based on a finance charge that includes most third-party 
fees in addition to points, origination fees, and any fees the creditor 
retains.
    As noted above, the Board solicited comment on the impact of the 
August 2009 Closed-End Proposal on higher-priced mortgage loans and 
HOEPA loans and triggering of state predatory lending laws. Numerous 
mortgage creditors and their trade associations commented on the 
proposal to make the finance charge and APR more inclusive. Most 
expressed agreement in principle with the proposed finance charge 
definition. Nevertheless, most industry

[[Page 58661]]

commenters opposed the proposal, stating that it would cause many prime 
loans to be incorrectly classified as higher-priced mortgage loans 
under Sec.  226.35. They also stated that the proposal would 
inappropriately expand the coverage of HOEPA and State laws. These 
commenters noted that HOEPA and most State laws have not only APR tests 
but also ``points and fees'' tests and that the more inclusive finance 
charge would have a much more significant impact under the applicable 
points and fees tests than under the APR tests. One creditor estimated 
that 30-50% of its subprime loans, which currently are higher-priced 
mortgage loans but not HOEPA loans, would become HOEPA (or state 
``high-cost'') loans under the proposal.
    Consumer advocates uniformly supported the proposal to make the 
finance charge and APR more inclusive. They recognized the resulting 
expansion of coverage under Sec. Sec.  226.32 and 226.35 and similar 
State laws, but they argued that any such expanded coverage would be 
appropriate. Consumer advocates stated that the more inclusive finance 
charge and APR would reveal newly covered loans for what they have 
always been, namely, HOEPA loans and higher-priced mortgage loans. 
Accordingly, they argued, the increased coverage would be warranted.
The Board's Proposal
    A new metric for determining coverage. As discussed above, the 
Board's definition of a higher-priced mortgage loan was intended to 
cover all of the subprime mortgage market and generally to exclude the 
prime market. Based on public comment and the Board's own analysis, the 
Board believes the test for coverage under Sec.  226.35 should be 
revised, especially in light of the Board's proposal to make the APR 
more inclusive. That is, the Board adopted the current test in 2008 
knowing it would result in some degree of coverage beyond the subprime 
market, but the degree of coverage would expand significantly with the 
inclusion in the finance charge and APR of title insurance premiums and 
other third-party charges that currently are excluded. The Board 
therefore proposes to replace the APR with the ``transaction coverage 
rate'' as the transaction-specific metric a creditor compares to the 
average prime offer rate to determine whether the transaction is 
covered. The Board adopted the APR as the metric for coverage under 
Sec.  226.35 because the Board believes the best way to identify the 
subprime market is by loan price, and the APR is the best available 
measure of loan price. See 73 FR 44532, July 30, 2008. The Board 
believes that a modified approach is appropriate, however, given the 
disparity between the average prime offer rate and the more-inclusive 
APR that the Board has proposed.
    Under proposed Sec.  226.35(a)(1), the creditor would compare the 
``transaction coverage rate,'' instead of the APR, to the average prime 
offer rate. As discussed below, the transaction coverage rate would be 
a modified version of the transaction's annual percentage rate. 
Specifically, under proposed Sec.  226.35(a)(2)(i), the transaction 
coverage rate would be calculated in the same manner as the APR, except 
that it would be based on a modified prepaid finance charge that would 
include only finance charges retained by the creditor, its affiliate, 
or a mortgage broker, as discussed below. The transaction coverage rate 
would not reflect other closing costs that are treated as finance 
charges for purposes of the APR that is disclosed to the consumer. 
Thus, the proposed, more inclusive APR would reflect such third-party 
charges as title insurance premiums, appraisal fees, and credit report 
fees, whereas the transaction coverage rate would not. Proposed comment 
35(a)(2)(i)-1 would clarify that the transaction coverage rate is not 
the APR that is disclosed to the consumer and that the transaction 
coverage rate calculated under Sec.  226.35(a)(2)(i) would be solely 
for coverage determination purposes. Existing Sec.  226.35(a)(2), which 
defines ``average prime offer rate,'' would be redesignated as Sec.  
226.35(a)(2)(ii).
    Mandatory use of transaction coverage rate. The Board's goal in 
developing the transaction coverage rate is to provide a simple 
modification to the metric for Sec.  226.35 coverage that does not 
create undue regulatory burden for creditors. The Board recognizes that 
any new metric would impose some costs, including training staff and 
modifying software and other systems. The Board believes, however, that 
these costs should be relatively small because the proposal would 
necessitate only a one-time modification to creditors' systems. On 
balance, the Board believes the costs of the new metric would be offset 
by the benefits of ensuring that the 2008 HOEPA protections apply only 
to loans for which they were intended, i.e., subprime mortgages.
    The Board considered whether to propose making the use of the 
transaction coverage rate optional. An optional approach, however, 
would have the anomalous result that identical transactions extended by 
two different creditors could have inconsistent coverage under Sec.  
226.35. The Board does not believe that whether a consumer receives the 
2008 HOEPA protections should depend on which creditor extends the 
credit. The Board seeks comment, however, on whether the use of the 
transaction coverage rate should be optional.
    Finance charges retained by the creditor, its affiliate, or a 
mortgage broker. The proposed transaction coverage rate would provide a 
measure of a loan's pricing that is more closely aligned with the 
average prime offer rate. As discussed above, the average prime offer 
rate reflects the contract interest rate and points for a hypothetical, 
low-risk transaction. Thus, the transaction coverage rate should 
reflect only a transaction's interest rate and points. A transaction's 
contract interest rate is well-understood, while ``points'' is not 
well-defined, as noted above. The proposal therefore seeks to define as 
clearly as possible which charges count toward the ``points'' component 
of the transaction coverage rate, i.e., which charges would be included 
in the modified prepaid finance charge used to calculate the 
transaction coverage rate. The Board proposes to include in the 
modified prepaid finance charge only charges that are retained by the 
creditor, its affiliates, or a mortgage broker. This rule would avoid 
any uncertainty about what is included and would prevent creditors from 
evading coverage by shifting points into other charges or to affiliated 
third-parties.
    The proposal would include in the modified prepaid finance charge 
any charges retained by a mortgage broker to ensure that the 
transaction coverage rate is comparable to the average prime offer rate 
for both retail and wholesale mortgage transactions. The average prime 
offer rate reflects creditors' retail pricing, which is higher (either 
in rate or in points) than the pricing the same creditors set for 
wholesale transactions. Lower wholesale pricing reflects creditors' 
reduced overhead and other costs of origination for loans originated 
through a mortgage broker. This difference tends to be eliminated once 
the mortgage broker's compensation is added into the retail pricing 
that the consumer pays. To ensure that Sec.  226.35 coverage 
determinations for wholesale transactions account for this difference, 
any charges retained by a mortgage broker would be reflected in the 
transaction coverage rate.
    Proposed comment 35(a)(2)(i)-2 would clarify that the inclusion of 
charges retained by a mortgage broker would be limited to compensation 
that otherwise constitutes a prepaid finance charge. This limitation 
would exclude

[[Page 58662]]

compensation paid by a creditor to a mortgage broker under a separate 
arrangement (e.g., compensation that comes from ``yield spread 
premium''), although such compensation is included already to the 
extent it comes from amounts paid by the consumer that are prepaid 
finance charges, such as points. See comment 4(a)(3)-3.\132\ If 
mortgage broker compensation comes from amounts paid by the consumer to 
the creditor that are finance charges but not prepaid finance charges, 
such as interest, those amounts would affect the transaction coverage 
rate just as they affect the APR, but the broker compensation itself 
would not affect the transaction coverage rate directly. Proposed 
comment 35(a)(2)(i)-2 would illustrate these principles with an 
example.
---------------------------------------------------------------------------

    \132\ Comment 4(a)(3)-3 provides that indirect compensation such 
as yield spread premiums paid by creditors to mortgage brokers is 
not a prepaid finance charge. Creditors and brokers have asked the 
Board whether these payments should be treated as prepaid finance 
charges because HUD's revised RESPA rules require a yield spread 
premium to be disclosed as a credit to the borrower. They believe 
that this disclosure results in a direct payment from the consumer 
to the mortgage broker, made by drawing on the disclosed credit. The 
Board notes that the RESPA disclosure does not affect the correct 
treatment of such payments for TILA purposes. Accordingly, indirect 
compensation such as yield spread premiums are not included as a 
separate component of the finance charge, regardless of how they 
must be disclosed on the RESPA disclosures.
---------------------------------------------------------------------------

    Alternative approach not proposed. Many industry commenters that 
expressed concerns about the Board's proposal to make the APR more 
inclusive suggested that the Board address the issue by revising the 
calculation of the average prime offer rate. These commenters asserted 
that the average prime offer rate should reflect average amounts for 
other closing costs that are reflected in the APR, in addition to the 
points currently included. The Board considered whether to propose such 
an approach but determined that it is not feasible. Closing costs vary 
significantly by geographical location. They also include costs that 
are fixed dollar amounts, which tend to have differing effects on the 
annual percentage rate depending on the loan amount. The commenters' 
suggested approach, therefore, would need to account for these two 
considerations, most likely by providing for separate average prime 
offer rates for various loan-size and geographical location categories. 
Such an approach would result in significant complexity and compliance 
burden for creditors.
    In addition, the Board is not proposing to include closing costs in 
the average prime offer rate because the Board could not identify a 
reliable source for ``average'' closing costs in every location 
throughout the country. Because closing costs change over time, the 
necessary data source would have to be updated periodically. The Board 
is not aware of any source that includes all closing costs for all 
relevant geographical and loan-size variations and that is reliably and 
regularly updated. The Board considered regularly surveying creditors 
for information on closing costs, but determined that the cost and 
burden on creditors would be significant. The Board believes the 
proposal achieves the same objective as the alternative approach, but 
without imposing the burden of ongoing data collection and reporting on 
creditors.
    HOEPA and State laws. As noted above, the Board considered the 
impact of the 2009 Closed-End Proposal's more inclusive APR on the 
coverage of HOEPA and certain State laws, in addition to higher-priced 
mortgage loans under Sec.  226.35. Industry commenters also raised 
concerns regarding additional coverage. The Board's proposal to address 
the potential impact of the more inclusive finance charge on HOEPA 
coverage under the points and fees test is discussed above in the 
section-by-section analysis of Sec.  226.32(b)(1). State predatory 
lending coverage thresholds are established under state authorities. 
The Board believes that those authorities are best positioned to make 
any adjustments to coverage they deem appropriate.
35(a)(3)
    Construction-permanent loans. The Board is proposing to add new 
comment 35(a)(3)-1 to clarify how Sec.  226.35 applies to cases where a 
creditor that extends financing for the initial construction of a 
dwelling also may permanently finance the home purchase. The proposed 
comment states that the construction phase is not a higher-priced 
mortgage loan, as provided in Sec.  226.35(a)(3), regardless of the 
creditor's election to disclose such cases as either a single 
transaction or as two separate transactions, pursuant to Sec.  
226.17(c)(6)(ii).
    Loans for the initial construction of a dwelling are excluded from 
the definition of a higher-priced mortgage loan by Sec.  226.35(a)(3). 
In adopting the 2008 HOEPA Final Rule, the Board found that 
construction-only loans do not appear to present the same risk of 
consumer abuse as other loans. Applying Sec.  226.35 to construction-
only loans, which generally have higher interest rates than the 
permanent financing, could hinder some borrowers' access to 
construction financing. The permanent financing of such loans, however, 
is not excluded from the definition. The Board has received inquiries 
as to how the Sec.  226.35 coverage test and the 2008 HOEPA protections 
apply to a construction loan that may be permanently financed by the 
same creditor.
    Section 226.17(c)(6)(ii) permits creditors, at their option, to 
disclose construction-permanent financing as either a single 
transaction or two separate transactions. That is, if a creditor 
extends credit to finance the initial construction of a dwelling and 
may permanently finance the transaction at the end of the construction 
phase, the creditor may deliver a single TILA disclosure of both phases 
as a single transaction or may deliver a separate TILA disclosure for 
each phase as though they were two separate transactions. Creditors 
have asked whether and how a creditor's election to disclose such cases 
as either a single transaction or as two separate transactions under 
Sec.  226.17(c)(6)(ii) affects the coverage and application of Sec.  
226.35. In providing that construction lending would not be subject to 
Sec.  226.35, the Board did not intend to influence creditors' 
elections under Sec.  226.17(c)(6)(ii). Neither did the Board intend 
these elections to affect the exclusion of construction financing from 
the meaning of higher-priced mortgage loan. In any event, the proposed 
transaction coverage rate, discussed above, would eliminate the use of 
APRs to determine whether transactions are subject to Sec.  226.35. 
Such determinations therefore would be unaffected by how many 
disclosures the creditor elects to provide for a construction-permanent 
loan, as transaction coverage rates would not be disclosed.
    Proposed staff comment 35(a)(3)-1 would clarify that, even if the 
creditor discloses construction financing that the creditor may 
permanently finance as two separate transactions, a single transaction 
coverage rate, reflecting the appropriate charges from both phases, 
must be calculated and compared to the average prime offer rate to 
determine coverage under Sec.  226.35(a)(1). If the transaction is 
determined to be a higher-priced mortgage loan, the proposed comment 
would clarify that only the permanent phase is subject to the 
requirements of Sec.  226.35. For example, the requirement to establish 
an escrow account prior to consummation of a higher-priced mortgage 
loan secured by a first lien on a principal dwelling, under Sec.  
226.35(b)(3), would apply only

[[Page 58663]]

to the permanent phase and not to the construction phase. The proposed 
comment would ensure that a creditor's disclosure election under Sec.  
226.17(c)(6)(ii) is not affected by whether the transaction would be 
covered under Sec.  226.35. It also would ensure that the construction 
loan phase is not subject to Sec.  226.35's requirements, for the 
reasons stated.
Effective Date for 2008 HOEPA Final Rule
    When the Board adopted the 2008 HOEPA Final Rule, it adopted 
comment 1(d)(5)-1, which provides guidance on the effective date for 
the rule. The Board is proposing to make two changes to comment 
1(d)(5)-1, as discussed in more detail in the section-by-section 
analysis for Sec.  226.1 above. One change would provide that a radio 
advertisement occurs on the date it is broadcast, and the other would 
conform comment 1(d)(5)-1 to changes proposed to Sec.  226.20(a). 
Proposed Sec.  226.20(a) provides that a new transaction would occur 
when the same creditor and the consumer agree to change certain key 
terms of an existing closed-end loan secured by real property or a 
dwelling, without reference to State law. A modification that is a new 
transaction under proposed Sec.  226.20(a)(1) would also be subject to 
the 2008 HOEPA rules in Sec.  226.35, if the new transaction is a 
``higher-priced mortgage loan'' under Sec.  226.35(a). The Board is 
soliciting comment on the potential burdens and benefits of the 
proposed changes to Sec.  226.20(a) and comment 1(d)(5)-1.
35(b) Rules for Higher-Priced Mortgage Loans
    Comment 35(b)-1 provides guidance regarding the applicability of 
the higher-priced mortgage loan rules to closed-end mortgage 
transactions. The Board proposes to amend comment 35(b)-1 to add a 
cross-reference to proposed comment 20(a)(1)(i)-2, which clarifies 
that, if the same consumer and same creditor agree to increase the 
interest rate on a transaction resulting in the new transaction being a 
higher-priced mortgage loan under Sec.  226.35(a), then the creditor 
must provide new disclosures and also must comply with the requirements 
under Sec.  226.35(b).

Section 226.38 Content of Disclosures for Closed-End Mortgages

38(a) Loan Summary
38(a)(5) Prepayment Penalty
    The August 2009 Closed-End Proposal would create a new Sec.  226.38 
governing disclosure content for mortgage transactions. (Current Sec.  
226.18 would provide disclosure content for non-mortgage transactions.) 
For the same reasons discussed above under Sec.  226.18(k)(1), this 
proposal would revise proposed comment 38(a)(5)-2 to parallel proposed 
comment 18(k)(1)-1.
38(h) Required or Voluntary Credit Insurance, Debt Cancellation 
Coverage, or Debt Suspension Coverage
    In the August 2009 Closed-End Proposal, the disclosures for credit 
insurance, debt cancellation coverage, or debt suspension coverage 
required under Sec.  226.4(d)(1) and (d)(3) were also listed in 
proposed Sec.  226.38(h). The Board proposes to consolidate the list of 
these disclosures in Sec.  226.4(d)(1) and (d)(3), and provide a cross-
reference to the required disclosures in Sec.  226.38(h). Associated 
commentary would be revised accordingly.
    The August 2009 Closed-End Proposal would require creditors to make 
a determination at the time of enrollment that the consumer meets any 
applicable age or employment eligibility criteria for insurance or debt 
cancellation or debt suspension coverage. See proposed Sec. Sec.  
226.4(d)(1)(iv) and (d)(3)(v), 226.38(h). To provide creditors with 
some flexibility, the Board proposes to revise comment 38(h)-2 to allow 
creditors to make the determination prior to or at the time of 
enrollment.
38(k) Reverse-mortgage Transactions
    Currently reverse-mortgage transactions that are structured as 
closed-end credit are subject to Sec. Sec.  226.17 and 18. Under the 
Board's August 2009 Closed-End Proposal, disclosures for closed-end 
mortgages would move to new Sec. Sec.  226.37 and 226.38. For closed-
end reverse mortgages, the Board is proposing to consolidate the 
content of the disclosure requirements in Sec.  226.33. However, under 
the August 2009 Closed-End Proposal there would be a number of other 
references in Regulation Z to mortgages subject to Sec.  226.38, which 
include closed-end reverse mortgages. In order to make clear that 
closed-end reverse-mortgage transactions should still be included in 
any reference to Sec.  226.38, the Board proposes to mention them 
explicitly in Sec.  226.38(k) and provide a cross-reference to the 
provisions in Sec.  226.33 and Sec.  226.38 which apply to reverse 
mortgages.

Section 226.40 Prohibited Acts or Practices in Connection With Reverse 
Mortgages

    In addition to the disclosure and advertising rules discussed above 
under Sec.  226.33, the Board is proposing additional consumer 
protections for reverse mortgages. As discussed below, the proposal 
would prohibit requiring the consumer to purchase other financial or 
insurance products as a condition of obtaining the reverse mortgage and 
would require counseling for reverse mortgage consumers. The Board also 
considered other consumer protections, discussed below, that it is not 
proposing.
40(a) Requiring the Purchase of Other Financial or Insurance Products
Background
    Consumer advocates and policy makers have raised concerns that 
reverse mortgage creditors and others may persuade consumers to use the 
proceeds of their reverse mortgages to purchase financial or other 
products unsuited to their circumstances. Based on discussions with 
industry representatives and consumer advocates, the Board understands 
that reverse mortgage originators often refer reverse mortgage 
consumers to third parties that offer the consumers other products or 
services. Some of these creditors or others affirmatively require the 
consumer to purchase another financial product to obtain the reverse 
mortgage. Some consumer advocates have stated that more unscrupulous 
creditors have allegedly ``tied'' other products to the reverse 
mortgage by covertly slipping authorization documents for them in with 
the reverse mortgage paperwork.\133\
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    \133\ See, e.g., Building Sustainable Homeownership: Responsible 
Lending and Informed Consumer Choice, Public Hearing on the Home 
Equity Lending Market before the Federal Reserve Bank of San 
Francisco, 183 (2006) (Statement by Shirley Krohn, Board Chair, Fair 
Lending Consortium).
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    Providers of other financial and insurance products may receive 
commissions, and those who refer consumers to these providers may 
receive referral fees, creating strong incentives to encourage reverse 
mortgage consumers to purchase additional products regardless of 
whether they are appropriate.\134\ When financed by reverse mortgage 
proceeds, these commissions and fees can deplete home equity, often 
without the consumer's full awareness of these charges and their long-
term consequences.
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    \134\ See, e.g., id. (statement by Margaret Burns, Director of 
the Federal Housing Administration's Single Family Program 
Development, U.S. Department of Housing and Urban Development); 
Nat'l Consumer Law Center, Subprime Revisited: How Reverse Mortgage 
Lenders Put Older Homeowners' Equity at Risk, 14 (Oct. 2009) (NCLC 
Report).
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    Products often cited as being required as part of a reverse 
mortgage transaction

[[Page 58664]]

include annuities,\135\ certificates of deposit (CDs) and long-term 
care insurance, among others. These may be beneficial products for many 
consumers and an appropriate way to spend reverse mortgage funds; 
however, purchase of these and other products may harm consumers who 
are uninformed or misinformed about them.
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    \135\ In this Supplementary Information, an ``annuity'' means a 
contractual arrangement under which an insurance or financial entity 
receives a premium or premiums from a consumer, and in exchange is 
obligated to make payments to the consumer at some point in the 
future, usually at regular intervals. See 4 Am. Jur. 2d Annuities, 
Sec.  1.
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    Consumers who purchase an annuity, for example, normally cannot 
receive payments until a future date; some reverse mortgage consumers 
have reportedly been sold annuities scheduled to mature after their 
life expectancy.\136\ Further, an annuity may yield at a lower rate of 
interest than the reverse mortgage used to pay for it, causing a 
borrower to lose more in home equity than he or she could gain in 
annuity profits. Reverse mortgage borrowers who become aware of these 
drawbacks face high fees for early withdrawal or cancellation of the 
annuity.
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    \136\ See, e.g., Reverse Mortgages: Polishing not Tarnishing the 
Golden Years, Hearings before the Senate Special Committee on Aging, 
110th Cong., 1st Sess. 22 (2007) (statement by Prescott Cole, on 
behalf of the Coalition to End Elder Financial Abuse).
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    Similarly, a CD may have a lower rate of interest than the reverse 
mortgage, tying up the consumer's money without yielding a greater 
return than the corresponding loss of home equity. Should the consumer 
need the funds before expiration of the CD term, high early withdrawal 
penalties may apply.
    Long-term care insurance may be unnecessary, such as where the 
long-term care insurance coverage is not appreciably better than 
Medicaid coverage. Other consumers may not be able to afford the 
premiums if they go up, resulting in the loss of all of their reverse 
mortgage and other funds used to pay upfront costs and premiums. 
Further, a particular plan may not cover what the consumer needs, or 
policies may have terms or limitations that make receiving money for a 
claim difficult.
Housing and Economic Recovery Act of 2008 (HERA)
    To address concerns about inappropriate product tying in reverse 
mortgage transactions, in 2008 Congress adopted three rules restricting 
the sale of other products and services with an FHA-insured reverse 
mortgage, or HECM. Adopted as part of the Housing and Economic Recovery 
Act of 2008 (HERA),\137\ these rules apply only to HECMs; they do not 
affect proprietary reverse mortgage products.
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    \137\ Housing and Economic Recovery Act of 2008 (HERA), Public 
Law 110-289 (July 30, 2008), Sec.  2122 (amending Section 255 of the 
National Housing Act, 12 U.S.C. 1715z-20).
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     Anti-tying Provision: First, Congress prohibited the 
lender (or any other party) from requiring a borrower (or any other 
party) to purchase ``an insurance, annuity, or other similar product'' 
as a condition of obtaining a HECM.\138\ Products exempt from this 
prohibition include title insurance, hazard, flood, or other peril 
insurance, or other products determined by HUD to be ``customary and 
normal'' for originating a HECM.
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    \138\ HERA, Sec.  2122(a)(9) (codified at 12 U.S.C. 1715z-20(n) 
and (o)).
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     Provision Restricting Activities: Second, Congress 
prohibited the lender and ``any other party that participates in the 
origination of a [reverse] mortgage'' from ``participat[ing] in'' any 
financial or insurance activity other than reverse mortgage lending. 
These parties may do so, however, if they have ``firewalls and other 
safeguards'' to ensure the following:
     Individuals involved in originating a reverse mortgage are 
not involved with any other financial or insurance product and have no 
incentive to see that the reverse mortgage consumer obtains one.
     The consumer will not be directly or indirectly required 
to purchase another financial or insurance product.
     Provision Restricting Relationships: Third, Congress 
prohibited reverse mortgage lenders and ``any other party that 
participates in the origination of a [reverse] mortgage'' from being 
``associated with'' or ``employing'' any party that participates in or 
is involved with any financial or insurance activity other than reverse 
mortgage lending. These relationships are permitted, however, if the 
party maintains the firewalls and safeguards described above.
HUD--Implementing the HERA Cross-selling Provisions
    As an initial step in implementing the HERA cross-selling 
provisions, HUD has issued a Mortgagee Letter instructing HECM lenders 
that they must not condition a HECM on the purchase of ``any other 
financial or insurance product.'' \139\ Consistent with HERA, the 
Mortgagee Letter also advises lenders to establish firewalls and other 
safeguards to ensure that there is no undue pressure or appearance of 
pressure for a HECM borrower to purchase another product from the 
mortgage originator or mortgage originator's company. The Board 
understands that HUD plans to issue an Advance Notice of Proposed 
Rulemaking (ANPR) to solicit input on how HUD should interpret the HERA 
cross-selling provisions.
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    \139\ HUD Mortgagee Letter 2008-24 (Sept. 16, 2008).
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Federal Anti-Tying Laws
    Banks and other depository institutions are subject to anti-tying 
rules under the Bank Holding Company Act \140\ (BHCA) and the Gramm-
Leach Bliley Act \141\ (GLBA).
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    \140\ Public Law 91-607, Title I, Sec.  106(b), 84 Stat. 1766 
(Dec. 31, 1970) (codified at 12 U.S.C. Sec. Sec.  1972 (banks and 
bank holding companies), 1464(q) (savings and loan associations), 
and 1467a(n) (savings and loan association holding companies and 
their affiliates)).
    \141\ Public Law 106-102, Title III, Subtitle A, Sec.  305, 113 
Stat. 1338, 1410-15 (Nov. 12, 1999) (codified at 12 U.S.C. 1831x) 
(implemented at 12 CFR 14.30 (Office of the Comptroller of the 
Currency), 208.83 (Board of Governors of the Federal Reserve 
System), 343.30 (Federal Deposit Insurance Corp.), and 536.30 
(Office of Thrift Supervision)).
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    Bank Holding Company Act amendments. Section 106 of the BHCA 
generally prohibits a bank from conditioning the availability or price 
of one product, such as a reverse mortgage, on a requirement that the 
customer also obtain another product, such as insurance or an annuity, 
from the bank or an affiliate of the bank. However, the statute 
expressly permits a bank to condition the availability or price of a 
product or service on a requirement that the customer also obtain 
certain bank products--loan discount, deposit, or trust services--from 
the bank or an affiliate of the bank. Savings associations and savings 
and loan association holding companies and their affiliates are subject 
to similar anti-tying restrictions under the Home Owners' Loan Act 
(HOLA).\142\
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    \142\ See 12 U.S.C. 1464(1) and 1467a(n).
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    Gramm-Leach Bliley Act. Section 305 of the GLBA requires the 
Federal banking agencies to prescribe regulations that prohibit 
depository institutions from engaging in practices that would cause a 
reasonable consumer to believe that an extension of credit (which would 
include a reverse mortgage) is conditioned on the purchase of an 
insurance product or an annuity from the creditor or its affiliates, or 
on the consumer's agreement not to purchase an insurance product or 
annuity from an unaffiliated entity.
    Interagency Supervisory Guidance on Reverse Mortgages. The Board 
and other Federal banking agencies, through the FFIEC, responded to 
concerns about unfair and deceptive practices in reverse mortgage 
lending by issuing guidance

[[Page 58665]]

for institutions offering reverse mortgages.\143\ To guard against 
inappropriate product tying with reverse mortgages, the Final Reverse 
Mortgage Guidance advises institutions to adopt policies and internal 
controls that do the following:
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    \143\ Final Reverse Mortgage Guidance, 75 FR 50801.
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     Ensure that the institution does not violate any 
applicable anti-tying restrictions. To illustrate, the Guidance states 
that an institution risks violations if it requires the borrower to 
purchase an annuity, insurance or any product other than a traditional 
banking product in order to obtain a reverse mortgage from the 
institution or an affiliate.
     Ensure that the institution complies with restrictions 
designed to avoid conflicts of interest. To illustrate, the Guidance 
states that an institution risks violations if it requires the borrower 
to purchase an annuity, insurance (other than appropriate title, flood 
or hazard insurance), or similar financial product from the institution 
or any third party in order to obtain a reverse mortgage from the 
institution or broker.\144\
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    \144\ Id. at 50811
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    The Guidance also advises institutions to adopt compensation 
policies to guard generally against ``other inappropriate incentives'' 
for loan officers and third parties, such as mortgage brokers and 
correspondents, to make a loan.\145\
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    \145\ Id.
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The Board's Proposal
    The anti-tying provisions of the BHCA, GLBA and HERA apply to some 
reverse mortgages, but not all. The Board believes that anti-tying 
rules specific to reverse mortgages may be appropriate to ensure that 
all reverse mortgage originations are covered--including both 
government-insured reverse mortgages and proprietary products, as well 
as reverse mortgages originated by both depository and nondepository 
institutions. For the reasons discussed below, the Board believes that 
the practice of requiring a consumer to purchase any other ``financial 
or insurance product'' as a condition of obtaining a reverse mortgage 
could be unfair to consumers. Based on its authority under TILA Section 
129(l)(2)(A) to prohibit acts or practices in mortgage lending that the 
Board finds to be unfair or deceptive, the Board proposes new Sec.  
226.40(a) to prohibit creditors and loan originators from engaging in 
this practice. The Board does not intend to suggest that this practice 
is unfair prior to the effective date of any final rule implementing 
this proposed prohibition. Prior to the effective date of a final rule, 
the Board expects that whether this practice is unfair will be judged 
on a case-by-case basis and on the totality of the circumstances under 
applicable laws and regulations.
    Substantial consumer injury. Consumers who are required to use 
reverse mortgage proceeds to purchase ancillary financial or insurance 
products stand to lose substantial equity in their most valuable 
lifetime asset for little or no benefit. This can take away their 
ability to cover daily living expenses, medical costs and other needed 
expenses at a time when their income sources are most limited. In 
addition, for many seniors, their longtime goal of having assets to 
share with their heirs can be significantly undermined, affecting their 
heirs' financial circumstances as well. Worse, misuse of reverse 
mortgage funds may leave borrowers unable to afford taxes and insurance 
or home maintenance required under the reverse mortgage contract, 
exposing them to foreclosure at an especially vulnerable time in their 
lives.
    Injury not reasonably avoidable. For several reasons, reverse 
mortgage consumers may not be reasonably able to avoid the injuries 
that may result from having to use their reverse mortgage funds for an 
ancillary product, or from having to obtain a substantially more 
expensive reverse mortgage if they do not purchase an additional 
product. First, reverse mortgage borrowers often have limited options 
for obtaining additional funds; for some, a reverse mortgage may be the 
resource of last resort. Faced with high medical expenses or other 
financial challenges, these consumers may be forced to accept a 
requirement that they use reverse mortgage funds to purchase another 
product, even if they question its necessity or benefits, or to accept 
a substantially more expensive loan that will diminish their home 
equity much more quickly.
    Second, reverse mortgages are complex loan products whose 
requirements and characteristics tend to be unfamiliar even to the most 
sophisticated consumers. Thus, many consumers may be easily misled or 
confused about the costs of other products and services and the 
potential downsides to using their home equity to pay for them.
    Third, other consumer protections may not, by themselves, 
sufficiently protect reverse mortgage consumers from inappropriate 
product tying because reverse mortgages are especially complex and the 
target consumer population--seniors--is comparatively vulnerable. For 
example, the disclosure required in proposed Sec.  226.33(b) that the 
consumer is not obligated to use his or her reverse mortgage proceeds 
to purchase any other financial or insurance product or service is an 
important consumer protection but may not by itself protect all 
consumers from persuasive loan officers and brokers, who may pressure 
consumers to rush through paperwork. In addition, the proposed anti-
tying rule and the disclosure rule are complementary: the anti-tying 
rule is necessary to make the disclosure true.
    Similarly, reverse mortgage counseling, required under proposed 
Sec.  226.40(b), is critical to a consumer's understanding of a reverse 
mortgage but may not sufficiently protect consumers from inappropriate 
product tying. Counselors are not trained to advise consumers about the 
suitability of a range of financial or insurance products and services, 
and recent data indicate that the effectiveness of counseling may not 
be consistent from borrower to borrower.\146\
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    \146\ U.S. Government Accountability Office, GAO-09-606 at 32-
40.
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    Injury not outweighed by countervailing benefits. On balance, 
potential benefits of tying other products to a reverse mortgage do not 
appear to outweigh the substantial harm that could be caused, as 
described above. The Board recognizes that requiring a consumer to pay 
for certain additional financial products to obtain a reverse mortgage 
or certain terms may benefit some consumers. For instance, if a 
consumer opts to receive reverse mortgage proceeds in a lump sum to 
take advantage of a fixed rate, the consumer may benefit from putting 
the funds in a CD rather than a savings account. However, consumers 
could still enjoy this benefit by voluntarily choosing this option. The 
proposed anti-tying prohibition prohibits the consumer from being 
required to put the money in a CD, because the consumer would incur 
penalties for early withdrawal.
    Benefits to competition also do not appear to outweigh injury to 
the consumer. Indeed, it has long been recognized that tying 
arrangements suppress competition.\147\ The function of a tying 
arrangement is generally to market a product that is critical or 
desirable to a consumer (the reverse mortgage) and tie access to that 
product to the purchase of a less critical or

[[Page 58666]]

desirable product (the ancillary financial or insurance product).\148\ 
Product tying by definition creates an obstacle to a consumer's ability 
to survey the available alternatives and choose the most advantageous 
product. In an ideal marketplace, if a consumer wants certain financial 
products, the consumer could weigh the costs, benefits, and risks of 
several alternatives, such as various insurance products. In a tying 
arrangement, however, the creditor chooses a product for the consumer 
regardless of the benefits for that consumer. By contrast, if consumers 
are permitted to choose ancillary products freely, as the proposed rule 
seeks to promote, competition would likely increase and costs would 
concomitantly go down.
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    \147\ See Standard Oil Co. of Cal. v. United States, 337 U.S. 
293, 305-06 (1949) (noting that tying arrangements ``serve hardly 
any purpose other than to suppress competition'').
    \148\ See Times-Picayune Publishing Co. v. United States, 345 
U.S. 594, 614 (1953) (``The common core of * * * unlawful tying 
arrangements is the forced purchase of a second distinct commodity 
with the desired purchase of a dominant `tying' product.'').
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    The Board requests comment on whether the proposed anti-tying rule 
addresses the practices of greatest concern and prevalence regarding 
product tying in reverse mortgage transactions. In this regard, the 
Board invites additional examples of inappropriate product tying in 
reverse mortgage transactions, as well as commenters' views on the 
potential effectiveness of the proposal in stopping these practices. 
Specific aspects of the proposed prohibition are discussed below.
    Covered Persons. The proposed anti-tying rule would apply to a 
creditor or a loan originator, as defined in Sec.  226.36(a)(1). 
Regulation Z defines ``creditor'' to mean, in pertinent part, ``A 
person (A) who regularly extends consumer credit that is subject to a 
finance charge * * *, and (B) to whom the obligation is initially 
payable, either on the face of the note or contract, or by agreement 
when there is no note or contract.'' Sec.  226.2(a)(17)(i). Under the 
Board's August 2009 Closed-End Proposal, a ``loan originator'' would be 
defined as, ``with respect to a particular transaction, a person who 
for compensation or other monetary gain, arranges, negotiates, or 
otherwise obtains an extension of consumer credit for another person. 
The term `loan originator' includes employees of the creditor. The term 
includes the creditor if the creditor does not provide the funds for 
the transaction at consummation out of the creditor's own resources, 
out of deposits held by the creditor, or by drawing on a bona fide 
warehouse line of credit.'' Proposed Sec.  226.36(a)(1); 74 FR 43232, 
43331-43332, Aug. 29, 2009. This definition was adopted by the Board in 
a final rule published elsewhere in today's Federal Register. The Board 
requests comment on the proposal to apply this rule to creditors and 
loan originators, including whether the proposed anti-tying rule should 
apply to any other persons.
40(a)(1) Financial or Insurance Products
Excluded Products and Services
    Proposed Sec.  226.40(a)(1) excludes from the meaning of 
``financial or insurance product'' two types of products and services: 
(1) transaction accounts and savings deposit accounts, as defined in 
Regulation D, 12 CFR part 204, that are established to disburse the 
reverse mortgage proceeds; and (2) products and services customarily 
required to protect the creditor's interest in the collateral or 
otherwise mitigate the creditor's risk of loss.
    Transaction accounts and savings deposits. With the first 
exemption--transaction accounts and savings deposits, as defined in 
Regulation D, that are established to disburse reverse mortgage 
proceeds--the Board seeks to facilitate the disbursement of reverse 
mortgage proceeds to the consumer. The Board understands based on 
outreach that a consumer may be able to access their reverse mortgage 
funds more readily if they are deposited in an account with the 
creditor or loan originator. Under Regulation D, a ``transaction 
account'' includes demand deposit accounts such as traditional checking 
accounts and NOW accounts.\149\ A ``savings deposit'' includes 
traditional interest-bearing savings accounts, passbook savings 
accounts and money market accounts.\150\ The Board does not propose to 
limit the consumer's use of these accounts only to transactions 
involving proceeds of the reverse mortgage. However, the Board proposes 
to permit that these accounts be required only if they will serve as a 
means of disbursing reverse mortgage proceeds. Neither ``transaction 
accounts'' nor ``savings deposits'' under Regulation Z include ``time 
deposit'' accounts. As indicated in proposed comment 40(a)(1)-1, the 
Board intends to prohibit the tying of time deposit accounts, which 
include CDs and other accounts to which penalties for early withdrawal 
may apply, to a reverse mortgage.
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    \149\ See 12 CFR 204.2(e).
    \150\ See id. 204.2(d).
---------------------------------------------------------------------------

    The Board requests comment on the necessity of the exemption for 
transaction and savings deposit accounts from the products that cannot 
be tied to a reverse mortgage, and solicits views on whether this 
exemption should include a broader or narrower range of accounts.
    Products and services customarily required in connection with a 
reverse mortgage. The Board also proposes to exempt products and 
services that creditors or loan originators ``customarily'' require in 
a reverse mortgage transaction to safeguard their interest in the 
collateral or otherwise guard against loss. Proposed comment 40(a)(1)-2 
explains that these products would include, among others, ``appraisal 
or other property evaluation services; title insurance; flood, hazard 
or other peril insurance; and mortgage insurance, such as the insurance 
required by the U.S. Department of Housing and Urban Development.'' The 
Board believes that this exemption is necessary to facilitate the 
availability of credit to consumers and to promote the safety and 
soundness of lending institutions. Comment is requested on the 
appropriateness of this exemption, and the utility of the examples of 
exempt products and services in the proposed comment.
Covered Products and Services
    Proposed comment 40(a)(1)-1 clarifies that the ``financial or 
insurance products,'' namely, products and services that may not be 
tied to a reverse mortgage, include both bank and nonbank products. The 
comment provides the following examples of covered products and 
services: extensions of credit, trust services, certificates of 
deposit, annuities, securities and other nondepository investment 
products, financial planning services, life insurance, long-term care 
insurance, credit insurance, and debt cancellation and debt suspension 
coverage.
    Unlike the proposal for reverse mortgages, the BHCA anti-tying 
provision specifically permits a bank to condition both the 
availability and price of credit on the requirement that the customer 
obtain a product traditionally provided by a bank, specifically, a 
``loan, discount, deposit, or trust service.'' \151\ These ``bank'' 
products include, but are not limited to, all types of extensions of 
credit, including loans, lines of credit, and backup lines of credit, 
and all forms of deposit accounts, including demand, negotiable order 
of withdrawal (``NOW''), savings and time deposit accounts, as well as 
CDs.
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    \151\ 12 U.S.C. 1972(1)(A).
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    With the exception of certain deposit accounts, discussed below, 
the Board proposes to include these types of bank products in the 
proposed anti-tying rule for reverse mortgages for three reasons.

[[Page 58667]]

First, any number of traditional bank products could be inappropriate 
for a reverse mortgage consumer to purchase in connection with 
obtaining the reverse mortgage. As noted, one example would be a CD 
that yields at a lower rate than the rate of interest accruing on the 
reverse mortgage. Thus, the proposal is intended to enhance consumer 
protection by covering a fuller range of potential abuses.
    Second, as discussed earlier, the Board believes that reverse 
mortgage borrowers are particularly vulnerable to abusive product tying 
and need stronger protections than those that apply to other financial 
service consumers. The proposal is intended to give reverse mortgage 
borrowers added protections without diminishing their access to 
appropriate traditional bank products, such as a checking or savings 
account to facilitate receipt of funds; reverse mortgage consumers 
would retain the freedom to choose any product voluntarily.
    Third, an exemption for bank products would unfairly favor 
depositories over nondepositories. Unlike the BHCA's anti-tying rule, 
which applies only to depository institutions, the Board's proposed 
rule would apply to both depositories and nondepositories. The 
rationale for the traditional bank product exception under the BHCA 
anti-tying rule--namely, to allow banks and their customers to continue 
to negotiate their fee arrangements on the basis of the customer's 
entire banking relationship with the bank--would not apply to 
nondepositories. In effect, depositories would have greater leverage to 
reduce rates and fees on reverse mortgages than nondepositories because 
they could package a wider range of products with the reverse mortgage.
    Proposed comment 40(a)(1)-1 also specifically mentions certain 
products that the Board has learned through research and outreach may 
be especially problematic in reverse mortgage transactions. These 
include annuities, financial planning services, and long-term care 
insurance. Credit insurance and debt cancellation and debt suspension 
coverage are mentioned to clarify that they would be covered as well, 
even though they may not be common in reverse mortgage transactions.
Other Products and Services
    As proposed, the reverse mortgage anti-tying rule would not 
prohibit conditioning a reverse mortgage on the consumer's obtaining 
home improvement services, because home repairs may legitimately be 
required before a consumer is eligible for a reverse mortgage.\152\ The 
Board received anecdotal evidence, however, that reverse mortgage 
originators may require consumers to obtain unnecessary or excessively 
costly home repairs. The Board requests additional evidence of abuse in 
home improvement contracting associated with reverse mortgages, if any, 
and comments on whether and how Board rules should address potential 
abuse in this area without interfering with legitimately required 
repairs.
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    \152\ See, e.g., 24 CFR 206.47 (requiring properties that do not 
meet the property standards of the HECM program to be repaired 
before FHA will insure reverse mortgages secured by those 
properties).
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    The Board requests comment on benefits or drawbacks of its proposed 
explanations of ``financial or insurance product,'' as well as whether 
any additional products should be expressly included in or exempted 
from the tying restrictions.
40(a)(2) Safe Harbor
    The Board is aware that whether a creditor has required a consumer 
to purchase another product to obtain a reverse mortgage in violation 
of Sec.  226.40(a) may not always be clear. For this reason, the Board 
proposes in Sec.  226.40(a)(2) a ``safe harbor'' for compliance with 
the anti-tying rule. The proposed paragraph provides that a creditor or 
other person will not be deemed to have required a consumer to purchase 
another financial or insurance product if two conditions are met.
    First, the consumer received at application the ``Key Questions to 
Ask about Your Reverse Mortgage'' document required under proposed 
Sec.  226.33(b), or a substantially similar document. As proposed by 
the Board, this document includes a statement that the consumer is not 
obligated to purchase any other financial or insurance product to 
obtain the reverse mortgage, along with explanatory information.
    Second, for a reverse mortgage subject to Sec.  226.5b, the account 
was opened, or, for any other reverse mortgage, the loan was 
consummated, at least 10 calendar days before the consumer becomes 
obligated to purchase any financial or insurance product from any of 
the following persons:
    (1) The creditor;
    (2) The loan originator;
    (3) An affiliate of either the creditor or loan originator; or
    (4) Any other party, if the creditor, loan originator, or an 
affiliate of either will receive compensation for the purchase of the 
ancillary product or service.
    Comment 40(a)(2)-1 safe harbor conditions not met. Proposed comment 
40(a)(2)-1 clarifies that where the safe harbor conditions are not met 
in a particular reverse mortgage transaction, the creditor or loan 
originator will not necessarily have violated the anti-tying rule in 
Sec.  226.40(a). Whether a violation has occurred in this case will 
depend on an evaluation of all of the facts and circumstances. To 
provide additional guidance, however, the Board proposes an example of 
an instance in which the safe harbor conditions were not met and the 
creditor violated Sec.  226.40(a). In this example, the terms or 
features of a reverse mortgage are not available unless the consumer 
purchases another financial or insurance product; in this situation, 
the Board believes that the consumer has been required to purchase the 
product to obtain the reverse mortgage.
    The Board solicits comment on the example of an anti-tying 
violation where the creditor did not meet the safe harbor conditions.
``Key Questions'' Document
    The first condition of the safe harbor--that the consumer has 
received the ``Key Questions to Ask about Your Reverse Mortgage''--is 
intended to promote the consumer's understanding that he or she is not 
obligated to purchase an additional financial or insurance product. As 
proposed by the Board, this two-page document includes the following 
information for the consumer:
    What if my lender wants me to use money from my reverse mortgage to 
buy an annuity or make another investment?
    Under Federal law, you cannot be required to use your reverse 
mortgage money to purchase any other financial or insurance product 
(such as an annuity, long-term care insurance, or life insurance). If 
another product is offered to you, make sure you understand: (1) how 
the product works and what its benefits are, (2) how much it costs, (3) 
whether you need it, and (4) how much money the person selling the 
product makes if you purchase it. Talk with a HUD-approved reverse 
mortgage counselor or financial advisor before you decide.
    See Attachment A. To qualify for the safe harbor, the creditor or 
loan originator must have provided this disclosure on or with the 
application, as required under proposed Sec.  226.33(b).
10-Calendar-Day Waiting Period
    The Board believes that the ``Key Questions'' document is an 
important

[[Page 58668]]

consumer safeguard but is concerned that by itself the document may not 
sufficiently protect all consumers from high-pressure sales tactics. 
Therefore, the Board proposes a second element of the safe harbor--
requiring a 10-day waiting period after account-opening or 
consummation, as applicable, before the consumer becomes obligated to 
purchase another financial or insurance product from one of four 
parties: the creditor; the loan originator; an affiliate of either the 
creditor or loan originator; and any other person, if the creditor, 
loan originator, or an affiliate of either will receive compensation 
for the purchase.
    This element of the proposed safe harbor is intended to create an 
operational barrier to requiring the purchase of an additional product 
as a condition of providing a reverse mortgage. In the Board's view, a 
purchase several days after reverse mortgage funds are available to a 
consumer is more likely to be voluntary than a purchase closer in time 
to consummation or account opening of a reverse mortgage. Consumers 
will be more adequately prepared to make decisions about purchasing 
additional products when they have several days after consummation or 
account opening to consider whether to enter into a reverse mortgage 
and also to purchase another financial or insurance product. A reverse 
mortgage, as any other home mortgage, is a major financial undertaking 
requiring the consumer to contemplate considerable details, review 
voluminous paperwork, and make numerous decisions at and around the 
time of closing. But reverse mortgages are particularly complex loan 
products that carry special risks; consumers need ample time before and 
after the transaction to understand them.
    The proposal may also have the effect of curtailing instances of 
consumers believing (or being led to believe) that the purchase of 
another product is required to complete the reverse mortgage 
transaction when it is not. In rescindable transactions, for example, 
proceeds typically may not be disbursed until after the consumer's 
right to rescind has expired, which is three business days after 
account-opening or consummation. Thus, if a consumer consummates the 
reverse mortgage on Monday, June 1, the consumer typically would have 
access to the reverse mortgage funds on Friday, June 5 (i.e., the day 
after the consumer's right to rescind has expired). The 10-day waiting 
period would extend until Thursday, June 11, however. The condition 
that the reverse mortgage transaction and the purchase of another 
product be separated by 10 days ensures that consumers are less 
susceptible to high-pressure sales tactics that might occur at or 
immediately after consummation or account opening, but before funds are 
available. Finally, the proposal has the added consumer benefit of 
giving consumers a ``cooling off'' period of several days after reverse 
mortgage funds are available to consider whether using that money to 
buy another financial or insurance product is a sound financial choice.
    Comment 40(a)(2)(B)-1 obligated to purchase. Proposed comment 
40(a)(2)(ii)-1 states that whether a consumer has become obligated to 
purchase a financial or insurance product will be a factual inquiry. 
This comment provides guidance on when a consumer becomes obligated to 
purchase a product through two examples. First, a consumer would become 
obligated to purchase a financial or insurance product, for example, 
when the consumer signs an agreement to purchase the product, even if 
the purchase will occur in the future. Second, a consumer would also 
become obligated to purchase a product when the consumer signs an 
agreement to purchase a product but has the option to cancel the 
purchase for a period of time after the purchase occurs. Finally, 
proposed comment 40(a)(2)(ii)-1 provides the following example to 
explain the effect of the 10-calendar-day waiting period: If a consumer 
consummates a reverse mortgage on Monday, June 1, the creditor will 
qualify for the safe harbor only if the consumer does not sign an 
agreement to purchase another financial or insurance product from the 
parties enumerated in this paragraph until Thursday, June 11, at the 
earliest.
    The Board requests comment on the utility and appropriateness of 
the guidance in the proposed commentary regarding when a reverse 
mortgage consumer becomes obligated to purchase another financial or 
insurance product. The Board solicits comment on whether and what 
additional examples may be warranted.
Persons From Whom the Consumer may not Purchase a Product
    Creditor, loan originator, or affiliate of either. The proposed 
safe harbor waiting period is intended to eliminate incentives for the 
creditor or loan originator to require a consumer to purchase another 
product or service to obtain the reverse mortgage. Thus, the persons 
from whom a consumer cannot have purchased another product or service 
within 10 days of consummation are the creditor, loan originator, and 
any affiliate of either. See proposed Sec.  226.40(a)(2)(ii)(A)-(C). 
The Board believes that a product purchased from one of these parties 
would confer a financial benefit on the creditor or loan originator 
that may give the creditor or loan originator an incentive to require 
the purchase.
    Nonaffiliated third party. The safe harbor would also prohibit, 
within the 10-calendar-day waiting period, the consumer's purchase of a 
product or service from a nonaffiliated third party if the creditor or 
loan originator, or an affiliate of either, would receive compensation 
for the purchase. Proposed comment 40(a)(2)(ii)(D)-1 is intended to 
clarify that compensation would be considered to be received by a 
creditor, loan originator, or an affiliate of either with respect to a 
particular purchase, if any of these parties receives a fee because the 
consumer purchased the ancillary product.
    For further guidance, this comment also gives an example of a 
situation in which a creditor would not be deemed to have received 
compensation for a consumer's purchase of an ancillary product. 
Specifically, the comment states that a creditor does not receive 
compensation for a consumer's purchase of an ancillary product if the 
creditor sells a customer list to a nonaffiliated third party, which, 
in turn, sells a financial or insurance product to a reverse mortgage 
consumer on the list within the 10-day waiting period, as long as the 
creditor receives no compensation directly or indirectly related to 
whether the consumer purchases the product. The Board intends with this 
example to clarify that the safe harbor does not prohibit practices 
that may result in compensation to the creditor, loan originator, or 
affiliate, when the compensation received would be too attenuated from 
the purchase of the ancillary product to create a realistic incentive 
for the creditor or loan originator to engage in prohibited product 
tying.
    The Board requests comment on the appropriateness and efficacy of 
the proposed safe harbor and accompanying commentary for addressing the 
problem of inappropriate product tying in reverse mortgage 
transactions.
Disbursements Directly to the Consumer
    The HECM rules require that reverse mortgage proceeds must be 
disbursed directly to the consumer ``at the initial disbursement or 
after closing (upon expiration of the 3-day rescission period under 12 
CFR part 226, if applicable),'' except for certain payments related to

[[Page 58669]]

the mortgage transaction. The following disbursements are excepted from 
the requirement to disburse HECM proceeds directly to the consumer: (1) 
Disbursements to a relative or legal representative of the mortgagor, 
or a trustee for the benefit of the mortgagor; (2) disbursements for 
the initial mortgage insurance premium required for the HECM; (3) fees 
that the mortgagee is authorized to collect under the HECM rules; (4) 
amounts required to discharge any existing liens on the property; (5) 
annuity premiums if disclosed as part of the TALC disclosure required 
in current Sec.  226.33; and (6) funds required to pay contractors who 
performed repairs as a condition of closing, in accordance with 
standard FHA requirements for repairs required by appraisers.\153\
---------------------------------------------------------------------------

    \153\ See 24 CFR 206.29.
---------------------------------------------------------------------------

    The Board believes that the proposed disclosure requirement and 10-
day waiting period to qualify for the ``safe harbor'' will sufficiently 
protect consumers from harmful product tying in reverse mortgage 
transactions; thus, the Board does propose to require that reverse 
mortgage proceeds be disbursed only to the consumer. The Board is also 
concerned that the term ``initial'' disbursement may be difficult to 
define clearly, especially in open-end reverse mortgage transactions 
where the consumer might not draw on the line until well after account 
opening. A rule covering disbursements beyond those occurring at or 
immediately after account opening, however, may be overly broad. For 
example, requiring that proceeds be disbursed directly to the consumer 
one year after account opening would be unnecessary to stop the 
creditor from requiring the consumer to purchase another product as a 
condition of obtaining the reverse mortgage; the consumer would already 
have the reverse mortgage.
    The Board requests comment on whether the Board should adopt 
disbursement restrictions similar to those that apply to HECMs for 
proprietary reverse mortgages, including specific reasons why 
commenters believe that the Board should or should not do so.
40(b) Counseling
    The Board is concerned that consumers seeking reverse mortgages may 
not be sufficiently aware of the risks, obligations, and financial 
implications of reverse mortgages solely through disclosures provided 
during the origination process. The Board's consumer testing of reverse 
mortgage disclosures revealed that even more sophisticated consumers do 
not readily understand how reverse mortgages work and their impact on a 
consumer's financial future. As discussed above in the section-by-
section analysis to proposed Sec.  226.33(a)-(d), the Board proposes 
comprehensive revisions to TILA's reverse mortgage disclosures, which 
the Board anticipates will significantly improve consumer understanding 
of these complex transactions. As discussed further below, however, the 
Board believes that the complexity of and risks associated with reverse 
mortgages warrant added consumer protections, including a requirement 
that counseling occur before the consumer obtains a reverse mortgage 
and at least three business days before a consumer has to pay a 
nonrefundable fee in connection with a reverse mortgage transaction 
(except a fee for the counseling).
Background
    Prospective borrowers must receive counseling before obtaining a 
HECM.\154\ In addition, several states have enacted reverse mortgage 
counseling rules.\155\ Federal law does not require prospective 
borrowers of proprietary reverse mortgages to obtain counseling.
---------------------------------------------------------------------------

    \154\ See 12 U.S.C. 1715z-20(d)(2)(B) and (f); HECM Handbook 
4235.1 REV-1, ch. 2-1.
    \155\ See Ariz. Rev. Stat. Sec. Sec.  6-1602, 1603A; Ark. Code 
Ann. Sec.  23-54-106(a); Cal. Civ. Code Sec. Sec.  1923.2(j) and 
(k), 1923.5(a); Colo. Rev. Stat. Sec.  11-38-111; Del. Code Ann. 
Tit. 5 Sec. Sec.  2118 and Sec.  2244; 205 Ill. Comp. Stat. Ann. 
Sec.  5/6-1; Md. Fin. Inst. Code Ann. Sec. Sec.  12-1219, 12-1221; 
Mass. Gen. Laws Ann. Ch. 167E, Sec.  7(e); Mo. Rev. Stat. Sec.  53-
270(6); N.Y. Real Property Law Sec. Sec.  280(2)(g) and 280-a(2)(j); 
N.C. Gen. Stat. Sec. Sec.  53-257(4), 53-264(b), 53-269, 53-270(6); 
S.C. Code Ann. Sec.  29-4-60; Tenn. Code Ann. Sec. Sec.  47-30-
102(4), 47-30-104(c), 47-30-115(6), 47-30-109(b); Tex Const. Art. 16 
Sec.  50(k)(8); Utah Code Ann. Sec.  61-2d-112; Vt. Stat. Ann. Tit. 
8 Sec.  10702; W.Va. Code Sec.  47-24-7(b).
---------------------------------------------------------------------------

Counseling Requirements for HECMs
    Referrals. When a potential HECM borrower first contacts or 
communicates with an FHA-approved HECM mortgagee, the mortgagee must 
provide the borrower with contact information for ten HUD-approved 
counseling agencies.\156\
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    \156\ HUD Mortgagee Letter 2009-10 (March 27, 2009).
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    Timing. A HECM mortgagee may not begin ``processing'' a HECM loan 
application before receiving a certificate confirming that the borrower 
has received reverse mortgage counseling.\157\ According to HUD 
guidance, this means that a mortgagee may accept a borrower's 
application before receiving the counseling certificate, but ``may not 
order an appraisal, title search, or FHA case number or in any other 
way begin the process of originating a HECM loan.'' \158\ The mortgagee 
also may not charge an application fee or any other HECM-related fees 
before the mortgagee receives a required HECM counseling certificate 
indicating that counseling has been completed.
---------------------------------------------------------------------------

    \157\ HECM Handbook 4235.1 REV-1, ch. 2-1, 2-3; HUD Mortgagee 
Letter 2004-25 (June 23, 2004).
    \158\ HUD Mortgagee Letter 2004-25 (June 23, 2004).
---------------------------------------------------------------------------

    Content. HECM counselors must provide information on, among other 
topics: (1) The financial implications of entering into a HECM; (2) the 
consequences of a HECM on the borrower's taxes, estate, and eligibility 
for assistance under Federal and state programs; (3) other home equity 
conversion options, such as sale-leaseback financing; (4) additional 
financial options such as other housing, social service, health, and 
financial options (provided through the government or non-profit 
organizations, for example); and (5) the circumstances under which the 
HECM becomes due.\159\
---------------------------------------------------------------------------

    \159\ HECM Handbook 4235.1 REV-1, ch. 2-5; HUD Mortgagee Letter 
2004-25 (June 23, 2004).
---------------------------------------------------------------------------

    Counselor independence. HECM mortgagees are prohibited from 
steering, directing, recommending, or otherwise encouraging a consumer 
to choose a particular counseling agency.\160\ They also may not 
contact a counselor or counseling agency to refer a consumer or discuss 
a consumer's personal information.
---------------------------------------------------------------------------

    \160\ HUD Mortgagee Letter 2004-25 (June 23, 2004).
---------------------------------------------------------------------------

    In 2008, Congress expanded these general restrictions by 
prohibiting certain parties from directly or indirectly compensating or 
being associated with a counselor or counseling agency; specifically, 
any party ``involved in'': (1) ``originating or servicing the 
mortgage''; (2) ``funding the loan underlying the mortgage''; or (3) 
``the sale of annuities, investments, long-term care insurance, or any 
other type of financial or insurance product.'' \161\ To implement 
these measures, HUD issued a Mortgagee Letter prohibiting lenders from 
paying counseling agencies, directly or indirectly, for HECM counseling 
services through either a lump-sum payment or on a case-by-case 
basis.\162\ The Mortgagee Letter indicates that a lender would 
``indirectly'' pay for HECM counseling by ``funneling payment for HECM 
counseling through a nonprofit, foundation, association or any other 
entity or organization that is a branch of,

[[Page 58670]]

affiliated with or associated with a lending institution.'' Neither the 
statute nor HUD's Mortgagee Letter indicates whether a creditor or 
other person is prohibited from, for example, making charitable 
donations designated for general purposes to a non-profit organization 
that offers multiple services that include reverse mortgage counseling, 
or whether this rule prohibits arranging for the consumer to finance 
the counseling fee as part of the reverse mortgage transaction.
---------------------------------------------------------------------------

    \161\ HERA Sec.  2122(a)(3) (codified at 12 U.S.C. 1715z-
20(d)(2)(B)).
    \162\ HUD Mortgagee Letter 2008-28 (Sept. 29, 2008).
---------------------------------------------------------------------------

    Counseling protocol. HUD has previously issued a ``Counseling 
Protocol,'' which includes additional counseling requirements.\163\ HUD 
issued an updated and expanded Counseling Protocol that will go into 
effect on September 11, 2010.\164\
---------------------------------------------------------------------------

    \163\ HUD, HECM Counseling Protocol (December 2006).
    \164\ See HUD Handbook 7610.1 (05/2010) http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/7610.1/76101HSGH.pdf (visited 
July 15, 2010).
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Interagency Supervisory Guidance on Reverse Mortgages
    Through the FFIEC, the Board and other Federal banking agencies 
recently stated in the Final Reverse Mortgage Guidance that reverse 
mortgage borrowers ``do not consistently understand the terms, 
features, and risks of their loans.'' \165\ Thus, despite concerns 
about whether counseling is uniformly effective, the agencies stated 
further that counseling for borrowers of proprietary reverse mortgages 
is necessary to ``promote consumer understanding and manage compliance 
risks.''Sec.  \166\
---------------------------------------------------------------------------

    \165\ Final Reverse Mortgage Guidance, 75 FR at 50809.
    \166\ Id. at 50811.
---------------------------------------------------------------------------

    Timing. The Guidance advises institutions to require consumers to 
have received counseling before the consumer submits a reverse mortgage 
application or pays an application fee.
    Content. The Final Reverse Mortgage Guidance states that counseling 
sessions should cover a range of information, largely consistent with 
information required for HECM counseling. This information includes, 
for example, ``[t]he availability of other housing, social service, 
health, and financial options'' and ``[t]he financial implications and 
tax consequences of entering into a reverse mortgage.'' In addition, 
the Guidance advises that counseling sessions should cover, among other 
topics, ``[t]he differences between HECM loans and proprietary reverse 
mortgages.''
    Counselor independence. Under the Guidance, institutions offering 
proprietary reverse mortgages should ensure the independence of 
counselors by adopting policies that prohibit the following:
     Steering a consumer to any one particular counseling 
agency.
     Contacting a counselor to discuss a particular consumer, a 
particular transaction, or the timing or content of a counseling 
session ``unless the consumer is involved.''
Outreach
    During Board outreach for this proposal and in comments on the 
Proposed Reverse Mortgage Guidance, representatives of the reverse 
mortgage industry uniformly affirmed the importance and value of 
counseling for reverse mortgage borrowers and generally agreed that 
creditors should ensure that prospective borrowers of proprietary 
reverse mortgages receive counseling. The National Reverse Mortgage 
Lenders Association (NRMLA) commented that the Federal banking agencies 
should deem the HECM counseling rules ``best and prudent practices'' 
for institutions offering proprietary products. Several industry 
representatives, however, expressed concerns that the counseling 
network is underfunded and understaffed, resulting in long wait times 
for prospective borrowers and lower quality counseling.
    Consumer advocates have expressed support for requiring consumer 
counseling in all reverse mortgage transactions. They caution, however, 
that counseling alone may insufficiently protect consumers against 
abusive practices.\167\ Like industry representatives, consumer 
advocates question the effectiveness of counseling due to inadequate 
funding and the limited availability of trained counselors. Some 
consumer advocates therefore favor not only strengthening counseling, 
but also requiring lenders and brokers to assess the suitability of a 
reverse mortgage for each borrower before making a loan.\168\ See 
``Suitability,'' below.
---------------------------------------------------------------------------

    \167\ NCLC Report at 18.
    \168\ Id. at 19.
---------------------------------------------------------------------------

    Reverse mortgage counselors consulted by the Board expressed 
differing views on a range of counseling issues. They differed on when 
counseling should occur; some suggested that counseling was best after 
the consumer had transaction-specific documents to review with the 
counselor, while others thought that counseling was optimal earlier in 
the process as an aid to informed consumer shopping. On counseling 
content, counselors generally expressed concerns that requirements such 
as having to complete a full budget for the consumer to determine the 
appropriateness and affordability of a reverse mortgage would be too 
difficult and time-consuming. Some advocated requiring additional 
content, such as information about the general differences between 
proprietary reverse mortgages and HECMs.
    On counselor independence, some counselors shared anecdotally that 
creditors have compromised counselor independence by providing the 
required list of HECM counselors, while orally ``recommending'' 
particular counselors. At least one expressed support for Congress's 
ban on creditors directly or indirectly paying HECM counselors 
(discussed above), stating that this has stopped significant abuses. 
All, however, shared the view that lack of funding for counseling is a 
significant and growing problem.
The Board's Proposal
    Based on its research and outreach, the Board believes that 
originating a reverse mortgage before the consumer has obtained 
counseling should be considered an unfair practice under Regulation Z. 
The Board also believes that imposing a nonrefundable fee on a 
prospective reverse mortgage consumer within three days after a 
consumer has obtained counseling should be considered unfair. The Board 
therefore proposes to prohibit these practices under its authority in 
TILA Section 129(l)(2)(A) to prohibit practices in connection with 
mortgage lending that the Board finds unfair or deceptive. 12 U.S.C. 
1639(l)(2)(A). The Board does not intend to suggest that these 
practices are unfair prior to the effective date of any final rule 
implementing these proposed prohibitions. Prior to the effective date 
of a final rule, the Board expects that whether these practices are 
unfair will be judged on a case-by-case basis and on the totality of 
the circumstances under applicable laws and regulations.
    The proposed counseling requirement would apply to HECMs as well as 
to proprietary reverse mortgages. While counseling is already required 
for HECMs, a private action may not be brought against a mortgagee for 
failure to comply with the counseling requirements; TILA Section 130, 
however, gives consumers a private right of action. 15 U.S.C. 1640. 
Consequently, the Board's proposal is intended in part to level the 
playing field between HECM and proprietary reverse mortgage 
originators. As discussed below, the Board is also proposing to provide 
that compliance

[[Page 58671]]

with the HECM counseling rules satisfies the Board's rule.
    Substantial consumer injury. Uninformed reverse mortgage consumers 
stand to lose substantial equity in their most valuable asset--their 
home--at a time when they may be least able to recover financially. 
This loss could jeopardize a consumer's health and fundamental well-
being. Home equity is a critical financial resource for reverse 
mortgage borrowers, who generally must be 62 years of age or older. 
Borrowers in this age group are more likely to be retired than younger 
borrowers, and thus tend to have more limited income sources. Should 
emergency expenses arise or the cost of living increase higher than 
expected, home equity may be the only resource for these consumers.
    Reverse mortgage borrowers also risk foreclosure if they do not 
clearly understand important facts about reverse mortgages. These 
include the consequences of failing to pay property taxes and insurance 
directly (rather than relying on the lender to do so, as is common with 
some traditional ``forward'' mortgages), moving out of the home for an 
extended period, or failing to maintain the property. Borrowers aged 62 
or older may be more likely to face physical constraints on their 
mobility than younger borrowers, and so as a practical matter may be 
less able to find affordable alternative housing should they lose their 
home.
    In addition, uninformed or misinformed reverse mortgage borrowers 
may unknowingly compromise their goals to leave assets for their heirs, 
undermining not only their personal financial objectives that may have 
taken years to achieve, but also their heirs' financial prospects. 
Finally, Board research and outreach has indicated that many consumers 
choose reverse mortgages if they have few or no other options; at age 
62 or older, they may be on a fixed income or otherwise have limited 
financial resources. Consequently, reverse mortgage consumers may be 
especially vulnerable to pressure to go through with a reverse mortgage 
transaction if they have to pay nonrefundable fees before they have 
received adequate information to make an informed decision about 
whether the transaction is appropriate for them.
    Injury not reasonably avoidable. Without counseling, prospective 
reverse mortgage borrowers may not reasonably be able to avoid these 
injuries. If counseling is not required, creditors and financial 
advisors may not be aware of or inform consumers of counseling 
resources. Consumers could receive information about reverse mortgages 
from other sources, such as the Internet, but these sources may provide 
conflicting and confusing information, and be too voluminous for 
consumers to categorize coherently for review. Creditors or financial 
planners themselves may be willing to provide counseling to consumers, 
but their guidance and information may be biased by an economic 
interest in steering the consumer to a reverse mortgage.
    As noted above, consumer testing conducted by the Board has shown 
that consumers need considerable guidance to understand the 
complexities of reverse mortgages, and that for some prospective 
reverse mortgage borrowers, disclosures about reverse mortgage costs, 
features, and risks, while valuable, are not by themselves sufficient. 
For the same reason, merely informing consumers orally or in a written 
disclosure that counseling is advisable and available may not ensure 
that consumers in fact receive sufficient information and guidance.
    Finally consumers who have to pay nonrefundable fees after applying 
for a reverse mortgage, but before they receive counseling, may feel 
locked into a reverse mortgage transaction--even if subsequent 
counseling creates doubt about whether a reverse mortgage is right for 
them. Consumers on a fixed income or with otherwise limited resources, 
as many reverse mortgage borrowers are, may be especially vulnerable to 
this pressure. A primary purpose of counseling is to ensure that the 
consumer freely chooses a reverse mortgage, based on an informed 
conclusion that the reverse mortgage is truly suitable for that 
consumer. The imposition of nonrefundable fees on consumers before they 
have had a chance to consider the information received through 
counseling may render counseling ineffective in accomplishing this 
purpose.
    Injury not outweighed by countervailing benefits. The potential 
injury to consumers described above may not be outweighed by the 
potential benefits of not requiring counseling. Benefits of not 
requiring counseling might include that consumers would save the 
counseling fee and potentially be able to obtain reverse mortgages more 
quickly to receive needed cash sooner. Creditors might also benefit by 
being able to make more reverse mortgages in a shorter timeframe. 
Creditors might be more likely to enter the reverse mortgage 
marketplace if counseling is not required, increasing competition.
    In the Board's view, however, these potential benefits may not 
outweigh the possibility of severe negative consequences to reverse 
mortgage consumers' financial well-being. Moreover, any increased 
competition due to higher reverse mortgage volume would be offset by 
the detriment to competition resulting from uninformed consumers. 
Informed consumers are able to shop more effectively than uninformed 
consumers, driving the market to produce more affordable loan products 
with features better tailored to consumers' needs and preferences.
40(b)(1) Counseling Required
    Under proposed Sec.  226.40(b)(1), a creditor or other person may 
not originate a reverse mortgage before the consumer has obtained 
counseling from a counselor or counseling agency that meets the 
counselor qualification standards established by HUD pursuant to its 
authority under the National Housing Act, as amended (NHA),\169\ or 
``substantially similar'' standards. See 12 U.S.C. 1715z-20(f).
---------------------------------------------------------------------------

    \169\ 12 U.S.C. 1701 et seq.
---------------------------------------------------------------------------

Counselor Qualifications
    For several reasons, the Board proposes to require that counselors 
meet HUD's qualification standards for HECM counselors, or standards 
that would require a similar level of training and knowledge to those 
required for HUD-approved counselors. First, the Board recognizes that 
HUD has developed and continues to improve a comprehensive system of 
certifying counselors to provide required counseling on reverse 
mortgages under the HECM program. Second, the Board learned through 
outreach with creditors and reverse mortgage counselors that 
proprietary reverse mortgage creditors have routinely required 
borrowers to obtain counseling from HUD-approved counselors, indicating 
that the Board's proposal would not be unduly burdensome. Finally, the 
Board believes that consumer protection can be served through a 
counseling requirement only if counselors are properly trained to 
provide germane, consistent, and detailed information about reverse 
mortgages to consumers.
    The Board requests comment on the potential benefits and drawbacks 
of this aspect of the proposal. In particular, the Board acknowledges 
concerns expressed during outreach that the quantity of counselors may 
be insufficient to meet the demand for counseling and requests comment 
on the potential effects of the proposed qualification standards on the 
reverse mortgage market for both HECMs and proprietary products. The 
Board also requests comment on the appropriateness of allowing 
counselors

[[Page 58672]]

to meet qualification standards that are ``substantially similar'' to 
those established by HUD, such as standards that might be developed by 
a state.
Originating a Reverse Mortgage
    The Board proposes to prohibit originating a reverse mortgage 
before the consumer has obtained counseling from a HUD-approved or 
similarly qualified counselor. As noted above, the HECM program 
requires counseling before a HECM mortgagee may ``process'' an 
application, meaning that the mortgagee may accept an application, but 
``may not order an appraisal, title search, or an FHA case number or in 
any other way begin the process of originating a HECM loan'' before the 
consumer has received counseling.\170\ The Board proposes to take a 
different position in proposed comment 40(b)(1)-1, which states that a 
creditor or other person may not ``open a reverse mortgage account (for 
an open-end reverse mortgage) or consummate a reverse mortgage loan 
(for a closed-end reverse mortgage) before the consumer has obtained 
the counseling required under Sec.  226.40(b)(1).'' The proposed 
comment explains that a creditor or other person may accept an 
application for a reverse mortgage and may also begin processing the 
application (by, for example, ordering an appraisal or title search) 
before the consumer has obtained counseling. As discussed below, 
however, the Board is also proposing that the creditor not be permitted 
to impose a nonrefundable fee before the consumer has obtained 
counseling.
---------------------------------------------------------------------------

    \170\ HUD Mortgagee Letter 2004-25 (June 23, 2004).
---------------------------------------------------------------------------

    The proposed rule is intended to establish a bright line basis for 
determining the time by which counseling must have occurred--
origination. The Board believes that this approach will provide greater 
clarity to proprietary reverse mortgage creditors subject to the 
proposed counseling rule. The proposal will facilitate compliance, 
because creditors and others would not have to question whether a 
particular activity related to a consumer's application is considered 
part of ``processing'' the application and therefore prohibited. A more 
precise rule is especially important where, as here, creditors are 
subject to a private right of action for violations. At the same time, 
consumers would be protected because, as discussed below, the proposal 
would also require a creditor to refund any fees that the consumer paid 
if the consumer decides, within three business days after receiving 
counseling, not to proceed with the transaction. See proposed Sec.  
226.40(b)(2) and comment 40(b)(2)(i)-1.
    Allowing creditors and others to engage in the full range of 
application processing activities before receiving confirmation of 
counseling may in some cases allow them to produce transaction-specific 
documents that the consumer could then review with the counselor. In 
outreach, some reverse mortgage counselors expressed the view that 
counseling can be particularly effective when transaction-specific 
documents are available. The proposed rule, however, would also permit 
counseling to be obtained earlier in the process, such as before 
application, equipping the consumer to engage in more informed 
shopping.
    Proposed comment 40(b)(1)-2 provides that a creditor may rely on a 
certificate of counseling in a form approved by HUD pursuant to 12 
U.S.C. 1715z-20(f), or a substantially similar form, to confirm that 
the consumer received the required counseling. HUD's current 
Certificate of HECM Counseling requires the names, addresses and 
signatures of the homeowners receiving counseling (namely, all persons 
shown as homeowners on the deed); a list of seven topics required to be 
covered in HECM counseling sessions; and spaces for the name, contact 
information, employer information, and signature of the counselor.\171\ 
The Certificate of HECM Counseling also requires an indication of how 
the interview was held (face-to-face or by telephone), how long the 
session lasted, how much was charged for the session, and whether the 
fee was paid up front, financed or waived. Finally, the Certificate 
requires the date of counseling and the ``certificate expiration 
date,'' which is 180 days from the date of the counseling session.
---------------------------------------------------------------------------

    \171\ See HUD Form 92902 (6/2008).
---------------------------------------------------------------------------

    The Board's proposed counseling rule applies not only to HECMs, but 
also to proprietary reverse mortgages. Hence the Board proposes to give 
creditors the flexibility of relying on a ``substantially similar'' 
form, which the Board believes should include information sufficient to 
confirm, at a minimum, that the consumer received counseling in 
accordance with the requirements in the proposed rule for counselor 
qualifications and the date of the counseling session. The Board 
understands that many proprietary reverse mortgage creditors have 
required that counseling be verified with the Certificate of HECM 
Counseling and requests comment on whether the proposed safe harbor 
allowing creditors to rely on a form ``substantially similar'' to the 
Certificate of HECM Counseling is appropriate.
40(b)(2) Nonrefundable Fees Prohibited
Paragraph 40(b)(2)(i)
    Under the proposal, neither a creditor nor any other person may 
impose a nonrefundable fee in connection with a reverse mortgage 
subject to Sec.  226.33 until after the third business day following 
the consumer's completion of counseling. See proposed Sec.  
226.40(b)(2)(i) and accompanying commentary. With this proposal, the 
Board seeks to address concerns that consumers who have to pay a 
nonrefundable fee after applying for a reverse mortgage, but before 
they receive counseling, may feel locked into a reverse mortgage even 
if they later receive counseling and have doubts about whether a 
reverse mortgage is a sound choice. As noted above, Board research and 
outreach have indicated that many consumers choose reverse mortgages if 
they have few or no other options; at age 62 or older, they may be on a 
fixed income or otherwise have limited financial resources. The Board 
therefore is concerned that a reverse mortgage consumer may be 
especially vulnerable to pressure to go through with a transaction once 
the consumer has invested money in it that cannot be recouped. A 
restriction on imposing nonrefundable fees would help ensure that 
counseling effectively assists consumers in making informed financial 
choices, because consumers would not be financially committed to a 
reverse mortgage transaction before receiving comprehensive guidance 
and information.
    For consistency in Regulation Z, this rule is similar to the rule 
on imposing nonrefundable fees under current Sec.  226.5b(h) and 
accompanying commentary (redesignated and revised in the August 2009 
HELOC Proposal as Sec.  226.5b(e) and comments 5b(e)-1 and -2), which 
prohibits imposing nonrefundable fees until three business days after a 
consumer receives the disclosures required by Sec.  226.5b. 74 FR 
43428, 43536, 43594, Aug. 26, 2009. As discussed in the section-by-
section analysis to Sec.  226.19 above, the Board is proposing a 
parallel rule for closed-end real property- or dwelling-secured 
mortgages. See proposed Sec.  226.19(a)(1