Reg Z HOEPA R1305 NFRM

Wednesday,
July 30, 2008

Part III

Federal Reserve
System

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12 CFR Part 226
Truth in Lending; Final Rule

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Federal Register / Vol. 73, No. 147 / Wednesday, July 30, 2008 / Rules and Regulations
FOR FURTHER INFORMATION CONTACT:

FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Regulation Z; Docket No. R–1305]

Truth in Lending
Board of Governors of the
Federal Reserve System.
ACTION: Final rule; official staff
commentary.
AGENCY:

SUMMARY: The Board is publishing final
rules amending Regulation Z, which
implements the Truth in Lending Act
and Home Ownership and Equity
Protection Act. The goals of the
amendments are to protect consumers in
the mortgage market from unfair,
abusive, or deceptive lending and
servicing practices while preserving
responsible lending and sustainable
homeownership; ensure that
advertisements for mortgage loans
provide accurate and balanced
information and do not contain
misleading or deceptive representations;
and provide consumers transactionspecific disclosures early enough to use
while shopping for a mortgage. The final
rule applies four protections to a newlydefined category of higher-priced
mortgage loans secured by a consumer’s
principal dwelling, including a
prohibition on lending based on the
collateral without regard to consumers’
ability to repay their obligations from
income, or from other sources besides
the collateral. The revisions apply two
new protections to mortgage loans
secured by a consumer’s principal
dwelling regardless of loan price,
including a prohibition on abusive
servicing practices. The Board is also
finalizing rules requiring that
advertisements provide accurate and
balanced information, in a clear and
conspicuous manner, about rates,
monthly payments, and other loan
features. The advertising rules ban
several deceptive or misleading
advertising practices, including
representations that a rate or payment is
‘‘fixed’’ when it can change. Finally, the
revisions require creditors to provide
consumers with transaction-specific
mortgage loan disclosures within three
business days after application and
before they pay any fee except a
reasonable fee for reviewing credit
history.

This final rule is effective on
October 1, 2009, except for
§ 226.35(b)(3)) which is effective on
April 1, 2010. See part XIII, below,
regarding mandatory compliance with
§ 226.35(b)(3) on mortgages secured by
manufactured housing.

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DATES:

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Kathleen C. Ryan or Dan S. Sokolov,
Counsels; Paul Mondor, Senior
Attorney; Jamie Z. Goodson, Brent
Lattin, Jelena McWilliams, Dana E.
Miller, or Nikita M. Pastor, Attorneys;
Division of Consumer and Community
Affairs, Board of Governors of the
Federal Reserve System, Washington,
DC 20551, at (202) 452–2412 or (202)
452–3667. For users of
Telecommunications Device for the Deaf
(TDD) only, contact (202) 263–4869.
SUPPLEMENTARY INFORMATION:
I. Summary of Final Rules
A. Rules To Prevent Unfairness, Deception,
and Abuse
B. Revisions To Improve Mortgage
Advertising
C. Requirement To Give Consumers
Disclosures Early
II. Consumer Protection Concerns in the
Subprime Market
A. Recent Problems in the Mortgage Market
B. Market Imperfections That Can
Facilitate Abusive and Unaffordable
Loans
III. The Board’s HOEPA Hearings
A. Home Ownership and Equity Protection
Act (HOEPA)
B. Summary of 2006 Hearings
C. Summary of June 2007 Hearing
D. Congressional Hearings
IV. Interagency Supervisory Guidance
V. Legal Authority
A. The Board’s Authority Under TILA
Section 129(l)(2)
B. The Board’s Authority Under TILA
Section 105(a)
VI. The Board’s Proposal
A. Proposals To Prevent Unfairness,
Deception, and Abuse
B. Proposals To Improve Mortgage
Advertising
C. Proposal To Give Consumers
Disclosures Early
VII. Overview of Comments Received
VIII. Definition of ‘‘Higher-Priced Mortgage
Loan’’—§ 226.35(a)
A. Overview
B. Public Comment on the Proposal
C. General Approach
D. Index for Higher-Priced Mortgage Loans
E. Threshold for Higher-Priced Mortgage
Loans
F. The Timing of Setting the Threshold
G. Proposal To Conform Regulation C
(HMDA)
H. Types of Loans Covered Under § 226.35
IX. Final Rules for Higher-Priced Mortgage
Loans and HOEPA Loans
A. Overview
B. Disregard of Consumer’s Ability To
Repay—§§ 226.34(a)(4) and 226.35(b)(1)
C. Prepayment Penalties—§ 226.32(d)(6)
and (7); § 226.35(b)(2)
D. Escrows for Taxes and Insurance—
§ 226.35(b)(3)
E. Evasion Through Spurious Open-End
Credit—§ 226.35(b)(4)
X. Final Rules for Mortgage Loans—§ 226.36
A. Creditor Payments to Mortgage
Brokers—§ 226.36(a)
B. Coercion of Appraisers—§ 226.36(b)

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C. Servicing Abuses—§ 226.36(c)
D. Coverage—§ 226.36(d)
XI. Advertising
A. Advertising Rules for Open-End HomeEquity Plans—§ 226.16
B. Advertising Rules for Closed-End
Credit)—§ 226.24
XII. Mortgage Loan Disclosures
A. Early Mortgage Loan Disclosures—
§ 226.19
B. Plans To Improve Disclosure
XIII. Mandatory Compliance Dates
XIV. Paperwork Reduction Act
XV. Regulatory Flexibility Analysis

I. Summary of Final Rules
On January 9, 2008, the Board
published proposed rules that would
amend Regulation Z, which implements
the Truth in Lending Act (TILA) and the
Home Ownership and Equity Protection
Act (HOEPA). 73 FR 1672. The Board is
publishing final amendments to
Regulation Z to establish new regulatory
protections for consumers in the
residential mortgage market. The goals
of the amendments are to protect
consumers in the mortgage market from
unfair, abusive, or deceptive lending
and servicing practices while preserving
responsible lending and sustainable
homeownership; ensure that
advertisements for mortgage loans
provide accurate and balanced
information and do not contain
misleading or deceptive representations;
and provide consumers transactionspecific disclosures early enough to use
while shopping for mortgage loans.
A. Rules To Prevent Unfairness,
Deception, and Abuse
The Board is publishing seven new
restrictions or requirements for
mortgage lending and servicing
intended to protect consumers against
unfairness, deception, and abuse while
preserving responsible lending and
sustainable homeownership. The
restrictions are adopted under TILA
Section 129(l)(2), which authorizes the
Board to prohibit unfair or deceptive
practices in connection with mortgage
loans, as well as to prohibit abusive
practices or practices not in the interest
of the borrower in connection with
refinancings. 15 U.S.C. 1639(l)(2). Some
of the restrictions apply only to higherpriced mortgage loans, while others
apply to all mortgage loans secured by
a consumer’s principal dwelling.
Protections Covering Higher-Priced
Mortgage Loans
The Board is finalizing four
protections for consumers receiving
higher-priced mortgage loans. These
loans are defined as consumer-purpose,
closed-end loans secured by a
consumer’s principal dwelling and

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Federal Register / Vol. 73, No. 147 / Wednesday, July 30, 2008 / Rules and Regulations
having an annual percentage rate (APR)
that exceeds the average prime offer
rates for a comparable transaction
published by the Board by at least 1.5
percentage points for first-lien loans, or
3.5 percentage points for subordinatelien loans. For higher-priced mortgage
loans, the final rules:
Æ Prohibit creditors from extending
credit without regard to a consumer’s
ability to repay from sources other than
the collateral itself;
Æ Require creditors to verify income
and assets they rely upon to determine
repayment ability;
Æ Prohibit prepayment penalties
except under certain conditions; and
Æ Require creditors to establish
escrow accounts for taxes and
insurance, but permit creditors to allow
borrowers to cancel escrows 12 months
after loan consummation.
In addition, the final rules prohibit
creditors from structuring closed-end
mortgage loans as open-end lines of
credit for the purpose of evading these
rules, which do not apply to open-end
lines of credit.
Protections Covering Closed-End Loans
Secured by Consumer’s Principal
Dwelling
In addition, in connection with all
consumer-purpose, closed-end loans
secured by a consumer’s principal
dwelling, the Board’s rules:
Æ Prohibit any creditor or mortgage
broker from coercing, influencing, or
otherwise encouraging an appraiser to
provide a misstated appraisal in
connection with a mortgage loan; and
Æ Prohibit mortgage servicers from
‘‘pyramiding’’ late fees, failing to credit
payments as of the date of receipt, or
failing to provide loan payoff statements
upon request within a reasonable time.
The Board is withdrawing its proposal
to require servicers to deliver a fee
schedule to consumers upon request;
and its proposal to prohibit creditors
from paying a mortgage broker more
than the consumer had agreed in
advance that the broker would receive.
The reasons for the withdrawal of these
two proposals are discussed in parts
X.A and X.C below.

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Prospective Application of Final Rule
The final rule is effective on October
1, 2009, or later for the requirement to
establish an escrow account for taxes
and insurance for higher-priced
mortgage loans. Compliance with the
rules is not required before the effective
dates. Accordingly, nothing in this rule
should be construed or interpreted to be
a determination that acts or practices
restricted or prohibited under this rule

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are, or are not, unfair or deceptive
before the effective date of this rule.
Unfair acts or practices can be
addressed through case-by-case
enforcement actions against specific
institutions, through regulations
applying to all institutions, or both. A
regulation is prospective and applies to
the market as a whole, drawing bright
lines that distinguish broad categories of
conduct. By contrast, an enforcement
action concerns a specific institution’s
conduct and is based on all of the facts
and circumstances surrounding that
conduct.1
Because broad regulations, such as the
rules adopted here, can require large
numbers of institutions to make major
adjustments to their practices, there
could be more harm to consumers than
benefit if the rules were effective
immediately. If institutions were not
provided a reasonable time to make
changes to their operations and systems
to comply with this rule, they would
either incur excessively large expenses,
which would be passed on to
consumers, or cease engaging in the
regulated activity altogether, to the
detriment of consumers. And because
the Board finds an act or practice unfair
only when the harm outweighs the
benefits to consumers or to competition,
the implementation period preceding
the effective date set forth in the final
rule is integral to the Board’s decision
to restrict or prohibit certain acts or
practices.
For these reasons, acts or practices
occurring before the effective dates of
these rules will be judged on the totality
of the circumstances under other
applicable laws or regulations.
Similarly, acts or practices occurring
after the rule’s effective dates that are
not governed by these rules will
continue to be judged on the totality of
the circumstances under other
applicable laws or regulations.
B. Revisions To Improve Mortgage
Advertising
Another goal of the final rules is to
ensure that mortgage loan
advertisements provide accurate and
balanced information and do not
contain misleading or deceptive
representations. Thus the Board’s rules
require that advertisements for both
open-end and closed-end mortgage
loans provide accurate and balanced
information, in a clear and conspicuous
manner, about rates, monthly payments,
and other loan features. These rules are
1 See Board and FDIC, CA 04–2, Unfair Acts or
Practices by State-Chartered Banks (March 11,
2004), available at http://www.federalreserve.gov/
boarddocs/press/bcreg/2004/20040311/
attachment.pdf.

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adopted under the Board’s authorities
to: adopt regulations to ensure
consumers are informed about and can
shop for credit; require that information,
including the information required for
advertisements for closed-end credit, be
disclosed in a clear and conspicuous
manner; and regulate advertisements of
open-end home-equity plans secured by
the consumer’s principal dwelling. See
TILA Section 105(a), 15 U.S.C. 1604(a);
TILA Section 122, 15 U.S.C. 1632; TILA
Section 144, 15 U.S.C. 1664; TILA
Section 147, 15 U.S.C. 1665b.
The Board is also adopting, under
TILA Section 129(l)(2), 15 U.S.C.
1639(l)(2), rules to prohibit the
following seven deceptive or misleading
practices in advertisements for closedend mortgage loans:
Æ Advertisements that state ‘‘fixed’’
rates or payments for loans whose rates
or payments can vary without
adequately disclosing that the interest
rate or payment amounts are ‘‘fixed’’
only for a limited period of time, rather
than for the full term of the loan;
Æ Advertisements that compare an
actual or hypothetical rate or payment
obligation to the rates or payments that
would apply if the consumer obtains the
advertised product unless the
advertisement states the rates or
payments that will apply over the full
term of the loan;
Æ Advertisements that characterize
the products offered as ‘‘government
loan programs,’’ ‘‘government-supported
loans,’’ or otherwise endorsed or
sponsored by a federal or state
government entity even though the
advertised products are not governmentsupported or -sponsored loans;
Æ Advertisements, such as
solicitation letters, that display the
name of the consumer’s current
mortgage lender, unless the
advertisement also prominently
discloses that the advertisement is from
a mortgage lender not affiliated with the
consumer’s current lender;
Æ Advertisements that make claims of
debt elimination if the product
advertised would merely replace one
debt obligation with another;
Æ Advertisements that create a false
impression that the mortgage broker or
lender is a ‘‘counselor’’ for the
consumer; and
Æ Foreign-language advertisements in
which certain information, such as a
low introductory ‘‘teaser’’ rate, is
provided in a foreign language, while
required disclosures are provided only
in English.

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Federal Register / Vol. 73, No. 147 / Wednesday, July 30, 2008 / Rules and Regulations

C. Requirement To Give Consumers
Disclosures Early
A third goal of these rules is to
provide consumers transaction-specific
disclosures early enough to use while
shopping for a mortgage loan. The final
rule requires creditors to provide
transaction-specific mortgage loan
disclosures such as the APR and
payment schedule for all home-secured,
closed-end loans no later than three
business days after application, and
before the consumer pays any fee except
a reasonable fee for the review of the
consumer’s credit history.
The Board recognizes that these
disclosures need to be updated to reflect
the increased complexity of mortgage
products. In early 2008, the Board began
testing current TILA mortgage
disclosures and potential revisions to
these disclosures through one-on-one
interviews with consumers. The Board
expects that this testing will identify
potential improvements for the Board to
propose for public comment in a
separate rulemaking.
II. Consumer Protection Concerns in the
Subprime Market

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A. Recent Problems in the Mortgage
Market
Subprime mortgage loans are made to
borrowers who are perceived to have
high credit risk. These loans’ share of
total consumer originations, according
to one estimate, reached about nine
percent in 2001 and doubled to 20
percent by 2005, where it stayed in
2006.2 The resulting increase in the
supply of mortgage credit likely
contributed to the rise in the
homeownership rate from 64 percent in
1994 to a high of 69 percent in 2005—
though about 68 percent now—and
expanded consumers’ access to the
equity in their homes.
Recently, however, some of these
benefits have eroded. In the last two
years, delinquencies and foreclosure
starts among subprime mortgages have
increased dramatically and reached
exceptionally high levels as house price
growth has slowed or prices have
declined in some areas. The proportion
of all subprime mortgages past-due
ninety days or more (‘‘serious
delinquency’’) was about 18 percent in
May 2008, more than triple the mid2005 level.3 Adjustable-rate subprime
mortgages have performed the worst,
reaching a serious delinquency rate of
27 percent in May 2008, five times the
2 Inside Mortgage Finance Publications, Inc., The
2007 Mortgage Market Statistical Annual vol. I (IMF
2007 Mortgage Market), at 4.
3 Delinquency rates calculated from data from
First American LoanPerformance.

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mid-2005 level. These mortgages have
seen unusually high levels of early
payment default, or default after only
one or two payments or even no
payment at all.
The serious delinquency rate has also
risen for loans in alt-A (near prime)
securitized pools. According to one
source, originations of these loans were
13 percent of consumer mortgage
originations in 2006.4 Alt-A loans are
made to borrowers who typically have
higher credit scores than subprime
borrowers, but the loans pose more risk
than prime loans because they involve
small down payments or reduced
income documentation, or the terms of
the loan are nontraditional and may
increase risk. The rate of serious
delinquency for these loans has risen to
over 8 percent (as of April 2008) from
less than 2 percent only a year earlier.
In contrast, 1.5 percent of loans in the
prime-mortgage sector were seriously
delinquent as of April 2008.
The consequences of default are
severe for homeowners, who face the
possibility of foreclosure, the loss of
accumulated home equity, higher rates
for other credit transactions, and
reduced access to credit. When
foreclosures are clustered, they can
injure entire communities by reducing
property values in surrounding areas.
Higher delinquencies are in fact
showing through to foreclosures.
Lenders initiated over 550,000
foreclosures in the first quarter of 2008,
about half of them on subprime
mortgages. This was significantly higher
than the quarterly average of 325,000 in
the first half of the year, and nearly
twice the quarterly average of 225,000
for the past six years.5
Rising delinquencies have been
caused largely by a combination of a
decline in house price appreciation—
and in some areas slower economic
growth—and a loosening of
underwriting standards, particularly in
the subprime sector. The loosening of
underwriting standards is discussed in
more detail in part II.B. The next section
discusses underlying market
imperfections that facilitated this
loosening and made it difficult for
consumers to avoid injury.
B. Market Imperfections That Can
Facilitate Abusive and Unaffordable
Loans
The recent sharp increase in serious
delinquencies has highlighted the roles
that structural elements of the subprime
2007 Mortgage Market at 4.
are based on data from Mortgage
Bankers’ Association’s National Delinquency
Survey (2007) (MBA Nat’l Delinquency Survey).

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5 Estimates

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mortgage market may play in increasing
the likelihood of injury to consumers
who find themselves in that market.
Limitations on price and product
transparency in the subprime market—
often compounded by misleading or
inaccurate advertising—may make it
harder for consumers to protect
themselves from abusive or unaffordable
loans, even with the best disclosures.
The injuries consumers in the subprime
market may suffer as a result are
magnified when originators’ incentives
to carefully assess consumers’
repayment ability grow weaker, as can
happen when originators sell their loans
to be securitized.6 The fragmentation of
the originator market can further
exacerbate the problem by making it
more difficult for investors to monitor
originators and for regulators to protect
consumers.
Limited Transparency and Limits of
Disclosure
Limited transparency in the subprime
market increases the risk that borrowers
in that market will receive unaffordable
or abusive loans. The transparency of
the subprime market to consumers is
limited in several respects. First, price
information for the subprime market is
not widely and readily available to
consumers. A consumer reading a
newspaper, telephoning brokers or
lenders, or searching the Internet can
easily obtain current prime interest rate
quotes for free. In contrast, subprime
rates, which can vary significantly based
on the individual borrower’s risk
profile, are not broadly advertised and
are usually obtainable only after
application and paying a fee. Subprime
rate quotes may not even be reliable if
the originator engages in a ‘‘bait and
switch’’ strategy. Price opacity is
exacerbated because the subprime
consumer often does not know her own
credit score. Even if she knows her
score, the prevailing interest rate for
someone with that score and other
credit risk characteristics is not
generally publicly available.
Second, products in the subprime
market tend to be complex, both relative
to the prime market and in absolute
terms, as well as less standardized than
in the prime market.7 As discussed
6 Benjamin J. Keys, Tanmoy K. Mukherjee, Amit
Seru and Vikram Vig, Did Securitization Lead to
Lax Screening? Evidence from Suprime Loans at 22,
available at: http://ssrn.com/abstract=1093137.
7 U.S. Dep’t of Housing & Urban Development and
U.S. Dep’t of Treasury, Recommendations to Curb
Predatory Home Mortgage Lending 17 (2000)
(‘‘While predatory lending can occur in the prime
market, such practices are for the most part
effectively deterred by competition among lenders,
greater homogeneity in loan terms and the prime
borrowers’ greater familiarity with complex

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earlier, subprime originations have
much more often been ARMs than fixed
rate mortgages. ARMs require
consumers to make judgments about the
future direction of interest rates and
translate expected rate changes into
changes in their payment amounts.
Subprime loans are also far more likely
to have prepayment penalties. Because
the annual percentage rate (APR) does
not reflect the price of the penalty, the
consumer must both calculate the size
of the penalty from a formula and assess
the likelihood of moving or refinancing
during the penalty period. In these and
other ways, subprime products tend to
be complex for consumers.
Third, the roles and incentives of
originators are not transparent. One
source estimates that 60 percent or more
of mortgages originated in the last
several years were originated through a
mortgage broker, often an independent
entity, who takes loan applications from
consumers and shops them to
depository institutions or other
lenders.8 Anecdotal evidence indicates
that consumers in both the prime and
subprime markets often believe, in error,
that a mortgage broker is obligated to
find the consumer the best and most
suitable loan terms available.
Consumers who rely on brokers often
are unaware, however, that a broker’s
interests may diverge from, and conflict
with, their own interests. In particular,
consumers are often unaware that a
creditor pays a broker more to originate
a loan with a rate higher than the rate
the consumer qualifies for based on the
creditor’s underwriting criteria.
Limited shopping. In this
environment of limited transparency,
consumers—particularly those in the
subprime market—may reasonably
decide not to shop further among
originators or among loan options once
an originator has told them they will
receive a loan, because further shopping
can be very costly. Shopping may
require additional applications and
application fees, and may delay the
consumer’s receipt of funds. This delay
creates a potentially significant cost for
the many subprime borrowers seeking to
refinance their obligations to lower their
debt payments at least temporarily, to
extract equity in the form of cash, or
financial transactions.’’); Howard Lax, Michael
Manti, Paul Raca and Peter Zorn, Subprime
Lending: An Investigation of Economic Efficiency,
15 Housing Policy Debate 533, 570 (2004)
(Subprime Lending Investigation) (stating that the
subprime market lacks the ‘‘overall standardization
of products, underwriting, and delivery systems’’
that is found in the prime market).
8 Data reported by Wholesale Access Mortgage
Research and Consulting, Inc., available at http://
www.wholesaleaccess.com/.

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both.9 In recent years, nearly 90 percent
of subprime ARMs used for refinancings
were ‘‘cash out.’’ 10
While shopping costs are likely clear,
the benefits may not be obvious or may
appear minimal. Without easy access to
subprime product prices, a consumer
may have only a limited idea after
working with one originator whether
further shopping is likely to produce a
better deal. Moreover, consumers in the
subprime market have reported in
studies that they were turned down by
several lenders before being approved.11
Once approved, these consumers may
see little advantage to continuing to
shop for better terms if they expect to
be turned down by other originators.
Further, if a consumer uses a broker
believing that the broker is shopping for
the consumer for the best deal, the
consumer may believe a better deal is
not obtainable. An unscrupulous
originator may also seek to discourage a
consumer from shopping by
intentionally understating the cost of an
offered loan. For all of these reasons,
borrowers in the subprime market may
not shop beyond the first approval and
may be willing to accept unfavorable
terms.12

Limited focus. Consumers considering
obtaining a typically complex subprime
mortgage loan may simplify their
decision by focusing on a few attributes
of the product or service that seem most
important.13 A consumer may focus on
loan attributes that have the most
obvious and immediate consequence
such as loan amount, down payment,
initial monthly payment, initial interest
rate, and up-front fees (though up-front
fees may be more obscure when added
to the loan amount, and ‘‘discount
points’’ in particular may be difficult for
consumers to understand). These
consumers, therefore, may not focus on
terms that may seem less immediately
important to them such as future
increases in payment amounts or
interest rates, prepayment penalties, and
negative amortization. They are also not
likely to focus on underwriting practices
such as income verification, and on
features such as escrows for future tax
and insurance obligations.14 Consumers
who do not fully understand such terms
and features, however, are less able to
appreciate their risks, which can be
significant. For example, the payment
may increase sharply and a prepayment
penalty may hinder the consumer from

9 See Anthony Pennington-Cross & Souphala
Chomsisengphet, Subprime Refinancing: Equity
Extraction and Mortgage Termination, 35 Real
Estate Economics 2, 233 (2007) (reporting that 49%
of subprime refinance loans involve equity
extraction, compared with 26% of prime refinance
loans); Marsha J. Courchane, Brian J. Surette, and
Peter M. Zorn, Subprime Borrowers: Mortgage
Transitions and Outcomes (Subprime Outcomes),
29 J. of Real Estate Economics 4, 368–371 (2004)
(discussing survey evidence that borrowers with
subprime loans are more likely to have experienced
major adverse life events (marital disruption; major
medical problem; major spell of unemployment;
major decrease of income) and often use refinancing
for debt consolidation or home equity extraction);
Subprime Lending Investigation, at 551–552 (citing
survey evidence that borrowers with subprime
loans have increased incidence of major medical
expenses, major unemployment spells, and major
drops in income).
10 A ‘‘cash out’’ transaction is one in which the
borrower refinances an existing mortgage, and the
new mortgage amount is greater than the existing
mortgage amount, to allow the borrower to extract
from the home. Figure calculated from First
American LoanPerformance data.
11 James M. Lacko and Janis K. Pappalardo,
Federal Trade Commission, Improving Consumer
Mortgage Disclosures: An Empirical Assessment of
Current and Prototype Disclosure Forms at 24–26
(2007), available at: http://www.ftc.gov/os/2007/06/
P025505MortgageDisclosureReport.pdf (Improving
Mortgage Disclosures) (reporting evidence based on
qualitative consumer interviews); Subprime
Lending Investigation at 550 (finding based on
survey data that ‘‘[p]robably the most significant
hurdle overcome by subprime borrowers * * * is
just getting approved for a loan for the first time.
This impact might well make subprime borrowers
more willing to accept less favorable terms as they
become uncertain about the possibility of qualifying
for a loan at all.’’).
12 Subprime Outcomes at 371–372 (reporting
survey evidence that relative to prime borrowers,

subprime borrowers are less knowledgeable about
the mortgage process, search less for the best rates,
and feel they have less choice about mortgage terms
and conditions); Subprime Mortgage Investigation
at 554 (‘‘Our focus groups suggested that prime and
subprime borrowers use quite different search
criteria in looking for a loan. Subprime borrowers
search primarily for loan approval and low monthly
payments, while prime borrowers focus on getting
the lowest available interest rate. These distinctions
are quantitatively confirmed by our survey.’’).
13 Jinkook Lee and Jeanne M. Hogarth, Consumer
Information Search for Home Mortgages: Who,
What, How Much, and What Else?, Financial
Services Review 291 (2000) (Consumer Information
Search) (‘‘In all, there are dozens of features and
costs disclosed per loan, far in excess of the
combination of terms, lenders, and information
sources consumers report using when shopping.’’).
14 Consumer Information Search at 285 (reporting
survey evidence that most consumers compared
interest rate or APR, loan type (fixed-rate or ARM),
and mandatory up-front fees, but only a quarter
considered the costs of optional products such as
credit insurance and back-end costs such as late
fees). There is evidence that borrowers are not
aware of, or do not understand, terms of this nature
even after they have obtained a loan. See Improving
Mortgage Disclosures at 27–30 (discussing
anecdotal evidence based on consumer interviews
that borrowers were not aware of, did not
understand, or misunderstood an important cost or
feature of their loans that had substantial impact on
the overall cost, the future payments, or the ability
to refinance with other lenders); Brian Bucks and
Karen Pence, Do Homeowners Know Their House
Values and Mortgage Terms? 18–22 (Board Fin. and
Econ. Discussion Series Working Paper No. 2006–
3, 2006) (discussing statistical evidence that
borrowers with ARMs underestimate annual as well
as life-time caps on the interest rate; the rate of
underestimation increases for lower-income and
less-educated borrowers), available at http://
www.federalreserve.gov/pubs/feds/2006/200603/
200603pap.pdf.

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refinancing to avoid the payment
increase. Thus, consumers may
unwittingly accept loans that they will
have difficulty repaying.
Limits of disclosure. Disclosures
describing the multiplicity of features of
a complex loan could help some
consumers in the subprime market, but
may not be sufficient to protect them
against unfair loan terms or lending
practices. Obtaining widespread
consumer understanding of the many
potentially significant features of a
typical subprime product is a major
challenge.15 If consumers do not have a
certain minimum level understanding of
the market and products, disclosures for
complex and infrequent transactions
may not effectively provide that
minimum understanding. Moreover,
even if all of a loan’s features are
disclosed clearly to consumers, they
may continue to focus on a few features
that appear most significant.
Alternatively, disclosing all features
may ‘‘overload’’ consumers and make it
more difficult for them to discern which
features are most important.
Moreover, consumers may rely more
on their originators to explain the
disclosures when the transaction is
complex; some originators may have
incentives to misrepresent the
disclosures so as to obscure the
transaction’s risks to the consumer; and
such misrepresentations may be
particularly effective if the originator is
face-to-face with the consumer.16
Therefore, while the Board anticipates
proposing changes to Regulation Z to
improve mortgage loan disclosures, it is
unlikely that better disclosures, alone,
will address adequately the risk of
abusive or unaffordable loans in the
subprime market.

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Misaligned Incentives and Obstacles to
Monitoring
Not only are consumers in the
subprime market often unable to protect
themselves from abusive or unaffordable
loans, originators may at certain times
be more likely to extend unaffordable
loans. The recent sharp rise in serious
delinquencies on subprime mortgages
has made clear that originators were not
15 Improving Mortgage Disclosures at 74–76
(finding that borrowers in the subprime market may
have more difficulty understanding their loan terms
because their loans are more complex than loans in
the prime market).
16 U.S. Gen. Accounting Office, GAO 04–280,
Consumer Protection: Federal and State Agencies
Face Challenges in Combating Predatory Lending
97–98 (2004) (stating that the inherent complexity
of mortgage loans, some borrowers’ lack of financial
sophistication, education, or infirmities, and
misleading statements and actions by lenders and
brokers limit the effectiveness of even clear and
transparent disclosures).

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adequately assessing repayment ability,
particularly where mortgages were sold
to the secondary market and the
originator retained little of the risk. The
growth of the secondary market gave
lenders—and, thus, mortgage
borrowers—greater access to capital
markets, lowered transaction costs, and
allowed risk to be shared more widely.
This ‘‘originate-to-distribute’’ model,
however, has also contributed to the
loosening of underwriting standards,
particularly during periods of rapid
house price appreciation, which may
mask problems by keeping default and
delinquency rates low until price
appreciation slows or reverses.17
This potential tendency has several
related causes. First, when an originator
sells a mortgage and its servicing rights,
depending on the terms of the sale, most
or all of the risks typically are passed on
to the loan purchaser. Thus, originators
that sell loans may have less of an
incentive to undertake careful
underwriting than if they kept the loans.
Second, warranties by sellers to
purchasers and other ‘‘repurchase’’
contractual provisions have little
meaningful benefit if originators have
limited assets. Third, fees for some loan
originators have been tied to loan
volume, making loan sales—sometimes
accomplished through aggressive ‘‘push
marketing’’—a higher priority than loan
quality for some originators. Fourth,
investors may not exercise adequate due
diligence on mortgages in the pools in
which they are invested, and may
instead rely heavily on credit-ratings
firms to determine the quality of the
investment.18
Fragmentation in the originator
market can further exacerbate the
problem. Data reported under the Home
Mortgage Disclosure Act (HMDA) show
that independent mortgage companies—
those not related to depository
institutions or their subsidiaries or
affiliates—in 2005 and 2006 made
nearly one-half of first-lien mortgage
loans reportable as being higher-priced
but only one-fourth of loans that were
not reportable as higher-priced. Nor was
lending by independent mortgage
companies particularly concentrated: In
each of 2005 and 2006 around 150
independent mortgage companies made
500 or more first-lien mortgage loans on
owner-occupied dwellings that were
reportable as higher-priced. In addition,
17 Atif Mian and Amir Sufi, The Consequences of
Mortgage Credit Expansion: Evidence from the 2007
Mortgage Default Crisis (May 2008), available at:
http://ssrn.com/abstract=1072304.
18 Benjamin J. Keys, Tanmoy K. Mukherjee, Amit
Seru and Vikram Vig, Did Securitization Lead to
Lax Screening? Evidence from Suprime Loans at 22,
available at: http://ssrn.com/abstract=1093137.

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as noted earlier, one source suggests that
60 percent or more of mortgages
originated in the last several years were
originated through mortgage brokers.19
This same source estimates the number
of brokerage companies at over 50,000
in recent years.
Thus, a securitized pool of mortgages
may have been sourced by tens of
lenders and thousands of brokers.
Investors have limited ability to directly
monitor these originators’ activities.
Further, government oversight of such a
fragmented market faces significant
challenges because originators operate
in different states and under different
regulatory and supervisory regimes and
different practices in sharing
information among regulators. These
circumstances may inhibit the ability of
regulators to protect consumers from
abusive and unaffordable loans.
A Role for New HOEPA Rules
As explained above, consumers in the
subprime market face serious
constraints on their ability to protect
themselves from abusive or unaffordable
loans, even with the best disclosures;
originators themselves may at times lack
sufficient market incentives to ensure
loans they originate are affordable; and
regulators face limits on their ability to
oversee a fragmented subprime
origination market. These circumstances
warrant imposing a new national legal
standard on subprime lenders to help
ensure that consumers receive mortgage
loans they can afford to repay, and help
prevent the equity-stripping abuses that
unaffordable loans facilitate. Adopting
this standard under authority of HOEPA
ensures that it is applied uniformly to
all originators and provides consumers
an opportunity to redress wrongs
through civil actions to the extent
authorized by TILA. As explained in the
next part, substantial information
supplied to the Board through several
public hearings confirms the need for
new HOEPA rules.
III. The Board’s HOEPA Hearings
A. Home Ownership and Equity
Protection Act (HOEPA)
The Board has recently held extensive
public hearings on consumer protection
issues in the mortgage market, including
the subprime sector. These hearings
were held pursuant to the Home
Ownership and Equity Protection Act
(HOEPA), which directs the Board to
hold public hearings periodically on the
home equity lending market and the
adequacy of existing law for protecting
19 Data reported by Wholesale Access Mortgage
Research and Consulting, Inc., available at http://
www.wholesaleaccess.com.

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the interests of consumers, particularly
low income consumers. HOEPA
imposes substantive restrictions, and
special pre-closing disclosures, on
particularly high-cost refinancings and
home equity loans (‘‘HOEPA loans’’).20
These restrictions include limitations on
prepayment penalties and ‘‘balloon
payment’’ loans, and prohibitions of
negative amortization and of engaging in
a pattern or practice of lending based on
the collateral without regard to
repayment ability.
When it enacted HOEPA, Congress
granted the Board authority, codified in
TILA Section 129(l), to create
exemptions to HOEPA’s restrictions and
to expand its protections. 15 U.S.C.
1639(l). Under TILA Section 129(l)(1),
the Board may create exemptions to
HOEPA’s restrictions as needed to keep
responsible credit available; and under
TILA Section 129(l)(2), the Board may
adopt new or expanded restrictions as
needed to protect consumers from
unfairness, deception, or evasion of
HOEPA. In HOEPA Section 158,
Congress directed the Board to monitor
changes in the home equity market
through regular public hearings.
Hearings the Board held in 2000 led
the Board to expand HOEPA’s
protections in December 2001.21 Those
rules, which took effect in 2002,
lowered HOEPA’s rate trigger, expanded
its fee trigger to include single-premium
credit insurance, added an anti‘‘flipping’’ restriction, and improved the
special pre-closing disclosure.

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B. Summary of 2006 Hearings
In the summer of 2006, the Board held
four hearings in four cities on three
broad topics: (1) The impact of the 2002
HOEPA rule changes on predatory
lending practices, as well as the effects
on consumers of state and local
predatory lending laws; (2)
nontraditional mortgage products and
reverse mortgages; and (3) informed
consumer choice in the subprime
market. Hearing panelists included
mortgage lenders and brokers, credit
ratings agencies, real estate agents,
consumer advocates, community
development groups, housing
counselors, academicians, researchers,
20 HOEPA loans are closed-end, non-purchase
money mortgages secured by a consumer’s principal
dwelling (other than a reverse mortgage) where
either: (a) The APR at consummation will exceed
the yield on Treasury securities of comparable
maturity by more than 8 percentage points for firstlien loans, or 10 percentage points for subordinatelien loans; or (b) the total points and fees payable
by the consumer at or before closing exceed the
greater of 8 percent of the total loan amount, or
$547 for 2007 (adjusted annually).
21 Truth in Lending, 66 FR 65604, 65608, Dec. 20,
2001.

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and state and federal government
officials. In addition, consumers,
housing counselors, brokers, and other
individuals made brief statements at the
hearings during an ‘‘open mike’’ period.
In all, 67 individuals testified on panels
and 54 comment letters were submitted
to the Board.
Consumer advocates and some state
officials stated that HOEPA is generally
effective in preventing abusive terms in
loans subject to the HOEPA price
triggers. They noted, however, that very
few loans are made with rates or fees at
or above the HOEPA triggers, and some
advocated that Congress lower them.
Consumer advocates and state officials
also urged regulators and Congress to
curb abusive practices in the origination
of loans that do not meet HOEPA’s price
triggers.
Consumer advocates identified
several particular areas of concern. They
urged the Board to prohibit or restrict
certain loan features or terms, such as
prepayment penalties, and underwriting
practices such as ‘‘stated income’’ or
‘‘low documentation’’ (‘‘low doc’’) loans
for which the borrower’s income is not
documented or verified. They also
expressed concern about aggressive
marketing practices such as steering
borrowers to higher-cost loans by
emphasizing initial low monthly
payments based on an introductory rate
without adequately explaining that the
consumer will owe considerably higher
monthly payments after the
introductory rate expires.
Some consumer advocates stated that
brokers and lenders should be held to a
duty of care such as a duty of good faith
and fair dealing or a duty to make only
loans suitable for the borrower. These
advocates also urged the Board to ban
‘‘yield spread premiums,’’ payments
that brokers receive from the lender at
closing for delivering a loan with an
interest rate that is higher than the
lender’s ‘‘buy rate,’’ because they
provide brokers an incentive to increase
consumers’ interest rates. They argued
that such steps would align reality with
consumers’ perceptions that brokers
serve their best interests. Consumer
advocates also expressed concerns that
brokers, lenders, and others may coerce
appraisers to misrepresent the value of
a dwelling; and that servicers may
charge consumers unwarranted fees and
in some cases make it difficult for
consumers who are in default to avoid
foreclosure.
Industry panelists and commenters,
on the other hand, expressed concern
that state predatory lending laws may
reduce the availability of credit for some
subprime borrowers. Most industry
commenters opposed prohibiting stated

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44527

income loans, prepayment penalties, or
other loan terms, asserting that this
approach would harm borrowers more
than help them. They urged the Board
and other regulators to focus instead on
enforcing existing laws to remove ‘‘bad
actors’’ from the market. Some lenders
indicated, however, that restrictions on
certain features or practices might be
appropriate if the restrictions were clear
and narrow. Industry commenters also
stated that subjective suitability
standards would create uncertainties for
brokers and lenders and subject them to
excessive litigation risk.
C. Summary of June 2007 Hearing
In light of the information received at
the 2006 hearings and the rise in
defaults that began soon after, the Board
held an additional hearing in June 2007
to explore how it could use its authority
under HOEPA to prevent abusive
lending practices in the subprime
market while still preserving
responsible subprime lending. The
Board focused the hearing on four
specific areas: Lenders’ determination of
borrowers’ repayment ability; ‘‘stated
income’’ and ‘‘low doc’’ lending; the
lack of escrows in the subprime market
relative to the prime market; and the
high frequency of prepayment penalties
in the subprime market.
At the hearing, the Board heard from
16 panelists representing consumers,
mortgage lenders, mortgage brokers, and
state government officials, as well as
from academicians. The Board also
received almost 100 written comments
after the hearing from an equally diverse
group.
Industry representatives
acknowledged concerns with recent
lending practices but urged the Board to
address most of these concerns through
supervisory guidance rather than
regulations under HOEPA. They
maintained that supervisory guidance,
unlike regulation, is flexible enough to
preserve access to responsible credit.
They also suggested that supervisory
guidance issued recently regarding
nontraditional mortgages and subprime
lending, as well as market selfcorrection, have reduced the need for
new regulations. Industry
representatives support improving
mortgage disclosures to help consumers
avoid abusive loans. They urged that
any substantive rules adopted by the
Board be clearly drawn to limit
uncertainty and narrowly drawn to
avoid unduly restricting credit.
In contrast, consumer advocates, state
and local officials, and Members of
Congress urged the Board to adopt
regulations under HOEPA. They
acknowledged a proper place for

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guidance but contended that recent
problems indicate the need for
requirements enforceable by borrowers
through civil actions, which HOEPA
enables and guidance does not. They
also expressed concern that less
responsible, less closely supervised
lenders are not subject to the guidance
and that there is limited enforcement of
existing laws for these entities.
Consumer advocates and others
welcomed improved disclosures but
insisted they would not prevent abusive
lending. More detailed accounts of the
testimony and letters are provided
below in the context of specific issues
the Board is addressing in these final
rules.

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D. Congressional Hearings
Congress has also held a number of
hearings in the past year about
consumer protection concerns in the
mortgage market.22 In these hearings,
Congress has heard testimony from
individual consumers, representatives
of consumer and community groups,
representatives of financial and
mortgage industry groups and federal
and state officials. These hearings have
focused on rising subprime foreclosure
rates and the extent to which lending
practices have contributed to them.
Consumer and community group
representatives testified that certain
lending terms or practices, such as
22 E.g., Foreclosure Problems and Solutions:
Federal, State, and Local Efforts to Address the
Foreclosure Crisis in Ohio: Hearing before the
Subcomm. on Housing and Comm. Oppty. of the H.
Comm. on Fin. Servs., 110th Cong. (2008); Targeting
Federal Aid to Neighborhoods Distressed by the
Subprime Mortgage Crisis: Hearing before the
Subcomm. on Housing and Comm. Oppty. of the H.
Comm. on Fin. Servs., 110th Cong. (2008);
Improving Consumer Protections in Subprime
Lending: Hearing before the Subcomm. on Int.
Comm., Trade, and Tourism of the S. Comm. on
Comm., Sci., and Trans., 110th Cong. (2008); H.R.
5679, The Foreclosure Prevention and Sound
Mortgage Servicing Act of 2008: Hearing before the
Subcomm. on Housing and Comm. Oppty. of the H.
Comm. on Fin. Servs., 110th Cong. (2008); Restoring
the American Dream: Solutions to Predatory
Lending and the Foreclosure Crisis: S. Comm. on
Banking, Hsg., and Urban Affairs, 110th Cong.
(2008); Consumer Protection in Financial Services:
Subprime Lending and Other Financial Activities:
Hearing before the Subcomm. on Fin. Svcs. and
Gen. Gov’t of the H. Approp. Comm., 110th Cong.
(2008); Progress in Administration and Other Efforts
to Coordinate and Enhance Mortgage Foreclosure
Prevention: Hearing before the H. Comm. on Fin.
Servs., 110th Cong. (2007); Legislative Proposals on
Reforming Mortgage Practices: Hearing before the
H. Comm. on Fin. Servs., 110th Cong. (2007);
Legislative and Regulatory Options for Minimizing
and Mitigating Mortgage Foreclosures: Hearing
before the H. Comm. on Fin. Servs., 110th Cong.
(2007); Ending Mortgage Abuse: Safeguarding
Homebuyers: Hearing before the S. Subcomm. on
Hous., Transp., and Cmty. Dev. of the S. Comm. on
Banking, Hous., and Urban Affairs, 110th Cong.
(2007); Improving Federal Consumer Protection in
Financial Services: Hearing before the H. Comm. on
Fin. Servs., 110th Cong. (2007).

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hybrid adjustable-rate mortgages,
prepayment penalties, low or no
documentation loans, lack of escrows
for taxes and insurance, and failure to
consider the consumer’s ability to repay
have contributed to foreclosures. In
addition, these witnesses testified that
consumers often believe that mortgage
brokers represent their interests and
shop on their behalf for the best loan
terms. As a result, they argue that
consumers do not shop independently
to ensure that they are getting the best
terms for which they qualify. They also
testified that, because originators sell
most loans into the secondary market
and do not share the risk of default,
brokers and lenders have less incentive
to ensure consumers can afford their
loans.
Financial services and mortgage
industry representatives testified that
consumers need better disclosures of
their loan terms, but that substantive
restrictions on subprime loan terms
would risk reducing access to credit for
some borrowers. In addition, these
witnesses testified that applying a
fiduciary duty to the subprime market,
such as requiring that a loan be in the
borrower’s best interest, would
introduce subjective standards that
would significantly increase compliance
and litigation risk. According to these
witnesses, some lenders would be less
willing to offer loans in the subprime
market, making it harder for some
consumers to get loans.
IV. Interagency Supervisory Guidance
In December 2005, the Board and the
other federal banking agencies
responded to concerns about the rapid
growth of nontraditional mortgages in
the previous two years by proposing
supervisory guidance. Nontraditional
mortgages are mortgages that allow the
borrower to defer repayment of
principal and sometimes interest. The
guidance advised institutions of the
need to reduce ‘‘risk layering’’ practices
with respect to these products, such as
failing to document income or lending
nearly the full appraised value of the
home. The proposal, and the final
guidance issued in September 2006,
specifically advised lenders that
layering risks in nontraditional
mortgage loans to subprime borrowers
may significantly increase risks to
borrowers as well as institutions.23
The Board and the other federal
banking agencies addressed concerns
about the subprime market more
broadly in March 2007 with a proposal
23 Interagency Guidance on Nontraditional
Mortgage Product Risks, 71 FR 58609, Oct. 4, 2006
(Nontraditional Mortgage Guidance).

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addressing the heightened risks to
consumers and institutions of ARMs
with two or three-year ‘‘teaser’’ rates
followed by substantial increases in the
rate and payment. The guidance,
finalized in June 2007, sets out the
standards institutions should follow to
ensure borrowers in the subprime
market obtain loans they can afford to
repay.24 Among other steps, the
guidance advises lenders to (1) use the
fully-indexed rate and fully-amortizing
payment when qualifying borrowers for
loans with adjustable rates and
potentially non-amortizing payments;
(2) limit stated income and reduced
documentation loans to cases where
mitigating factors clearly minimize the
need for full documentation of income;
(3) provide that prepayment penalty
clauses expire a reasonable period
before reset, typically at least 60 days.
The Conference of State Bank
Supervisors (CSBS) and American
Association of Residential Mortgage
Regulators (AARMR) issued parallel
statements for state supervisors to use
with state-supervised entities, and many
states have adopted the statements.
The guidance issued by the federal
banking agencies has helped to promote
safety and soundness and protect
consumers in the subprime market.
Guidance, however, is not necessarily
implemented uniformly by all
originators. Originators who are not
subject to routine examination and
supervision may not adhere to guidance
as closely as originators who are.
Guidance also does not provide
individual consumers who have
suffered harm because of abusive
lending practices an opportunity for
redress. The new and expanded
consumer protections that the Board is
adopting apply uniformly to all
creditors and are enforceable by federal
and state supervisory and enforcement
agencies and in many cases by
borrowers.
V. Legal Authority
A. The Board’s Authority Under TILA
Section 129(l)(2)
The substantive limitations in new
§§ 226.35 and 226.36 and corresponding
revisions to §§ 226.32 and 226.34, as
well as restrictions on misleading and
deceptive advertisements, are based on
the Board’s authority under TILA
Section 129(l)(2), 15 U.S.C. 1639(l)(2).
That provision gives the Board authority
to prohibit acts or practices in
connection with:
24 Statement on Subprime Mortgage Lending, 72
FR 37569, Jul. 10, 2007 (Subprime Statement).

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• 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 types of mortgage
loans not covered under that section,
such as home purchase loans. Section
129(l)(2) also authorizes the Board to
strengthen the protections in Section
129(c)–(i) for the loans to which Section
103(aa) applies these protections
(HOEPA loans). In TILA Section 129
(c)–(i), Congress set minimum standards
for HOEPA loans. The Board is
authorized to strengthen those standards
for HOEPA loans when the Board finds
practices unfair, deceptive, or abusive.
The Board is also authorized by Section
129(l)(2) to apply those strengthened
standards to loans that are not HOEPA
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
when such practices are ‘‘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).25
Congress has codified standards
developed by the Federal Trade
Commission (FTC) for determining
whether acts or practices are unfair
25 H.R.

Rep. 103–652, at 162 (1994) (Conf. Rep.).

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under Section 5(a), 15 U.S.C. 45(a).26
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.27
The FTC has interpreted these
standards to mean that consumer injury
is the central focus of any inquiry
regarding unfairness.28 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.29 The FTC looks to
whether an act or practice is injurious
in its net effects.30 The agency 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.31 In evaluating
unfairness, the FTC looks to whether
consumers’ free market decisions are
unjustifiably hindered.32
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).33 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.34
26 See 15 U.S.C. 45(n); Letter from FTC to the
Hon. Wendell H. Ford and the Hon. John C.
Danforth (Dec. 17, 1980).
27 15 U.S.C. 45(n).
28 Statement of Basis and Purpose and Regulatory
Analysis, Credit Practices Rule, 42 FR 7740, 7743,
March 1, 1984 (Credit Practices Rule).
29 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).
30 Credit Practices Rule, 42 FR at 7744.
31 Id.
32 Id.
33 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).
34 Dingell Letter at 1–2.

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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.35
In adopting final 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
FTC Act’s prohibition against unfair or
deceptive acts or practices, as well as
the standards applied to similar state
statutes.
B. The Board’s Authority Under TILA
Section 105(a)
Other aspects of these rules are based
on the Board’s general authority under
TILA Section 105(a) to prescribe
regulations necessary or proper to carry
out TILA’s purposes 15 U.S.C. 1604(a).
This section is the basis for the
requirement to provide early disclosures
for residential mortgage transactions as
well as many of the revisions to improve
advertising disclosures. These rules are
intended to carry out TILA’s purposes of
informing consumers about their credit
terms and helping them shop for credit.
See TILA Section 102, 15 U.S.C. 1603.
VI. The Board’s Proposal
On January 9, 2008, the Board
published a notice of proposed
rulemaking in the Federal Register (73
FR 1672) proposing to amend
Regulation Z.
A. Proposals To Prevent Unfairness,
Deception, and Abuse
The Board proposed new restrictions
and requirements for mortgage lending
and servicing intended to protect
consumers against unfairness,
deception, and abuse while preserving
responsible lending and sustainable
homeownership. Some of the proposed
restrictions would apply only to higherpriced mortgage loans, while others
35 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 * * * 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).

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would apply to all mortgage loans
secured by a consumer’s principal
dwelling.
Protections Covering Higher-Priced
Mortgage Loans
The Board proposed certain
protections for consumers receiving
higher-priced mortgage loans. Higherpriced mortgage loans would have been
loans with an annual percentage rate
(APR) that exceeds the comparable
Treasury security by three or more
percentage points for first-lien loans, or
five or more percentage points for
subordinate-lien loans. For such loans,
the Board proposed to:
Æ Prohibit creditors from engaging in
a pattern or practice of extending credit
without regard to borrowers’ ability to
repay from sources other than the
collateral itself;
Æ Require creditors to verify income
and assets they rely upon in making
loans;
Æ Prohibit prepayment penalties
unless certain conditions are met; and
Æ Require creditors to establish
escrow accounts for taxes and
insurance, but permit creditors to allow
borrowers to opt out of escrows 12
months after loan consummation.
In addition, the proposal would have
prohibited creditors from structuring
closed-end mortgage loans as open-end
lines of credit for the purpose of evading
these rules, which do not apply to lines
of credit.
Proposed Protections Covering ClosedEnd Loans Secured by Consumer’s
Principal Dwelling

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In addition, in connection with all
consumer-purpose, closed-end loans
secured by a consumer’s principal
dwelling, the Board proposed to:
Æ Prohibit creditors from paying a
mortgage broker more than the
consumer had agreed in advance that
the broker would receive;
Æ Prohibit any creditor or mortgage
broker from coercing, influencing, or
otherwise encouraging an appraiser to
provide a misstated appraisal in
connection with a mortgage loan; and
Æ Prohibit mortgage servicers from
‘‘pyramiding’’ late fees, failing to credit
payments as of the date of receipt,
failing to provide loan payoff statements
upon request within a reasonable time,
or failing to deliver a fee schedule to a
consumer upon request.
B. Proposals To Improve Mortgage
Advertising
Another goal of the Board’s proposal
was to ensure that mortgage loan
advertisements provide accurate and
balanced information and do not

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contain misleading or deceptive
representations. The Board proposed to
require that advertisements for both
open-end and closed-end mortgage
loans provide accurate and balanced
information, in a clear and conspicuous
manner, about rates, monthly payments,
and other loan features. The proposal
was issued under the Board’s authorities
to: Adopt regulations to ensure
consumers are informed about and can
shop for credit; require that information,
including the information required for
advertisements for closed-end credit, be
disclosed in a clear and conspicuous
manner; and regulate advertisements of
open-end home-equity plans secured by
the consumer’s principal dwelling. See
TILA Section 105(a), 15 U.S.C. 1604(a);
Section 122, 15 U.S.C. 1632; Section
144, 15 U.S.C. 1664; Section 147, 15
U.S.C. 1665b.
The Board also proposed, under TILA
Section 129(l)(2), 15 U.S.C. 1639(l)(2), to
prohibit the following seven deceptive
or misleading practices in
advertisements for closed-end mortgage
loans:
Æ Advertising ‘‘fixed’’ rates or
payments for loans whose rates or
payments can vary without adequately
disclosing that the interest rate or
payment amounts are ‘‘fixed’’ only for a
limited period of time, rather than for
the full term of the loan;
Æ Comparing an actual or
hypothetical consumer’s rate or
payment obligations and the rates or
payments that would apply if the
consumer obtains the advertised
product unless the advertisement states
the rates or payments that will apply
over the full term of the loan;
Æ Advertisements that characterize
the products offered as ‘‘government
loan programs,’’ ‘‘government-supported
loans,’’ or otherwise endorsed or
sponsored by a federal or state
government entity even though the
advertised products are not governmentsupported or -sponsored loans;
Æ Advertisements, such as
solicitation letters, that display the
name of the consumer’s current
mortgage lender, unless the
advertisement also prominently
discloses that the advertisement is from
a mortgage lender not affiliated with the
consumer’s current lender;
Æ Advertising claims of debt
elimination if the product advertised
would merely replace one debt
obligation with another;
Æ Advertisements that create a false
impression that the mortgage broker or
lender has a fiduciary relationship with
the consumer; and
Æ Foreign-language advertisements in
which certain information, such as a

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low introductory ‘‘teaser’’ rate, is
provided in a foreign language, while
required disclosures are provided only
in English.
C. Proposal To Give Consumers
Disclosures Early
A third goal of the proposal was to
provide consumers transaction-specific
disclosures early enough to use while
shopping for a mortgage loan. The Board
proposed to require creditors to provide
transaction-specific mortgage loan
disclosures such as the APR and
payment schedule for all home-secured,
closed-end loans no later than three
business days after application, and
before the consumer pays any fee except
a reasonable fee for the originator’s
review of the consumer’s credit history.
VII. Overview of Comments Received
The Board received approximately
4700 comments on the proposal. The
comments came from community banks,
independent mortgage companies, large
bank holding companies, secondary
market participants, credit unions, state
and national trade associations for
financial institutions in the mortgage
business, mortgage brokers and
mortgage broker trade associations,
realtors and realtor trade associations,
individual consumers, local and
national community groups, federal and
state regulators and elected officials,
appraisers, academics, and other
interested parties.
Commenters generally supported the
Board’s effort to protect consumers from
unfair practices, particularly in the
subprime market, while preserving
responsible lending and sustainable
homeownership. However, industry
commenters generally opposed the
breadth of the proposal; favoring
narrower and more flexible rules. They
also expressed concerns about the costs
of certain proposals, such as the
requirement to establish escrows for all
first-lien higher-priced mortgage loans.
Consumer advocates, federal and state
regulators (including the Federal
Deposit Insurance Corporation (FDIC)),
and elected officials (including
members of Congress and some state
attorneys general) supported the
proposal as addressing some of the
abuses in the subprime market, but
argued that additional consumer
protections are needed.
Many commenters supported the
approach of using loan price to identify
‘‘higher-priced’’ loans. Financial
institution commenters and their trade
associations were concerned, however,
that the proposed price thresholds were
too low, and could capture many prime
loans. They contended that broad

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coverage would reduce credit
availability because creditors would
refrain from making covered loans or
would pass on compliance costs. Many
industry commenters urged the Board to
use a different index to define higherpriced mortgage loans than the
proposed index of Treasury security
yields, because the spread between
Treasury yields and mortgage rates can
change. Consumer advocate commenters
generally, but not uniformly, favored
applying the Board’s proposed
protections to all loans secured by a
principal dwelling regardless of loan
price. In the alternative, they favored
the proposed price thresholds but urged
the Board also to apply the protections
to nontraditional mortgage loans.
Industry commenters generally, but
not uniformly, supported or did not
oppose a rule prohibiting lenders from
engaging in a pattern or practice of
unaffordable lending. They urged the
Board, however, to provide a clear and
specific ‘‘safe harbor’’ and remove the
presumptions of violations in order to
avoid unduly constraining credit. In
contrast, consumer advocate
commenters and others urged the Board
to revise the ability to repay rule so that
it applies on a loan-by-loan basis and
not only to a pattern or practice of
disregarding borrowers’ ability to repay.
These commenters argued that a
requirement to prove a ‘‘pattern or
practice’’ would prevent consumers
from bringing claims and would weaken
the rule’s power to deter abuse.
Consumer advocate commenters and
some federal and state regulators and
elected officials also maintained that a
complete ban on prepayment penalties
is necessary to protect consumers. In
particular, many of these commenters
argued that prepayment penalties’
harms to subprime consumers outweigh
the benefits of any reductions in interest
rate consumers receive, and that the
Board’s proposed restrictions on
prepayment penalties would not
adequately address the harms. However,
most banks and their trade associations
stated that the interest rate benefit
afforded to consumers with loans
having prepayment penalty provisions
lowers credit costs and increases credit
availability.
Many community banks and mortgage
brokers as well as several industry trade
associations opposed the proposed
escrow requirement, contending that
escrow infrastructures would be costly
and that creditors would either refrain
from making higher-priced loans or
would pass costs on to consumers.
Consumers also expressed concern that
they would lose interest on their
escrowed funds and that servicers

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would fail to properly pay tax and
insurance obligations. Several industry
trade associations, several large
creditors and some mortgage brokers,
consumer and community development
groups, and state and federal officials,
however, supported the proposed
escrow requirement as protecting
consumers from expensive force-placed
insurance or default, and possibly
foreclosure.
For their part, mortgage brokers and
their trade associations principally
addressed the yield spread premium
proposal, which they strongly opposed.
They, as well as FTC staff, argued that
prohibiting creditors from paying
brokers more than the consumer agreed
to in writing would put brokers at a
competitive disadvantage relative to
retail lenders. They also argued that
consumers would be confused and
misled by a broker compensation
disclosure. Consumer advocates, several
members of Congress, several state
attorneys general, and the FDIC
contended that the proposal would do
little to protect consumers and urged the
Board to ban yield spread premiums
outright.
Most commenters generally supported
the Board’s proposed advertising rules,
although some commenters requested
clarifications and modifications.
Commenters were divided about the
proposal to require early mortgage loan
disclosures. Many creditors and their
trade associations opposed the proposal
because of perceived operational cost
and compliance difficulties, and
concerns about the scope of the fee
restriction and its application to third
party originators. Consumer groups,
state regulators and enforcement
generally supported the proposed rule,
however, because it would make more
information available to consumers
when they are shopping for loans. Some
of the commenters requested that the
Board require lenders to redisclose
before loan consummation to enhance
the accuracy of information.
Industry commenters urged the Board
to adopt all of the proposed restrictions
in §§ 226.35 and 226.36 under its TILA
Section 105(a) authority rather than its
Section 129(l)(2) authority. They argued
that using Section 129(l)(2) authority
would impose disproportionately heavy
penalties on lenders for violations and
unnecessary costs on consumers.
Consumer advocates, on the other hand,
supported using Section 129(l)(2)
authority and urged the Board use it
more broadly to adopt the other
proposed rules concerning early
disclosures and advertising.
Public comments with respect to
these and other provisions of the rule

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are described and discussed in more
detail below.
VIII. Definition of ‘‘Higher-Priced
Mortgage Loan’’—§ 226.35(a)
A. Overview
The Board proposed to extend certain
consumer protections to a subset of
consumer residential mortgage loans
referred to as ‘‘higher-priced mortgage
loans.’’ This part VIII discusses the
definition of ‘‘higher-priced mortgage
loan’’ the Board is adopting. A
discussion of the specific protections
that apply to these loans follows in part
IX. The Board is also finalizing the
proposal to apply certain other
restrictions to closed-end consumer
mortgage loans secured by the
consumer’s principal dwelling without
regard to loan price. These restrictions
are discussed separately in part X.
Under the proposal, higher-priced
mortgage loans would be defined as
consumer credit transactions secured by
the consumer’s principal dwelling for
which the APR on the loan exceeds the
yield on comparable Treasury securities
by at least three percentage points for
first-lien loans, or five percentage points
for subordinate-lien loans. The
proposed definition would include
home purchase loans, refinancings, and
home equity loans. The definition
would exclude home equity lines of
credit (‘‘HELOCs’’). There would also be
exclusions for reverse mortgages,
construction-only loans, and bridge
loans.
The Board is adopting a definition of
‘‘higher-priced mortgage loan’’ that is
substantially similar to that proposed
but different in the particulars. The
changes to the final rule are being made
in response to commenters’ concerns.
The final definition, like the proposed
definition, sets a threshold above a
measure of market rates to distinguish
higher-priced mortgage loans from the
rest of the mortgage market. But the
measure the Board is adopting is
different, and therefore so is the
threshold. Instead of yields on Treasury
securities, the definition uses average
offer rates for the lowest-risk prime
mortgages, termed ‘‘average prime offer
rates.’’ For the foreseeable future, the
Board will obtain or, as applicable,
derive average prime offer rates from the
Freddie Mac Primary Mortgage Market
Survey. The threshold is set at 1.5
percentage points above the average
prime offer rate on a comparable
transaction for first-lien loans, and 3.5
percentage points for subordinate-lien
loans. The exclusions from ‘‘higherpriced mortgage loans’’ for HELOCs and

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certain other types of transactions are
adopted as proposed.
The definition of ‘‘higher-priced
mortgage loans’’ appears in § 226.35(a).
Such loans are subject to the restrictions
and requirements in § 226.35(b)
concerning repayment ability, income
verification, prepayment penalties,
escrows, and evasion, except that only
first-lien higher-priced mortgage loans
are subject to the escrow requirement.
B. Public Comment on the Proposal
Most industry commenters, a national
consumer advocacy and research
organization, and others supported the
approach of using loan price to identify
loans subject to stricter regulations. A
large number and wide variety of these
commenters, however, urged the Board
to use a prime mortgage market rate
instead of, or in addition to, Treasury
yields to avoid arbitrary changes in
coverage due to changes in the premium
for mortgages over Treasuries or in the
relationship between short-term and
long-term Treasury yields. The precise
recommendations are discussed in more
detail in subpart D below. Industry
commenters were particularly
concerned that the threshold over the
chosen index be set high enough to
exclude the prime market. They
maintained that the proposed thresholds
of 300 and 500 basis points over
Treasury yields would cover a
significant part of the prime market and
reduce credit availability.
Consumer and civil rights group
commenters generally, but not
uniformly, opposed limiting protections
to higher-priced mortgage loans and
recommended applying these
protections to all loans secured by a
principal dwelling. They recommended
in the alternative that the thresholds be
adopted at the levels proposed, or even
lower, and that nontraditional mortgage
loans, which permit non-amortizing
payments or negatively amortizing
payments, be covered regardless of loan
price. They believe the Nontraditional
Mortgage Guidance is not adequate to
protect consumers.
The proposed exclusion of HELOCs
drew criticism from several consumer
and civil rights groups but strong
support from industry commenters. The
other proposed exclusions drew limited
comment. Some industry commenters
proposed additional exclusions for
loans with federal guaranties such as
FHA, VA, and Rural Housing Service. A
few commenters also proposed
excluding ‘‘jumbo’’ loans, that is, loans
in an amount that exceeds the threshold
of eligibility for purchase by Fannie Mae
or Freddie Mac. Other proposed
exclusions are discussed below.

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C. General Approach
Cover Subprime, Exclude Prime
The Board stated in connection with
the proposal a general principle that
new regulations should be applied as
broadly as needed to protect consumers
from actual or potential injury, but not
so broadly that the costs, including the
always-present risk of unintended
consequences, would clearly outweigh
the benefits. Consistent with this
principle, the Board believes, as it stated
in connection with the proposal, that
the stricter regulations of § 226.35
should cover the subprime market and
generally exclude the prime market.
The Board believes that the practices
that § 226.35 would prohibit—lending
without regard to ability to pay from
verified income and non-collateral
assets, failure to establish an escrow for
taxes and insurance, and prepayment
penalties outside of prescribed limits—
are so clearly injurious on balance to
consumers within the subprime market
that they should be categorically barred
in that market. The reasons for this
conclusion are detailed below in part IX
with respect to each practice. Moreover,
the Board has concluded that, to be
effective, these prohibitions must cover
the entire subprime market and not just
subprime products with particular terms
or features. Market imperfections
discussed in part II—the subprime
market’s lack of transparency and
potentially inadequate incentives for
creditors to make only loans that
consumers can repay—affect consumers
throughout the subprime market. To be
sure, risk within the subprime market
has varied by loan type. For example,
delinquencies on fixed-rate subprime
mortgages have been lower in recent
years than on adjustable-rate subprime
mortgages. It is not likely to be practical
or effective, however, to target certain
types of loans in the subprime market
for coverage while excluding others.
Such a rule would be unduly complex,
likely fail to adapt quickly enough to
ever-changing products, and encourage
creditors to steer borrowers to
uncovered products.
In the prime market, however, the
Board believes that a case-by-case
approach to determining whether the
§ 226.35 practices are unfair or
deceptive is more appropriate. By
nature, loans in the prime market have
a lower credit risk. Moreover, the prime
market is more transparent and
competitive, characteristics that make it
less likely a creditor can sustain an
unfair, abusive, or deceptive practice. In
addition, borrowers in the prime market
are less likely to be under the degree of
financial stress that tends to weaken the

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ability of many borrowers in the
subprime market to protect themselves
against unfair, abusive, or deceptive
practices. The final rule applies
protections against coercion of
appraisers and unfair servicing practices
to the prime market because, with
respect to these particular practices, the
prime market, too, suffers a lack of
transparency and these practices do not
appear to be limited to the subprime
market.
With these limited exceptions, at
present the Board believes that any
undue risks to consumers in the prime
market from particular loan terms or
lending practices are better addressed
through means other than new
regulations under HOEPA. Supervisory
guidance from the federal agencies
influences a large majority of the prime
market which, unlike the subprime
market, has been dominated by federally
supervised institutions.36 Such
guidance affords regulators and
institutions alike more flexibility than a
regulation, with potentially fewer
unintended consequences. In addition,
the standards the Government
Sponsored Enterprises set for the loans
they will purchase continue to have
significant influence within the prime
market, and these entities are
accountable for those standards to
regulators and Congress.37
Use the APR
The Board also continues to believe—
and few, if any, commenters disagreed—
that the best way to identify the
subprime market is by loan price rather
than by borrower characteristics.
Identifying a class of protected
borrowers would present operational
difficulties and other problems. For
example, it is common to distinguish
borrowers by credit score, with lowerscoring borrowers generally considered
to be at higher risk of injury in the
mortgage market. Defining the protected
field as lower-scoring consumers would
fail to protect higher-scoring consumers
‘‘steered’’ to loans meant for lowerscoring consumers. Moreover, the
market uses different commercial
scores, and choosing a particular score
36 According to HMDA data from 2005 and 2006,
more than three-quarters of prime, conventional
first-lien mortgage loans on owner-occupied
properties were made by depository institutions or
their affiliates. For this purpose, a loan for which
price information was not reported is treated as a
prime loan.
37 According to HMDA data from 2005 and 2006,
nearly 30 percent of prime, conventional first-lien
mortgage loans on owner-occupied properties were
purchased by Fannie Mae or Freddie Mac. This
figure understates the GSEs’ influence on the prime
market because it excludes the many loans that
were underwritten using the GSEs’ standards but
were not sold to the GSEs.

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as the benchmark for a regulation could
give unfair advantage to the company
that provides that score.
The most appropriate measure of loan
price for this regulation is the APR; few,
if any, commenters disagreed with this
point either. The APR corresponds
closely to credit risk, that is, the risk of
default as well as the closely related
risks of serious delinquency and
foreclosure. Loans with higher APRs
generally have higher credit risks,
whatever the source of the risk might
be—weaker borrower credit histories,
higher borrower debt-to-income ratios,
higher loan-to-value ratios, less
complete income or asset
documentation, less traditional loan
terms or payment schedules, or
combinations of these or other risk
factors. Because disclosing an APR has
long been required by TILA, the figure
is also very familiar and readily
available to creditors and consumers.
Therefore, the Board believes it
appropriate to use a loan’s APR to
identify loans having a high enough
credit risk to warrant the protections of
§ 226.35.
Two loans with identical risk
characteristics will likely have different
APRs if they were originated when
market rates were different. It is
important to normalize the APR by an
index that moves with mortgage market
rates so that loans with the same risk
characteristics will be treated the same
regardless of when the loans were
originated. The Board proposed to use
as this index the yields on comparable
Treasury securities, which HOEPA uses
currently to identify HOEPA-covered
loans, see TILA Section 103(aa), 15
U.S.C. 1602(aa), and § 226.32(a), and
Regulation C uses to identify mortgage
loans reportable under HMDA as being
higher-priced, see 12 CFR 203.4(a)(12).
For reasons discussed in more detail
below, the final rule uses instead an
index that more closely tracks
movements in mortgage rates than do
Treasury yields.

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Uncertainty
As the Board stated in connection
with the proposal, there are three major
reasons why it is inherently uncertain
which APR threshold would achieve the
twin objectives of covering the subprime
market and generally excluding the
prime market. First, there is not a
uniform definition of the prime or
subprime market, or of a prime or
subprime loan. Moreover, the markets
are separated by a somewhat loosely
defined segment known as the alt-A
market, the precise boundaries of which
are not clear.

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Second, available data sets provide
only a rough measure of the empirical
relationship between APR and credit
risk. A proprietary dataset such as the
loan-level data on subprime securitized
mortgages published by First American
LoanPerformance may contain detailed
information on loan characteristics,
including the contract rate, but lack the
APR or sufficient data to derive the
APR. Other data must be consulted to
estimate APRs based on contract rates.
HMDA data contain the APR for
mortgage loans reportable as being
higher-priced (as adjusted by
comparable Treasury securities), but
they have little information about credit
risk.
Third, data sets can of course show
only the existing or past distribution of
loans across market segments, which
may change in ways that are difficult to
predict. In particular, the distribution
could change in response to the Board’s
imposition of the restrictions in
§ 226.35, but the likely direction of the
change is not clear. ‘‘Over compliance’’
could effectively lower the threshold.
While a loan’s APR can be estimated
early in the application process, it is
typically not known to a certainty until
after the underwriting has been
completed and the interest rate has been
locked. Creditors might build in a
‘‘cushion’’ against this uncertainty by
voluntarily setting their internal
thresholds lower than the threshold in
the regulation.
Creditors would have a competing
incentive to avoid the restrictions,
however, by restructuring the prices of
potential loans that would have APRs
just above the threshold to cause the
loans’ APRs to come under the
threshold. Different combinations of
contract rates and points that are
economically identical for an originator
produce different APRs. With the
adoption of § 226.35, an originator may
have an incentive to achieve a rate-point
combination that would bring a loan’s
APR below the threshold (if the
borrower had the resources or equity to
pay the points). Moreover, some fees,
such as late fees and prepayment
penalties, are not included in the APR.
Creditors could increase the number or
amounts of such fees to maintain a
loan’s effective price while lowering its
APR below the threshold. It is not clear
whether the net effect of these
competing forces of over-compliance
and circumvention would be to capture
more, or fewer, loans.
For all of the above reasons, there is
inherent uncertainty as to what APR
threshold would perfectly achieve the
objectives of covering the subprime
market and generally excluding the

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44533

prime market. In the face of this
uncertainty, deciding on an APR
threshold calls for judgment. As the
Board stated with the proposal, the
Board believes it is appropriate to err on
the side of covering somewhat more
than the subprime market.
The Alt-A Market
If the selected thresholds cover more
than the subprime market, then they
likely extend into what has been known
as the alt-A market. The alt-A market is
generally understood to be for borrowers
who typically have higher credit scores
than subprime borrowers but still pose
more risk than prime borrowers because
they make small down payments or do
not document their incomes, or for other
reasons. The definition of this market is
not precise, however.
The Board judges that the benefits of
extending § 226.35’s restrictions into
some part of the alt-A market to ensure
coverage of the entire subprime market
outweigh the costs. This market segment
also saw undue relaxation of
underwriting standards, one reason that
its share of residential mortgage
originations grew sixfold from 2003 to
2006 (from two percent of originations
to 13 percent). 38 See part VIII.C for
further discussion of the relaxation of
underwriting standards in the alt-A
market.
To the extent § 226.35 covers the
higher-priced end of the alt-A market,
where risks in that segment are highest,
the regulation will likely benefit
consumers more than it would cost
them. Prohibiting lending without
regard to repayment ability in this
market slice would likely reduce the
risk to consumers from ‘‘payment
shock’’ on nontraditional loans.
Applying the income verification
requirement of §§ 226.32(a)(4)(ii) and
226.35(b)(1) to the riskier part of the altA market could ameliorate injuries to
consumers from lending based on
inflated incomes without necessarily
depriving consumers of access to credit.
D. Index for Higher-Priced Mortgage
Loans
Under the proposal, higher-priced
mortgage loans would be defined as
consumer credit transactions secured by
the consumer’s principal dwelling for
which the APR on the loan exceeds the
yield on comparable Treasury securities
by at least three percentage points for
first-lien loans, or five percentage points
for subordinate-lien loans. The
proposed definition would include
home purchase loans, refinancings of
home purchase loans, and home equity
38 IMF

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sroberts on PROD1PC70 with RULES

loans. The definition would exclude
home equity lines of credit (‘‘HELOCs’’),
reverse mortgages, construction-only
loans, and bridge loans.
The Board is adopting a definition of
‘‘higher-priced mortgage loan’’ that is
substantially similar to that proposed
but different in the particulars. The final
definition, like the proposed definition,
sets a threshold above a measure of
market rates to distinguish higherpriced mortgage loans from the rest of
the mortgage market. But the measure
the Board is adopting is different, and
therefore so is the threshold. Instead of
yields on Treasury securities, the final
definition uses average offer rates for the
lowest-risk prime mortgages, termed
‘‘average prime offer rates.’’ For the
foreseeable future, the Board will obtain
or, as applicable, derive average prime
offer rates for a wide variety of types of
transactions from the Primary Mortgage
Market Survey (PMMS) conducted by
Freddie Mac, and publish these rates on
at least a weekly basis. The Board will
conduct its own survey if it becomes
appropriate or necessary to do so. The
threshold is set at 1.5 percentage points
above the average prime offer rate on a
comparable transaction for first-lien
loans, and 3.5 percentage points for
subordinate-lien loans. The exclusions
from ‘‘higher-priced mortgage loans’’ for
HELOCs and certain other types of
transactions are adopted as proposed.
Public Comment
A large number and wide variety of
industry commenters, as well as a
consumer research and advocacy group,
urged the Board to use a prime mortgage
market rate instead of, or in addition to,
Treasury yields. First, they argued the
tendency of prime mortgage rates at
certain times to deviate significantly
from Treasury yields—such as during
the ‘‘flight to quality’’ seen in recent
months—would lead to unwarranted
coverage of the prime market and
arbitrary swings in coverage. Many of
these commenters also pointed out that
changes in the Treasury yield curve (the
relationship of short-term to long-term
Treasury yields) can increase or
decrease coverage even though neither
borrower risk profiles nor creditor
practices or products have changed. The
Board’s proposal to address this second
problem by matching Treasuries to
mortgages on the basis of the loan’s
expected life span drew limited, but
mostly negative, comment. Although
one large lender specifically agreed with
the proposed matching rules, a few
others stated the rules were too
complicated.
The precise recommendations for a
measure of mortgage market rates

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varied. Several commenters specifically
recommended using the PMMS. They
recommended that a threshold be added
to the PMMS figure because it is, by
design, at the low end of the range of
rates that can be found in the prime
market. Recommendations for
thresholds for first-lien loans ranged
from 150 to 300 basis points over the
PMMS. Some commenters
recommended approaches that would
rely on both Treasuries and the PMMS.
A few recommended the approach of a
recent North Carolina law, which covers
a first-lien loan only if its APR exceeds
two thresholds: 300 basis points over
the comparable Treasury yield and 175
basis points over the PMMS rate for the
30-year fixed-rate loan. A few
recommended a different way to
integrate Treasuries and the PMMS.
Under this approach, the threshold
would be set at the comparable Treasury
yield (determined as proposed) plus 200
basis points (400 for subordinate-lien
loans), plus the spread between the
PMMS 30-year FRM rate and the sevenyear Treasury.
Some commenters offered alternatives
to the PMMS. A consumer research and
advocacy group and Freddie Mac
suggested that the Board could use the
higher of the Freddie Mac Required Net
Yield (the yield Freddie Mac expects
from purchasing a conforming mortgage)
and the equivalent Fannie Mae yield.
Fannie Mae offered a similar, but not
identical, recommendation to use the
higher of the current coupon yield for
Fannie Mae Mortgage Backed Securities
and Freddie Mac participation
certifications (PC). These yields reflect
the price at which a governmentsponsored entity (GSE) security can be
sold in the market. At least one
commenter suggested that the Board
could conduct its own survey of
mortgage market rates.
Discussion
Based on these comments and the
analysis below, the final rule does not
use Treasury yields as the index for
higher-priced mortgage loans. Instead,
the rule uses average offer rates on the
lowest-risk prime mortgage loans,
termed ‘‘average prime offer rates.’’ For
the foreseeable future, the Board will
obtain or, as applicable, derive these
rates for a wide variety of types of
transactions from the PMMS and
publish them on a weekly basis.
Drawbacks of using Treasury security
yields. There are significant advantages
to using Treasury yields to set the APR
thresholds. Treasuries are traded in a
highly liquid market; Treasury yield
data are published for many different
maturities and can easily be calculated

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for other maturities; and the integrity of
published yields is not subject to
question. For these reasons, Treasuries
are also commonly used in federal
statutes, such as HOEPA, for
benchmarking purposes.
As recent events have highlighted,
however, using Treasury yields to set
the APR threshold in a law regulating
mortgage loans has two major
disadvantages. The most significant
disadvantage is that the spread between
Treasuries and mortgage rates, even
prime mortgage rates, changes in the
short term and in the long term.
Moreover, the comparable Treasury
security for a given mortgage loan is
quite difficult to determine accurately.
The Treasury-mortgage spread can
change for at least three different
reasons. First, credit risk may change on
mortgages, even for the highest-quality
borrowers. For example, credit risk
increases when house prices fall.
Second, competition for prime
borrowers can increase, tightening
spreads, or decrease, allowing lenders to
charge wider spreads. Third,
movements in financial markets can
affect Treasury yields but have no effect
on lenders’ cost of funds or, therefore,
on mortgage rates. For example,
Treasury yields fall disproportionately
more than mortgage rates during a
‘‘flight to quality.’’
Recent events illustrate how much the
Treasury-mortgage spread can swing.
The spread averaged about 170 basis
points in 2007, but increased to an
average of about 220 basis points in the
first half of 2008. In addition, the spread
was highly volatile in this period,
shifting as much as 25 basis points in a
week. The spread may decrease, but
predictions of long-term spreads are
highly uncertain.
Changes in the Treasury-mortgage
spread can undermine key objectives of
the regulation. These changes mean that
loans with identical credit risk are
covered in some periods but not in
others, contrary to the objective of
consistent and predictable coverage over
time. Moreover, lenders’ uncertainty as
to when such changes will occur can
cause them to set an internal threshold
below the regulatory threshold. This
may reduce credit availability directly
(if a lender’s policy is not to make
higher-priced mortgage loans) or
indirectly, by increasing regulatory
burden. The recent volatility might lead
lenders to set relatively conservative
cushions.
Adverse consequences of volatility in
the spread between mortgages rates and
Treasuries could be reduced simply by
setting the regulatory threshold at a high
enough level to ensure it excludes all

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Federal Register / Vol. 73, No. 147 / Wednesday, July 30, 2008 / Rules and Regulations
prime loans. But a threshold high
enough to accomplish this objective
would likely fail to meet another,
equally important objective of covering
essentially all of the subprime market.
Instead, the Board is adopting a rate that
closely follows mortgage market rates,
which should mute the effects on
coverage of changes in the spread
between mortgage rates and Treasury
yields.
The second major disadvantage of
using Treasury yields to set the
threshold is that the comparable
Treasury security for a given mortgage
loan is quite difficult to determine
accurately. Regulation C determines the
comparable Treasury security on the
basis of contractual maturity: A loan is
matched to a Treasury with the same
contract term. For example, the
regulation matches a 30-year mortgage
loan to a 30-year Treasury security. This
method does not, however, account for
the fact that very few loans reach their
full maturity, and it causes significant
distortions when the yield curve
changes shape.39 These distortions can
bias coverage, sometimes in
unpredictable ways, and consequently
might influence the preferences of
lenders to offer certain loan products in
certain environments. For example, a
steep yield curve will create two
regulatory forces pushing the subprime
market toward ARMs: A lender could
avoid coverage on the margins by selling
ARMs rather than fixed-rate mortgages,
and the consumer would receive an
APR that understates the interest rate
risk from an ARM relative to that from
a fixed-rate mortgage. (Regulation Z
requires the APR be calculated as if the
index does not change; a steep yield
curve indicates that the index will likely
rise.) Artificial regulatory incentives to
increase ARMs production in the
subprime market could undermine
consumer protection.
The Board proposed to reduce
distortions in coverage resulting from
changes in the yield curve by matching
loans to Treasury securities on the basis
of the loan’s expected life span rather
than its legal term to maturity. For
example, the Board proposed to match
a 30-year fixed-rate mortgage loan to a
10-year Treasury security on the
supposition that the mortgage loan will
prepay (or default) in ten years or less.
A limitation of this approach is that
loan life spans change as rates of house
price appreciation, mortgage rates, and
macroeconomic factors such as
39 Robert B. Avery, Kenneth P. Brevoort, and
Glenn B. Canner, Higher-Priced Home Lending and
the 2005 HMDA Data, 92 Fed. Res. Bulletin A123–
66 (Sept. 8, 2006).

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unemployment rates change. Loan life
spans also change as specific loan
features that influence default or
prepayment rates change, such as
prepayment penalties. The challenge of
adjusting the regulation’s matching
rules on a timely basis would be
substantial, and too-frequent
adjustments would complicate
creditors’ compliance. Indeed, many
commenters judged the proposed
matching rules to be too complicated.
This matching problem can be reduced,
if not necessarily eliminated, by using
mortgage market rates instead of
Treasury security yields to set the
threshold.
A rate from the prime mortgage
market. To address the principal
drawbacks of Treasury security yields,
the Board is adopting a final rule that
relies instead on a rate that more closely
tracks rates in the prime mortgage
market. Section 226.35(a)(2) defines an
‘‘average prime offer rate’’ as an annual
percentage rate derived from average
interest rates, points, and other pricing
terms offered by a representative sample
of creditors for mortgage transactions
that have low-risk pricing
characteristics. Comparing a
transaction’s annual percentage rate to
this average offered annual percentage
rate, rather than to an average offered
contract interest rate, should make the
rule’s coverage more accurate and
consistent. A transaction is a higherpriced mortgage loan if its APR exceeds
the average prime offer rate for a
comparable transaction by 1.5
percentage points, or 3.5 percentage
points in the case of a subordinate-lien
transaction. (The basis for selecting
these thresholds is explained further in
part VIII.E) The creditor uses the most
recently available average prime offer
rate as of the date the creditor sets the
transaction’s interest rate for the final
time before consummation.
To facilitate compliance, the final rule
and commentary provide that the Board
will derive average prime offer rates
from survey data according to a
methodology it will make publicly
available, and publish these rates in a
table on the Internet on at least a weekly
basis. This table will indicate how to
identify a comparable transaction.
As noted above, the survey the Board
intends to use for the foreseeable future
is the PMMS, which contains weekly
average rates and points offered by a
representative sample of creditors to
prime borrowers seeking a first-lien,
conventional, conforming mortgage and
who would have at least 20 percent
equity. The PMMS contains pricing data
for four types of transactions: ‘‘1-year
ARM,’’ ‘‘5/1-year ARM,’’ ‘‘30-year

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44535

fixed,’’ and ‘‘15-year fixed.’’ For the two
types of ARMs, PMMS pricing data are
based on ARMs that adjust according to
the yield on one-year Treasury
securities; the pricing data include the
margin and the initial rate (if it differs
from the sum of the index and margin).
These data are updated every week and
are published on Freddie Mac’s Web
site.40
The Freddie Mac PMMS is the most
viable option for obtaining average
prime offer rates. This is the only
publicly available data source that has
rates for more than one kind of fixedrate mortgage (the 15-year and the 30year) and more than one kind of
variable-rate mortgage (the 1-year ARM
and the 5/1 ARM). Having rates on at
least two fixed-rate products and at least
two variable-rate products supplies a
firmer basis for estimating rates for other
fixed-rate and variable-rate products
(such as a 20-year fixed or a 3/1 ARM).
Other publicly available surveys the
Board considered are less suitable for
the purposes of this rule. Only one ARM
rate is collected by the Mortgage
Bankers Association’s Weekly Mortgage
Applications Survey and the Federal
Housing Finance Board’s Monthly
Survey of Interest Rates and Terms on
Conventional Single-Family Non-Farm
Mortgage Loans. Moreover, the FHFB
Survey has a substantial lag because it
is monthly and reports rates on closed
loans. The Board also evaluated two
non-survey options involving Fannie
Mae and Freddie Mac. One is the
Required Net Yield, the prices these
institutions will pay to purchase loans
directly. The other is the yield on
mortgage-backed securities issued by
Fannie Mae and Freddie Mac. With
either option, data for ARM yields
would be difficult to obtain.
These other data sources, however,
provide useful benchmarks to evaluate
the accuracy of the PMMS. The PMMS
has closely tracked these other indices,
according to a Board staff analysis. The
Board will continue to use them
periodically to help it determine
whether the PMMS remains an
appropriate data source for Regulation
Z. If the PMMS ceases to be available,
or if circumstances arise that render it
unsuitable for this rule, the Board will
consider other alternatives including
conducting its own survey.
The Board will use the pricing terms
from the PMMS, such as interest rate
and points, to calculate an annual
percentage rate (consistent with
Regulation Z, § 226.22) for each of the
four types of transactions that the
40 See http://www.freddiemac.com/dlink/html/
PMMS/display/PMMSOutputYr.jsp.

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PMMS reports. These annual percentage
rates are the average prime offer rates for
transactions of that type. The Board will
derive annual percentage rates for other
types of transactions from the loan
pricing terms available in the survey.
The method of derivation the Board
expects to use is being published for
comment in connection with the
simultaneously proposed revisions to
Regulation C. When finalized, the
method will be published on the
Internet along with the table of annual
percentage rates.
E. Threshold for Higher-Priced Mortgage
Loans
The Board proposed a threshold of
three percentage points above the
comparable Treasury security for firstlien loans, or five percentage points for
subordinate-lien loans. Since the final
rule uses a different index, it must also
use a different threshold. The Board is
adopting a threshold for first-lien loans
of 1.5 percentage points above the
average prime offer rate for a
comparable transaction, and 3.5
percentage points for second-lien loans.

sroberts on PROD1PC70 with RULES

Public Comment
Industry commenters consistently
contended that, should the Board use
Treasury yields as proposed, thresholds
of 300 and 500 basis points would be
too low to meet the Board’s stated
objective of excluding the prime
market.41 These commenters
recommended thresholds of 400 basis
points (600 for subordinate-lien loans)
41 One trade association reported that some of its
members found the proposal would have covered
up to one-third of prime loans originated between
November 2007 and January 2008. This and other
commenters said the effect was particularly
pronounced with ARMs. Several members of this
association were reported to have found that more
than one-half of prime 7/1, 5/1, and 3/1 ARMs
originated between November 2007 and January
2008 would have been covered. A different
association of mortgage lenders indicated that some
of its members had found that almost 20 percent of
prime and alt-A loans would be covered under the
proposal, though the time frame its members used
was not specified. A major lender reported that the
proposal would have captured 8–10 percent of its
portfolio in 2006 and 2007, about twice the portion
of its portfolio that it was required to report as
higher-priced under HMDA. The lender represents
that it did not make subprime loans in this period
and asserts that its figures are predictive of the
impact the proposal would have on the prime
market overall. Another large lender that stated it
does not make subprime loans believes that about
10 percent of its current originations would fall
above the proposed thresholds. One lender,
however, expressed satisfaction with the proposed
300 basis points for first-lien loans and said an
internal analysis of historical data found it would
not have captured significant numbers of its prime
loans. But this lender’s analysis found that
significant numbers of prime subordinate-lien loans
would have been captured, leading the lender to
recommend raising the threshold for subordinatelien loans to 600 basis points.

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or higher, but a few trade associations
recommended 500 (700) or 600 (800).
These commenters contended that
covering any part of the prime market
would harm consumers because the
secondary market would not purchase
loans with rates over the threshold.
They also stated that many originators
would seek to avoid originating such
loans because of a stigma these
commenters expect will attach to such
loans, the increased compliance cost
associated with the proposed
regulations, and the substantial
monetary recovery TILA Section 130
would provide plaintiffs for violations
of the regulations.
A trade association for the
manufactured housing industry
submitted that the proposed thresholds
would cover a substantial majority of
personal property loans used to
purchase manufactured homes. This
commenter contended that the reasons
these loans are priced higher than loans
secured by real estate (such as the
smaller loan amounts and the lack of
real property securing the loan) do not
support a rule that would cover
personal property loans
disproportionately.
Consumer and civil rights group
commenters generally, but not
uniformly, opposed limiting protections
to higher-rate loans and recommended
applying these protections to all loans
secured by a principal dwelling. They
recommended in the alternative that the
thresholds be adopted at the levels
proposed or even lower. They argued it
was critical to cover all of the subprime
market and much if not all of the alt-A
market.
Discussion
As discussed above, the Board has
concluded that the stricter regulations of
§ 226.35 should cover the subprime
market and generally exclude the prime
market; and in the face of uncertainty it
is appropriate to err on the side of
covering somewhat more than the
subprime market. Based on available
data, it appeared that the thresholds the
Board proposed would capture all of the
subprime market and a portion of the
alt-A market.42 Based also on available
42 The Board noted in the proposal that the
percentage of the first-lien mortgage market
Regulation C has captured as higher-priced using a
threshold of three percentage points has been
greater than the percentage of the total market
originations that one industry source has estimated
to be subprime (25 percent vs. 20 percent in 2005;
28 percent vs. 20 percent in 2006). For industry
estimates see IMF 2007 Mortgage Market at 4.
Regulation C’s coverage of higher-priced loans is
not thought, however, to have reached the prime
market in those years. Rather, in both 2005 and
2006 it reached into the alt-A market, which the

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data, the Board believes that the
thresholds it is adopting would cover
all, or virtually all, of the subprime
market and a portion of the alt-A
market. The Board considered loan-level
origination data for the period 2004 to
2007 for subprime and alt-A securitized
pools. The proprietary source of these
data is FirstAmerican Loan
Performance.43 The Board also
ascertained from a proprietary database
of mostly prime loans (McDash
Analytics) that coverage of the prime
market during the first three quarters of
2007 at these thresholds would have
been very limited. The Board recognizes
that the recent mortgage market
disruption began at the end of this
period, but it is the latest period for
which data were available.
The Board is adopting a threshold for
subordinate-lien loans of 3.5 percentage
points. This is consistent with the
Board’s proposal to set the threshold
over Treasury yields for these loans two
percentage points above the threshold
for first-lien loans. With rare exceptions,
commenters explicitly endorsed, or at
least did not raise any objection to, this
approach. The Board recognizes that it
would be preferable to set a threshold
for second-lien loans above a measure of
market rates for second-lien loans, but it
does not appear that a suitable measure
of this kind exists. Although data are
very limited, the Board believes it is
appropriate to apply the same difference
of two percentage points to the
thresholds above average prime offer
rates.
As discussed earlier, the Board
recognizes that there are limitations to
making judgments about the future
scope of the rule based on past data. For
example, when the final rule takes
effect, the risk premiums for alt-A loans
compared to the conforming loans in the
PMMS may be higher than the risk
premiums for the period 2004–2007. In
that case, coverage of alt-A loans would
be higher than an estimate for that
period would indicate.
Another important example is prime
‘‘jumbo’’ loans, or loans extended to
borrowers with low-risk mortgage
same source estimated to be 12 percent in 2005 and
13 percent in 2006. In 2004, Regulation C captured
a significantly smaller part of the market than an
industry estimate of the subprime market (11
percent vs. 19 percent), but that year’s HMDA data
were somewhat anomalous because of a steep yield
curve.
43 Annual percentage rates were estimated from
the contract rates in these data using formulas
derived from a separate proprietary database of
subprime loans that collects contract rates, points,
and annual percentage rates. This separate database,
which contains data on the loan originations of
eight subprime mortgage lenders, is maintained by
the Financial Services Research Program at George
Washington University.

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pricing characteristics, but in amounts
that exceed the threshold for loans
eligible for purchase by Freddie Mac or
Fannie Mae. The PMMS collects pricing
data only on loans eligible for purchase
by one of these entities (‘‘conforming
loans’’). Prime jumbo loans have always
had somewhat higher rates than prime
conforming loans, but the spread has
widened significantly and become much
more volatile since August 2007. If this
spread remains wider and more volatile
when the final rule takes effect, the rule
will cover a significant share of
transactions that would be prime jumbo
loans. While covering prime jumbo
loans is not the Board’s objective, the
Board does not believe that it should set
the threshold at a higher level to avoid
what may be only temporary coverage of
these loans relative to the long time
horizon for this rule.
A third example is a request from a
trade association for the manufactured
housing industry, including lenders
specializing in this industry, that the
thresholds be set higher for loans
secured by dwellings deemed to be
personal property. This association
pointed to the higher risk creditors bear
on these loans compared to loans
secured by real property, which makes
their rates systematically higher for
reasons apart from the risks they pose to
consumers. It also maintained that such
loans have not been associated with the
abusive practices of the subprime
market.44
Credit risk and liquidity risk can vary
by many factors, including geography,
property type, and type of loan. This
may suggest to some that different
thresholds should be applied to
different classes of transactions. This
approach would make the regulation
inordinately complicated and subject it
to frequent revision, which would not
be in the interest of creditors, investors,
or consumers. Although the simpler
approach the Board is adopting—just
two thresholds, one for first-lien loans
and another for subordinate-lien loans—
has its disadvantages, the Board believes
they are outweighed by its benefits of
simplicity and stability.

sroberts on PROD1PC70 with RULES

F. The Timing of Setting the Threshold
The Board proposed to set the
threshold for a dwelling-secured
mortgage loan as of the application date.
Specifically, a creditor would use the
Treasury yield as of the 15th of the
month preceding the month in which
44 The specific concern of the commenter is with
the requirement to escrow, not, apparently, with the
other requirements for higher-priced loans. As
discussed in part IX.D, the Board is providing
creditors two years to comply with the escrow
requirement for manufactured home loans.

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the application is received. The Board
noted that inconsistency with
Regulation C, which sets the threshold
as of the 15th of the month before the
rate is locked, could increase regulatory
burden. The Board suggested, however,
that setting the threshold as of the
application date might introduce more
certainty, earlier in the application
process, to the determination as to
whether a potential transaction would
be a higher-priced mortgage loan when
consummated.
Very few commenters addressed the
precise issue. A couple of them
specifically advocated using the rate
lock date to select the Treasury yield, as
in Regulation C, rather than the
application date. Subsequent outreach
by the Board indicated that there are
different views as to which date to use.
Some parties prefer the rate lock date
because it is more accurate and
therefore would minimize coverage of
loans that are not intended to be
covered and maximize coverage of loans
that are intended to be covered. Other
parties prefer the application date
because they believe it increases the
creditor’s ability to predict, when
underwriting the loan, that the loan is,
or is not, covered by § 226.35.
As noted above, the final rule requires
the creditor to use the rate lock date, the
date the rate is set for the final time
before consummation, rather than the
application date. Using the application
date might increase the predictability of
coverage at the time of underwriting.
Using the rate lock date would increase
the accuracy of coverage at least
somewhat. On balance, the Board
believes it is more important to
maximize coverage accuracy.
G. Proposal To Conform Regulation C
(HMDA)
Regulation C, which implements
HMDA, requires creditors to report price
data on higher-priced mortgage loans. A
creditor reports the difference between
a loan’s annual percentage rate and the
yield on Treasury securities having
comparable periods of maturity, if that
difference is at least three percentage
points for first-lien loans or at least five
percentage points for subordinate-lien
loans. 12 CFR 203.4(a)(12). Many
commenters suggested that the Board
establish a uniform definition of
‘‘higher-priced mortgage loan’’ for
purposes of Regulation C and
Regulation Z. Having a single definition
would reduce regulatory burden and
make the HMDA data a more useful tool
to evaluate effects of Regulation Z.
Moreover, the Board adopted Regulation
C’s requirement to report certain
mortgage loans as being higher-priced

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with an objective of covering the
subprime market and exclude the prime
market, and the definition of ‘‘higherpriced mortgage loan’’ adopted in this
rule better achieves this objective than
the definition in Regulation C for the
reasons discussed in part VIII.D.
Accordingly, in a separate notice
published simultaneously with this
final rule the Board is proposing to
amend Regulation C to apply the same
index and threshold adopted in
§ 226.35(a).
H. Types of Loans Covered Under
§ 226.35
The Board proposed to apply the
protections of § 226.35 to first-lien, as
well as subordinate-lien, closed-end
mortgage loans secured by the
consumer’s principal dwelling. This
would include home purchase loans,
refinancings, and home equity loans.
The proposed definition would not
cover loans that do not have primarily
a consumer purpose, such as loans for
real estate investment. The proposed
definition also would not cover
HELOCs, reverse mortgages,
construction-only loans, or bridge loans.
In these respects, the rule is adopted as
proposed.
Coverage of Home Purchase Loans,
Refinancings, and Home Equity Loans
The statutory protections for HOEPA
loans are generally limited to closed-end
refinancings and home equity loans. See
TILA Section 103(aa), 15 U.S.C.
1602(aa). The final rule applies the
protections of § 226.35 to loans of these
types, which have historically presented
the greatest risk to consumers. These
loans are often made to consumers who
have home equity and, therefore, have
an existing asset at risk. These loans
also can be marketed aggressively by
originators to homeowners who may not
benefit from them and who, if
responding to the marketing and not
shopping independently, may have
limited information about their options.
The Board proposed to use its
authority under TILA Section 129(l)(2),
15 U.S.C. 1639(l)(2), to apply the
protections of § 226.35 to home
purchase loans as well. Commenters did
not object, and the Board is adopting the
proposal. Covering only refinancings of
home purchase loans would fail to
protect consumers adequately. From
2003 through the first half of 2007, 42
percent of the higher-risk ARMs that
came to dominate the subprime market
in recent years were extended to

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consumers to purchase a home.45
Delinquencies on subprime ARMs used
for home purchase have risen more
sharply than they have for refinancings.
Moreover, comments and testimony at
the Board’s hearings indicate that the
problems with abusive lending practices
are not confined to refinancings and
home equity loans.
Furthermore, consumers who are
seeking home purchase loans can face
unique constraints on their ability to
make decisions. First-time homebuyers
are likely unfamiliar with the mortgage
market. Homebuyers generally are
primarily focused on acquiring a new
home, arranging to move into it, and
making other life plans related to the
move, such as placing their children in
new schools. These matters can occupy
much of the time and attention
consumers might otherwise devote to
shopping for a loan and deciding what
loan to accept. Moreover, even if the
consumer comes to understand later in
the application process that an offered
loan may not be appropriate, the
consumer may not be able to reject the
loan without risk of abrogating the sales
agreement and losing a substantial
deposit, as well as disrupting moving
plans.
Limitation to Loans Secured by
Principal Dwelling; Exclusion of Loans
for Investment
As proposed, § 226.35 protections are
limited to loans secured by the
consumer’s principal dwelling. The
Board’s primary concern is to ensure
that consumers not lose the homes they
principally occupy because of unfair,
abusive, or deceptive lending practices.
The inevitable costs of new regulation,
including potential unintended
consequences, can most clearly be
justified when people’s principal homes
are at stake.
A loan to a consumer to purchase or
improve a second home would not be
covered by these protections unless the
loan was secured by the consumer’s
principal dwelling. Loans primarily for
a real estate investment purpose also are
not covered. This exclusion is
consistent with TILA’s focus on
consumer-purpose transactions and its
exclusion in Section 104 of credit
primarily for business, commercial, or
agricultural purposes. See 15 U.S.C.
1603(1). Real estate investors are
expected to be more sophisticated than
ordinary consumers about the real estate
financing process and to have more
experience with it, especially if they
invest in several properties.
45 Figure calculated from First American
LoanPerformance data.

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Accordingly, the need to protect
investors is not clear, and in any event
is likely not sufficient to justify the
potential unintended consequences of
imposing restrictions, with civil liability
if they are violated, on the financing of
real estate investment transactions.
The Board shares concerns that
individuals who invest in residential
real estate and do not pay their mortgage
obligations put tenants at risk of
eviction in the event of foreclosure.
Regulating the rights of landlords and
tenants, however, is traditionally a
matter for state and local law. The Board
believes that state and local law could
better address this particular concern
than a Board regulation.
Coverage of Nontraditional Mortgages
Under the final rule, nontraditional
mortgage loans, which permit nonamortizing payments or negatively
amortizing payments, are covered by
§ 226.35 if their APRs exceed the
threshold. Several consumer and civil
rights groups, and others, contended
that § 226.35 should cover
nontraditional mortgage loans regardless
of loan price because of their potential
for significant payment shock and other
risks that led the federal banking
agencies to issue the Nontraditional
Mortgage Guidance. The Board does not
believe that the enhanced protections of
§ 226.35 should be applied on the basis
of product type, with the limited
exception of the narrow exemptions for
HELOCs and other loan types the Board
is adopting. A rule based on product
type would need to be reexamined
frequently as new products were
developed, which could undermine the
market by making the rule less
predictable. Moreover, it is not clear
what criteria the Board would use to
decide which products were sufficiently
risky to warrant categorical coverage.
The Board believes that other tools such
as supervisory guidance provide the
requisite flexibility to address particular
product types when that becomes
necessary.
HELOC Exemption
The Board proposed to exempt
HELOCs largely for two reasons. First,
the Board noted that most originators of
HELOCs hold them in portfolio rather
than sell them, which aligns these
originators’ interests in loan
performance more closely with their
borrowers’ interests. Second, unlike
originations of higher-priced closed-end
mortgage loans, HELOC originations are
concentrated in the banking and thrift
industries, where the federal banking
agencies can use supervisory authorities
to protect borrowers. For example, when

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inadequate underwriting of HELOCs
unduly increased risks to originators
and consumers several years ago, the
agencies responded with guidance.46
The Board also pointed to TILA and
Regulation Z’s special protections for
borrowers with HELOCs such as
restrictions on changing plan terms.
Several national trade associations
and a few large lenders voiced strong
support for excluding HELOCs,
generally for the reasons the Board
cited. Several consumer and civil rights
groups disagreed, contending that
enough HELOCs are securitized to raise
doubts that the originator’s interests are
sufficiently aligned with the borrower’s
interests. They maintained that
Regulation Z disclosures and limitations
for HELOCs are not adequate to protect
consumers, and pointed to specific
cases in which unaffordable HELOCs
had been extended. Other commenters,
such as an association of state
regulators, agreed that HELOCs should
be covered. Commenters offered very
few concrete suggestions, however, for
how to determine which HELOCs would
be covered, such as an index and
threshold.
The Board is adopting the proposal
for the reasons stated. The Board
recognizes, however, that HELOCs
present a risk of circumvention.
Creditors may seek to evade limitations
on closed-end transactions by
structuring such transactions as openend transactions. In § 226.35(b)(5),
discussed below in part IX.E, the Board
prohibits structuring a closed-end loan
as an open-end transaction for the
purpose of evading the new rules in
§ 226.35.
Other Exemptions Adopted
The other proposed exclusions drew
limited comment. A couple of
commenters expressed support for
excluding reverse mortgages while a
couple of commenters opposed it. A few
large lenders voiced support for
excluding construction-only loans. A
few commenters voiced support for the
exclusion of temporary bridge loans of
12 months or less, and none of the
commenters seemed to oppose it. The
Board is adopting the proposed
exclusions for reverse mortgages,
construction-only loans, and temporary
or bridge loans of 12 months or less.
46 Interagency Credit Risk Guidance for Home
Equity Lending, SR 05–11 (May 16, 2005), available
at http://www.federalreserve.gov/boarddocs/
srletters/2005/sr0511a1.pdf.; Addendum to Credit
Risk Guidance for Home Equity Lending, SR 06–15
(Sept. 29, 2006), available at http://
www.federalreserve.gov/BoardDocs/SRLetters/2006/
SR0615a3.pdf.

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Reverse mortgages. The Board is
keenly aware of consumer protection
concerns raised by the expanding
market for reverse mortgages, which are
complex and are sometimes marketed
with other complex financial products.
Unique aspects of reverse mortgages—
for example, the borrower’s repayment
ability is based on the value of the
collateral rather than on income—
suggest that they should be addressed
separately from this final rule. The
Board is reviewing this segment of the
mortgage market in connection with its
comprehensive review of Regulation Z
to determine what measures may be
required to ensure consumers are
protected.
Construction-only loans. Section
226.35 excludes a construction-only
loan, defined as a loan solely for the
purpose of financing the initial
construction of a dwelling, consistent
with the definition of a ‘‘residential
mortgage transaction’’ in § 226.2(a)(24).
A construction-only loan does not
include the permanent financing that
replaces a construction loan.
Construction-only loans do not appear
to present the same risk of consumer
abuse as other loans the proposal would
cover. The permanent financing, or a
new home-secured loan following
construction, would be covered by
proposed § 226.35 depending on its
APR. Applying § 226.35 to constructiononly loans, which generally have higher
interest rates than the permanent
financing, could hinder some borrowers’
access to construction financing without
meaningfully enhancing consumer
protection
Bridge loans. HOEPA now covers
certain bridge loans with rates or fees
high enough to make them HOEPA
loans. TILA Section 129(l)(1) provides
the Board authority to exempt classes of
mortgage transactions from HOEPA if
the Board finds that the exemption is in
the interest of the borrowing public and
will apply only to products that
maintain and strengthen
homeownership and equity protection.
15 U.S.C. 1639(l)(2). The Board believes
a narrow exemption for bridge loans
from the restrictions of § 226.35, as they
apply to HOEPA loans, would be in
borrowers’ interest and support
homeownership.
The final rule, like the proposed rule,
gives as an example of a ‘‘temporary or
bridge loan’’ a loan to purchase a new
dwelling where the consumer plans to
sell a current dwelling within 12
months. This is not the only potential
bona fide example of a temporary or
bridge loan. The Board does expect,
however, that the temporary or bridge
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narrowly and not to evade or
circumvent the regulation. For example,
a 12-month loan with a substantial
balloon payment would not qualify for
the exemption where it was clearly
intended to lead a borrower to refinance
repeatedly into a chain of 12-month
loans.
Exemptions Not Adopted
Industry commenters proposed
additional exclusions that the Board is
not adopting.
Government-guaranteed loans. Some
commenters proposed excluding loans
with federal guaranties such as FHA,
VA, and Rural Housing Service. They
suggested that the federal regulations
that govern these loans are sufficient to
protect consumers, and that new
regulations under HOEPA were not only
unnecessary but could cause confusion.
At least one commenter also suggested
excluding loans with state or local
agency guaranties.
The Board does not believe that
exempting government-guaranteed loans
from § 226.35 is appropriate. It is not
clear what criteria the Board would use
to decide precisely which government
programs would be exempted;
commenters did not offer concrete
suggestions. Moreover, such exemptions
could attract to agency programs less
scrupulous originators seeking to avoid
HOEPA’s civil liability, with serious
unintended consequences for
consumers as well as for the agencies
and taxpayers.
Jumbo loans. A few commenters
proposed excluding non-conforming or
‘‘jumbo’’ loans, that is, loans that exceed
the threshold amount for eligibility for
purchase by Fannie Mae or Freddie
Mac. They cited a lack of evidence of
widespread problems with jumbo loan
performance, and a belief that borrowers
who can afford jumbo loans are more
sophisticated consumers and therefore
better able to protect themselves.
The Board does not believe excluding
jumbo loans would be appropriate. The
request is based on certain assumptions
about the characteristics of the
borrowers who take out jumbo loans. In
fact, jumbo loans are offered in the
subprime and alt-A markets and not just
in the prime market. A categorical
exemption of jumbo loans could
therefore seriously undermine
protections for consumers, especially in
areas with above-average home prices.
Portfolio loans. A commenter
proposed excluding loans held in
portfolio on the basis that a lender will
take more care with these loans. Among
other concerns with such an exemption
is that it often cannot be determined as
of consummation whether a loan will be

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held in portfolio or sold immediately—
or, if held, for how long before being
sold. Therefore, such an exception to
the rule does not appear practicable and
could present significant opportunities
for evasion.
IX. Final Rules for Higher-Priced
Mortgage Loans and HOEPA Loans
A. Overview
This part discusses the new consumer
protections the Board is applying to
‘‘higher-priced mortgage loans’’ and
HOEPA loans. Creditors are prohibited
from extending credit without regard to
borrowers’ ability to repay from sources
other than the collateral itself. The final
rule differs from the proposed rule in
that it removes the proposed ‘‘pattern or
practice’’ phrase and adds a
presumption of compliance when
certain underwriting procedures are
followed. Creditors are also required to
verify income and assets they rely upon
to determine repayment ability, and to
establish escrow accounts for property
taxes and insurance. In addition, a
higher-priced mortgage loan may not
have a prepayment penalty except
under certain conditions. These
conditions are substantially narrower
than those proposed.
The Board finds that the prohibitions
in the final rule are necessary to prevent
practices that the Board finds to be
unfair, deceptive, associated with
abusive lending practices, or otherwise
not in the interest of the borrower. See
TILA Section 129(l)(2), 15 U.S.C.
1639(l)(2), and the discussion of this
statute in part V above.
The Board is also adopting the
proposed rule prohibiting a creditor
from structuring a closed-end mortgage
loan as an open-end line of credit for the
purpose of evading the restrictions on
higher-priced mortgage loans, which do
not apply to open-end lines of credit.
This rule is based on the authority of the
Board under TILA Section 129(l)(2) to
prohibit practices that would evade
Board regulations adopted under
authority of that statute. 15 U.S.C.
1639(l)(2).
B. Disregard of Consumer’s Ability To
Repay—§§ 226.34(a)(4) and 226.35(b)(1)
TILA Section 129(h), 15 U.S.C.
1639(h), and Regulation Z § 226.34(a)(4)
prohibit a pattern or practice of
extending credit subject to § 226.32
(HOEPA loans) based on consumers’
collateral without regard to their
repayment ability. The regulation
creates a presumption of a violation
where a creditor has a pattern or
practice of failing to verify and
document repayment ability. The Board

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proposed to revise the prohibition on
disregarding repayment ability and
extend it, through proposed
§ 226.35(b)(1), to higher-priced mortgage
loans as defined in § 226.35(a). The
proposed revisions included adding
several rebuttable presumptions of
violations for a pattern or practice of
failing to follow certain underwriting
procedures, and a safe harbor.
The final rule removes ‘‘pattern or
practice’’ and therefore prohibits any
HOEPA loan or higher-priced mortgage
loan from being extended based on the
collateral without regard to repayment
ability. Verifying repayment ability has
been made a requirement rather than a
presumptive requirement. The proposal
provided that a failure to follow any one
of several specified underwriting
procedures would create a presumption
of a violation. In the final rule, those
procedures, with modifications, have
instead been incorporated into a
presumption of compliance which
replaces the proposed safe harbor.
Public Comment
Mortgage lenders and their trade
associations that commented generally,
but not uniformly, support or at least do
not oppose a rule requiring creditors to
consider repayment ability. They
maintain, however, that the rule as
drafted would unduly constrain credit
availability because of the combination
of potentially significant damages under
TILA Section 130, 15 U.S.C. 1640, and
a perceived lack of a clear and flexible
safe harbor. These commenters stated
that two elements of the rule that the
Board had intended to help preserve
credit availability—the ‘‘pattern or
practice’’ element and a safe harbor for
a creditor having a reasonable
expectation of repayment ability for at
least seven years—would not have the
intended effect. Many of these
commenters suggested that the rule
would unduly constrain credit unless
the Board removed the presumptions of
violations and provided a clearer and
more specific safe harbor. Some of these
commenters also requested additional
safe harbors, such as for use of an
automated underwriting system (AUS)
of Fannie Mae or Freddie Mac.
Consumer, civil rights, and
community development groups, as
well as some state and local government
officials, several members of Congress, a
federal regulator, and others argued that
‘‘pattern or practice’’ seriously
weakened the rule and urged its
removal. They maintain that ‘‘pattern or
practice’’ would effectively prevent an
individual borrower from bringing a
claim or counter-claim based on his or
her loan, and reduce the rule’s

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deterrence of irresponsible lending.
These commenters generally support the
proposed presumptions of violations but
many of them urged the Board to adopt
quantitative standards for the proposed
presumptions for failing to consider
debt-to-income ratios (DTI) and residual
income levels. As discussed above,
these commenters also would apply the
rule to nontraditional mortgages
regardless of price, and a few would
apply the rule to the entire mortgage
market including the prime market.
The comments are discussed in more
detail throughout this section as
applicable.
Discussion
The Board finds that disregarding a
consumer’s repayment ability when
extending a higher-priced mortgage loan
or HOEPA loan, or failing to verify the
consumer’s income, assets, and
obligations used to determine
repayment ability, are unfair practices.
This section discusses the evidence
from recent events of a disregard for
repayment ability and reliance on
unverified incomes in the subprime
market; the substantial injuries that
disregarding repayment ability and
failing to verify income causes
consumers; the reasons consumers
cannot reasonably avoid these injuries;
and the Board’s basis for concluding
that the injuries are not outweighed by
countervailing benefits to consumers or
competition when repayment ability is
disregarded or income is not verified.
Evidence of a recent widespread
disregard of repayment ability.
Approximately three-quarters of
securitized originations in subprime
pools from 2003 to 2007 were 2–28 or
3–27 ARMs with a built-in potential for
significant payment shock at the start of
the third or fourth year, respectively.47
Originations of these types of mortgages
during 2005 and 2006 and through early
2007 have contributed significantly to a
substantial increase in serious
delinquencies and foreclosures. The
proportion of all subprime mortgages
47 In a typical case of a 2–28 discounted ARM, a
$200,000 loan with a discounted rate of 7 percent
for two years (compared to a fully-indexed rate of
11.5 percent) and a 10 percent maximum rate in the
third year would start at a payment of $1,531 and
jump to a payment of $1,939 in the third year, even
if the index value did not increase. The rate would
reach the fully-indexed rate in the fourth year (if the
index value still did not change), and the payment
would increase to $2,152. The example assumes an
initial index of 5.5 percent and a margin of 6
percent; assumes annual payment adjustments after
the initial discount period; a 3 percent cap on the
interest rate increase at the end of year 2; and a 2
percent annual payment adjustment cap on interest
rate increases thereafter, with a lifetime payment
adjustment cap of 6 percent (or a maximum rate of
13 percent).

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past-due ninety days or more (‘‘serious
delinquency’’) was about 13 percent in
October 2007, more than double the
mid-2005 level.48 Adjustable-rate
subprime mortgages reached a serious
delinquency rate of almost 28 percent in
May 2008, quintuple the mid-2005
level. The serious delinquency rate has
also risen for loans in alt-A (near prime)
securitized pools to almost 8 percent (as
of April 2008) from less than 2 percent
only a year ago. In contrast, 1.5 percent
of loans in the prime-mortgage sector
were seriously delinquent as of April
2008.
Higher delinquencies have shown
through to foreclosures. Foreclosures
were initiated on some 1.5 million U.S.
homes during 2007, up 53 percent from
2006, and the rate of foreclosure starts
looks to be higher yet for 2008. Lenders
initiated over 550,000 foreclosures in
the first quarter of 2008, about 274,000
of them on subprime mortgages. This
was significantly higher than the
quarterly average of 440,000
foreclosures in the second half of 2007
and 325,000 in the first half, and twice
the quarterly average of 225,000 for the
past six years.49
Payment increases on 2–28 and 3–27
ARMs have not been a major cause of
the increase in delinquencies and
foreclosures because most delinquencies
occurred before the payments were
adjusted. Rather, a major contributor to
these delinquencies was lenders’
extension of credit on the basis of
income stated on applications without
verification.50 Originators had strong
incentives to make these ‘‘stated
income’’ loans, and consumers had
incentives to accept them. Because the
loans could be originated more quickly,
originators, who were paid based on
volume, could increase their earnings by
originating more of them. The share of
‘‘low doc’’ and ‘‘no doc’’ loan
originations in the securitized subprime
market rose from 20 percent in 2000, to
30 percent in 2004, to 40 percent in
2006.51 The prevalence of stated income
lending left wide room for the loan
officer, mortgage broker, or consumer to
overstate the consumer’s income so the
consumer could qualify for a larger loan
48 Delinquency rates calculated from data from
First American LoanPerformance on mortgages in
subprime securitized pools. Figures include loans
on non-owner-occupied properties.
49 Estimates are based on data from MBA Nat’l
Delinquency Survey.
50 See U.S. Gov’t Accountability Office, GAO–08–
78R, Information on Recent Default and Foreclosure
Trends for Home Mortgages and Associated
Economic and Market Developments 5 (2007);
Fannie Mae, Weekly Economic Commentary (Mar.
26, 2007).
51 Figures calculated from First American
LoanPerformance data.

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and the loan officer or broker could
receive a larger commission. There is
substantial anecdotal evidence that
borrower incomes were commonly
inflated.52
Lenders relying on overstated
incomes to make loans could not
accurately assess consumers’ repayment
ability.53 Evidence of this failure is
found in the somewhat steeper increase
in the rate of default for low/no doc
loans originated when underwriting
standards were declining in 2005 and
2006 relative to full documentation
loans.54 Due in large part to creditors’
reliance on inaccurate ‘‘stated incomes,’’
lenders often failed to determine
reliably that the consumer would be
able to afford even the initial discounted
payments. Almost 13 percent of the 2–
28 ARMs originated in 2005 appear to
have become seriously delinquent
before their first reset.55 While some of
these borrowers may have been able to
make their payments—but stopped
because their home values declined and
they lost what little equity they had—
others were not able to afford even their
initial payments.
Although payment shock on 2–28 and
3–27 ARMs did not contribute
significantly to the substantial increase
in delinquencies, there is reason to
believe that creditors did not underwrite
to a rate and payment that would take
into account the risk to consumers of a
payment shock. Creditors also may not
have factored in the consumer’s
obligation for the expected property
taxes and insurance, or the increasingly
common ‘‘piggyback’’ second-lien loan
or line of credit a consumer would use
52 See Mortgage Asset Research Inst., Inc., Eighth
Periodic Mortgage Fraud Case Report to the
Mortgage Bankers Association (2006) (reporting that
90 of 100 stated income loans sampled used
inflated income when compared to tax return data);
Fitch Ratings, Drivers of 2006 Subprime Vintage
Performance (November 13, 2007) (Fitch 2006
Subprime Performance) (reporting that stated
income loans with high combined loan to value
ratios appear to have become vehicles for fraud).
53 Consumers may also have been led to pay more
for their loans than they otherwise would. There is
generally a premium for a stated income loan. An
originator may not have sufficient incentive to
disclose the premium on its own initiative because
collecting and reviewing documents could slow
down the origination process, reduce the number of
loans an originator produces in a period, and,
therefore, reduce the originator’s compensation for
the period. Consumers who are unaware of this
premium are effectively deprived of an opportunity
to shop for a potentially lower-rate loan requiring
full documentation.
54 Determined from First American
LoanPerformance data. See also Fitch 2006
Subprime Performance (stating that lack of income
verification, as opposed to lack of employment or
down payment verification, caused 2006 low
documentation loans delinquencies to be higher
than earlier vintages’ low documentation loans).
55 Figure calculated from First American
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to finance part or all of the down
payment.
By frequently basing lending
decisions on overstated incomes and
understated obligations, creditors were
in effect often extending credit based on
the value of the collateral, that is, the
consumer’s house. Moreover, by
coupling these practices with a practice
of extending credit to borrowers with
very limited equity, creditors were often
extending credit based on an
expectation that the house’s value
would appreciate rapidly.56 Creditors
may have felt that rapid house price
appreciation justified loosening their
lending standards, but in some locations
house price appreciation was fed by
loosened standards, which permitted
consumers to take out larger loans and
bid up house prices. Loosened lending
standards therefore made it more likely
that the inevitable readjustment of
house prices in these locations would be
severe.
House price appreciation began to
slow in 2006 and house price levels
actually began to decline in many places
in 2007. Borrowers who could not afford
their mortgage obligations because their
repayment ability had not been assessed
properly found it more difficult to lower
their payments by refinancing. They
lacked sufficient equity to meet newly
tightened lending standards, or they had
negative equity, that is, they owed more
than their house was worth. For the
same reasons, many consumers also
could not extinguish their mortgage
obligations by selling their homes.
Declining house prices led to sharp
increases in serious delinquency rates in
both the subprime and alt-A market
segments, as discussed above.57
Although the focus of § 226.35 is the
subprime market, it may cover part of
the alt-A market. Disregard for
repayment ability was often found in
the alt-A market as well. Alt-A loans are
made to borrowers who typically have
higher credit scores than subprime
borrowers, but the loans pose more risk
than prime loans because they involve
small down payments or reduced
income documentation, or the terms of
56 Often the lender extended credit knowing that
the borrower would have no equity after taking into
account a simultaneous second-lien (‘‘piggyback’’)
loan. According to Fitch 2006 Subprime
Performance, first-lien loans in subprime
securitized pools with simultaneous second liens
rose from 1.1 percent in 2000 to 6.4 percent in 2003
to 30 percent in 2006. Moreover, in some cases the
appraisal the lender relied on overstated borrower
equity because the lender or broker pressured the
appraiser to inflate the house value. The prohibition
against coercing appraisers is discussed below in
part X.B.
57 Estimates are based on data from MBA Nat’l
Delinquency Survey.

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the loan are nontraditional. According
to one estimate, loans with
nontraditional terms that permitted
borrowers to defer principal (‘‘interestonly’’) or both principal and some
interest (‘‘option ARM’’) in exchange for
higher payments later—reached 78
percent of alt-A originations in 2006.58
The combination of a variable rate with
a deferral of principal and interest held
the potential for substantial payment
shock within five years. Yet rising
delinquency rates to almost 8 percent in
2008, from less than 1 percent in 2006,
could suggest that lenders too often
assessed repayment ability at a low
interest rate and payment that did not
adequately account for near-certain
payment increases. In addition, these
loans typically were made based on
reduced income documentation. For
example, the share of interest-only
mortgages with low or no
documentation in alt-A securitized
pools increased from around 64 percent
in 2003 to nearly 80 percent in 2006.59
It is generally accepted that the reduced
documentation of income led to a high
degree of income inflation in the alt-A
market just as it did in the subprime
market.
Substantial injury. A borrower who
cannot afford to make the loan
payments as well as payments for
property taxes and homeowners
insurance because the lender did not
adequately assess the borrower’s
repayment ability suffers substantial
injury. Missing mortgage payments is
costly: Large late fees are charged and
the borrower’s credit record is impaired,
reducing her credit options. If
refinancing to a loan with a lower
payment is an option (for example, if
the borrower can obtain a loan with a
longer maturity), refinancing can slow
the rate at which the consumer is able
to pay down principal and build equity.
The borrower may have to tap home
equity to cover the refinancing’s closing
costs or may have to accept a higher
interest rate in exchange for the lender
paying the closing costs. If refinancing
is not an option, then the borrower and
household must make sacrifices to keep
the home such as reducing other
expenditures or taking additional jobs. If
keeping the home is not tenable, the
borrower must sell it or endure
foreclosure, the costs of which (for
example, property maintenance costs,
attorneys fees, and other fees passed on
to the consumer) will erode any equity
58 David Liu and Shumin Li, Alt-A Credit—The
Other Shoe Drops?, The MarketPulse (First
American LoanPerformance, Inc., San Francisco,
Cal.) Dec. 2006.
59 Figures calculated from First American
LoanPerformance data.

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the consumer had. The foreclosure will
mar the consumer’s credit record and
make it very difficult for the consumer
to become a homeowner again any time
soon. Many borrowers end up owing the
lender more than the house is worth,
especially if their homes are sold into a
declining market as is happening today
in many parts of the country.
Foreclosures also may force consumers
to move, which is costly and disruptive.
In addition to the financial costs of
unsustainable lending practices,
borrowers and households can suffer
serious emotional hardship.
If foreclosures due to irresponsible
lending rise rapidly or reach high levels
in a particular geographic area, then the
injuries can extend beyond the
individual borrower and household to
the larger community. A foreclosure
cluster in a neighborhood can reduce
homeowner equity throughout the
neighborhood by bringing down prices,
eroding the asset that for many
households is their largest.60 A
significant rise in foreclosures can
create a cycle where foreclosures bring
down property values, reducing the
ability and incentive of homeowners,
particularly those under stress for other
reasons, to retain their homes.
Foreclosure clusters also can lower
municipal tax revenues, reducing a
locality’s ability to maintain services
and make capital investments. At the
same time, revenues may be diverted to
mitigating hazards that clusters of
vacant homes can create.61
Lending without regard to repayment
ability also has other consequences. It
facilitates an abusive strategy of
‘‘flipping’’ borrowers in a succession of
refinancings designed ostensibly to
lower borrowers’ burdensome payments
that actually convert borrowers’ equity
into fees for originators without
providing borrowers a benefit.
Moreover, relaxed standards, such as
those that pervaded the subprime
market recently, may increase the
incidence of abusive lending practices
by attracting less scrupulous originators
into the market while at the same time
bringing more vulnerable borrowers into
the market. The rapid influx of new
originators that can accompany a
relaxation of lending standards makes it
more difficult for regulators and
60 E.g., Zhenguo Lin, et al. Spillover Effects of
Foreclosures on Neighborhood Property Values,
Journal of Real Estate Finance and Economics
Online (Nov. 2007), available at http://
www.springerlink.com/content/rk4q0p4475vr3473/
fulltext.pdf.
61 E.g., William C. Apgar and Mark Duda.
Collateral Damage: The Municipal Impact of
Today’s Mortgage Foreclosure Boom (Minneapolis:
Homeownership Preservation Foundation 2005).

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investors alike to distinguish
responsible from irresponsible actors.
See supra part II.
Injury not reasonably avoidable. One
might assume that borrowers could
avoid unsustainable loans by comparing
their current and expected incomes to
their current and expected expenses,
including the scheduled loan payments
disclosed under TILA and an estimate of
property taxes and homeowners
insurance. There are several reasons,
however, why consumers, especially in
the subprime market, accept risky loans
they will struggle or fail to repay. In
some cases, originators mislead
borrowers into entering into
unaffordable loans by understating the
payment before closing and disclosing
the true payment only at closing (‘‘bait
and switch’’). At the closing table, many
borrowers may not notice the disclosure
of the payment amount or have time to
consider it because borrowers are
typically provided with many
documents to sign then. Borrowers who
consider the disclosure may nonetheless
feel constrained to close the loan, for a
number of reasons. They may already
have paid substantial fees and expect
that more applications would require
more fees. They may have signed
agreements to purchase a new house
and sell the current house. Or they may
need to escape an overly burdensome
payment on a current loan, or urgently
need the cash that the loan will provide
for a household emergency.
Furthermore, many consumers in the
subprime market will accept loans
knowing they may have difficulty
affording the payments because they
reasonably believe a more affordable
loan will not be available to them. As
explained in part II.B, limited
transparency of prices, products, and
originator incentives reduces a
borrower’s expected benefit from
shopping further for a better option.
Moreover, taking more time to shop can
be costly, especially for the borrower in
a financial pinch. Thus, borrowers often
make a reasoned decision to accept
unfavorable terms.
Furthermore, borrowers’ own
assessment of their repayment ability
may be influenced by their belief that a
lender would not provide credit to a
consumer who did not have the capacity
to repay. Borrowers could reasonably
infer from a lender’s approval of their
applications that the lender had
appropriately determined that they
would be able to repay their loans.
Borrowers operating under this
impression may not independently
assess their repayment ability to the
extent necessary to protect themselves
from taking on obligations they cannot

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repay. Borrowers are likely unaware of
market imperfections that may reduce
lenders’ incentives to fully assess
repayment ability. See part II.B. And
borrowers would not realize that a
lender was applying loose underwriting
standards such as assessing repayment
ability on the basis of a ‘‘teaser’’
payment. In addition, originators may
sometimes encourage borrowers to be
excessively optimistic about their ability
to refinance should they be unable to
sustain repayment. For example, they
sometimes offer reassurances that
interest rates will remain low and house
prices will increase; borrowers may be
swayed by such reassurances because
they believe the sources are experts.
Stated income and stated asset loans
can make it even more difficult for a
consumer to avoid an unsustainable
loan. With stated income (or stated
asset) loans, the applicant may not
realize that the originator is inflating the
applicant’s income and assets to qualify
the applicant for the loan. Applicants do
not necessarily even know that they are
being considered for stated income or
stated asset loans. They may give the
originator documents verifying their
income and assets that the originator
keeps out of the loan file because the
documents do not demonstrate the
income and assets needed to make the
loan. Moreover, if a consumer
knowingly applies for a stated income
or stated asset loan and correctly states
her income or assets, the originator can
write an inflated figure into the
application form. It is typical for the
originator to fill out the application for
the consumer, and the consumer may
not see the written application until
closing, when the borrower often is
provided with numerous documents to
review and sign and may not review the
application form with care. The
consumer who detects the inflated
numbers at the closing table may not
realize their importance or may face
constraints that make it particularly
difficult to walk away from the table
without the loan.
Some consumers may also overstate
their income or assets with the
encouragement of a loan originator who
makes it clear that the consumer’s actual
income or assets are not high enough to
qualify them for the loans they seek.
Such originators may reassure
applicants that this is a benign and
common practice. In addition,
applicants may inflate their incomes
and assets on their own initiative in
circumstances where the originator does
not have reason to know.
For all of these reasons, borrowers
cannot reasonably avoid injuries from
lenders’ disregard of repayment ability.

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Moreover, other consumers who are not
parties to irresponsible transactions but
suffer from their spillover effects have
no ability to prevent these injuries.
Injury not outweighed by
countervailing benefits to consumers or
to competition. There is no benefit to
consumers or competition from loans
that are extended without regard to
consumers’ ability to make even the
initial payments. There may be some
benefit to consumers from loans that are
underwritten based on the collateral and
without regard to consumers’ ability to
sustain their payments past some initial
period. For example, a consumer who
has lost her principal source of income
may benefit from being able to risk her
home and her equity in the hope that,
before she exhausts her savings, she will
obtain a new job that will generate
sufficient income to support the
payment obligation. The Board believes,
however, that this rare benefit is
outweighed by the substantial costs to
most borrowers and communities of
extending higher-risk loans without
regard to repayment ability. (Adopting
exceptions to the rule for hardship cases
would create significant potential
loopholes and make the rule unduly
complex. The final rule does, however,
contain an exemption for temporary or
‘‘bridge’’ loans of 12 months or less,
though this exemption is intended to be
construed narrowly.)
The Board recognizes as well that
stated income (or stated asset) lending
has at least three potential benefits for
consumers and competition. It may
speed credit access for consumers who
need credit on an emergency basis, save
some consumers from expending
significant effort to document their
income, and provide access to credit for
consumers who cannot document their
incomes. The first two benefits are
limited relative to the substantial
injuries caused by lenders’ relying on
unverified incomes. The third benefit is
also limited given that consumers who
file proper tax returns can use at least
these documents, if no others are
available, to verify their incomes.
Among higher-priced mortgage loans,
where risks to consumers are already
elevated, the potential benefits to
consumers of stated income/stated asset
lending are outweighed by the potential
injuries to consumers and competition.
Final Rule
HOEPA and § 226.34(a)(4) currently
prohibit a lender from engaging in a
pattern or practice of extending HOEPA
loans based on the consumer’s collateral
without regard to the consumer’s
repayment ability, including the
consumer’s current and expected

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income, current obligations, and
employment. Section 226.34(a)(4)
currently provides that a creditor is
presumed to have violated this
prohibition if it engages in a pattern or
practice of failing to verify repayment
ability.
The Board proposed to extend this
prohibition to higher-priced mortgage
loans, see proposed § 226.35(b)(1), and
to add several additional rebuttable
presumptions of violation as well as a
safe harbor. Under the proposal a
creditor would have been presumed to
violate the regulation if it engaged in a
pattern or practice of failing to consider:
consumers’ ability to pay the loan based
on the interest rate specified in the
regulation (§ 226.34(a)(4)(i)(B));
consumers’ ability to make fullyamortizing loan payments that include
expected property taxes and
homeowners insurance
(§ 226.34(a)(4)(i)(C)); the ratio of
borrowers’ total debt obligations to
income as of consummation
(§ 226.34(a)(4)(i)(D)); and borrowers’
residual income (§ 226.34(a)(4)(i)(E)).
The proposed safe harbor appeared in
§ 226.34(a)(4)(ii), which provided that a
creditor does not violate § 226.34(a)(4) if
the creditor has a reasonable basis to
believe that consumers will be able to
make loan payments for at least seven
years, considering each of the factors
identified in § 226.34(a)(4)(i) and any
other factors relevant to determining
repayment ability.
The final rule removes the ‘‘pattern or
practice’’ qualification and therefore
prohibits a creditor from extending any
HOEPA loan or higher-priced mortgage
loan based on the collateral without
regard to repayment ability. Like the
proposal, the final rule provides that
repayment ability is determined
according to current and reasonably
expected income, employment, assets
other than the collateral, current
obligations, and mortgage-related
obligations such as expected property
tax and insurance obligations. See
§ 226.34(a)(4) and (a)(4)(i);
§ 226.35(b)(1). The final rule also shifts
the proposed new presumptions of
violations to a presumption of
compliance, with modifications. The
presumption of compliance is revised to
specify a finite set of underwriting
procedures; the reference to ‘‘any other
factors relevant to determining
repayment ability’’ has been removed.
See § 226.34(a)(4)(iii). The presumption
of violation for failing to verify
repayment ability currently in
§ 226.34(a)(4)(i), however, is being
finalized instead as an explicit
requirement to verify repayment ability.
See § 226.34(a)(4)(ii). This section

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discusses the basic prohibition, and
ensuing sections discuss the removal of
pattern or practice, the verification
requirement, and the presumption of
compliance.
As discussed above, the Board finds
extending higher-priced mortgage loans
or HOEPA loans based on the collateral
without regard to the consumer’s
repayment ability to be an unfair
practice. The final rule prohibits this
practice. The Board also took into
account state laws that declare
extending loans to consumers who
cannot repay an unfair practice.62
Section 226.34(a)(4) governs the
process for extending credit; it is not
intended to dictate which types of credit
or credit terms are permissible and
which are not. The rule does not
prohibit potentially riskier types of
loans such as loans with balloon
payments, loans with interest-only
payments, or ARMs with discounted
initial rates. With proper underwriting,
such products may be appropriate for
certain borrowers in the subprime
market. The regulation merely prohibits
a creditor from extending such products
or any other higher-priced mortgage
loans without adequately evaluating
repayment ability.
The rule is intended to ensure that
creditors do not assess repayment
ability using overstated incomes or
understated payment obligations. The
rule explicitly requires that the creditor
verify income and assets using reliable
third party documents and, therefore,
prohibits relying merely on an income
statement from the applicant. See
§ 226.34(a)(4)(ii). (This requirement is
discussed in more detail below.) In
addition, the rule requires assessing not
just the consumer’s ability to pay loan
principal and interest, but also the
consumer’s ability to pay property taxes,
homeowners insurance, and similar
mortgage-related expenses. Mortgagerelated expenses, such as homeowner’s
association dues or condominium or
cooperative fees, are included because
failure to pay them could result in a
consumer’s default on his or her
mortgage (if, for example, failure to pay
resulted in a senior lien on the unit that
constituted a default under the terms of
the consumer’s mortgage obligations).
See §§ 226.34(a)(4); 226.34(a)(4)(i).
As of consummation. The final rule
provides, as did the proposed rule, that
the creditor is responsible for assessing
repayment ability as of consummation.
Two industry trade associations
expressed concern over proposed
62 See, e.g., Ind. Code §§ 24–4.5–6–102, 24–4.5–6–
111(l)(3); Mass. Gen. Laws ch. 93A, ch. 183 §§ 4,
18(a); W.V. Code § 46A–7–109(3)(a).

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comment 34(a)(4)-2, indicating that,
while a creditor would be liable only for
what it knew or should have known as
of consummation, events after
consummation may be relevant to
determining compliance. These
commenters contend that creditors
should not be held responsible for
accurately predicting future events such
as a borrower’s employment stability or
house price appreciation. One asserted
that the rule would lead creditors to
impose more stringent underwriting
criteria in geographic areas with
economies projected to decline. These
commenters requested that the Board
clarify in the commentary that postclosing events cannot be used to secondguess a lender’s underwriting decision,
and one requested that the commentary
specifically state that a foreclosure does
not create a presumption of a violation.
The Board has revised the comment,
renumbered as 34(a)(4)-5, to delete the
statement that events after
consummation may be relevant to
determining whether a creditor has
violated § 226.34(a)(4), but events after
consummation do not, by themselves,
establish a violation. Postconsummation events such as a sharp
increase in defaults could be relevant to
showing a ‘‘pattern or practice’’ of
disregarding repayment ability, but the
final rule does not require proof of a
pattern or practice. The final comment
retains the proposed statement that a
violation is not established if borrowers
default because of significant expenses
or income losses that occur after
consummation. The Board believes it is
clear from the regulation and comment
that a default does not create a
presumption of a violation.
Income, assets, and employment. The
final rule, like the proposal, provides
that sources of repayment ability
include current and reasonably
expected income, employment, and
assets other than the collateral. For the
sake of clarity, new comment 34(a)(4)-2
indicates that a creditor may base its
determination of repayment ability on
current or reasonably expected income,
on assets other than the collateral, or
both. A creditor that purported to
determine repayment ability on the
basis of information other than income
or assets would have to clearly
demonstrate that this information is
probative of repayment ability.
The Board is not adopting the
suggestion from several commenters to
permit creditors to consider, when
determining repayment ability, other
characteristics of the borrower or the
transaction such as credit score and
loan-to-value ratio. These other
characteristics may be critical to

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responsible mortgage underwriting, but
they are not as probative as income and
assets of the consumer’s ability to make
the scheduled payments on a mortgage
obligation. For example, if a consumer
has income of $3,000 per month, it is
very unlikely that the consumer will be
able to afford a monthly mortgage
payment of $2,500 per month regardless
of the consumer’s credit score or loanto-value ratio. Moreover, incorporating
these other characteristics in the
regulation would potentially create a
major loophole for originators to
discount the importance of income and
assets to repayment ability. For the same
reasons, the Board also is not adopting
the suggestion of some commenters to
permit a creditor to rely on any factor
that the creditor finds relevant to
determine credit or delinquency risk.
The final rule, like the proposal,
provides broad flexibility as to the types
of income, assets, and employment a
creditor may rely on. Specific references
to seasonal and irregular employment
were added to comment 34(a)(4)–6
(numbered 34(a)(4)–3 in the proposal) in
response to requests from commenters.
References to several different types of
income, such as interest and dividends,
were also added. These examples are
merely illustrative, not exhaustive.
The final rule and commentary also
follow the proposal in permitting a
lender to rely on expected income and
employment, not just current income
and employment. Expectations for
improvements in employment or
income must be reasonable and verified
with third party documents. The
commentary gives examples of expected
bonuses verified with documents
demonstrating past bonuses, and
expected employment verified with a
commitment letter from the future
employer stating a specified salary. See
comment 34(a)(4)(ii)–3. In some cases a
loan may have a likely payment increase
that would not be affordable at the
borrower’s income as of consummation.
A creditor may be able to verify a
reasonable expectation of an increase in
the borrower’s income that will make
the higher payment affordable to the
borrower.
Several commenters expressed
concern over language in proposed
comment 34(a)(4)–3 indicating that
creditors are required, not merely
allowed, to consider information about
expected changes in income or
employment that would undermine
repayment ability. The proposed
comment gave as an example that a
creditor must consider information
indicating that an employed person will
become unemployed. Some commenters
contended that it is appropriate to

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permit lenders to consider expected
income or employment, but
inappropriate to require that they do so.
Creditors are concerned that they would
be liable for accurately assessing a
borrower’s employment stability, which
may depend on regional economic
factors.
The final comment, renumbered as
34(a)(4)–5, is revised somewhat to
address this concern. The revised
comment indicates that a creditor might
have knowledge of a likely reduction in
income or employment and provides the
following example: a consumer’s
written application indicates that the
consumer plans to retire within twelve
months or transition from full-time to
part-time employment. As the example
indicates, the Board does not intend to
place unrealistic requirements on a
creditor to speculate or inquire about
every possible change in a borrower’s
life circumstances. The sentence ‘‘a
creditor may have information
indicating that an employed person will
become unemployed’’ is deleted as
duplicative.
Finally, new comment 34(a)(4)–7
addresses the concern of several
commenters that the proposal appeared
to require them to make inquiries of
borrowers or consider information about
them that Regulation B, 12 CFR part
202, would prohibit, such as a question
posed solely to a female applicant as to
whether she is likely to continue her
employment. The comment explains
that § 226.34(a)(4) does not require or
permit the creditor to make inquiries or
verifications that would be prohibited
by Regulation B.
Obligations. The final rule, like the
proposed rule, requires the creditor to
consider the consumer’s current
obligations as well as mortgage-related
obligations such as expected property
tax and required insurance. See
§ 226.34(a)(4)(i). The final rule does not
contain the proposed rule’s reference to
‘‘expected obligations.’’ An industry
trade association suggested the reference
would stifle communications between a
lender and a consumer because the
lender would seek to avoid eliciting
information about the borrower’s plans
for future indebtedness, such as an
intention to take out student loans to
send children to college. The Board
agrees that the proposal could stifle
communications. This risk does not
have a sufficient offsetting benefit
because it is by nature speculative
whether a mortgage borrower will
undertake other credit obligations in the
future.
A reference to simultaneous mortgage
obligations (proposed comment
34(a)(4)(i)–2)) has been retained but

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revised. See comment 34(a)(4)–3.
Several commenters objected to the
proposed comment. They suggested a
lender has a limited ability to identify
the existence of a simultaneous
obligation with an unaffiliated lender if
the borrower does not self-report. They
asked that the requirement be restricted
to simultaneous obligations with the
same lender, or that it be limited to
obligations the creditor knows or has
reason to know about, or that it have a
safe harbor for a lender that has
procedures to prevent consumers from
obtaining a loan from another creditor
without the lender’s knowledge. The
comment has been revised to indicate
that the regulation makes a creditor
responsible for considering only those
simultaneous obligations of which the
creditor has knowledge.
Exemptions. The Board is adopting
the proposed exemptions from the rule
for bridge loans, construction-only
loans, reverse mortgages, and HELOCs.
These exemptions are discussed in part
VIII.H. A national bank and two trade
associations with national bank
members requested an additional
exemption for national banks that are in
compliance with OCC regulation 12 CFR
34.3(b). The OCC regulation prohibits
national banks from making a mortgage
loan based predominantly on the bank’s
realization of the foreclosure or
liquidation value of the borrower’s
collateral without regard to the
borrower’s ability to repay the loan
according to its terms. Unlike HOEPA,
however, the OCC regulation does not
authorize private actions or actions by
state attorneys general when the
regulation is violated. Thus, the Board
is not adopting the requested
exemption.
Pattern or Practice
Based on the comments and
additional information gathered by the
Board, the Board is adopting the rule
without the phrase ‘‘pattern or
practice.’’ The rule therefore prohibits
an individual HOEPA loan or higherpriced mortgage loan from being
extended based on the collateral
without regard to repayment ability.
TILA Section 129(l)(2), 15 U.S.C.
1638(l)(2), confers on the Board
authority to revise HOEPA’s restrictions
on HOEPA loans if the Board finds that
such revisions are necessary to prevent
unfair or deceptive acts or practices in
connection with mortgage loans. The
Board so finds for the reasons discussed
below.
Public comment. Consumer advocates
and others strongly urged the Board to
remove the pattern or practice element.
They argued that the burden to prove a

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pattern or practice is so onerous as to
make it impracticable for an individual
plaintiff to seek relief, either
affirmatively or in recoupment. They
suggested a typical plaintiff does not
have the resources to obtain information
about a lender’s loans and loan policies
sufficient to allege a pattern or practice.
Moreover, should a plaintiff be able to
allege a pattern or practice and proceed
to the discovery stage, one legal aid
organization commented based on direct
experience that a creditor may produce
a mountain of documents that
overwhelms the plaintiff’s resources and
makes it impractical to pursue such
cases. One consumer group argued that
the proposed rule would not adequately
deter abuse because, by the time a
pattern or practice emerged, substantial
harm would already have been done to
consumers and investors. This
commenter also argued that other TILA
provisions give creditors sufficient
protection against litigation risk, such as
the cap on class action damages, the
right to cure certain errors creditors
discover on their own, and the defense
for bona fide errors.
Several lenders and lender trade
associations expressed concern that
‘‘pattern or practice’’ is too vague to
provide the certainty creditors seek and
asked for more specific guidance and
examples. Other industry commenters
contended that the phrase was likely to
be interpreted to hold lenders that
originate large numbers of loans liable
for errors in assessing repayment ability
in just a small fraction of their
originations. For example, one large
lender pointed out that an error rate of
0.5 percent in its 400,000 HMDAreportable originations in 2006 would
have amounted to 2,000 loans. Several
commenters cited cases decided under
other statutes holding that a mere
handful of instances were a pattern or
practice. To address these concerns, two
commenters requested that the phrase
be changed to ‘‘systematic practice’’ and
that this new phrase be interpreted to
mean willful or reckless disregard.
Industry commenters generally
preferred that ‘‘pattern or practice,’’
whatever its limitations, be retained as
a form of protection against
unwarranted litigation.
Discussion. The Board believes that
removing ‘‘pattern or practice’’ is
necessary to ensure a remedy for
consumers who are given unaffordable
loans and to deter irresponsible lending,
which injures not just individual
borrowers but also their neighbors and
communities. The Board further
believes that the presumption of
compliance the Board is adopting will
provide more certainty to creditors than

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either ‘‘pattern or practice’’ or the
proposed safe harbor. The presumption
will better aid creditors with
compliance planning, and it will better
help them mitigate litigation risk. In
short, the Board believes that removing
‘‘pattern or practice’’ and providing
creditors a presumption of compliance
will be more effective to prevent unfair
practices, remedy them when they
occur, and preserve access to credit.
Imposing the burden to prove
‘‘pattern or practice’’ on an individual
borrower would leave many borrowers
without a remedy under HOEPA for
loans that were made without regard to
repayment ability. Borrowers would not
have a HOEPA remedy for individual,
unrelated loans made without regard to
repayment ability, of which there could
be many in the aggregate. Even if an
unaffordable loan was part of a pattern
or practice, the individual borrower and
his or her attorney would not
necessarily have that information.63 By
the time information about a particular
lender’s pattern or practice of
unaffordable lending became
widespread, the lender could have
caused great injury to many borrowers,
as well as to their neighbors and
communities. In addition, imposing a
‘‘pattern or practice’’ requirement on
HOEPA loans, but not higher-priced
mortgage loans, would create an
anomaly.
Moreover, a ‘‘pattern or practice’’
claim can be costly to litigate and might
not be economically feasible except as
part of a class action, which would not
assure individual borrowers of adequate
remedies. Class actions can take years to
reach a settlement or trial, while the
individual borrower who is facing
foreclosure because of an unaffordable
loan requires a speedy resolution if the
borrower is to keep the home. Moreover,
lower-income homeowners are often
represented by legal aid organizations,
which are barred from bringing class
actions if they accept funds from the
Legal Services Corporation.64
To be sure, many borrowers who
would be left without a HOEPA remedy
for an unaffordable loan may have
remedies under state laws that lack a
‘‘pattern or practice’’ requirement. In
some cases, however, state law remedies
would be inferior or unavailable.
Moreover, state laws do not assure
consumers uniform protection because
these laws vary considerably and
63 Federal rules of civil procedure require that a
defendant’s motion to dismiss be granted unless the
plaintiff alleged sufficient facts to make a pattern or
practice ‘‘plausible.’’ Bell Atlantic v. Twombly, 127
S. Ct. 1955 (2007). Many states follow the federal
rules.
64 45 CFR 1617.3.

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generally may not cover federally
chartered depository institutions (due to
federal preemption) or state chartered
depository institutions (due to specific
exemptions or general ‘‘parity laws’’).
For these reasons, imposing the
burden to prove ‘‘pattern or practice’’ on
an individual borrower would leave
many borrowers with a lesser remedy,
or without any remedy, for loans made
without regard to repayment ability.
Removing this burden would not only
improve remedies for individual
borrowers, it would also increase
deterrence of irresponsible lending.
Individual remedies impose a more
immediate and more certain cost on
violators than either class actions or
actions by state or federal agencies,
which can take years and, in the case of
the agencies, are subject to resource
constraints. Increased deterrence of
irresponsible lending practices should
benefit not just borrowers who might
obtain higher-priced mortgage loans but
also their neighbors and communities
who would otherwise suffer the
spillover effects of such practices.
The Board acknowledges the
legitimate concerns that lenders have
expressed over litigation costs. As the
Board indicated with the proposal, it
proposed ‘‘pattern or practice’’ out of a
concern that creating civil liability for
an originator that fails to assess
repayment ability on any individual
loan could inadvertently cause an
unwarranted reduction in the
availability of mortgage credit to
consumers. After further study,
however, the Board believes that any
increase in litigation risk would be
justified by the substantial benefits of a
rule that provided remedies to
individual borrowers. While
unwarranted litigation may well
increase, the Board believes that several
factors will mitigate this cost. In
particular, TILA imposes a one-year
statute of limitations on affirmative
claims, after which only recoupment
and set-off are available; HOEPA limits
the strict assignee liability of TILA
Section 131(d), 15 U.S.C. 1641(d) to
HOEPA loans; many defaults may be
caused by intervening events such as job
loss rather than faulty underwriting; and
plaintiffs (or their counsel) may bear a
substantial cost to prove a claim of
faulty underwriting, which would often
require substantial discovery and expert
witnesses. Creditors could further
contain litigation risk by using the
procedures specified in the regulation
that earn the creditor a presumption of
compliance.
The Board has also considered the
possibility that the statute’s ‘‘pattern or
practice’’ element allows creditors an

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appropriate degree of flexibility to
extend occasional collateral-based
HOEPA loans to consumers who truly
need them and clearly understand the
risks involved. Removing ‘‘pattern or
practice’’ would eliminate this potential
consumer benefit. Based on industry
comments, however, the benefit is more
theoretical than real. While industry
commenters may prefer retaining
‘‘pattern or practice’’ as a barrier to
individual suits, these commenters
indicated that ‘‘pattern or practice’’ is
too vague to be useful for compliance
planning. Therefore, retaining ‘‘pattern
or practice’’ would not likely lead a
creditor to extend legitimate collateralbased loans except, perhaps, a trivial
number such as one per year.
The Board reached this conclusion
only after exploring ways to provide
more clarity as to the meaning of
‘‘pattern or practice.’’ Existing comment
34(a)(4)–2 provides that a pattern or
practice depends on the totality of the
circumstances in the particular case; can
be established without the use of a
statistical process and on the basis of an
unwritten lending policy; and cannot be
established with isolated, random, or
accidental acts. Although this comment
has been in effect for several years, its
effectiveness is impossible to assess
because the market for HOEPA loans
shrank to near insignificance soon after
the comment was adopted.65 On its face,
however, the guidance removes little of
the uncertainty surrounding the
meaning of ‘‘pattern or practice.’’ (There
is only one reported decision to
interpret ‘‘pattern or practice’’ under
HOEPA, Newton v. United Companies
Financial Corp., 24 F. Supp. 2d 444
(E.D. Pa. 1998), and it has limited
precedential value in light of lateradopted comment 34(a)(4)–2.) The
Board re-proposed the comment but
commenters provided few concrete
suggestions for making the rule clearer
and the suggestions that were offered
would have left a large degree of
uncertainty.
The Board considered other potential
sources of guidance on ‘‘pattern or
practice’’ from other statutes and
regulations. Case law is of inherently
limited value for such a contextual
inquiry. Moreover, there are published
court decisions, some cited by industry
commenters, that suggest that even a
few instances could be considered to
meet this standard.66 The Board also
65 By 2004, HOEPA loans reported under HMDA
were less than one percent of the mortgage market.
The Board does not believe the market’s contraction
can be traced to the guidance on pattern or practice.
66 See, e.g., United States v. Balistrieri, 981 F.2d
916, 929–30 (7th Cir. 1992); United States v. Pelzer
Realty Co., Inc., 484 F.2d 438, 445 (5th Cir. 1973).

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consulted informal guidance
interpreting ‘‘pattern or practice’’ under
ECOA.67 The Board carefully
considered how it could adapt this
guidance to § 226.34(a)(4). Based on its
efforts, the Board concluded that, while
additional guidance could reduce some
uncertainty, it would necessarily leave
substantial uncertainty. The Board
further concluded that significantly
more certainty could be provided
through the ‘‘presumption of
compliance’’ the final rule provides for
following enumerated underwriting
practices. See § 226.34(a)(4)(iii),
discussed below.
Verification of Repayment Ability
Section 226.34(a)(4) currently
contains a provision creating a
rebuttable presumption of a violation
where a lender engages in a pattern or
practice of making HOEPA loans
without verifying and documenting
repayment ability. The Board proposed
to retain this presumption and extend it
to higher-priced mortgage loans. The
final rule is different in two respects.
First, as discussed above, the final rule
does not contain a ‘‘pattern or practice’’
element. Second, it makes verifying
repayment ability an affirmative
requirement, rather than making failure
to verify a presumption of a violation.
In the final rule, the regulation
applies the verification requirement to
current obligations explicitly, see
§ 226.34(a)(4)(ii)(C); in the proposal, an
explicit reference to obligations was in
a staff comment. See proposed comment
34(a)(4)(i)(A)–2, 73 FR at 1732. The
requirement to verify income and assets
in final § 226.34(a)(4)(ii)(A) is
essentially identical to the requirement
of proposed § 226.35(b)(2). Under
§ 226.34(a)(4)(ii)(A), creditors must
verify assets or income, including
expected income, relied on in approving
an extension of credit using third-party
documents that provide reasonably
reliable evidence of the income or
assets. The final rule, like that proposed,
includes an affirmative defense for a
creditor that can show that the amounts
of the consumer’s income or assets
relied on were not materially greater
than the amount the creditor could have
verified at consummation.
Public comment. Many, but by no
means all, financial institutions,
mortgage brokers, and mortgage
industry trade groups that commented
support a verification requirement. They
raised concerns, however, that the
particular requirement proposed would
67 Board Policy Statement on Enforcement of the
Equal Credit Opportunity and Fair Housing Acts,
Q9.

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restrict or eliminate access to credit for
some borrowers, especially the selfemployed, those who earn irregular
commission- or cash-based incomes,
and low- and moderate-income
borrowers. Consumer and community
groups and government officials
generally supported the proposed
verification requirement, with some
suggesting somewhat stricter
requirements. Many of these same
commenters, however, contended the
proposed affirmative defense would be
a major loophole and urged its
elimination. The comments are
discussed in further detail below as
applicable.
Discussion. For the reasons discussed
above, the Board finds that it is unfair
not to verify income, assets, and
obligations used to determine
repayment ability when extending a
higher-priced mortgage loan or HOEPA
loan. The Board is finalizing the rule as
proposed and incorporating it directly
into § 226.34(a)(4), where it replaces the
proposed presumption of a violation for
a creditor that has a pattern or practice
of failing to verify repayment ability.
‘‘Pattern or practice’’ has been removed
and the presumption has been made a
requirement. The legal effect of this
change is that the final rule, unlike the
proposal, would rarely, if ever, permit a
creditor to make even isolated ‘‘no
income, no asset’’ loans (loans made
without regard to income and assets) in
the higher-priced mortgage loan market.
For the reasons explained above,
however, the Board does not believe this
legal change will reduce credit
availability; nor will it affect the
availability of ‘‘no income, no asset’’
loans in the prime market.
As discussed above, relying on
inflated incomes or assets to determine
repayment ability often amounts to
disregarding repayment ability, which
causes consumers injuries they often
cannot reasonably avoid. By requiring
verification of income and assets, the
final rule is intended to limit these
injuries by reducing the risk that higherpriced mortgage loans will be made on
the basis of inflated incomes or assets.68
The Board believes the rule is
sufficiently flexible to keep costs to
consumers, such as any additional time
needed to close a loan or costs for
obtaining documentation, at reasonable
levels relative to the expected benefits
of the rule.
The rule specifically authorizes a
creditor to rely on W–2 forms, tax
68 By requiring verification the rule also addresses
the risk that consumers with higher-priced
mortgage loans who could document income would
unknowingly pay more for a loan that did not
require documentation.

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returns, payroll receipts, and financial
institution records such as bank
statements. These kinds of documents
are sufficiently reliable sources of
information about borrowers’ income
and assets that the Board believes it is
appropriate to provide a safe harbor for
their use. Moreover, most consumers
can, or should be able to, produce one
of these kinds of documents with little
difficulty. For other consumers, the rule
is quite flexible. It permits a creditor to
rely on any third-party document that
provides reasonably reliable evidence of
the income or assets relied on to
determine repayment ability. Examples
include check-cashing or remittance
receipts or a written statement from the
consumer’s employer. See comment
34(a)(4)(ii)(A)–3. These examples are
only illustrative, not limiting. The one
type of document that is excluded is a
statement only from the consumer.
Many commenters suggested that the
Board require creditors to collect the
‘‘best and most appropriate’’
documentation. The Board believes that
the costs of such a requirement would
outweigh the benefits. The vagueness of
the suggested standard could make
creditors reluctant to accept
nontraditional forms of documentation.
Nor is it clear how creditors would
verify that a form of documentation that
might be best or most appropriate was
not available.
The commentary has been revised to
clarify several points. See comments
34(A)(4)(ii)(A)–3 and –4. Oral
information from a third party would
not satisfy the rule, which requires
documentation. Creditors may,
however, rely on a letter or an e-mail
from the third party. Creditors may also
rely on third party documentation the
consumer provides directly to the
creditor. Furthermore, as interpreted by
the comments, the rule excludes
documents that are not specific to the
consumer. It would not be sufficient to
look at average incomes for the
consumer’s stated profession in the
region where the consumer lives or
average salaries for employees of the
consumer’s employer. The commentary
has been revised, however, to indicate
that creditors may use third party
information that aggregates individualspecific data about consumers’ income,
such as a database service used by an
employer to centralize income
verification requests, so long as the
information is reasonably current and
accurate and identifies the specific
consumer’s income.
The rule does not require creditors
that have extended credit to a consumer
and wish to extend new credit to the
same consumer to re-collect documents

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that the creditor previously collected
from the consumer, if the creditor
believes the documents would not have
changed since they were initially
verified. See comment 34(a)(4)(ii)(A)–5.
For example, if the creditor has
collected the consumer’s 2006 tax return
for a May 2007 loan, and the creditor
makes another loan to that consumer in
August 2007, the creditor may rely on
the 2006 tax return.
Nor does the rule require a creditor to
verify amounts of income or assets the
creditor is not relying on to determine
repayment ability. For example, if a
creditor does not rely on a part of the
consumer’s income, such as an annual
bonus, in determining repayment
ability, the creditor would not need to
verify the consumer’s bonus. A creditor
may verify an amount of income or
assets less than that stated in the loan
file if adequate to determine repayment
ability. If a creditor does not verify
sufficient amounts to support a
determination that the consumer has the
ability to pay the loan, however, then
the creditor risks violating the
regulation.
Self-employed borrowers. The Board
has sought to address commenters’
concerns about self-employed
borrowers. The rule allows for flexibility
in underwriting standards so that
creditors may adapt their underwriting
processes to the needs of self-employed
borrowers, so long as creditors comply
with § 226.34(a)(4). For example, the
rule does not dictate how many years of
tax returns or other information a
creditor must review to determine a selfemployed applicant’s repayment ability.
Nor does the rule dictate which income
figure on the tax returns the creditor
must use. The Internal Revenue Code
may require or permit deductions from
gross income, such as a deduction for
capital depreciation, that a creditor
reasonably would regard as not relevant
to repayment ability.
The rule is also flexible as to
consumers who depend heavily on
bonuses and commissions. If an
employed applicant stated that he was
likely to receive an annual bonus of a
certain amount from the employer, the
creditor could verify the statement with
third-party documents showing a
consumer’s past annual bonuses. See
comment 34(a)(4)(ii)–1. Similarly,
employees who work on commission
could be asked to produce third-party
documents showing past commissions.
The Board is not adopting the
exemption some commenters requested
for self-employed borrowers. The
exemption would give borrowers and
originators an incentive to declare a
borrower employed by a third party to

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be self-employed to avoid having to
verify the borrower’s income. It is not
clear how a declaration of self-employed
status could be verified except by
imposing the very burden the
exemption would be meant to avoid,
such as reviewing tax returns.
The affirmative defense. The Board
received a number of comments about
the proposed affirmative defense for a
creditor that can show that the amounts
of the consumer’s income or assets the
creditor relied on were not materially
greater than what the creditor could
have documented at consummation.
The Board’s reference to this defense as
a ‘‘safe harbor’’ appears to have caused
some confusion. Many commenters
interpreted the phrase ‘‘safe harbor’’ to
mean that the Board was proposing a
specific way to comply with the rule.
These commenters either criticized the
safe harbor as insufficiently specific
about how to comply (in the case of
industry commenters) or urged that it be
eliminated as a major loophole for
avoiding verifying income and assets (in
the case of consumer group and other
commenters).
The Board intended the provision
merely as a defense for a lender that did
not verify income as required where the
failure did not cause injury. The
provision would place the burden on
the lender to prove that its noncompliance was immaterial. A creditor
that does not verify income has no
assurance that the defense will be
available should the loan be challenged
in court. This creditor takes a
substantial risk that it will not be able
to prove through discovery that the
income was as stated. Therefore, the
Board expects that the defense will be
used only in limited circumstances. For
example, a creditor might be able to use
the defense when a bona fide
compliance error, such as an occasional
failure of reasonable procedures for
collecting and retaining appropriate
documents, produces litigation. The
defense is not likely to be helpful to a
creditor in the case of compliance
examinations because there will not be
an opportunity in that context for the
creditor to determine the borrower’s
actual income. With this clarification,
the Board is adopting the affirmative
defense as proposed.
The defense is available only where
the creditor can show that the amounts
of income and assets relied on were not
materially greater than the amounts the
creditor could have verified. The
definition of ‘‘material’’ is not based on
a numerical threshold as some
commenters suggested. Rather, the
commentary has been revised to clarify
that creditors would be required to

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show that, if they had relied on the
amount of verifiable income or assets,
their decision to extend credit and the
terms of the credit would not have been
different. See comment 34(a)(4)(ii)(B)–2.
Narrower alternatives. The Board
sought comment on whether the rule
should be narrowed to prohibit only
extending credit where the creditor or
mortgage broker engaged in, influenced
the borrower to engage in, or knew of
income or asset inflation. The vast
majority of commenters who addressed
this alternative did not support it, and
the Board is not adopting it. Placing the
burden on the borrower or supervisory
agency to prove the creditor knew the
income was inflated would undermine
the rule’s effectiveness. In the case of
borrower claims or counter-claims, this
burden would lead to costly discovery
into factual questions, and this
discovery would often produce
conflicting evidence (‘‘he said, she
said’’) that would require trial before a
factfinder. A creditor significantly
increases the risk of income inflation
when it accepts a mere statement of
income, and the creditor is in the best
position to substantially reduce this risk
at limited cost by simply requiring
documentation. The Board believes this
approach is the most effective and
efficient way to protect not just the
individual borrower but also the
neighbors and communities that can
suffer from spillover effects of
unaffordable lending.
Some industry commenters suggested
adopting an affirmative defense for
creditors who can show that the
consumer intentionally misrepresented
income or assets or committed fraud.
The Board is not adopting this defense.
As discussed above, a rule that provided
creditors with a defense where no
documentation was present could result
in litigation that was costly for both
sides. A defense for cases of consumer
misrepresentation or fraud where the
creditor documented the consumer’s
income or assets would be unnecessary.
Creditors are allowed to rely on
documents provided directly by the
consumer so long as those documents
provide reasonably reliable evidence of
the consumer’s income or assets. A
consumer who provided false
documentation to the creditor, and who
wished to bring a claim against the
creditor, would have to demonstrate
that the creditor reasonably should not
have relied on the document. If the only
fact that made the document unreliable
was the consumer’s having provided
false information without the creditor’s
knowledge, it would not have been
unreasonable for the creditor to rely on
that document.

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Obligations. The proposal essentially
required a creditor to verify repayment
ability; it provided that a pattern or
practice of failing to verify repayment
ability created a presumption of a
violation. A proposed comment
indicated that verifying repayment
ability included verifying obligations.
See proposed comment 34(a)(4)(i)(A)–2.
The final rule explicitly includes the
requirement to verify obligations in the
regulation. See § 226.34(a)(4)(ii)(C). A
comment to this provision indicates that
a credit report may be used to verify
current obligations. A credit report,
however, might not reflect certain
obligations undertaken just before or at
consummation of the transaction and
secured by the same dwelling that
secures the transaction (for example, a
‘‘piggyback’’ second-lien transaction
used to finance part of the down
payment on the house where the firstlien transaction is for home purchase).
A creditor is responsible for considering
such obligations of which the creditor
has knowledge. See comment 34(a)(4)–
3.
Presumption of Compliance
The Board proposed to add new,
rebuttable presumptions of violations to
§ 226.34(a)(4) and, by incorporation,
§ 226.35(b)(1). These presumptions
would have been for engaging in a
pattern or practice of failing to consider:
consumers’ ability to pay the loan based
on the interest rate specified in the
regulation; consumers’ ability to make
fully-amortizing loan payments that
include expected property taxes and
homeowners insurance; the ratio of
borrowers’ total debt obligations to
income as of consummation; and
borrowers’ residual income. See
proposed § 226.34(a)(4)(i)(B)–(E). The
Board also proposed a presumption of
compliance for a creditor that has a
reasonable basis to believe that
consumers will be able to make loan
payments for at least seven years,
considering each of the factors
identified in § 226.34(a)(4)(i) and any
other factors relevant to determining
repayment ability.
The final rule removes the proposed
presumptions of violation for failing to
follow certain underwriting practices
and incorporates these practices, with
modifications, into a presumption of
compliance that is substantially revised
from that proposed. Under
§ 226.34(a)(4)(iii), a creditor is presumed
to have complied with § 226.34(a)(4) if
the creditor satisfies each of three
requirements: (1) Verifying repayment
ability; (2) determining the consumer’s
repayment ability using largest
scheduled payment of principal and

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interest in the first seven years
following consummation and taking
into account property tax and insurance
obligations and similar mortgage-related
expenses; and (3) assessing the
consumer’s repayment ability using at
least one of the following measures: a
ratio of total debt obligations to income,
or the income the consumer will have
after paying debt obligations. (The
procedures for verifying repayment
ability are required under paragraph
34(a)(4)(ii); the other procedures are not
required.)
Unlike the proposed presumption of
compliance, the presumption of
compliance in the final rule is not
conditioned on a requirement that a
creditor have a reasonable basis to
believe that a consumer will be able to
make loan payments for a specified
period of years. Comments from
creditors indicated this proposed
requirement was not necessary and
introduced an undue degree of
compliance uncertainty. The final
presumption of compliance, therefore,
replaces this general requirement with
the three specific procedural
requirements mentioned in the previous
paragraph.
The creditor’s presumption of
compliance for following these
procedures is not conclusive. The Board
believes a conclusive presumption
could seriously undermine consumer
protection. A creditor could follow the
procedures and still disregard
repayment ability in a particular case or
potentially in many cases. Therefore,
the borrower may rebut the presumption
with evidence that the creditor
disregarded repayment ability despite
following these procedures. For
example, evidence of a very high debtto-income ratio and a very limited
residual income could be sufficient to
rebut the presumption, depending on all
of the facts and circumstances. If a
creditor fails to follow one of the nonmandatory procedures set forth in
paragraph 34(a)(4)(iii), then the
creditor’s compliance is determined
based on all of the facts and
circumstances without there being a
presumption of either compliance or
violation. See comment 34(a)(4)(iii)–1.
Largest scheduled payment in seven
years. When a loan has a fixed rate and
a fixed payment that fully amortizes the
loan over its contractual term to
maturity, there is no ambiguity about
the rate and payment at which the
lender should assess repayment ability:
The lender will use the fixed rate and
the fixed payment. But when the rate
and payment can change, as has often
been true of subprime loans, a lender
has to choose a rate and payment at

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which to assess repayment ability. The
Board proposed that a creditor would be
presumed to have disregarded
repayment ability if it had engaged in a
pattern or practice of failing to use the
fully-indexed rate (or the maximum rate
in seven years on a step-rate loan) and
the fully-amortizing payment.
As discussed, the final rule does not
contain this proposed presumption of
violation. Instead, it provides that a
creditor will have a presumption of
compliance if, among other things, the
creditor uses the largest scheduled
payment of principal and interest in the
first seven years. This payment could be
higher, or lower, than the payment
determined according to the fullyindexed rate and fully-amortizing
payment. The Board believes that the
final rule is clearer and simpler than the
proposal. It incorporates longestablished principles in Regulation Z
for determining a payment schedule
when rates or payments can change,
which should facilitate compliance. See
comment 34(a)(4)(iii)(B)–1. The final
rule is also more flexible than the
proposal. Instead of requiring the
creditor to use a particular payment, it
provides the creditor who uses the
largest scheduled payment in seven
years a presumption of compliance. The
creditor has the flexibility to use a lower
payment, and no presumption of
violation would attach; though neither
would a presumption of compliance.
Instead, compliance would be
determined based on all of the facts and
circumstances.
Two aspects of § 226.34(a)(4) help
ensure that this approach provides
consumers effective protection. First,
the Board is adopting the proposed
seven-year horizon. That is, under
§ 226.34(a)(4)(iii)(B) the relevant
payment for underwriting is the largest
payment in seven years. Industry
commenters requested that the rule
incorporate a time horizon of no more
than five years. As these commenters
indicated, most subprime loans,
including those with fixed rates, have
paid off (or defaulted) within five years.
It is possible that prepayment speeds
will slow, however, as subprime lending
practices and loan terms undergo
substantial changes. Moreover, the final
rule addresses commenters’ concern
that the proposal seemed to require
them to project the consumer’s income,
employment, and other circumstances
for as long as seven years as a condition
to obtaining a presumption of
compliance. Under the final rule, the
creditor is expected to underwrite based
on the facts and circumstances that exist
as of consummation. Section
226.34(a)(4)(iii)(B) sets out the payment

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44549

to which the creditor should underwrite
if it seeks to have a presumption of
compliance. Furthermore, nothing in
the regulation prohibits, or creates a
presumption against, loan products that
are designed to serve consumers who
legitimately expect to sell or refinance
sooner than seven years.
A second aspect of § 226.34(a)(4) that
is integral to its balance of consumer
protection and credit availability is its
exclusion of two nontraditional types of
loans from the presumption of
compliance that can pose more risk to
consumers in the subprime market.
Under § 226.34(a)(4)(iv), no
presumption of compliance is available
for a balloon-payment loan with a term
shorter than seven years. If the term is
at least seven years, the creditor that
underwrites the loan based on the
regular payments (not the balloon
payment) may retain the presumption of
compliance. If the term is less than
seven years, compliance is determined
on the basis of all of the facts and
circumstances. This approach is simpler
than some of the alternatives
commenters recommended to address
balloon-payment loans, and it better
balances consumer protection and credit
availability than other alternatives they
suggested.69 Consumers are statistically
very likely to prepay (or default) within
seven years and avoid the balloon
payment.
Loans with scheduled payments that
would increase the principal balance
(negative amortization) within the first
seven years are also excluded from the
presumption of compliance. This
exclusion will help ensure that the
presumption is available only for loans
that leave the consumer sufficient
equity after seven years to refinance. If
the payments scheduled for the first
seven years would cause the balance to
increase, then compliance is determined
69 One large lender contended that balloon loans
should be exempted from a repayment-ability rule
because consumers understand their risks. Another
recommended that balloon loans be exempted from
the repayment ability rule if the term of the loan
exceeds seven years for first-lien mortgages or five
years for subordinate-lien loans. A trade association
representing community banks urged that balloon
payments be permitted so long as the creditor has
a reasonable basis to believe the borrower will make
the payments for the term of the loan except the
final, balloon payment. This trade association
indicated that community banks often structure the
loans they hold in portfolio as 3- or 5-year balloon
loans, typically with 15–30 year amortization
periods, to match the maturity of the loan to the
maturity of their deposit base. A lender and a
lender trade association recommended using on
short-term balloon loans a payment larger than the
scheduled payment but smaller than the fullyamortizing payment, such as the payment that
would correspond to an interest rate two percentage
points higher than the rate specified in the
presumption of compliance.

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on all of the facts and circumstances
without a presumption of compliance or
violation.
‘‘Interest-only’’ loans can have a
presumption of compliance. With these
loans, after an initial period of interestonly payments the payment is recast to
fully amortize the loan over the
remaining term to maturity. If the period
of interest-only payments is shorter than
seven years, the creditor may retain the
presumption of compliance if it uses the
fully-amortizing payment that
commences after the interest-only
period. If the interest-only period is
seven years or longer, the creditor may
retain the presumption of compliance if
it assesses repayment ability using the
interest-only payment. Examples have
been added to the commentary to
facilitate compliance. See comment
34(a)(4)(iii)(B)–1. Examples of variablerate loans and a step-rate loan have also
been added.
Debt-to-income ratio and residual
income. The proposal provided that a
creditor would be presumed to have
violated the regulation if it engaged in
a pattern or practice of failing to
consider the ratio of consumers’ total
debt obligations to consumers’ income
or the income consumers will have after
paying debt obligations. A major
secondary market participant proposed
that considering total DTI and residual
income not be an absolute prerequisite
because other measures of income,
assets, or debts may be valid methods to
assess repayment ability. A credit union
trade association contended that
residual income is not a necessary
underwriting factor if a lender uses DTI.
Consumer and civil rights groups,
however, specifically support including
both DTI and residual income as factors,
contending that residual income is an
essential component of an affordability
analysis for lower-income families.
Based on the comments and its own
analysis, the Board is revising the
proposal to provide that a creditor does
not have a presumption of compliance
with respect to a particular transaction
unless it uses at least one of the
following: the consumer’s ratio of total
debt obligations to income, or the
income the consumer will have after
paying debt obligations. Thus, the final
rule permits a creditor to retain a
presumption of compliance so long as it
uses at least one of these two measures.
The Board believes the flexibility
permitted by the final rule will help
promote access to responsible credit
without weakening consumer
protection. The rule provides creditors
flexibility to determine whether using
both a DTI ratio and residual income
increases a creditor’s ability to predict

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repayment ability. If one of these
metrics alone holds as much predictive
power as the two together, as may be
true of certain underwriting models at
certain times, then conditioning access
to a safe harbor on using both metrics
could reduce access to credit without an
offsetting increase in consumer
protection. The Board also took into
account that, at this time, residual
income appears not to be as widely used
or tested as the DTI ratio.70 It is
appropriate to permit the market to
develop more experience with residual
income before considering whether to
incorporate it as an independent
requirement of a regulatory presumption
of compliance.
The final rule does not contain
quantitative thresholds for either of the
two metrics. The Board specifically
solicited comment on whether it should
adopt such thresholds. Industry
commenters did not favor providing a
presumption of compliance (or a
presumption of a violation) based on a
specified debt-to-income ratio. The
reasons given include: Different
investors have different guidelines for
lenders to follow in calculating DTI;
underwriters following the same
procedures can calculate different DTIs
on the same loan; borrowers may want
or, in some high-cost areas, may need to
spend more than any specified
percentage of their income on housing
and may have sufficient non-collateral
assets or residual incomes to support
the loan; and loans with high DTIs have
not necessarily had high delinquency
rates. Two trade associations indicated
they would accept a quantitative safe
harbor if it were sufficiently flexible.
Some commenters suggested a standard
of reasonableness.
Consumer and civil rights groups, a
federal banking agency, and others
requested that the Board set threshold
levels for both DTI and residual income
beyond which a loan would be
considered unaffordable, subject to
rebuttal by the creditor. They argued
that quantitative thresholds for these
factors would improve compliance and
loan performance. These commenters
suggested that the regulation should
expressly recognize that, as residual
income increases, borrowers can
support higher DTI levels. They
provided alternative recommendations:
mandate the DTI and residual income
levels found in the guidelines for loans
70 Michael E. Stone, What is Housing
Affordability? The Case for the Residual Income
Approach, 17 Housing Policy Debate 179 (Fannie
Mae 2006) (advocating use of a residual income
approach but acknowledging that it ‘‘is neither well
known, particularly in this country, nor widely
understood, let alone accepted’’).

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guaranteed by the Department of
Veterans Affairs, 38 CFR 36.4840;
develop the Board’s own guidelines; or
impose a threshold of 50 percent DTI
with sufficient residual income. A
consumer research and advocacy group,
however, supported the Board’s
proposal not to set a quantitative
threshold. It specifically opposed a 50
percent threshold as too high for
sustainable lending. It further
maintained that any specific DTI
threshold would not be workable
because proper underwriting depends
on too many factors, and the definition
of ‘‘debt’’ is too easily manipulated.
The Board is concerned that making
a specific DTI ratio or residual income
level either a presumptive violation or
a safe harbor could limit credit
availability without providing adequate
offsetting benefits. The same debt-toincome ratio can have very different
implications for two consumers’
repayment ability if the income levels of
the consumers differ significantly.
Moreover, it is not clear what thresholds
would be appropriate. Limited data are
available to the Board to support such
a determination. Underwriting
guidelines of the Department of
Veterans Affairs may be appropriate for
the limited segment of the mortgage
market this agency is authorized to
serve, but they are not necessarily
appropriate for the large segment of the
mortgage market this regulation will
cover.
Safe Harbors and Exemptions Not
Adopted
Commenters requested several safe
harbors or exemptions that the Board is
not adopting. Many industry
commenters sought a safe harbor for any
loan approved by the automated
underwriting system (AUS) of Fannie
Mae or Freddie Mac; some sought a safe
harbor for an AUS of any federallyregulated institution. The Board is not
adopting such a safe harbor.
Commenters did not suggest a clear and
objective definition of an AUS that
would distinguish it from other types of
systems used in underwriting. It would
not be appropriate to try to resolve this
concern by limiting a safe harbor to the
AUS’s of Fannie Mae and Freddie Mac,
as that would give them an unfair
advantage in the marketplace. Moreover,
a safe harbor for an AUS that is a ‘‘black
box’’ and is not specifically required to
comply with the regulation could
undermine the regulation. Some
industry commenters sought safe
harbors for transactions that provide the
consumer a lower rate or payment on
the grounds that these transactions
would generally benefit the borrower.

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The chief example given is a refinance
(without cash out) that reduces the
consumer’s current monthly payment
or, in the case of an ARM, the payment
expected upon reset. The Board does
not believe that a safe harbor for such
a transaction would benefit consumers.
For example, it could provide an
incentive to an originator to make an
unaffordable loan to a consumer and
then repeatedly refinance the loan with
new loans offering a slightly lower
payment each time.
One state Attorney General submitted
a comment supporting permitting an
asset-based loan where the borrower has
suffered a loss of income but reasonably
anticipates improving her circumstances
(e.g., temporary disability or illness,
unemployment, or salary cut), or the
borrower seeks a short-term loan
because she must sell the home due to
a permanent reduction in income (e.g.,
loss of job, or divorce from co-borrower)
or some other event (e.g., pending
foreclosure or occurrence of natural
disaster). An association of mortgage
brokers also recommended that
exceptions be made for such cases.
The Board is not adopting safe
harbors or exemptions for such
‘‘hardship’’ cases. As discussed above,
the Board recognizes that consumers in
such situations who fully understood
the risks involved would benefit from
having the ability to address their
situation by taking a large risk with their
home equity. At the same time, the
Board is concerned that exceptions for
such cases could severely undermine
the rule because it would be difficult, if
not impossible, to distinguish bona fide
cases from mere circumvention. For
some of these cases, such as selling a
home due to divorce or job loss (or any
reason) and purchasing a new,
presumably less expensive home, the
carve-out for bridge loans may apply.
C. Prepayment Penalties—§ 226.32(d)(6)
and (7); § 226.35(b)(2)
The Board proposed to apply to
higher-priced mortgage loans the
prepayment penalty restrictions that
TILA Section 129(c) applies to HOEPA
loans. Specifically, HOEPA-covered
loans may only have a prepayment
penalty if: The penalty period does not
exceed five years from loan
consummation; the penalty does not
apply if there is a refinancing by the
same creditor or its affiliate; the
borrower’s debt-to-income (DTI) ratio at
consummation does not exceed 50
percent; and the penalty is not
prohibited under other applicable law.
15 U.S.C. 1639(c); see also 12 CFR
226.32(d)(6) and (7). In addition, the
Board proposed, for both HOEPA loans

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and higher-priced mortgage loans, to
require that the penalty period expire at
least sixty days before the first date, if
any, on which the periodic payment
amount may increase under the terms of
the loan.
Based on the comments and its own
analysis, the Board is adopting
substantially revised rules for
prepayment penalties. There are two
components to the final rule. First, the
final rule prohibits a prepayment
penalty with a higher-priced mortgage
loan or HOEPA loan if payments can
change during the four-year period
following consummation. Second, for
all other higher-priced mortgage loans
and HOEPA loans—loans whose
payments may not change for four years
after consummation—the final rule
limits prepayment penalty periods to a
maximum of two years following
consummation, rather than five years as
proposed. In addition, the final rule
applies to this second category of loans
two requirements for HOEPA loans that
the Board proposed to apply to higherpriced mortgage loans: the penalty must
be permitted by other applicable law,
and it must not apply in the case of a
refinancing by the same creditor or its
affiliate.
The Board is not adopting the
proposed rule requiring a prepayment
penalty provision to expire at least sixty
days before the first date on which a
periodic payment amount may increase
under the loan’s terms. The final rule
makes such a rule unnecessary. Under
the final rule, if the consumer’s payment
may change during the first four years
following consummation, a prepayment
penalty is prohibited outright. If the
payment is fixed for four years, the final
rule limits a prepayment penalty period
to two years, leaving the consumer a
penalty-free window of at least two
years before the payment may increase.
In addition, for the reasons discussed
below, the Board is not adopting the
proposed rule prohibiting a prepayment
penalty where a consumer’s verified DTI
ratio, as of consummation, exceeds 50
percent. This restriction, however, will
continue to apply to HOEPA loans, as
provided by the statute.
Under Regulation Z, 12 CFR
226.23(a)(3), footnote 48, a HOEPA loan
having a prepayment penalty that does
not conform to the requirements of
§ 226.32(d)(7) is a mortgage containing a
provision prohibited by TILA Section
129, 15 U.S.C. 1639, and therefore is
subject to the three-year right of the
consumer to rescind. Final
§ 226.35(b)(2), which the Board is
adopting under the authority of Section
129(l)(2), 15 U.S.C. 1639(l)(2), applies
restrictions on prepayment penalties for

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higher-priced mortgage loans that are
substantially the same as the restrictions
that § 226.32(d)(6) and (7) apply on
prepayment penalties for HOEPA loans.
Accordingly, the Board is revising
footnote 48 to clarify that a higherpriced mortgage loan (whether or not it
is a HOEPA loan) having a prepayment
penalty that does not conform to the
requirements of § 226.35(b)(2) also is
subject to a three-year right of
rescission. (The right of rescission,
however, does not extend to home
purchase loans, construction loans, or
certain refinancings with the same
creditor.)
Public Comment
The Board received public input
about the advantages and disadvantages
of prohibiting or restricting prepayment
penalties in testimony provided at the
2006 and 2007 hearings the Board
conducted on mortgage lending, and in
comment letters associated with these
hearings. In the official notice of the
2007 hearing, the Board expressly asked
for oral and written comment about the
effects of a prohibition or restriction
under HOEPA on prepayment penalties
on consumers and on the type and terms
of credit offered. 72 FR 30380, 30382
(May 31, 2007). Most consumer and
community groups, as well as some
state and local government officials and
a trade association for community
development financial institutions,
urged the Board to prohibit prepayment
penalties with subprime loans. By
contrast, most industry commenters
opposed prohibiting prepayment
penalties or restricting them beyond
requiring that they expire sixty days
before reset, on the grounds that a
prohibition or additional restrictions
would reduce credit availability in the
subprime market. Some industry
commenters, however, stated that a
three-year maximum prepayment
penalty period would be appropriate.
In connection with the proposed rule,
the Board asked for comment about the
benefits and costs of prepayment
penalties to consumers who have
higher-priced mortgage loans, as well as
about the costs and benefits of the
specific restrictions proposed. Most
financial institutions and their trade
associations stated that consumers
should be able to choose a loan with a
prepayment penalty in order to lower
their interest rate. Many of these
commenters stated that prepayment
penalties help creditors to manage
prepayment risk, which in turn
increases credit availability and lowers
credit costs. Industry commenters
generally opposed the proposed rule
that would prohibit prepayment

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penalties in cases where a consumer’s
DTI ratio exceeds 50 percent. The few
industry commenters that addressed the
proposal to require that a prepayment
penalty not apply in the case of a
refinancing by the creditor or its affiliate
opposed the provision. These
commenters supported, or did not
oppose, the proposal to require
prepayment penalties to expire at least
sixty days before any possible payment
increase. Several financial institutions,
an industry trade association, and a
secondary-market investor
recommended that the Board set a threeyear maximum penalty period instead of
a five-year maximum.
By contrast, many other commenters,
including most consumer organizations,
several trade associations for state
banking authorities, a few local, state,
and federal government officials, a
credit union trade association, and a
real estate agent trade association,
supported prohibiting prepayment
penalties for higher-priced mortgage
loans and HOEPA loans. Many of these
commenters stated that the cost of
prepayment penalties to subprime
borrowers outweigh the benefits of any
reductions in interest rates or up-front
fees they may receive. These
commenters stated that the Board’s
proposed rule would not address
adequately the harms that prepayment
penalties cause consumers. Several
commenters recommended alternative
restrictions of prepayment penalties
with higher-priced mortgage loans and
HOEPA loans if the Board did not
prohibit such penalties, including
limiting a prepayment penalty period to
two or three years following
consummation or prohibiting
prepayment penalties with ARMs.
Public comments are discussed in
greater detail throughout this section.
Discussion
For the reasons discussed below, the
Board concludes that the fairness of
prepayment penalty provisions on
higher-priced mortgage loans and
HOEPA loans depends to an important
extent on the structure of the mortgage
loan. It has been common in the
subprime market to structure loans to
have a short expected life span. This has
been achieved by building in a
significant payment increase just a few
years after consummation. With respect
to subprime loans designed to have
shorter life spans, the injuries from
prepayment provisions are potentially
the most serious, as well as the most
difficult for a reasonable consumer to
avoid. For these loans, therefore, the
Board concludes that the injuries caused
by prepayment penalty provisions with

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subprime loans outweigh their benefits.
With respect to subprime loans
structured to have longer expected life
spans, however, the Board concludes
that the injuries from prepayment
penalties are closer to being in balance
with their benefits, warranting
restrictions but not, at this time, a
prohibition.
Background. Prepayment risk is the
risk that a loan will be repaid before the
end of the loan term, a major risk of
mortgage lending. Along with default
risk, it is the major risk of extending
mortgage loans. When mortgages
prepay, cash flow from loan payments
may not offset origination expenses or
discounts consumers were provided on
fees or interest rates. Moreover,
prepayment when market interest rates
are declining, which is when borrowers
are more likely to prepay, forces
investors to reinvest prepaid funds at a
lower rate. Furthermore, prepayment by
subprime borrowers whose credit risk
declines (for example, their equity or
their credit score increases) leaves an
investor holding relatively riskier loans.
Creditors seek to account for
prepayment risk when they set loan
interest rates and fees, and they may
also seek to address prepayment risk
with a prepayment penalty. A
prepayment penalty is a fee that a
borrower pays if he repays a mortgage
within a specified period after
origination. A prepayment penalty can
amount to several thousand dollars. For
example, a consumer who obtains a 3–
27 ARM with a thirty-year term for a
loan in the amount of $200,000 with an
initial rate of 6 percent would have a
principal balance of $194,936 at the end
of the second year following
consummation. If the consumer pays off
the loan, a penalty of six months’
interest on the remaining balance—close
to six monthly payments—will cost the
consumer about $5,850.71 A penalty of
this magnitude reduces a borrower’s
likelihood of prepaying and assures a
return for the investor if the borrower
does prepay.
Substantial injury. Prepayment
penalty provisions have been very
common on subprime loans. Almost
three-quarters of loans in a large dataset
of securitized subprime loan pools
originated from 2003 through the first
half of 2007 had a prepayment penalty
is a typical contractual formula for
calculating the penalty. There are other formulas for
calculating the penalty, such as a percentage of the
amount prepaid or of the outstanding loan balance
(potentially reduced by the percentage (for example,
20 percent) that a borrower, by law or contract, may
prepay without penalty). As explained further
below, a consumer may pay a lower rate in
exchange for having a provision providing for a
penalty of this magnitude.

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provision.72 These provisions cause
many consumers who pay the penalty,
as well as many consumers who cannot,
substantial injuries. The risk of injury is
particularly high for borrowers who
receive loans structured to have short
expected life spans because of a
significant expected payment increase.
A borrower with a prepayment
penalty provision who has reason to
refinance while the provision is in effect
must choose between paying the penalty
or foregoing the refinance, either of
which could be very costly. Paying the
penalty could exact several thousand
dollars from the consumer; financing
the penalty through the refinance loan
adds interest to that cost. When the
consumer’s credit score has improved,
delaying the refinance until the penalty
expires could mean losing or at least
postponing an opportunity to lower the
consumer’s interest rate. Declining to
pay the penalty also could mean
foregoing or delaying a ‘‘cash out’’ loan
that would consolidate several large
unsecured debts at a lower rate or help
the consumer meet a major life expense,
such as for medical care. Borrowers who
have no ability to pay or finance the
penalty, however, have no choice but to
forego or delay any benefits from
refinancing.
Prepayment penalty provisions also
exacerbate injuries from unaffordable or
abusive loans. In the worst case, where
a consumer has been placed in a loan
he cannot afford to pay, delaying a
refinancing could increase the
consumer’s odds of defaulting and,
ultimately, losing the house.73
Borrowers who were steered to loans
with less favorable terms than they
qualify for based on their credit risk face
an ‘‘exit tax’’ for refinancing to improve
their terms.
Prepayment penalty provisions can
cause more injury with loans designed
to have short expected life spans. With
these loans, borrowers are particularly
likely to want to prepay in a short time
to avoid the expected payment increase.
Moreover, in recent years, loans
designed to have short expected life
spans have been among the most
difficult for borrowers to afford—even
before their payment increases.
Borrowers with 2–28 and 3–27 ARMs
have been much more likely to become
72 Figure calculated from First American
LoanPerformance data.
73 For the reasons set forth in part II.B.,
consumers in the subprime market have had a high
risk of receiving loans they cannot afford to pay.
The Board expects that the rule prohibiting
disregard for repayment ability will reduce this risk
substantially, but no rule can eliminate it.
Moreover, its success depends on vigorous
enforcement by a wide range of agencies and
jurisdictions.

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seriously delinquent than borrowers
with fixed-rate subprime mortgages. In
part, the difference reflects that
borrowers receiving 2–28 and 3–27
ARMs have had lower average credit
scores and less equity in their homes at
origination. But the large difference also
suggests that these shorter-term loans
were more likely to be marketed and
underwritten in ways that increase the
risk of unaffordability. A prepayment
penalty provision exacerbates this
injury, especially because borrowers
with lower credit scores are the most
likely to have a need to refinance to
extract cash.
Injury not reasonably avoidable. In
the prime market, the injuries
prepayment penalties cause are readily
avoidable because lenders do not
typically offer borrowers mortgages with
prepayment penalty provisions. Indeed,
in one large dataset of first-lien prime
loans originated from 2003 to mid-2007
just six percent of loans had these
provisions.74 In a dataset of subprime
securitized loans originated during the
same period, however, close to threequarters had a prepayment penalty
provision.75 Moreover, evidence
suggests that a large proportion of
subprime borrowers with prepayment
penalty provisions have paid the
penalty. Approximately 55 percent of
subprime 2–28 ARMs in this same
dataset originated from 2000 to 2005
prepaid while the prepayment penalty
provision was in effect.76 The data do
not indicate how many consumers
actually paid a penalty, or how much
they paid. But the data suggest that a
significant percentage of borrowers with
subprime loans have paid prepayment
penalties, which, as indicated above,
can amount to several thousand dollars.
These figures raise a serious question
as to whether a substantial majority of
subprime borrowers have knowingly
and voluntarily taken the very high risk
of paying a significant penalty. While
subprime borrowers receive some rate
reduction for a prepayment penalty
provision (as discussed at more length
in the next subsection), they also have
major incentives to refinance. They
often have had difficulty meeting their
regular obligations and experienced
major life disruptions. Many would
therefore anticipate refinancing to
extract equity to consolidate their debts
or pay a major expense; nearly 90
percent of subprime ARMs used for
refinancings in recent years were ‘‘cash
74 Figure

calculated from McDash Analytics data.
calculated from First American
LoanPerformance data.
76 Id.
75 Figure

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out.’’ 77 In addition, many subprime
borrowers would aspire to refinance for
a lower rate when their credit risk
declines (for example, their credit score
improves, or their equity increases).
Prepayment penalties’ lack of
transparency also suggests that
prepayment penalty provisions are often
not knowingly and voluntarily chosen
by subprime borrowers whose loans
have them. In the subprime market,
information on rates and fees is not easy
to obtain. See part II.B. Information on
prepayment penalties, such as how large
they can be or how many consumers
actually pay them, is even harder to
obtain. The lack of transparency is
exacerbated by originators’ incentives—
largely hidden from consumers—to
‘‘push’’ loans with prepayment penalty
provisions and at the same time obscure
or downplay these provisions. If the
consumer seeks the lowest monthly
payment—as the consumer in the
subprime market often does—then the
originator has a limited incentive to
quote the payment for a loan without a
prepayment penalty provision, which
will tend to be at least slightly higher.
Perhaps more importantly, lenders pay
originators considerably larger
commissions for loans with prepayment
penalties, because the penalty assures
the lender a larger revenue stream to
cover the commission. The originator
also has an incentive not to draw the
consumer’s attention to the prepayment
penalty provision, in case the consumer
should prefer a loan without it.
Although the prepayment penalty
provision must be disclosed on the postapplication TILA disclosure, the
consumer may not notice it amidst
numerous other disclosures or may not
appreciate its significance. Moreover, an
unscrupulous originator may not
disclose the penalty until closing, when
the consumer’s ability to negotiate terms
is much reduced.
Even a consumer offered a genuine
choice would have difficulty comparing
the costs of subprime loans with and
without a penalty, and would likely
77 Id. It is not possible to discern from the data
whether the cash was used only to cover the costs
of refinancing or also for other purposes. See also
Subprime Refinancing at 233 (reporting that 49
percent of subprime refinance loans involve equity
extraction, compared with 26 percent of prime
refinance loans); Subprime Outcomes at 368–371
(discussing survey evidence that borrowers with
subprime loans are more likely to have experienced
major adverse life events (marital disruption; major
medical problem; major spell of unemployment;
major decrease of income) and often use refinancing
for debt consolidation or home equity extraction);
Subprime Lending Investigation at 551–52 (citing
survey evidence that borrowers with subprime
loans have increased incidence of major medical
expenses, major unemployment spells, and major
drops in income).

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choose to place more weight on the
more certain and tangible cost of the
initial monthly payment. There is a
limit to the number of factors a
consumer can reasonably be expected to
consider, so the more complex a loan
the less likely the consumer is to
consider the prepayment penalty. For
example, an FTC staff study found that
consumers presented with mortgage
loans with more complex terms were
more likely to miss or misunderstand
key terms.78
These concerns are magnified with
subprime loans structured to have short
expected life spans, which will have
variable rates (such as 2–28 and 3–27
ARMs) or other terms that can increase
the payment. Adjustable-rate mortgages
are complicated for consumers even
without prepayment penalties. A
Federal Reserve staff study suggests that
borrowers with ARMs underestimate the
amount by which their interest rates can
change.79 The study also suggests that
the borrowers most likely to make this
mistake have a statistically higher
likelihood of receiving subprime
mortgages (for example, they have lower
incomes and less education).80 Adding
a prepayment penalty provision to an
already-complex ARM product makes it
less likely the consumer will notice,
understand, and consider this provision
when making decisions. Moreover, the
shorter the period until the likely
payment increase, the more the
consumer will have to focus attention
on the adjustable-rate feature of the loan
and the less the consumer may be able
to focus on other features.
Moreover, subprime mortgage loans
designed to have short expected life
spans appear more likely than other
types of subprime mortgages to create
incentives for abusive practices.
Because these loans create a strong
incentive to refinance in a short time,
they are likely to be favored by
originators who seek to ‘‘flip’’ their
clients through repeated refinancings to
increase fee revenue; prepayment
penalties are frequently associated with
such a strategy.81 Moreover, 2–28 and
78 Improving Consumer Mortgage Disclosures at
74 (‘‘[R]espondents had more difficulty recognizing
and identifying mortgage cost in the complex-loan
scenario. This implies that borrowers in the
subprime market may have more difficulty
understanding their loan terms than borrowers in
the prime market. The difference in understanding,
however, would be due largely to differences in the
complexities of the loans, rather than the
capabilities of the borrowers.’’).
79 Brian Bucks and Karen Pence, Do Borrowers
Understand their Mortgage Terms?, Journal of
Urban Economics (forthcoming 2008).
80 Id.
81 See generally U.S. Dep’t of Hous. & Urban Dev.
& U.S. Dep’t of Treasury, Recommendations to Curb

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3–27 ARMs were marketed to borrowers
with low credit scores as ‘‘credit repair’’
products, obscuring the fact that a
prepayment penalty provision would
inhibit or prevent the consumer who
improved his credit score from
refinancing at a lower rate. These loans
were also associated more than other
loan types with irresponsible
underwriting and marketing practices
that contributed to high rates of
delinquency even before the consumer’s
payment increased.
Subprime loans designed to have
short expected life spans also attracted
consumers who are more vulnerable to
abusive prepayment penalties.
Borrowers with 2–28 and 3–27 ARMs
had lower credit scores than borrowers
with any other type of subprime loan.82
These borrowers include consumers
with the least financial sophistication
and the fewest financial options. Such
consumers are less likely to scrutinize a
loan for a restriction on prepayment or
negotiate the restriction with an
originator, who in any event has an
incentive to downplay its significance.
Injury not outweighed by
countervailing benefits to consumers or
to competition. The Board concludes
that prepayment penalties’ injuries
outweigh their benefits in the case of
higher-priced mortgage loans and
HOEPA loans designed with planned or
potential payment increases after just a
few years. For other types of higherpriced and HOEPA loans, however, the
Board concludes that the injuries and
benefits are much closer to being in
equipoise. Thus, as explained further in
the next section, the final rule prohibits
penalties in the first case and limits
them to two years in the second.
Prepayment penalties can increase
market liquidity by permitting creditors
and investors to price directly and
efficiently for prepayment risk. This
liquidity benefit is more significant in
the subprime market than in the prime
market. Prepayment in the subprime
market is motivated by a wider variety
of reasons than in the prime market, as
discussed above, and therefore is subject
to more uncertainty. In principle,
prepayment penalty provisions allow
creditors to charge most of the
prepayment risk only to the consumers
who actually prepay, rather than
Predatory Home Mortgage Lending 73 (2000) (‘‘Loan
flipping generally refers to repeated refinancing of
a mortgage loan within a short period of time with
little or no benefit to the borrower.’’), available at
http://www.huduser.org/publications/pdf/
treasrpt.pdf.
82 Figures calculated from First American
LoanPerformance data about securitized subprime
pools show that the median FICO score was 627 for
fixed-rate loans and 612 for short-term hybrid
ARMs (2–28 and 3–27 ARMS).

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charging all of the risk in the form of
higher interest rates or up-front fees for
all consumers. The extent to which
creditors have actually passed on lower
rates and fees to consumers with
prepayment penalty provisions in their
loans is debated and, moreover,
inherently difficult to measure. With
limited exceptions, however, available
studies, discussed at more length below,
have shown consistently that loans with
prepayment penalties carry lower rates
or APRs than loans without prepayment
penalties having similar credit risk
characteristics.83
Evidence of lower rates or APRs is not
sufficient to demonstrate that penalties
provide a net benefit to consumers.
Some consumers may not have chosen
the lower rates or APRs voluntarily and
may have preferred ex ante, had they
been properly informed, to have no
prepayment penalty provision and
somewhat higher rates or fees.
Borrowers with these provisions who
hold their loans past the penalty period
are likely better off because they have
lower rates and do not incur a
prepayment penalty; but the benefit
these borrowers receive may be small
compared to the injury suffered by the
many borrowers who pay the penalty, or
who cannot pay it and are locked into
an inappropriate or unaffordable loan. It
does appear, however, that prepayment
penalty provisions provide some benefit
to at least some consumers in the form
of reduced rates and increased credit
availability.
In the case of higher-priced mortgage
loans and HOEPA loans designed to
have short expected life spans, the
Board concludes that these potential
benefits do not outweigh the injuries to
consumers. Available studies generally
have found reductions in interest rate or
83 See Chris Mayer, Tomasz Piskorski, and Alexei
Tchistyi, The Inefficiency of Refinancing: Why
Prepayment Penalties Are Good for Risky Borrowers
(Apr. 28, 2008) (Why Prepayment Penalties Are
Good), http://www1.gsb.columbia.edu/mygsb/
faculty/research/pubfiles/3065/
Inefficiency%20of%20Refinancing%2Epdf; Gregory
Elliehausen, Michael E. Staten, and Jevgenijs
Steinbuks, The Effect of Prepayment Penalties on
the Pricing of Subprime Mortgages, 60 Journal of
Economics and Business 33 (2008) (Effect of
Prepayment Penalties); Michael LaCour-Little,
Prepayment Penalties in Residential Mortgage
Contracts: A Cost-Benefit Analysis (Jan. 2007)
(unpublished) (Cost-Benefit Analysis); Richard F.
DeMong and James E. Burroughs, Prepayment Fees
Lead to Lower Interest Rates, Equity (Nov./Dec.
2005), available at http://
www.commerce.virginia.edu/faculty_research/
faculty_homepages/DeMong/Prepaymentsand
InterestRates.pdf (Prepayment Fees Lower Rates);
but see Keith E. Ernst, Center for Responsible
Lending, Borrowers Gain No Interest Rate Benefit
from Prepayment Penalties on Subprime Mortgages
(2005), http://www.responsiblelending.org/pdfs/
rr005-PPP_Interest_Rate-0105.pdf (No Interest Rate
Benefit).

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APR associated with subprime 2–28
ARMs and 3–27 ARMs to be minimal,
ranging from 18 to a maximum of 29
basis points, with one study finding no
rate reduction on such loans originated
by brokers.84 The one available (but
unpublished) study to compare the rate
reduction to the cost of the penalty itself
found a net cost to the consumer with
2–28 and 3–27 ARMs.85 The minimal
rate reductions strengthen doubt that
the high incidence of penalty provisions
was the product of informed consumer
choice. Moreover, for the reasons
discussed above, prepayment penalties
are likely to cause the most significant,
and least avoidable, injuries when
coupled with loans designed to have
short expected life spans, which have
proved to be the riskiest loans for
consumers. On balance, therefore, the
Board believes these injuries outweigh
potential benefits.
For higher-priced mortgage loans and
HOEPA loans structured to have longer
expected life spans, however, the Board
concludes that the injuries and benefits
are closer to being in balance. Studies
that analyze both fixed-rate mortgages
and 2–28 and 3–27 ARMs show a more
significant reduction of rates and fees
for fixed-rate mortgages for loans with
prepayment penalties, ranging from 38
basis points 86 to 60 basis points.87
Moreover, longer-term ARMs and fixedrate mortgages have had significantly
lower delinquency rates than 2–28 and
3–27 ARMs, suggesting these mortgages
are more likely to be affordable to
consumers. In addition, mortgages
84 See Effect of Prepayment Penalties 43 (finding
that the presence of a prepayment penalty reduced
risk premiums by 18 basis points for hybrid loans
and 13 basis points for variable-rate loans);
Prepayment Fees Lower Rates 5 (stating that, for
first-lien subprime loans with a thirty-year term, the
presence of a prepayment penalty reduced the APR
by 29 basis points for adjustable-rate loans and 20
basis points for interest-only loans).
85 Cost-Benefit Analysis 26 (‘‘For the [2–28] ARM
product, the total interest rate savings is
significantly less than the amount of the expected
prepayment penalty; for the [3–28] ARM product,
the two values are approximately equal.’’).
86 Effect of Prepayment Penalties 43. See also
Cost-Benefit Analysis 24 (finding the total estimated
interest rate savings for fixed-rate loans to be 51
basis points for retail-originated loans and 33 basis
points for broker-originated loans).
87 Prepayment Fees Lower Rates 5. See also Why
Prepayment Penalties Are Good 25 & fig. 4 (finding
that, depending on the borrower’s FICO score,
fixed-rate loans with prepayment penalties had
interest rates that were about 50 basis points (where
FICO score 680 or higher) to about 70 basis points
(where FICO score less than 620) lower than
mortgages without prepayment penalties); but see
No Interest Rate Benefit (finding, for subprime
fixed-rate loans, that interest rates for purchase
loans with a prepayment penalty were between 39
and 51 basis points higher than for such loans
without a penalty and that for refinance loans there
was no statistically significant difference in the
interest rates paid).

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Federal Register / Vol. 73, No. 147 / Wednesday, July 30, 2008 / Rules and Regulations
designed to have longer life spans create
less opportunity for flipping and other
abuses, and the borrowers offered these
loans may be less vulnerable to abuse.
These borrowers have had higher credit
scores and therefore more options, and
their preference for a longer-lived loan
may imply that they have a longer-term
perspective and a more realistic
assessment of their situation. In fact, a
smaller proportion of borrowers with
subprime fixed-rate mortgages with
penalty provisions originated between
2000 and 2005 prepaid in the first two
years (about 35 percent) than did
borrowers with subprime 2–28 ARMs
with penalty provisions (about 55
percent).88 Therefore, in the case of
shorter prepayment penalty provisions
on loans structured to have longer life
spans, the Board does not conclude at
this time that the injuries from these
provisions outweigh the benefits.

sroberts on PROD1PC70 with RULES

The Final Rule
For both higher-priced mortgage loans
and HOEPA loans, the final rule
prohibits prepayment penalties if
periodic payments can change during
the first four years following loan
consummation. For all other higherpriced mortgage loans and HOEPA
loans, the final rule limits the
prepayment penalty period to two years
after loan consummation and also
requires that a prepayment penalty not
apply if the same creditor or its affiliate
makes the refinance loan. For HOEPA
loans, the final rule retains the current
prohibition of prepayment penalties
where the borrower’s DTI ratio at
consummation exceeds 50 percent; the
Board is not adopting this prohibition
for higher-priced mortgage loans. The
final rule sets forth the foregoing
prepayment penalty rules in two
separate sections: For HOEPA loans, in
§ 226.32(d)(7), and for higher-priced
mortgage loans, in § 226.35(b)(3).
TILA Section 129(c)(2)(C), 15 U.S.C.
1639(c)(2)(C), limits the maximum
prepayment penalty period with
HOEPA loans to five years following
consummation. The Board proposed to
apply this HOEPA provision to higherpriced mortgage loans. Commenters
generally stated that a five-year
maximum prepayment period was too
long. Some consumer organizations, an
association of credit unions, and a
federal banking regulatory agency
recommended a two-year limit on
prepayment penalty periods. A few
consumer organizations recommended a
88 Figures calculated from First American
LoanPerformance data. About 90 percent of the
penalty provisions on the fixed-rate loans applied
for at least two years.

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one-year maximum length. Although a
financial services trade association
supported a five-year maximum, several
financial institutions and mortgage
banking trade associations and a
government-sponsored enterprise stated
that three years would be an appropriate
maximum period for prepayment
penalties with higher-priced mortgage
loans.
As discussed above, the Board
concludes that the injuries from
prepayment penalty provisions that
consumers cannot reasonably avoid
outweigh these provisions’ benefits with
respect to higher-priced mortgage loans
and HOEPA loans structured to have
short expected life spans. Accordingly,
the final rule prohibits a prepayment
penalty provision with a higher-priced
mortgage loan or a HOEPA loan whose
payments may change during the first
four years following consummation.89 A
four-year discount period is not
common, but a three-year period was
common at least until recently. Using a
three-year period in the regulation,
however, might simply encourage the
market to structure loans with discount
periods of three years and one day.
Therefore, the Board adopts a four-year
period in the final rule as a prophylactic
measure.
The prohibition applies to loans with
potential payment changes within four
years, including potential increases and
potential declines; the prohibition is not
limited to loans where the payment can
increase but not decline. The Board is
concerned that such a limitation might
encourage the market to develop
unconventional repayment schedules
for HOEPA loans and higher-priced
mortgage loans that are more difficult
for consumers to understand, easier for
originators to misrepresent, or both. The
final rule also refers specifically to
periodic payments of principal or
interest or both, to distinguish such
payments from other payments,
including amounts directed to escrow
accounts. Staff commentary lists
89 This rule is stricter than HOEPA’s statutory
provision on prepayment penalties for HOEPA
loans. This provision permits such penalties under
certain conditions regardless of a potential payment
change within the first four years. Section 129(l)(2)
authorizes the Board, however, to prohibit acts or
practices it finds to be unfair or deceptive in
connection with mortgage loans—including HOEPA
loans. Since HOEPA’s restrictions on prepayment
penalty provisions were adopted, much has
changed to make these provisions more injurious to
consumers and these injuries more difficult to
avoid. The following risk factors became much
more common in the subprime market: ARMs with
payments that reset after just two or three years;
securitization of subprime loans under terms that
reduce the originator’s incentive to ensure the
consumer can afford the loan; and mortgage brokers
with hidden incentives to ‘‘push’’ penalty
provisions.

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examples showing whether prepayment
penalties are permitted or prohibited in
particular circumstances where the
amount of the periodic payment can
change. The commentary also provides
examples of changes that are not
deemed payment changes for purposes
of the rule.90
With respect to loans structured to
have longer expected life spans, the
Board concludes that the injuries from
prepayment penalty provisions that are
short relative to the expected life span
are closer to being in balance with their
benefits. Accordingly, for loans for
which the payment may not change, or
may change only after four or more
years, the Board is not banning
prepayment penalties. Instead, it is
seeking to ensure the benefits of penalty
provisions on these loans are in line
with the injuries they can cause by
limiting the potential for injury to two
years from consummation.
The Board recognizes that creditors
may respond by increasing interest
rates, up-front fees, or both, and that
some subprime borrowers may pay more
than they otherwise would, or not be
able to obtain credit when they would
prefer. The Board believes these costs
are justified by the benefits of the rule.
Based on available studies, the expected
increase in costs on the types of loans
for which penalty provisions are
prohibited is not large. For the
remaining loan types, reducing the
allowable penalty period from the
typical three years to two years should
not lead to significant cost increases for
subprime borrowers. Moreover, to the
extent cost increases come in the form
of higher rates or fees, they will be
reflected in the APR, where they may be
more transparent to consumers than as
a prepayment penalty. Thus, it is not
clear that the efficiency of market
pricing would decline.
The Board is not adopting the
suggestion of some commenters that it
set a maximum penalty amount. A
restriction of that kind does not appear
necessary or warranted at this time.
90 As discussed above, the final rule sets forth the
prepayment penalty rules in two separate sections.
For HOEPA loans, § 226.32(d)(7) lists conditions
that must be met for the general penalty prohibition
in § 226.32(d)(6) not to apply. For higher-priced
mortgage loans, § 226.35(b)(2) prohibits a penalty
described in § 226.32(d)(6) unless the conditions in
§ 226.35(b)(i) and (ii) are met. To ensure consistent
interpretation of the separate sections, the staff
commentary to § 226.35(b)(2) cross-references the
payment-change examples and exclusions in staff
commentary to § 226.32(d)(7). The examples in staff
commentary to § 226.32(d)(7)(iv) refer to a
condition that final § 226.35(b)(2) does not include,
however—the condition that, at consummation, the
consumer’s total monthly debt payments may not
exceed 50 percent of the consumer’s monthly gross
income. The staff commentary to § 226.35(b)(2)
clarifies this difference.

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Sixty-day window. The Board does
not believe that the proposed
requirement that a prepayment penalty
period expire at least sixty days before
a potential payment increase would
adequately protect consumers with
loans where the increase was expected
shortly. As discussed, these loans, such
as 2–28 ARMs, will tend to attract
consumers who have a short planning
horizon and intend to avoid the
payment increase by refinancing. If
provided only a brief penalty-free
window to refinance before the increase
(as proposed, a window in months 23
and 24 for a 2–28 ARM), the consumer
deciding whether to accept a loan with
a penalty provision—assuming the
consumer was provided a genuine
choice—must predict quite precisely
when he will want to refinance. If the
consumer believes he will want to
refinance in month 18 and that his
credit score, home equity, and other
indicators of credit quality will be high
enough then to enable him to refinance,
then the consumer probably would be
better off with a loan without a penalty
provision. If, however, the consumer
believes he will not be ready or able to
refinance until month 23 or 24 (the
penalty-free window), he probably
would be better off accepting the
penalty provision. It is not reasonable to
expect consumers in the subprime
market to make such precise
predictions. Moreover, for transactions
on which prepayment penalties are
permitted by the final rule, a sixty-day
window would be moot because the
penalty provision may not exceed two
years and the payment on a loan with
a penalty provision may not change
during the first four years following
consummation.91
Refinance loan from same creditor.
The Board is adopting with minor
revisions the proposed requirement that
a prepayment penalty not apply when a
creditor refinances a higher-priced
mortgage loan the creditor or its affiliate
originated. HOEPA imposes this
requirement in connection with HOEPA
loans. 15 U.S.C. 1639(c)(2)(B).
Some large financial institutions and
financial institution trade associations
that commented opposed the proposal.
A large bank stated that the requirement
would not prevent loan flipping and
that mortgage brokers would easily
circumvent the rule by directing repeat
customers to a different creditor each
91 The Board sought comment on whether it
should revise § 226.20(c) or draft new disclosure
requirements to reconcile that section with the
proposed requirement that a prepayment penalty
provision expire at least sixty days prior to the date
of the first possible payment increase. This issue is
also moot.

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time. A mortgage bankers’ trade
association and a large bank stated that
the requirement would prevent
customers from returning to the same
institution with which they have
existing relationships. Another large
bank stated that the rule would place
lenders at a competitive disadvantage
when trying to refinance the loan of an
existing customer.
Requiring that a prepayment penalty
not apply when a creditor refinances a
loan it originated will discourage
originators from seeking to ‘‘flip’’ a
higher-priced mortgage loan. To prevent
evasion by creditors who might direct
borrowers to refinance with an affiliated
creditor, the same-lender refinance rule
covers loans by a creditor’s affiliate.
Although creditors may waive a
prepayment penalty when they
refinance a loan that they originated to
a consumer, consumers who refinance
with the same creditor may be charged
a prepayment penalty even if a creditor
or mortgage broker has told the
consumer that the prepayment penalty
would be waived in that circumstance.92
The final rule requires that a
prepayment penalty not apply where a
creditor or its affiliate refinances a
higher-priced mortgage loan that the
creditor originated to the consumer. The
final rule is based on TILA Section
129(c)(2)(B), 15 U.S.C. 1639(c)(2)(B),
which provides that a HOEPA loan may
contain a prepayment penalty ‘‘if the
penalty applies only to a prepayment
made with amounts obtained by the
consumer by means other than a
refinancing by the creditor under the
mortgage, or an affiliate of that
creditor.’’ The Board notes that TILA
Section 129(c)(2)(B), 15 U.S.C.
1639(c)(2)(B), applies regardless of
whether the creditor still holds the loan
at the time of a refinancing by the
creditor or an affiliate of the creditor. In
some cases, a creditor’s assignees are the
‘‘true creditor’’ funding the loan;
moreover, the rule prevents loan
transfers designed to evade the
prohibition.
TILA Section 129(c)(2)(B) does not
prohibit a creditor from refinancing a
loan it or its affiliate originated but
92 This concern is evident, for example, in a
settlement agreement that ACC Capital Holdings
Corporation and several of its subsidiaries,
including Ameriquest Mortgage Company
(collectively, the Ameriquest Parties) made in 2006
with 49 states and the District of Columbia. The
Ameriquest Parties agreed not to make false,
misleading, or deceptive representations regarding
prepayment penalties and specifically agreed not to
represent that they will waive a prepayment penalty
at some future date, unless that promise is made in
writing and included in the terms of a loan
agreement with a borrower. See, e.g., Iowa ex rel.
Miller v. Ameriquest Mortgage Co., No. 05771
EQCE–053090 at 18 (Iowa D. Ct. 2006) (Pls. Pet. 5).

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rather requires that a prepayment
penalty not apply in the event of a
refinancing by the creditor or its
affiliate. To make clear that the
associated regulation, § 226.32(d)(7)(ii),
does not prohibit a creditor from
refinancing a loan that the creditor (or
an affiliate of the creditor) originated,
the Board is revising the text of that
regulation somewhat. Final
§ 226.32(d)(7)(ii) states that a HOEPA
loan may provide for a prepayment
penalty if the prepayment penalty
provision will not apply if the source of
the prepayment funds is a refinancing
by the creditor or an affiliate of the
creditor. This change clarifies, without
altering, the meaning of the provision
and is technical, not substantive, in
nature. Final § 226.35(b)(2)(ii)(B) applies
to higher-priced mortgage loans rather
than to HOEPA loans but mirrors final
§ 226.32(d)(7)(ii) in all other respects.
Debt-to-income ratio. Under the
proposed rule, a higher-priced mortgage
loan could not include a prepayment
penalty provision if, at consummation,
the consumer’s DTI ratio exceeds 50
percent. Proposed comments would
have given examples of funds and
obligations that creditors commonly
classify as ‘‘debt’’ and ‘‘income’’ and
stated that creditors may, but need not,
look to widely accepted governmental
and non-governmental underwriting
standards to determine how to classify
particular funds or obligations as ‘‘debt’’
or ‘‘income.’’
Most banking and financial services
trade associations and several large
banks stated that the Board should not
prohibit prepayment penalties on
higher-cost loans where a consumer’s
DTI ratio at consummation exceeds 50
percent. Several of these commenters
stated that the proposed rule would
disadvantage a consumer living on a
fixed income but with significant assets,
including many senior citizens. Some of
these commenters stated that the
proposed rule would disadvantage
consumers in areas where housing
prices are relatively high. Some
consumer organizations also objected to
the proposed DTI-ratio requirement,
stating that the requirement would not
protect low-income borrowers with a
DTI ratio equal to or less than 50
percent but limited residual income.
The Board is not adopting a specific
DTI ratio in the rule prohibiting
disregard of repayment ability. See part
IX.B. For the same reasons, the Board is
not adopting the proposed prohibition
of a prepayment penalty for all higherpriced mortgage loans where a
consumer’s DTI ratio at consummation
exceeds 50 percent. The Board is,
however, leaving the prohibition in

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place as it applies to HOEPA loans, as
this prohibition is statutory, TILA
Section 129(c)(2)(A)(ii), and its removal
does not appear warranted at this time.
This statute provides that for
purposes of determining whether at
consummation of a HOEPA loan a
consumer’s DTI ratio exceeds 50
percent, the consumer’s income and
expenses are to be verified by a financial
statement signed by the consumer, by a
credit report, and, in the case of
employment income, by payment
records or by verification from the
employer of the consumer (which
verification may be in the form of a pay
stub or other payment record supplied
by the consumer). The Board proposed
to adopt a stronger standard that would
require creditors to verify the
consumer’s income and expenses in
accordance with verification rules that
the Board proposed and is adopting in
final § 226.34(a)(4)(ii), together with
associated commentary. Although the
Board requested comment about the
proposal to revise § 226.32(d)(7)(iii) and
associated commentary, commenters
did not discuss this proposal.
As proposed, the Board is
strengthening the standards that
§ 226.32(d)(7)(iii) establishes for
verifying the consumer’s income and
expenses when determining whether a
prepayment penalty is prohibited
because the consumer’s DTI ratio
exceeds 50 percent at consummation of
a HOEPA loan. There are three bases for
adopting an income verification
requirement that is stronger than the
standard TILA Section 129(c)(2)(A)(ii)
establishes. First, under TILA Section
129(l)(2), the Board has a broad
authority to update HOEPA’s
protections as needed to prevent unfair
practices. 15 U.S.C. 1639(l)(2)(A). For
the reasons discussed in part IX.B, the
Board believes that relying solely on the
income statement on the application is
unfair to the consumer, regardless of
whether the consumer is employed by
another person, self-employed, or
unemployed. Second, the Board has a
broad authority under TILA Section
129(l)(2) to update HOEPA’s protections
as needed to prevent their evasion. 15
U.S.C. 1639(l)(2)(A). A signed financial
statement declaring all or most of a
consumer’s income to be selfemployment income or income from
sources other than employment could
be used to evade the statute. Third,
establishing a single standard for
verifying a consumer’s income and
obligations for HOEPA loans and
higher-priced mortgage loans will
facilitate compliance.
For the foregoing reasons, for HOEPA
loans, final § 226.32(d)(7)(iii) requires

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creditors to verify that the consumer’s
total monthly debt payments do not
exceed 50 percent of the consumer’s
monthly gross income using the
standards set forth in final
§ 226.34(a)(4)(ii). The Board also is
revising the commentary associated
with § 226.32(d)(7)(iii) to cross-reference
certain commentary associated with
§ 226.34(a)(4).
Disclosure. For reasons discussed
above, the Board does not believe that
disclosure alone is sufficient to enable
consumers to avoid injury from a
prepayment penalty. There is reason to
believe, however, that disclosures could
more effectively increase
transparency.93 The Board will be
conducting consumer testing to
determine how to make disclosures
more effective. As part of this process,
the Board will consider the
recommendation from some
commenters that creditors who provide
loans with prepayment penalties be
required to disclose the terms of a loan
without a prepayment penalty.
D. Escrows for Taxes and Insurance—
§ 226.35(b)(3)
The Board proposed in § 226.35(b)(3)
to require a creditor to establish an
escrow account for property taxes and
homeowners insurance on a higherpriced mortgage loan secured by a first
lien on a principal dwelling. Under the
proposal, a creditor may allow a
consumer to cancel the escrow account,
but no sooner than 12 months after
consummation. The Board is adopting
the rule as proposed and adding limited
exemptions for loans on cooperative
shares and, in certain cases,
condominium units.
The final rule requires escrows for all
covered loans secured by site-built
homes for which creditors receive
applications on or after April 1, 2010,
and for all covered loans secured by
manufactured housing for which
creditors receive applications on or after
October 1, 2010.
Public Comments
Many community banks and mortgage
brokers as well as several industry trade
associations opposed the proposed
escrow requirement. Many of these
commenters contended that mandating
escrows is not necessary to protect
consumers. They argued that consumers
93 For example, an FTC study based on
quantitative consumer testing using several fixedrate loan scenarios found that improving a
disclosure of the prepayment penalty provision
increased the percentage of participants who could
tell that they would pay a prepayment penalty if
they refinanced. Improving Mortgage Disclosures
109.

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are adequately protected by the
proposed requirement to consider a
consumer’s ability to pay tax and
insurance obligations under
§ 226.35(b)(1), and by a disclosure of
estimated taxes and insurance they
recommended the Board adopt.
Commenters also contended that setting
up an escrow infrastructure would be
very expensive; creditors will either
pass on these costs to consumers or
decline to originate higher-priced
mortgage loans.
Individual consumers who
commented also expressed concern
about the proposal. Some consumers
expressed a preference for paying their
taxes and insurance themselves out of
fear that servicers may fail to pay these
obligations fully and on-time. Many
requested that, if escrows are required,
creditors be required to pay interest on
the escrowed funds.
Several industry trade associations,
several large creditors and some
mortgage brokers, however, supported
the proposed escrow requirement. They
were joined by the consumer groups,
community development groups, and
state and federal officials that
commented on the issue. Many of these
commenters argued that failure to
escrow leaves consumers unable to
afford the full cost of homeownership
and would face expensive force-placed
insurance or default, and possibly
foreclosure. Commenters supporting the
proposal differed on whether and under
what circumstances creditors should be
permitted to cancel escrows.
Large creditors without escrow
systems asked for 12 to 24 months to
comply if the proposal is adopted.
Discussion
As commenters confirmed, it is
common for creditors to offer escrows in
the prime market, but not in the
subprime market. The Board believes
that this discrepancy is not entirely the
result of consumers in the subprime
market making different choices than
consumers in the prime market. Rather,
subprime consumers, whether they
would wish to escrow or not, face a
market where competitive forces have
prevented significant numbers of
creditors from offering escrows at all. In
such a market, consumers suffer
significant injury, especially, but not
only, those who are not experienced
handling property taxes and insurance
on their own and are therefore least able
to avoid these injuries. The Board finds
that these injuries outweigh the costs to
consumers of offering them escrows. For
these reasons, the Board finds that it is
unfair for a creditor to make a higherpriced mortgage loan without presenting

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the consumer a genuine opportunity to
escrow. In order to ensure that the
opportunity to escrow is genuine, the
final rule requires that creditors
establish escrow accounts for first-lien
higher-priced mortgage loans for at least
twelve months. The Board believes that
consumers, creditors, and investors will
all benefit from this requirement.
Lack of escrow opportunities in the
subprime market. Relative to the prime
market, few creditors in the subprime
market offer consumers the opportunity
to escrow. The Board believes that,
absent a rule requiring escrows, market
forces alone are unlikely to drive
significant numbers of creditors to begin
to offer escrows in the subprime market.
Consumers in the subprime market tend
to shop based on monthly payment
amounts, rather than on interest rates.94
So creditors who are active in the
subprime market, and who can quote
low monthly payments to a prospective
borrower, have a competitive advantage
over creditors that quote higher monthly
payments. A creditor who does not offer
the opportunity to escrow (and thus
quotes monthly payments that do not
include amounts for escrows) can quote
a lower monthly payment than a
creditor who does offer an opportunity
to escrow (and thus quotes a higher
monthly payment that includes amounts
for escrow). Consequently, creditors in
the subprime market who offer escrows
may be at a competitive disadvantage to
creditors who do not.
Creditors who offer escrows could try
to overcome this competitive
disadvantage by advertising the
availability and benefits of escrows to
subprime consumers. Yet offering
escrows entails some significant cost to
the creditor. The creditor must either
outsource servicing rights to third party
servicers and lose servicing revenue, or
make a large initial investment to
establish an escrow infrastructure inhouse. According to comments from
some creditors, the cost to set up an
escrow infrastructure could range
between one million dollars and $16
million for a large creditor. While
escrows improve loan performance 95
94 Subprime Mortgage Investigation at 554 (‘‘Our
focus groups suggested that prime and subprime
borrowers use quite different search criteria in
looking for a loan. Subprime borrowers search
primarily for loan approval and low monthly
payments, while prime borrowers focus on getting
the lowest available interest rate. These distinctions
are quantitatively confirmed by our survey.’’).
95 An industry representative at the Board’s 2007
hearing indicated that her company’s internal
analysis showed that escrows clearly improved loan
performance. Home Ownership and Equity
Protection Act (HOEPA): Public Hearing, at 66 (June
14, 2007) (statement of Faith Schwartz, Senior Vice
President, Option One Mortgage Corp.), available at

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and offer creditors assurance that the
collateral securing the loan is protected,
those advantages alone have not proven
sufficient incentive to make escrowing
widespread in the subprime market.
Rather, if a creditor is to recoup its costs
for offering an opportunity to escrow,
the creditor must convince a significant
number of subprime consumers that
they would be better served by
accepting a higher monthly payment
with escrows rather than a lower
monthly payment without escrows. Yet
consumers’ focus on the lowest monthly
payments in the subprime market, and
the lack of familiarity with escrows,
could make it difficult to convince
consumers to accept the higher
payment. In addition, the creditor who
offered escrows would be vulnerable to
competitors’ attempts to lure away
existing borrowers by quoting a lower
monthly payment without disclosing
that the payment does not include
amounts for escrows. Nor could a
creditor who offered escrows
necessarily count on consumers who
wanted to escrow finding the creditor
on their own. If only a small minority
of creditors offer escrows, consumers
would, on average, have to contact
many creditors in order to find one that
offers escrows and many consumers
might reasonably give up the search
before they were successful.
Under these conditions, creditors are
unlikely to offer escrows unless their
competitors are required to offer
escrows. The Board believes that
creditors’ failure to establish a capacity
to escrow is a collective action problem;
creditors would likely be better off if
escrows were widely available in the
subprime market, but most creditors
who have not offered escrows lack the
necessary incentive to invest in the
requisite systems unless their
competitors do. This is the context for
the Board’s finding that it is unfair for
a creditor to make a higher-priced
mortgage loan without offering an
escrow.
Substantial injury. A creditor’s failure
to offer escrows can cause consumers
substantial injury. The lack of escrows
in the subprime market increases the
risk that consumers will base borrowing
decisions on unrealistically low
assessments of their mortgage-related
obligations. Brokers and loan officers
operating in a market where escrows are
not common generally quote monthly
http://federalreserve.gov/events/publichearings/
hoepa/2007/20070614/transcript.pdf. Also, the
Credit Union National Association and California
and Nevada Credit Union Leagues comment letters
note that ‘‘[o]verall, loans with escrow accounts are
likely to perform better than loans without these
accounts.’’

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payments of only principal and interest.
These originators have little incentive to
disclose or emphasize additional
obligations for taxes and insurance.
Therefore, many consumers will decide
whether they can afford the offered loan
on the basis of misleadingly low
payment quotes, making it more likely
that they will obtain mortgages they
cannot afford. This risk is particularly
high for first time homebuyers, who lack
experience with the obligations of
homeownership. The risk is also
elevated for homeowners who currently
have prime loans and contribute to an
escrow. If their circumstances change
and they refinance in the subprime
market, they may not be aware that
payments quoted to them do not include
amounts for escrow. For example,
current homeowners who have
substantial unsecured consumer debt,
but who also have equity in their
homes, can be especially vulnerable to
‘‘loan flipping’’ because they may find
a cash-out refinance offer attractive. Yet
if they assumed, erroneously, that the
monthly payment quoted to them
included amounts for escrows, they
would not be able to evaluate the true
cost of the loan product being offered.
The lack of escrows in the subprime
market also makes it more likely that
certain consumers will not be able to
handle their mortgage obligations
including taxes and insurance.
Subprime consumers, by definition, are
those who have experienced some
difficulty in making timely payments on
debt obligations. For this reason, some
consumers may prefer to escrow if
offered a choice, especially if they know
from personal experience that they have
difficulty saving on their own, paying
their bills on-time, or both. Without an
escrow, these consumers may be at
greater risk that a servicer will impose
costly force-placed homeowners
insurance or the local government will
seek to foreclose to collect unpaid taxes.
Consumers with unpaid property tax or
insurance bills are particularly
vulnerable to predatory lending
practices: originators offering them a
refinancing with ‘‘cash out’’ to cover
their tax and insurance obligations can
take advantage of their urgent
circumstances. The consumers who
cannot or will not borrow more (for
example, because they lack the equity)
face default and a forced sale or
foreclosure.
Injury not reasonably avoidable.
Consumers cannot reasonably avoid the
injuries that result from the lack of
escrows. As described above, originators
in the subprime market have strong
incentives to quote only principal and
interest payment amounts, and much

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weaker incentives to inform consumers
about tax and insurance obligations
since doing so could put them at a
competitive disadvantage. Consumers
may either be left unaware of the
magnitude of their taxes and insurance
obligations, or may not realize that
amounts for taxes and insurance are not
being escrowed for them if they are
accustomed to the prime market’s
practice of escrowing. And, in a market
where few creditors offer escrows and
advertise their availability, consumers
who would prefer to escrow may give
up trying to find a creditor who offers
escrows. Given the market they face,
subprime consumers have little ability
or incentive to shop for a loan with
escrows, and thus cannot reasonably
avoid a loan that does not offer escrows.
Injury not outweighed by
countervailing benefit to consumers or
to competition. The Board recognizes
that creditors incur costs in initiating
escrow capabilities and that creditors
who do not escrow can pass their cost
savings on to consumers. Creditors that
offer escrows in-house may incur
potentially substantial costs in setting
up or acquiring the necessary systems,
although they may also gain some
additional servicing revenue. Creditors
that outsource servicing of escrow
accounts to third parties incur some cost
and forgo servicing revenue.
In addition, there are some potential
costs to consumers. Servicers may at
times collect more funds than needed or
fail to pay property taxes and insurance
when due, causing consumers to incur
penalties and late fees. Congress has
expressly authorized the Department of
Housing and Urban Development (HUD)
to address these problems through
section 10 of the Real Estate Settlement
Procedures Act (RESPA), 12 U.S.C.
2609, which limits amounts that may be
collected for escrow accounts; requires
servicers to provide borrowers annual
statements of the escrow balance and
payments for property taxes and
homeowners insurance; and requires a
mortgage servicer to provide
information about anticipated activity in
the escrow accounts for the coming year
when it starts to service a loan. RESPA
also provides consumers the means to
resolve complaints by filing a ‘‘qualified
written request’’ with the servicer. The
Board expects that the number of
qualified written requests may increase
after the final rule takes effect.
On the other hand, there is evidence,
described above, that where escrows are
used they improve loan performance to
the advantage of creditors, investors,
and consumers alike. This appears to be
an important reason that escrows are
common in the prime market and often

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required by the creditor. Loans with
escrows generally perform better than
loans without because escrows make it
more likely that consumers will be able
to pay their obligations. By contrast,
when consumers are faced with unpaid
taxes and insurance, they may need to
tap into their home equity to pay these
expenses and may become vulnerable to
predatory lending. In the worst cases,
consumers may lose their homes to
foreclosure for failure to pay property
taxes. For these reasons, the Board finds
that the benefits from escrows outweigh
the costs associated with requiring
them.
The Final Rule
The final rule prohibits a creditor
from extending a first-lien higher-priced
mortgage loan secured by a principal
dwelling without escrowing property
taxes, homeowners insurance, and other
insurance obligations required by the
creditor. Creditors have the option to
allow for cancellation of escrows at the
consumer’s request, but no earlier than
12 months after consummation of the
loan transaction. The Board is adopting
an exemption for loans secured by
cooperative shares and a partial
exemption for loans secured by
condominium units. The final rule
defines ‘‘escrow account’’ by reference
to the definition of ‘‘escrow account’’ in
RESPA. Moreover, RESPA’s rules for
administering escrow accounts
(including how creditors handle
disclosures, initial escrow deposits,
cushions, and advances to cover
shortages) apply. The final rule also
complements the National Flood
Insurance Program requirement that
flood insurance premiums be escrowed
if the creditor requires escrow for other
obligations such as hazard insurance.96
The rule is intended to address the
consumer injuries described above
caused by the lack of a genuine
opportunity to escrow in the subprime
market. The rule assures a genuine
opportunity to escrow by establishing a
market that provides widespread
escrows through a requirement that
96 Congress authorized NFIP through the National
Flood Insurance Act of 1968 (42 U.S.C. 4001),
which provides property owners with an
opportunity to purchase flood insurance protection
made available by the federal government for
buildings and their contents. NFIP requires all
federally regulated private creditors and
government-sponsored enterprises (GSEs) that
purchase loans in the secondary market to ensure
that a building or manufactured home and any
applicable personal property securing a loan in a
special flood hazard area are covered by adequate
flood insurance for the term of the loan. The flood
insurance requirements do not apply to creditors or
servicers that are not federally regulated and that
do not sell loans to Fannie Mae and Freddie Mac
or other GSEs.

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every creditor that originates higherpriced mortgage loans secured by a first
lien on a principal dwelling establish an
escrow with each loan. The Board
proposed to limit the rule to first-lien
higher-priced mortgage loans because
creditors in the prime market have
traditionally required escrow accounts
on first-lien mortgage loans as a means
of protecting the lender’s interest in the
property securing the loan. The final
rule adopts this approach. A mandatory
escrow account on a first-lien loan
ensures that funds are set aside for
payment of property taxes and
insurance premiums and eliminates the
need to require an escrow on second
lien loans. One commenter asked the
Board to clarify in the final rule that
creditors are not obligated to escrow
payments for optional items that the
consumer may choose to purchase at its
discretion, such as an optional debtprotection insurance or earthquake
insurance. A commentary provision has
been added to clarify that creditors and
servicers are not required to escrow
optional insurance items chosen by the
consumer and not otherwise required by
creditor. See comment to
§ 226.35(b)(4)(i).
The Board recognizes that escrows
can impose certain financial costs on
both creditors and borrowers. Creditors
are likely to pass on to consumers,
either in part or entirely, the cost of
setting up and maintaining escrow
systems, whether done in-house or
outsourced. The Board also recognizes
that prohibiting consumers from
canceling before 12 months have passed
will impose costs on individual
consumers who prefer to pay property
taxes and insurance premiums on their
own, and to earn interest on funds that
otherwise would be escrowed.97 By
paying property taxes and insurance
premiums directly, consumers are better
able to monitor that their payments are
credited on time, thus limiting the
likelihood, and related cost, of servicing
mistakes and abuses. In addition,
homebuyers do not need as much cash
at closing when they are not required to
have an escrow account.
The Board believes, however, that the
benefits of the rule outweigh these costs.
Moreover, the rule preserves some
degree of consumer choice by
permitting a creditor to provide the
consumer an option to cancel an escrow
account 12 or more months after
consummation. The Board considered
alternatives that would avoid requiring
a creditor to set up an escrow system,
97 Some states require creditors to pay interest to
consumers for escrowed funds but most states do
not have such a requirement.

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or that would require a creditor to offer
an escrow, but permit consumers to optout of escrows at closing. These
alternatives would not provide
consumers sufficient protection from
the injuries discussed above, as
explained in more detail below.
Alternatives to requiring creditors to
escrow. Some creditors that currently do
not escrow oppose requiring escrows
because of the substantial cost to set up
new systems and maintain them over
time. They suggested that narrower, less
costly alternatives would protect
consumers adequately. Most of these
suggestions involved disclosure, such
as: requiring creditors to warn
consumers that they will be responsible
for property tax and insurance
obligations; estimating these obligations
on the TILA disclosure based on recent
assessments; and prohibiting creditors
from advertising monthly payments
without including estimated amounts
for property taxes and insurance.
The Board does not believe that these
disclosures would adequately protect
consumers from the injuries discussed
above. Because many consumers focus
on monthly payment obligations,
competition would continue to give
originators incentives to downplay tax
and insurance obligations when they
discuss payment obligations with
consumers. A disclosure provided at
origination of the estimated property tax
and insurance premiums does not assist
those consumers who need an escrow to
ensure they save for and pay their
obligations on time. Moreover, adding a
disclosure to the many disclosures
consumers already receive would not be
sufficient to educate first time
homebuyers and homeowners whose
previous loans contained escrows who
lack any real experience handling their
own taxes and insurance. Disclosure
does, however, have an important role
to play. Under the final rule, an
advertisement for closed-end credit
secured by a first lien on a principal
dwelling that states a monthly payment
of principal and interest must
prominently disclose that taxes and
insurance premiums are not included.
See § 226.24(f)(3). Moreover, the Board
plans to explore revising the TILA
disclosures to add an estimate of
property tax and insurance premium
costs to the disclosed monthly payment.
For similar reasons, merely mandating
that creditors offer escrows, but not that
they require them, would not
sufficiently address the injuries
associated with the failure to escrow.
Without a widespread requirement to
escrow, some creditors could still press
a competitive advantage in quoting low
monthly payments that do not include

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amounts for escrows by encouraging
consumers to decline the offered
escrow. A rule that required creditors
merely to offer escrows would impose
essentially the same costs on creditors
to establish escrow systems as would
the requirement to establish escrows,
but would not alter the competitive
landscape of the subprime market in a
way that would make widespread
escrowing more likely.
Creditors also suggested that
consumers would be adequately
protected by the final rule’s requirement
that creditors consider a consumer’s
ability to handle tax and insurance
obligations in addition to principal and
interest payments when originating
loans. See § 226.34(a)(4). While this
requirement will help ensure that
consumers can afford their monthly
payment obligations, it will not
adequately address the injuries
discussed above because creditors
would continue to have incentives to
downplay tax and insurance obligations
when they discussed payment
obligations with consumers. Nor will
the rule requiring consideration of
repayment ability sufficiently assist
consumers in saving on their own.
Another alternative would be to
require escrows only for first time
homebuyers or other classes of
borrowers (such as previously prime
borrowers) less likely to have
experience handling tax and insurance
obligations on their own. However,
limiting the escrow requirement to
borrowers who are unaccustomed to
paying taxes and insurance on their own
would only delay injury, rather than
prevent it. For example, if first time
homebuyers with higher-priced
mortgage loans were required to escrow,
those consumers would not gain the
experience of paying property taxes and
insurance on their own and might
reasonably believe that escrows are
standard. When those consumers went
to refinance their loan, however,
creditors could mislead them by quoting
payments without amounts for escrow
and the consumers might not be able to
handle the tax and insurance obligations
on their own.
In addition, requiring escrows only
for first time homebuyers or other
classes of borrowers would not save a
creditor the substantial expense of
setting up an escrow system unless the
creditor declined to extend higherpriced mortgage loans to such
borrowers. The Board believes most
creditors would not find this option
practical over the long term. Moreover,
defining the categories of covered
borrowers would present practical
challenges, require regular adjustment

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as the market changed, and complicate
creditors’ compliance.
Several commenters recommended
that the requirement to escrow be
limited to higher-priced mortgage loans
with a combined loan-to-value ratio that
exceeds 80 percent. They contended
that borrowers with at least 20 percent
equity have the option to tap this equity
to finance tax and insurance obligations.
The suggested exemption could,
however, have the unintended
consequence of permitting
unscrupulous originators to ‘‘strip’’ the
equity from less experienced borrowers.
As described above, homeowners with
existing escrow accounts who want to
refinance their loans may assume
erroneously that payment quotes
include escrows when they do not, or
they may prefer the security that an
escrow would provide if offered.
Cancellation after consummation.
The final rule permits, but does not
require, creditors to offer consumers an
option to cancel their escrows 12
months after consummation of the loan
transaction. Based on the operation of
escrows in the prime market, the Board
anticipates that creditors will likely
offer cancellation in exchange for a fee.
The Board acknowledges concerns
expressed by individual consumers that
requiring them to escrow for even a
relatively short time will increase their
costs. These costs include the
opportunity costs of the funds in
escrow, particularly if the funds do not
earn interest; a fee to cancel after 12
months; costs associated with mistakes
or abuses by escrow agents; and the cost
of saving for the deposit at
consummation of two months or more
of escrow payments that RESPA permits
a creditor to require. Mindful of these
costs, the Board considered requiring
only that creditors offer consumers a
choice to escrow either on an ‘‘opt in’’
or ‘‘opt out’’ basis.
As explained above, the Board
concluded that a requirement merely to
offer the consumer a choice to escrow
would not be effective to prevent the
injuries associated with the lack of
opportunity to escrow. A requirement to
offer, not require, escrows would raise
creditors’ costs but would not eliminate
their incentive to quote lower payment
amounts without escrows and
encourage borrowers to opt-out.
Requiring creditors to disclose
information about the benefits of
escrowing would not adequately
address this problem. It is likely that
most consumers would reasonably focus
their attention more on disclosures
about the terms of the credit being
offered, such as the monthly payment
amount, rather than on information

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about the benefits of escrowing. An
originator engaged in loan flipping
might reassure the consumer that if the
consumer has any difficulty with the tax
and insurance obligations the originator
will refinance the loan.
For the foregoing reasons, the Board
does not believe that requiring creditors
merely to offer escrows with higherpriced mortgage loans, with an opt out
or opt in before consummation, would
provide consumers sufficient protection.
The Board has concluded that requiring
creditors to impose escrows on
borrowers with higher-priced mortgage
loans, with an option to cancel only
some time after consummation, would
more effectively address the problems
created by subprime creditors’ failure to
offer escrows. This approach imposes
costs on creditors that will be passed on,
at least in part, to consumers but the
Board believes these costs are
outweighed by the benefits. Moreover,
to the extent that escrows improve loan
performance and lead to fewer defaults,
the benefits of escrows may reduce the
costs associated with establishing and
maintaining escrow accounts.
Twelve months mandatory escrow.
The final rule sets the mandatory period
for escrows at 12 months after loan
origination, at which point creditors
may allow borrowers to opt out of
escrow. Some community groups
commented that escrows should be
mandatory for a longer period or even
the life of the loan. Several groups
commented that borrowers should not
be allowed to opt out unless they have
demonstrated a record of timely
payments. Several commenters noted
that consumers should be allowed to opt
out at loan consummation.
The Board believes that a 12 month
period appropriately balances consumer
protection with consumer choice. For
the reasons already explained, a
mandatory period of some length is
necessary to ensure that originators will
not urge consumers to reduce their
monthly payment by choosing not to
escrow immediately at, or shortly after,
loan consummation. Twelve months
appears to be a sufficiently long period
to render such efforts ineffectual, and to
introduce consumers to the benefits of
escrowing, as most consumers will
receive bills for taxes and insurance in
that period. Moreover, 12 months is a
relatively short period compared to the
expected life of the average loan,
providing consumers an opportunity to
handle their own taxes and insurance
obligations after the initial escrow
requirement expires.
Although fees to cancel escrow
accounts are common, a consumer who
expects to hold the loan for a long

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period may find it worthwhile to pay
the fee. The final rule neither permits
nor prohibits creditors from imposing
escrow cancellation fees and instead
defers to state law on that issue.
Similarly, the rule neither requires nor
prohibits payment of interest on escrow
accounts since some, but not all, states
have chosen to address consumer
concerns about losing the opportunity to
invest their funds by requiring creditors
to pay interest on funds in escrow
accounts.
Exemptions for Cooperatives; Partial
Exemption for Condominiums
In response to comments and the
Board’s own analysis, the final rule does
not require escrows for property taxes
and insurance premiums for first-lien
higher-priced mortgage loans secured by
shares in a cooperative if the
cooperative association pays property
tax and insurance premiums. The final
rule requires escrows for property taxes
for first-lien higher-priced mortgage
loans secured by condominium units
but exempts from the escrow
requirement insurance premiums if the
condominium’s association maintains
and pays for insurance through a master
policy.
Cooperatives. The final rule exempts
mortgage loans for cooperatives from the
escrow requirement if the cooperative
pays property tax and insurance
premiums, and passes the costs on to
individual unit owners based on their
pro rata ownership share in the
cooperative. A cooperative association
typically owns the building, land, and
improvements, and each unit owner
holds a cooperative share loan based on
the appraisal value of the shareholder’s
unit. Creditors typically require
cooperative associations to maintain
insurance coverage under a single
package policy, commonly called an
association master policy, for common
elements, including fixtures, service
equipment and common personal
property. Creditors periodically review
an association master policy to ensure
adequate coverage.
At loan origination, creditors inform
consumers of their monthly cooperative
association dues, which include, among
other costs, the consumer’s pro rata
share for insurance and property taxes.
When property taxes and insurance
premiums are included in the monthly
association dues, they are generally not
escrowed with the lender. This is
because the consumer’s payment of the
monthly association dues acts in a
manner similar to an escrow itself. In
this way, the collection of insurance
premiums and property tax amounts on
a monthly basis by a cooperative

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association ensures that taxes and
insurance are paid when due.
Condominiums. The final rule
exempts certain higher-priced mortgage
loans secured by condominium units
from the requirement to escrow for
homeowners insurance where the only
insurance policy required by the
creditor is the condominium association
master policy. No exemption is
provided, however, for escrows for
property taxes.
Typically, individual condominium
units are taxed similarly to single-family
homes. Generally, each unit owner pays
the property tax for the unit and each
unit is assessed its pro rata share of
property taxes for common areas.
Condominium owners who do not have
escrow accounts receive property tax
bills directly from the taxing
jurisdiction. The final rule requires
escrows for property taxes for all higherpriced mortgage loans secured by
condominium units, regardless of
whether creditors are required to escrow
insurance premiums for such loans.
Homeowners insurance for
condominiums, on the other hand, can
vary based on the condominium
association’s bylaws and other
governing regulations, as well as
specific creditor requirements.
Generally, the condominium association
insures the building and the common
area under an association master policy.
In some cases, the condominium
association does not insure individual
units and a separate insurance policy
must be written for each individual
unit, just as it would be for a singlefamily home. In other cases, the master
policy does cover individual unit
owners’ fixtures and improvements
other than personal property. When the
condominium association insures the
entire structure, including individual
units, the condominium association
pays the insurance premium and passes
the costs on to the individual unit
owner. Much like the cooperative
arrangement described above, the
consumer’s payment of insurance
premiums through condominium
association dues acts in a manner
similar to an escrow account. For this
reason, the final rule does not require
creditors to escrow insurance premiums
for higher-priced mortgage loans
secured by condominium units if the
only insurance that the creditor requires
is an association master policy that
insures condominium units.
Manufactured Housing
The final rule requires escrows for all
covered loans secured by manufactured
housing for which creditors receive
applications on or after October 1, 2010

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to allow creditors and servicers
sufficient time to establish the capacity
to escrow. Manufactured housing
industry commenters requested that
manufactured housing loans be
exempted from the escrow requirement.
They argued that manufactured housing
loans are mostly personal property loans
taxed in many local jurisdictions like
other personal property, and that
creditors and servicers do not require
and do not offer escrows on
manufactured housing loans.98 For
reasons discussed in more detail below,
the final rule does not exempt from the
escrow requirement higher-priced
mortgage loans secured by a first lien on
manufactured housing used as the
consumer’s principal dwelling. The
final rule applies to manufactured
housing whether or not state law treats
it as personal or real property.99
A manufactured home owner
typically pays personal property taxes
directly to the taxing authority and
insurance premiums directly to the
insurer. Manufactured housing industry
commenters argued that if a taxing
jurisdiction does not have an automated
personal property tax system, creditors
and servicers would have to service
escrows on manufactured housing loans
manually at prohibitively high cost,
especially taking into consideration
small loan size and low amount of
property taxes for an average
manufactured home.
The Board believes, nonetheless, that
problems associated with first-lien
higher-priced mortgage loans secured by
manufactured housing are similar to
problems associated with site-built
home loans discussed above. Large
segments of manufactured housing
consumers are low to moderate income
families who may not enter the market
with full information about the
obligations associated with owning
98 Manufactured housing creditors are currently
required by law to escrow for property taxes in
Texas. Prior to passing state legislation requiring
escrows on manufactured housing, Texas legislators
observed that many manufactured housing owners
were unaware of, and unable to pay, their property
tax. See Tex. SB 521, 78th Tex. Leg., 2003, effective
June 18, 2003; bill analysis available through the
Texas Senate Research Center at http://
www.legis.state.tx.us/tlodocs/78R/analysis/pdf/
SB00521I.pdf.
99 Regulation Z currently defines a dwelling to
include manufactured housing. See § 226.2(a)(19).
Official staff commentary § 226.2(a)(19) states that
mobile homes, boats and trailers are dwellings if
they are in fact used as residences; § 226.2(b)
clarifies that the definition of ‘‘dwelling’’ includes
any residential structure, whether or not it is real
property under state law; §§ 226.15(a)(1)–5 and
226.23(a)(1)–3 make clear that a dwelling may
include structures that are considered personal
property under state laws (e.g., mobile home, trailer
or houseboat) and draws no distinction between
personal property loans and real property loans.

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manufactured housing. Instead,
consumers are likely to rely on the
dealer or the manufacturer as their
source for information, which can leave
consumers vulnerable. Often,
consumers obtain financing through the
dealer, who ties the financing to the sale
of the home. In addition, commissions
and yield spread premiums may be paid
to dealers for placing consumers in high
cost loans.100
In addition, manufactured homes are
usually concentrated in developments,
such as parks, where they represent a
large percentage of homes. Where
property tax revenues are the main
source of funding for local government
services, a failure by a significant
number of homeowners to pay property
taxes could cause a reduction in local
government services and an attendant
decline in property values.
The Board believes that homeowners
of manufactured housing should be
afforded the same consumer protections
as the owners of site-built homes.
Manufactured homes provide much
needed affordable housing for millions
of Americans who, like owners of sitebuilt homes, risk losing their homes for
failure to pay property taxes. Escrows
for property taxes and insurance
premiums on first-lien, higher-priced
mortgage loans secured by
manufactured homes that are
consumers’ principal dwellings are
necessary to prevent creditors from
understating the cost of
homeownership, to inform consumers
that their manufactured home is subject
to property tax, and to extend an
opportunity to consumers to escrow
funds each month for payment of
property tax and insurance premiums.
State Laws
Several industry commenters asked
the Board to clarify in the final rule that
the escrow requirement preempts
inconsistent state escrow laws. TILA
generally preempts only inconsistent
state laws. See TILA Section 111(a)(1),
15 U.S.C. 1610, § 226.28. Several
consumers expressed concern that the
regulation would preempt state laws
requiring creditors to pay interest on
escrow accounts under certain
conditions. The final rule does not
prevent states from requiring creditors
to pay interest on escrowed amounts.
See comment § 226.35(b)(4)(i).
Effective Date
Several industry representatives
commented that the escrow requirement
100 Kevin Jewell, Market Failures Evident in
Manufactured Housing (Jan. 2003), http://
www.consumersunion.org/consumeronline/
pastissues/housing/marketfailure.html.

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would require major system and
infrastructure changes by creditors that
do not currently have escrow
capabilities. They asked for an extended
compliance deadline of 12 to 24 months
prior to the effective date of the final
rule to allow for necessary escrow
systems and procedures to develop. The
Board recognizes that creditors and
servicers will need some time to
develop in-house escrowing capabilities
or to outsource escrow servicing to third
parties. For that reason, the Board agrees
that an extended compliance period is
appropriate for most covered loans
secured by site-built homes. Therefore,
the final rule is effective for first-lien
higher-priced mortgage loans for which
creditors receive applications on or after
April 1, 2010, except for loans secured
by manufactured housing. Recognizing
that there is a limited infrastructure for
escrowing on manufactured housing
loans, and that yet additional time is
needed for creditors and servicers to
comply with the rule, the final rule is
effective for all covered loans secured
by manufactured housing for which
creditors receive applications on or after
October 1, 2010.
E. Evasion Through Spurious Open-End
Credit—§ 226.35(b)(4)
The exclusion of HELOCs from
§ 226.35 is discussed in subpart A.
above. As noted, the Board recognizes
that the exclusion of HELOCs could lead
some creditors to attempt to evade the
restrictions of § 226.35 by structuring
credit as open-end instead of closedend. Section 226.34(b) addresses this
risk as to HOEPA loans by prohibiting
creditors from structuring a transaction
that does not meet the definition of
‘‘open-end credit’’ as a HELOC to evade
HOEPA. The Board proposed to extend
this rule to higher-priced mortgage loans
and is adopting § 226.35(b)(5). Section
226.35(b)(5) prohibits a creditor from
structuring a closed-end transaction—
that is, a transaction that does not meet
the definition of ‘‘open-end credit’’—as
a HELOC to evade the restrictions of
§ 226.35. The Board is also adding
comment 35(b)(5)-1 to provide guidance
on how to apply the higher-priced
mortgage loan APR trigger in § 226.35(a)
to a transaction structured as open-end
credit in violation of § 226.35. Comment
35(b)(5)-1 is substantially similar to
comment 34(b)-1 which applies to
HOEPA loans.
Public Comment
The Board received relatively few
comments on the proposed anti-evasion
rule. As discussed in subpart A. above,
some commenters suggested applying
§ 226.35 to HELOCs, which would

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eliminate the need for an anti-evasion
provision. By contrast, some creditors
who supported the exclusion of
HELOCs from § 226.35 noted that the
presence of the anti-evasion provision
would address concerns about HELOCs
being used to evade the rules in
§ 226.35. However, a few creditors
expressed concern that the anti-evasion
proposal was too vague. One commenter
stated that loans that do not meet the
definition of open-end credit would be
subject to the closed-end rules with or
without the anti-evasion provision, and
this commenter stated that therefore the
anti-evasion provision was unnecessary
and might cause confusion.
The Board also requested comment on
whether it should limit an anti-evasion
rule to HELOCs secured by first-liens,
where the consumer draws down all or
most of the entire line of credit
immediately after the account is
opened. Commenters did not express
support for this alternative, and a few
explicitly opposed it.
The Final Rule
The Board is adopting the antievasion provision as proposed. The rule
is not meant to add new substantive
requirements for open-end credit, but
rather to ensure that creditors do not
structure a loan which does not meet
the definition of open-end credit as a
HELOC to evade the requirements of
§ 226.35. The Board recognizes that
consumers may prefer HELOCs to
closed-end home equity loans because
of the added flexibility HELOCs provide
them. The Board does not intend to
limit consumers’ ability to choose
between these two ways of structuring
home equity credit. The anti-evasion
provision is intended to reach cases
where creditors have structured loans as
open-end ‘‘revolving’’ credit, even if the
features and terms or other
circumstances demonstrate that the
creditor had no reasonable expectation
of repeat transactions under a reusable
line of credit. Although the practice
violates TILA, the new rule will subject
creditors to HOEPA’s stricter remedies if
the credit carries an APR that exceeds
§ 226.35’s APR trigger for higher-priced
mortgage loans.
The Board is also adding comment
35(b)(5)-1 to provide guidance on how
to apply the higher-priced mortgage
loan APR trigger in § 226.35(a) to a
transaction structured as open-end
credit in violation of § 226.35.
Specifically, the comment provides
guidance on how to determine the
‘‘amount financed’’ and the ‘‘principal
loan amount’’ needed to determine the
loan’s APR. The comment provides that
the amount of credit that would have

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been extended if the loan had been
documented as a closed-end loan is a
factual determination to be made in
each case.
X. Final Rules for Mortgage Loans—
§ 226.36
Section 226.35, discussed above,
applies certain new protections to
higher-priced mortgage loans and
HOEPA loans. In contrast, § 226.36
applies other new protections to
mortgage loans generally, though only if
secured by the consumer’s principal
dwelling. The final rule prohibits: (1)
Creditors or mortgage brokers from
coercing, influencing, or otherwise
encouraging an appraiser to provide a
misstated appraisal and (2) servicers
from engaging in unfair fee and billing
practices. The final rule neither adopts
the proposal to require servicers to
deliver a fee schedule to consumers
upon request, nor the proposal to
prohibit creditors from paying a
mortgage broker more than the
consumer had agreed in advance that
the broker would receive. As with
proposed § 226.35, § 226.36 does not
apply to HELOCs.
The Board finds that the prohibitions
in the final rule are necessary to prevent
practices that the Board finds to be
unfair, deceptive, associated with
abusive lending practices, or otherwise
not in the interest of the borrower. See
TILA Section 129(l)(2), 15 U.S.C.
1639(l)(2), and the discussion of this
statute in part V.A above. The Board
also believes that the final rules will
enhance consumers’ informed use of
credit. See TILA Sections 105(a), 102(a).
A. Creditor Payments to Mortgage
Brokers—§ 226.36(a)
The Board proposed to prohibit a
creditor from paying a mortgage broker
in connection with a covered
transaction more than the consumer
agreed in writing, in advance, that the
broker would receive. The broker would
also disclose that the consumer
ultimately would bear the cost of the
entire compensation even if the creditor
paid any part of it directly; and that a
creditor’s payment to a broker could
influence the broker to offer the
consumer loan terms or products that
would not be in the consumer’s interest
or the most favorable the consumer
could obtain.101 Proposed commentary
101 Creditors could demonstrate compliance with
the proposed rule by obtaining a copy of the brokerconsumer agreement and ensuring their payment to
the broker does not exceed the amount stated in the
agreement. The proposal would provide creditors
two alternative means to comply, one where the
creditor complies with a state law that provides
consumers equivalent protection, and one where a

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provided model language for the
agreement and disclosures. The Board
stated that it would test this language
with consumers before determining how
it would proceed on the proposal.
The Board tested the proposal with
several dozen one-on-one interviews
with a diverse group of consumers. On
the basis of this testing and other
information, the Board is withdrawing
the proposal. The Board will continue to
explore available options to address
unfair acts or practices associated with
originator compensation arrangements
such as yield spread premiums. The
Board is particularly concerned with
arrangements that cause the incentives
of originators to conflict with those of
consumers, where the incentives are not
transparent to consumers who rely on
the originators for advice. As the Board
comprehensively reviews Regulation Z,
it will continue to consider whether
disclosure or other approaches could be
effective to address this problem.
Public Comment
The Board received over 4700
comments on the proposal. Mortgage
brokers, their federal and state trade
associations, the Federal Trade
Commission, and several consumer
groups argued that applying the
proposed disclosures to mortgage
brokers but not to creditors’ employees
who originate mortgages (‘‘loan
officers’’) would reduce competition in
the market and harm consumers. They
contended that disclosing a broker’s
compensation would cause consumers
to believe, erroneously, that a loan
arranged by a broker would cost more
than a loan originated by a loan officer.
These commenters stated that many
brokers would unfairly be forced out of
business, and consumers would pay
higher prices, receive poorer service, or
have fewer options. The FTC, citing its
published report of consumer testing of
mortgage broker compensation
disclosures, contended that focusing
consumers’ attention on the amount of
the broker’s compensation could
confuse consumers and, under some
circumstances, lead them to select a
more expensive loan.
Mortgage brokers and some creditors
expressed concerns that the proposed
rule would not be practicable in cases
where creditors forward applications to
other creditors and where brokers
decide to fund an application using a
warehouse line of credit.
Consumer advocates, members of
Congress, the FDIC, and others stated
creditor can demonstrate that its payments to a
mortgage broker are not determined by reference to
the transaction’s interest rate.

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that the proposal would not address the
conflict of interest between consumers
and brokers that rate-based
compensation of brokers (the yield
spread premium) can cause. These
commenters urged that the only
effective remedy for the conflict is to
ban this form of compensation. State
regulators expressed concern that the
proposed disclosures would not provide
consumers sufficient information, and
could give brokers a legal ‘‘shield’’
against claims they acted contrary to
consumers’ interests.
Creditors and their trade associations,
on the other hand, generally supported
the proposal, although with a number of
suggested modifications. These
commenters agreed with the Board that
yield spread premiums create financial
incentives for brokers to steer
consumers to less beneficial products
and terms. They saw a need for
regulation to remove or limit these
incentives.
Commenters generally did not believe
the proposed alternatives for
compliance (where a state law provides
substantially equivalent protections or
where a creditor can show that the
compensation amount is not tied to the
interest rate) were feasible. Creditors
and mortgage brokers stated that both
alternatives were vague and would be
little used. Consumer advocates
believed the alternatives would likely
create loopholes in the rule.
Comments on specific issues are
discussed in more detail below as
appropriate.
Discussion
The proposal was intended to limit
the potential for unfairness, deception,
and abuse in yield spread premiums
while preserving the ability of
consumers to cover their payments to
brokers through rate increases. Creditor
payments to brokers based on the
interest rate give brokers an incentive to
provide consumers loans with higher
interest rates. Many consumers are not
aware of this incentive and may rely on
the broker as a trusted advisor to help
them navigate the complexities of the
mortgage application process.
The proposal sought to reduce the
incentive of the broker to increase a
consumer’s rate and increase the
consumer’s leverage to negotiate with
the broker. Under the proposal, creditor
payments to brokers would be
conditioned on a broker’s advance
commitment to a specified
compensation amount. The proposal
would require the agreement to be
entered into before an application was
submitted by a consumer or prior to the
payment of any fee, whichever occurred

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earlier. Requiring an agreement before a
fee or application would help ensure the
compensation was set as independently
as possible of loan’s rate and other
terms, and that the consumer would not
feel obligated to proceed with the
transaction. The Board also anticipated
that the proposal would increase
transparency and improve competition
in the market for brokerage services,
which could lower the price of these
services, improve the quality of those
services, or both.
Reasons for withdrawal. Based on the
Board’s analysis of the comments,
consumer testing, and other
information, the Board is withdrawing
the proposal. The Board is concerned
that the proposed agreement and
disclosures would confuse consumers
and undermine their decision-making
rather than improve it. The risks of
consumer confusion arise from two
sources. First, an institution can act as
either creditor or broker depending on
the transaction; as explained below, this
could render the proposed disclosures
inaccurate and misleading in some,
possibly many, cases of both broker and
creditor originations. Second,
consumers who participated in one-onone interviews about the proposed
agreement and disclosures often
concluded, erroneously, that brokers are
categorically more expensive than
creditors or that brokers would serve
their best interests notwithstanding the
conflict resulting from the relationship
between interest rates and brokers’
compensation.
Dual roles. Mortgage brokers and
creditors noted that creditors and
brokers often play one of two roles. That
is, an institution that is ordinarily a
creditor and originates loans in its name
may determine that it cannot approve an
application based on its own
underwriting criteria and present it to
another creditor for consideration. This
practice is known as ‘‘brokering out.’’
The institution brokering out an
application would be a mortgage broker
under the proposed rule; to receive
compensation from the creditor, it
would have to execute the required
agreement and provide the required
disclosures.
The proposal requires a broker to
enter an agreement and give disclosures
before the consumer submits an
application, but an institution often may
not know whether it will be a broker or
a creditor for that consumer until it
receives and evaluates the application.
An institution that is ordinarily a
creditor but sometimes a broker would
have to enter into the agreement and
give the disclosures for all consumers
that seek to apply. In many cases,

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however, the institution will originate
the loan as a creditor and not switch to
being a broker. In these cases, the
agreement and disclosures, which
describe the institution as a broker and
state its compensation as if it were
brokering the transaction, would likely
mislead and confuse the consumer. This
problem also arises, if less frequently,
when an institution that ordinarily
brokers instead acts as creditor on
occasion. On those occasions, the
disclosures also would likely be
misleading and confusing.
The source of the problem is the
proposed requirement that the
agreement be signed and disclosures
given before the consumer has applied
for a loan or paid a fee. The Board
considered permitting post-application
execution and disclosure by institutions
that perform dual roles. The proposed
timing, however, was intended to
ensure that a consumer would be
apprised of the broker’s compensation
and understand the broker’s role before
becoming, or feeling, committed to
working with the broker. Accordingly,
the Board concluded that providing this
information later in the loan transaction
would seriously undermine the
proposal’s objective of empowering the
consumer to shop and negotiate.
Consumer testing. Consumer testing
also suggested that at least some aspects
of the proposal could confuse and
mislead consumers. After publishing the
proposal, a Board contractor, Macro
International, Inc. (‘‘Macro’’), conducted
in-depth one-on-one interviews with a
diverse group of several dozen
consumers who recently had obtained a
mortgage loan.102 Macro developed and
tested a form in which the broker would
agree to a specified total compensation
and disclose (i) that any part of the
compensation paid by the creditor
would cost the consumer a higher
interest rate, and (ii) that creditor
payments to brokers based on the rate
create a conflict of interest between
mortgage brokers and consumers.
Throughout the testing, revisions were
made to the form in an effort to improve
comprehension. The testing revealed
two difficulties with the forms tested.
First, the form’s statements that the
consumer would pay the broker through
a higher rate and that the broker had a
conflict of interest confused many
participants. Many participants stated,
upon reading the disclosure, that if they
agreed to pay the compensation the
broker was asking, then the broker
102 For more details on the consumer testing, see
Macro’s report, Consumer Testing of Mortgage
Broker Disclosures, (July 10, 2008), available at
http://www.federalreserve.gov.

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would be obliged to find them the
lowest interest rate and best terms
available. Many participants reached
this conclusion despite the clear
statement in the form tested that brokers
can increase their compensation by
increasing the interest rate.
Second, many first-round participants
stated or implied after reading the form
that working through a broker would
cost them more than working directly
with a lender, which is not necessarily
true. A new provision was added to the
disclosure stating that lenders’
employees are paid the same types of
rate-based commissions as brokers and
have the same conflict of interest. Many
participants, however, continued to
voice a belief that brokered loans must
cost more than direct loans.
The results of testing indicate that
consumers did not sufficiently
understand some major aspects of the
proposed disclosures. On the one hand,
the disclosures could cause consumers
to believe that mortgage brokers have
obligations to them that the law does
not actually impose. In consumer
testing, this belief seemingly resulted
from the disclosure of the fact that the
consumer would pay the broker a
commission, and it persisted
notwithstanding the accompanying
disclosure of the conflict of interest
resulting from the rate-commission
relationship. On the other hand, the
disclosures could cause consumers to
believe that retail loans are categorically
less costly than brokered loans.
Notwithstanding an explicit statement
in the tested forms that commissions
based on interest rates also are paid to
loan officers, many participants voiced
the belief that loan officers’
commissions would be lower than
brokers’ commissions. They offered
different reasons for this conclusion,
including for example that the lender
and not the consumer would pay the
loan officer’s commission.
Despite the difficulties with the
disclosures observed in consumer
testing, there were also some successes.
For instance, consumers generally
appeared to understand the language
describing the potential conflict of
interest, as noted above, even though it
often was ignored because of seemingly
conflicting information. In addition,
language intended to convey to
consumers the importance of shopping
on their own behalf in the mortgage
market appeared to be successful. These
more encouraging results suggest that
further development of a disclosure
approach to creditor payments to
mortgage originators, through additional
consumer testing, still may have merit.

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Conclusion. The Board considered
whether it could resolve the problems
described above by applying the
proposal to the retail channel. The
Board concluded, however, that
substantial additional testing and
analysis would be required to determine
whether such an approach would be
effective. Therefore, the Board is
withdrawing the proposal. The Board
will continue to explore available
options to address potential unfairness
associated with originator compensation
arrangements such as yield spread
premiums. As the Board
comprehensively reviews Regulation Z,
it will continue to consider whether
disclosures or other approaches could
effectively remedy this potential
unfairness without imposing
unintended consequences.
Definition of Mortgage Broker
In connection with the proposal
relating to mortgage broker
compensation and the proposal
prohibiting coercion of appraisers, the
Board proposed to define ‘‘mortgage
broker’’ as a person, other than a
creditor’s employee, who for monetary
gain arranges, negotiates, or otherwise
obtains an extension of credit for a
consumer. A person who met this
definition would be considered a
mortgage broker even if the credit
obligation was initially payable to the
person, unless the person funded the
transaction from its own resources, from
deposits, or from a bona fide warehouse
line of credit. Commenters generally did
not comment on the proposed
definition.
Defining ‘‘mortgage broker’’ is still
necessary, notwithstanding the Board’s
withdrawal of the proposed regulation
of creditor payments to mortgage
brokers, as mortgage brokers are subject
to the prohibitions on coercion of
appraisers, discussed below. The Board
is adopting the definition of mortgage
broker with a minor change to clarify
that the term ‘‘mortgage broker’’ does
not include a person who arranges,
negotiates, or otherwise obtains an
extension of credit for him or herself.
B. Coercion of Appraisers—§ 226.36(b)
The Board proposed to prohibit
creditors and mortgage brokers and their
affiliates from coercing, influencing, or
otherwise encouraging appraisers to
misstate or misrepresent the value of a
consumer’s principal dwelling. The
Board also proposed to prohibit a
creditor from extending credit when it
knows or has reason to know, at or
before loan consummation, that an
appraiser has been encouraged by the
creditor, a mortgage broker, or an

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affiliate of either, to misstate or
misrepresent the value of a consumer’s
principal dwelling, unless the creditor
acts with reasonable diligence to
determine that the appraisal was
accurate or extends credit based on a
separate appraisal untainted by
coercion. The Board is adopting the rule
substantially as proposed. The Board
has revised some of the proposed
examples of conduct that violates the
rule and conduct that does not violate
the rule and has added commentary
about when a misstatement of a
dwelling’s value is material.
Public Comment
Consumer and community advocacy
groups, appraiser trade associations,
state appraisal boards, individual
appraisers, some financial institutions
and banking trade associations, and a
few other commenters expressed general
support for the proposed rule to prohibit
appraiser coercion. Several of these
commenters stated that the rule would
enhance enforcement against parties
that are not subject to the same
oversight as depository institutions,
such as independent mortgage
companies and mortgage brokers. Some
of the commenters who supported the
rule also suggested including additional
practices in the list of examples of
prohibited conduct. In addition, several
appraiser trade associations jointly
recommended that the Board prohibit
appraisal management companies from
coercing appraisers.
On the other hand, community banks,
consumer banking and mortgage
banking trade associations, and some
large financial institutions opposed the
proposed rule, stating that its adoption
would lead to nuisance suits by
borrowers who regret the amount they
paid for a house and would make
creditors liable for the actions of
mortgage brokers and appraisers.
Several of these commenters stated that
the Board’s rule would duplicate
requirements set by existing laws and
guidance, including federal regulations,
interagency guidelines, state laws, and
the Uniform Standards of Professional
Appraisal Practice (USPAP). Further,
some of these commenters stated that
creditors have limited ability to detect
undue influence and should be held
liable only if they extend credit
knowing that a violation of
§ 226.36(b)(1) had occurred.
Many commenters discussed
appraisal-related agreements that Fannie
Mae and Freddie Mac have entered into
with the Attorney General of New York
and the Office of Federal Housing
Enterprise Oversight (GSE Appraisal
Agreements), which incorporated a

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Home Valuation Code of Conduct.
These commenters urged the Board to
coordinate with the parties to the GSE
Appraisal Agreements to promote
consistency in the standards that apply
to the residential appraisal process.
The comments are discussed in
greater detail below.
Discussion
The Board finds that it is an unfair
practice for creditors or mortgage
brokers to coerce, influence, or
otherwise encourage an appraiser to
misstate the value of a consumer’s
principal dwelling. Accordingly, the
Board is adopting the rule substantially
as proposed.
Substantial injury. Encouraging an
appraiser to overstate or understate the
value of a consumer’s dwelling causes
consumers substantial injury. An
inflated appraisal may cause consumers
to purchase a home they otherwise
would not have purchased or to pay
more for a home than they otherwise
would have paid. An inflated appraisal
also may lead consumers to believe that
they have more home equity than in fact
they do, and to borrow or make other
financial decisions based on this
incorrect information. For example, a
consumer who purchases a home based
on an inflated appraisal may
overestimate his or her ability to
refinance and therefore may take on a
riskier loan. A consumer also may take
out more cash with a refinance or home
equity loan than he or she would have
had an appraisal not been inflated.
Appraiser coercion thus distorts, rather
than enhances, competition. Though
perhaps less common than overstated
appraisals, understated appraisals can
cause consumers to be denied access to
credit for which they qualified.
Inflated or understated appraisals of
homes concentrated in a neighborhood
may affect appraisals of neighboring
homes, because appraisers factor into a
property valuation the value of
comparable properties. For the same
reason, understated appraisals may
affect appraisals of neighboring
properties. Therefore, inflating or
deflating appraised value can harm
consumers other than those who are
party to the transaction with the
misstated appraisal.
Injury not reasonably avoidable.
Consumers who are party to a consumer
credit transaction cannot prevent
creditors or mortgage brokers from
influencing appraisers to misstate or
misrepresent a dwelling’s value.
Creditors and mortgage brokers directly
or indirectly select and contract with
the appraisers that value a dwelling for
a consumer credit transaction.

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Consumers will not necessarily be
aware that a creditor or mortgage broker
is pressuring an appraiser to misstate or
misrepresent the value of the principal
dwelling they offer as collateral for a
loan. Furthermore, consumers who own
property near a dwelling securing a
consumer credit transaction but are not
parties to the transaction are not in a
position to know that a creditor or
mortgage broker is coercing an appraiser
to misstate a dwelling’s value.
Consumers thus cannot reasonably
avoid injuries that result from creditors’
or mortgage brokers’ coercing,
influencing, or encouraging an appraiser
to misstate or misrepresent the value of
a consumer’s principal dwelling.
Injury not outweighed by benefits to
consumers or to competition. The Board
finds that the practice of coercing,
influencing, or otherwise encouraging
appraisers to misstate or misrepresent
value does not benefit consumers or
competition. Acts or practices that
promote the misrepresentation of the
market value of a dwelling distort the
market, and any competitive advantage
a creditor or mortgage broker obtains
through influencing an appraiser to
misstate a dwelling’s value, or that a
creditor gains by knowingly originating
loans based on a misstated appraisal, is
an unfair advantage.
For the foregoing reasons, the Board
finds that it is an unfair practice for a
creditor or mortgage broker to coerce,
influence, or otherwise encourage an
appraiser to misstate the value of a
consumer’s principal dwelling. As
discussed in part V.A above, the Board
has broad authority under TILA Section
129(l)(2) to adopt regulations that
prohibit, in connection with mortgage
loans, acts or practices that the Board
finds to be unfair or deceptive. 15 U.S.C.
1639(l)(2). Therefore, the Board may
adopt regulations prohibiting unfair or
deceptive practices by mortgage brokers
who are not creditors and unfair or
deceptive practices that are ancillary to
the origination process, when such
practices are ‘‘in connection with
mortgage loans.’’ Because appraisals
play an important role in a creditor’s
decision to extend mortgage credit as
well as the terms of such credit, the
Board believes that it fits well within
the Board’s authority under Section
129(l)(2) to prohibit creditors and
mortgage brokers from coercing,
influencing, or otherwise encouraging
an appraiser to misstate the value of a
consumer’s principal dwelling and
creditors from extending credit based on
an appraisal when they know that
prohibited conduct has occurred.
Therefore, the Board issues the final

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rule prohibiting such acts under TILA
Section 129(l)(2), 15 U.S.C. 1639(l)(2).
The Final Rule
The Board requested comment on the
potential costs and benefits of its
proposed appraiser coercion regulation.
Some securitization trade associations
and financial institutions stated that
creditors obtain appraisals for their own
benefit, to determine whether to extend
credit and the terms of credit extended.
The Board recognizes that, because
appraisals provide evidence of the
collateral’s sufficiency to avoid losses if
a borrower defaults on a loan, creditors
have a disincentive to coerce appraisers
to misstate value. However, loan
originators may believe that they stand
to benefit from coercing an appraiser to
misstate value, for example, if their
compensation depends more on volume
of loans originated than on loan
performance. Despite the disincentives
cited by some commenters, there is
evidence that coercion of appraisers is
not uncommon, and may even be
widespread.103
A few large banks and a financial
services trade association suggested that
the Board prohibit mortgage brokers
from ordering appraisals, as the GSE
Appraisal Agreements do. The Board
declines to determine that any
particular procedure for ordering an
appraisal necessarily promotes false
reporting of value. As discussed above,
the Board finds that coercion of
appraisers by creditors or by mortgage
brokers is an unfair practice. Therefore,
the final rule prohibits actions by
creditors and mortgage brokers that are
aimed at pressuring appraisers to
misstate the value of a consumer’s
principal dwelling.
In addition, some commenters stated
that the Board’s rule would be
redundant given the existence of
USPAP. USPAP, however, establishes
uniform rules regarding preparation of
appraisals and addresses the conduct of
appraisers, not the conduct of creditors
or mortgage brokers. The federal
financial institution regulatory agencies
have issued to the institutions they
supervise regulations and guidance that
set forth standards for the policies and
procedures institutions should
implement to enable appraisers to
exercise independent judgment when
103 For example, the October Research
Corporation’s 2007 National Appraisal Survey
(released in Dec. 2006) found that appraisers
reported being pressured to restate, adjust, or
change reported property values by mortgage
brokers (71 percent), real estate agents (56 percent),
consumers (35 percent), lenders (33 percent), and
appraisal management companies (25 percent).

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valuing a property.104 For example,
these regulations prohibit staff and fee
appraisers from having any direct or
indirect interest, financial or otherwise,
in a subject property; fee appraisers also
may not have any such interest in the
subject transaction.105 Unlike the
Board’s rule, however, these federal
regulations do not apply to all
institutions. Moreover, these federal
rules are part of an overarching
framework of regulation and
supervision of federally insured
depository institutions and are not
necessarily appropriate for application
to independent mortgage companies and
mortgage brokers.
Some state legislatures have
prohibited coercion of appraisers or
enacted general laws against mortgage
fraud that may be used to combat
appraiser coercion.106 Not every state,
however, has passed laws equivalent to
the final rule. Prohibiting creditors and
mortgage brokers from pressuring
appraisers to misstate or misrepresent
the value of a consumer’s principal
dwelling provides enforcement agencies
in every state with a specific legal basis
for an action alleging appraiser
coercion. Though states are able to take
enforcement action against certain
institutions that are believed to engage
in appraisal abuses,107 some state laws
are preempted as to other creditors. The
final rule, adopted under HOEPA,
applies equally to all creditors.
In response to the Board’s request for
comment about the proposed rule’s
provisions, commenters addressed three
104 See, e.g., 12 CFR part 208 subpart E and app.
C, and 12 CFR part 225 subpart G (Board); 12 CFR
part 34, subparts C and D (Office of the Comptroller
of the Currency (OCC)); 12 CFR part 323 and 12
CFR part 365 (FDIC); 12 CFR part 564, 12 CFR
560.100, and 12 CFR 560.101 (Office of Thrift
Supervision (OTS)); and 12 CFR 722.5 (National
Credit Union Administration (NCUA)). Applicable
federal guidance the Board, OCC, FDIC, OTS, and
NCUA have issued includes Independent Appraisal
and Evaluation Functions, dated October 28, 2003,
and Interagency Appraisal and Evaluation
Guidelines, dated October 27, 1994.
105 12 CFR 225.65 (Board); 12 CFR 34.45 (OCC);
12 CFR 323.5 (FDIC); 12 CFR 564.5 (OTS); and 12
CFR 722.5 (NCUA).
106 See, e.g., Colo. Rev. Stat. § 6–1–717; Iowa Code
§ 543D.18A; Ohio Rev. Code Ann. §§ 1322.07(G),
1345.031(B), 4763.12(E).
107 For example, in 2006, 49 states and the
District of Columbia (collectively, the Settling
States) entered into a settlement agreement with
ACC Capital Holdings Corporation and several of its
subsidiaries, including Ameriquest Mortgage
Company (collectively, the Ameriquest Parties). The
Settling States alleged that the Ameriquest Parties
had engaged in deceptive or misleading acts that
resulted in the Ameriquest Parties’ obtaining
inflated appraisals of homes’ value. See, e,g., Iowa
ex rel Miller v. Ameriquest Mortgage Co., No. 05771
EQCE–053090 (Iowa D. Ct. 2006) (Pls. Pet. 5). To
settle the complaints, the Ameriquest Parties agreed
to abide by policies designed to ensure appraiser
independence and accurate valuations.

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main topics: (1) The terms used to
describe prohibited conduct; (2) the
specific examples of conduct that is
prohibited and conduct that is not
prohibited; and (3) the proscription on
extending credit where a creditor knows
about prohibited conduct.
Prohibited conduct. Some
commenters recommended that the
Board replace the phrase ‘‘coerce,
influence, or otherwise encourage’’ with
‘‘coerce, bribe, or extort.’’ These
commenters stated that the words
‘‘influence’’ and ‘‘encourage’’ are vague
and subjective, whereas the words
‘‘bribe’’ and ‘‘extort’’ would provide
bright-line standards for compliance.
Like the proposed rule, the final rule
prohibits a creditor or mortgage broker
from coercing, influencing, or otherwise
encouraging an appraiser to misstate the
value of a dwelling. The final rule does
not limit prohibited conduct to bribery
or extortion. Creditors and mortgage
brokers may act in ways that would not
constitute bribery or extortion but that
nevertheless improperly influence an
appraiser’s valuation of a dwelling.
These actions can visit the same harm
on consumers as do bribery or extortion,
and thus they are prohibited by the final
rule. The Board believes that
commenters’ concerns about the clarity
of the terms used in the final rule can
be addressed through the examples of
conduct that is prohibited and conduct
that is not prohibited discussed below.
Examples of conduct prohibited and
conduct not prohibited. The proposal
offered several examples of conduct that
would violate the rule and conduct that
would not violate the rule. The Board is
adopting the proposed examples of
prohibited conduct and adding two new
examples of prohibited conduct. The
Board also is adopting all but one of the
proposed examples of conduct that is
not prohibited.
Some commenters requested that
additional actions be listed as examples
that violate the rule, such as:
Æ Excluding an appraiser from a list
of ‘‘approved’’ appraisers because the
appraiser had valued properties at an
amount that had jeopardized or
prevented the consummation of loan
transactions.
Æ Telling an appraiser a minimum
acceptable appraised value.
Æ Providing an appraiser with the
price stated in a contract of sale.
Æ Suggesting that an appraiser
consider additional properties as
comparable to the subject property, after
an appraiser has submitted an appraisal
report.
Final § 226.36(b)(1) prohibits conduct
that coerces, influences, or encourages

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an appraiser to misstate or misrepresent
the value of a consumer’s principal
dwelling, and the list of examples the
section provides is illustrative and not
exhaustive. The Board believes that it is
not necessary or possible to list all
conceivable ways in which creditors or
mortgage brokers could pressure
appraisers to misstate a principal
dwelling’s value. However, the Board
has added two examples to enhance the
list in § 226.36(b)(1). The final rule does
not limit the ability of a creditor or
broker to terminate a relationship with
an appraiser for legitimate reasons.
Examples of prohibited conduct. The
Board is adopting the proposed
examples of prohibited conduct and
adding two examples. The first added
example is a creditor’s or broker’s
exclusion of an appraiser from
consideration for future engagement due
to the appraiser’s failure to report a
value that meets or exceeds a minimum
threshold. This example is adapted from
a statement in the supplementary
information to the proposed rule. 73 FR
1701. The second added example is
telling an appraiser a minimum reported
value of a consumer’s principal
dwelling that is needed to approve the
loan. This example is consistent with
the position of the Appraisal Standards
Board (ASB), which develops, interprets
and amends USPAP, that assignments
should not be contingent on the
reporting of a predetermined opinion of
value.108
The Board is not adopting other
examples of prohibited conduct
suggested by commenters. Some
commenters urged the Board to prohibit
a creditor or mortgage broker from
omitting or removing an appraiser’s
name from a list of approved appraisers,
where the appraiser has not valued a
property at the desired amount. The
Board believes such conduct is
encompassed in the examples provided
in § 226.36(b)(1)(i)(B) and (C).
Some commenters also requested that
the Board add, as an example of a
violation, a creditor’s or mortgage
broker’s provision to an appraiser of the
contract of sale for the principal
dwelling. The Board is not adopting the
example. USPAP Standard Rule 1–5
requires an appraiser to analyze all
agreements of sale for a subject
property, and Standard Rule 2–2
requires disclosure of information
contained in such agreements or an
explanation of why such information is
unobtainable or irrelevant.
108 See, e.g., ASB Advisory Opinion No. 19,
Unacceptable Assignment Conditions in Real
Property Appraisal Assignments.

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Examples of conduct that is not
prohibited. The final rule adopts the
proposed examples of prohibited
conduct with one change. The Board is
not adopting proposed
§ 226.36(b)(1)(ii)(F), which would have
provided that the rule would not be
violated when a creditor or mortgage
broker terminates a relationship with an
appraiser for violations of applicable
federal or state law or breaches of
ethical or professional standards. Some
commenters noted that there are other
legitimate reasons for terminating a
relationship with an appraiser, and they
requested that the Board include these
as examples of conduct that is not
prohibited so that the provision would
not be read as implicitly prohibiting
them. The Board believes that it is not
feasible to list all of the legitimate
reasons a creditor or broker might
terminate a relationship with an
appraiser. Accordingly, the Board is not
adopting proposed § 226.36(b)(1)(ii)(F).
Some commenters suggested that the
Board delete, from the examples of
conduct that is not prohibited, asking an
appraiser to consider additional
information about a consumer’s
principal dwelling or about comparable
properties. Although in some cases a
post-report request that an appraiser
consider additional information may be
a subtle form of pressure to change a
reported value, in other cases such a
request could reflect a legitimate desire
to improve an appraisal report.
Furthermore, federal interagency
guidance directs institutions to return
deficient reports to appraisers for
correction and to replace unreliable
appraisals or evaluations prior to the
final credit decision.109 Therefore, the
Board is not deleting, from the examples
of conduct that is not prohibited, asking
an appraiser to consider additional
information about a consumer’s
principal dwelling or about comparable
properties. However, § 226.36(b)
prohibits creditors and mortgage brokers
from making such requests in order to
coerce, influence, or otherwise
encourage an appraiser to misstate or
misrepresent the value of a dwelling.
Extension of credit. As proposed,
§ 226.36(b)(2) provided that a creditor is
prohibited from extending credit if the
creditor knows or has reason to know,
at or before loan consummation, of a
violation of § 226.36(b)(1) (for example,
by an employee of the creditor or a
mortgage broker), unless the creditor
acted with reasonable diligence to
determine that the appraisal does not
materially misstate the value of the
109 See Interagency Appraisal and Evaluation
Guidelines, SR 94–55 (FIS) (Oct. 24, 1994) at 9.

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consumer’s principal dwelling. The
proposed comment to § 226.36(b)(2)
stated that a creditor is deemed to have
acted with reasonable diligence if the
creditor extends credit based on an
appraisal other than the one subject to
the restriction.
The Board is adopting the text of
§ 226.36(b)(2) and the associated
commentary substantially as proposed.
Some financial institutions and
financial institution trade associations
stated that the phrase ‘‘reason to know’’
is vague and that creditors should be
held liable for violations only if they
extend credit when they had actual
knowledge that a violation of
§ 226.36(b)(1) exists. The final rule
prohibits ‘‘a creditor who knows, at or
before loan consummation, of a
violation of § 226.36(b)(1) in connection
with an appraisal’’ from extending
credit based on that appraisal, unless
the creditor acts with reasonable
diligence to determine that the appraisal
does not materially misstate or
misrepresent the value of the
consumer’s principal dwelling.
Although final § 226.36(b)(2) does not
include the phrase ‘‘reason to know’’
included in the proposed rule, the final
rule’s knowledge standard is not
intended to permit willful disregard of
violations of § 226.36(b)(1). The Board
also is adopting new commentary
regarding how to determine whether a
misstatement of value is material.
Many banks asked for guidance on
how to determine whether an appraisal
‘‘materially’’ misstates a dwelling’s
value. In response to these comments,
the Board is adopting a new comment
to § 226.36(b)(2) that provides that a
misrepresentation or misstatement of a
dwelling’s value is not material if it
does not affect the credit decision or the
terms on which credit is extended. The
Board notes that existing appraisal
regulations and guidance may direct
creditors to take certain steps in the
event the creditor knows about
problems with an appraisal. For
example, the Interagency Appraisal and
Evaluation Guidelines dated Oct. 28,
1994 direct institutions to return
deficient reports to appraisers and
persons performing evaluations for
correction and to replace unreliable
appraisals or evaluations prior to
making a final credit decision. These
guidelines further state that changes to
an appraisal’s estimate of value are
permitted only as a result of a review
conducted by an appropriately qualified
state-licensed or -certified appraiser in
accordance with Standard III of USPAP.
The final rule does not dictate specific
due diligence procedures for creditors to
follow when they suspect a violation of

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§ 226.36(b)(2), however. In addition, the
Board does not intend for § 226.36(b)(2)
to create grounds for voiding loan
agreements where violations are found.
That is, if a creditor knows of a violation
of § 226.36(b)(1), and nevertheless
extends credit in violation of § 226(b)(2),
while the creditor will have violated
§ 226.36(b)(2), this violation does not
necessarily void the consumer’s loan
agreement with the creditor. Whether
the loan agreement is void is a matter
determined by State or other applicable
law.
C. Servicing Abuses—§ 226.36(c)
The Board proposed to prohibit
certain practices of servicers of closedend consumer credit transactions
secured by a consumer’s principal
dwelling. Proposed § 226.36(d) provided
that no servicer shall: (1) Fail to credit
a consumer’s periodic payment as of the
date received; (2) impose a late fee or
delinquency charge where the late fee or
delinquency charge is due only to a
consumer’s failure to include in a
current payment a late fee or
delinquency charge imposed on earlier
payments; (3) fail to provide a current
schedule of servicing fees and charges
within a reasonable time of request; or
(4) fail to provide an accurate payoff
statement within a reasonable time of
request. The final rule, redesignated as
§ 226.36(c), adopts the proposals
regarding prompt crediting, fee
pyramiding, and payoff statements, and
modifies and clarifies the accompanying
commentary. The Board is not adopting
the fee schedule proposal, for the
reasons discussed below.
Public Comment
Consumer advocacy groups, federal
and state regulators and officials,
consumers, and others strongly
supported the Board’s proposal to
address servicing abuses, although some
urged alternative measures to address
servicer abuses, including requiring loss
mitigation. Industry commenters, on the
other hand, were generally opposed to
certain aspects of the proposals,
particularly the fee schedule. Industry
commenters also urged the Board to
adopt any such rules under its authority
in TILA Section 105(a) to adopt
regulations to carry out the purposes of
TILA, and not under Section 129(l)(2).
Commenters also requested several
clarifications.
Prompt crediting. Commenters
generally favored, or did not oppose, the
prompt crediting rule. In particular,
consumer advocacy groups, federal and
state regulators and officials, and others
supported the rule. However, some
industry commenters and others

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Federal Register / Vol. 73, No. 147 / Wednesday, July 30, 2008 / Rules and Regulations
requested clarification on certain
implementation details. Commenters
also disagreed about whether and how
to address partial payments.
Fee pyramiding. Commenters
generally supported prohibiting late fee
pyramiding. Several industry
commenters argued, however, that a
new rule would be unnecessary because
servicers are subject to a prohibition on
pyramiding under other regulations.
Fee schedule. Most commenters
opposed the fee schedule proposal. One
consumer advocate group criticized the
disclosure’s utility where consumers
cannot shop for and select servicers.
Other consumer advocates urged the
Board to adopt alternative measures
they argued would be more effective to
combat fee abuses. Industry commenters
also objected to the proposal as
impracticable and unnecessarily
burdensome. Most industry commenters
strongly opposed disclosure of third
party fees, particularly because third
party fees can vary greatly and may be
indeterminable in advance.
Payoff statements. Consumer
advocates strongly supported the
proposal to require provision of payoff
statements within a reasonable time.
The proposed commentary stated that it
would be reasonable under normal
market conditions to provide statements
within three business days of receipt of
a consumer’s request. Community banks
stated that three business days would
typically be adequate. However, large
financial institutions and their trade
associations urged the Board to adopt a
longer time period in the commentary.
These commenters also requested other
clarifications. The comments are
discussed in more detail throughout this
section, as applicable.

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Discussion
As discussed in the preamble to the
proposed rule, the Board shares
concerns about abusive servicing
practices. Consumer advocates raised
abusive mortgage servicer practices as
part of the Board’s 2006 and 2007
hearings as well as in recent
congressional hearings.110 Servicer
abuses have also received increasing
attention both in academia and the
press.111 In particular, consumer
110 See, e.g., Comment letter of the National
Consumer Law Center to Docket No. OP–1253 (Aug.
15, 2006) at 11; Legislative Proposals on Reforming
Mortgage Practices, Hearing Before the H. Comm.
On Fin. Servs., 110th Cong. 74 (2007) (Testimony
of John Taylor, National Community Reinvestment
Coalition).
111 See, e.g., Paula Fitzgerald Bone, Toward a
General Model of Consumer Empowerment and
Welfare in Financial Markets with an Application
to Mortgage Servicers, 42 Journal of Consumer
Affairs 165 (Summer 2008); Katherine M. Porter,

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advocates have raised concerns that
some servicers may be charging
consumers unwarranted or excessive
fees (such as late fees and other
‘‘service’’ fees) and may be improperly
submitting negative credit reports, in
the normal course of mortgage servicing
as well as in foreclosures. Some of these
abusive fees, they contend, result from
servicers’ failure to promptly credit
consumers’ accounts, or when servicers
pyramid late fees. In addition to
anecdotal evidence of significant
consumer complaints about servicing
practices, abusive practices have been
cited in a variety of court cases.112 In
2003, the FTC announced a $40 million
settlement with a large mortgage
servicer and its affiliates to address
allegations of abusive behavior.113
Consumer advocates have also raised
concerns that consumers are sometimes
unaware of fees charged, or unable to
understand the basis upon which fees
are charged. This may occur because
servicers often do not disclose precise
fees in advance; some consumers are not
provided any other notice of fees (such
as a monthly statement or other afterthe-fact notice); and when consumers
are provided a statement or other fee
notice, fees may not be itemized or
detailed. For example, in a number of
bankruptcy cases, servicers have
improperly assessed post-petition fees
Misbehavior and Mistake in Bankruptcy Mortgage
Claims, University of Iowa Legal Study Research
Paper No. 07–29 (Nov. 2007); Kevin McCoy, Hitting
Home: Homeowners Fight for their Mortgage Rights,
USA Today (June 25, 2008), available at http://
www.usatoday.com/money/industries/banking/
2008-06-25-mortgage-services-countrywidelawsuit_N.htm; Mara Der Hovanesian, The
‘‘Foreclosure Factories’’ Vise, BusinessWeek.com
(Dec. 25, 2006), available at http://
www.businessweek.com/magazine/content/06_52/
b4015147.htm?chan=search.
112 See, e.g., Workman v. GMAC Mortg. LLC (In
re Workman), 2007 Bankr. LEXIS 3887 (Bankr. D.
S.C. Nov. 21, 2007) (servicer held in civil contempt
for, among other things, failure to promptly credit
payments made before discharge from bankruptcy
and charging of unauthorized late and attorneys
fees); Islam v. Option One Mortgage Corp., 432 F.
Supp. 2d 181 (D. Mass 2006) (servicer allegedly
continued to report borrower delinquent even after
receiving the full payoff amount for the loan); In Re
Gorshstein, 285 B.R. 118 (S.D.N.Y. 2002) (servicer
sanctioned for falsely certifying that borrowers were
delinquent); Rawlings v. Dovenmuehle Mortgage
Inc., 64 F. Supp. 2d 1156 (M.D. Ala. 1999) (servicer
failed for over 7 months to correct account error
despite borrowers’ twice sending copies of canceled
checks evidencing payments, resulting in
unwarranted late and other fees); Ronemus v. FTB
Mortgage Servs., 201 B.R. 458 (1996) (among other
abuses, servicer failed to promptly credit payments
and instead paid them into a ‘‘suspense’’ account,
resulting in unwarranted late fees and unnecessary
and improper accrual of interest on the note).
113 Consent Order, United States v. Fairbanks
Capital Corp., Civ. No. 03–12219–DPW (D. Mass
Nov. 21, 2003, as modified Sept. 4, 2007). See also
Ocwen Federal Bank FSB, Supervisory Agreement,
OTS Docket No. 04592 (Apr. 19, 2004) (settlement
resolving mortgage servicing issues).

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without notifying either the consumer
or the court.114 Similarly, because
payoff statements lack transparency (in
that they do not provide detailed
accounting information) and because
consumers are often unaware of the
exact amount owed, some servicers may
assess inaccurate or false fees on the
payoff statement.115
Substantial injury. Consumers subject
to the servicer practices described above
suffer substantial injury. For example,
one state attorney general and several
consumer advocates stated that failure
to properly credit payments is one of the
most common problems consumers
have with servicers. Servicers that do
not timely credit, or that misapply,
payments cause the consumer to incur
late fees where none should be
assessed.116 Even where the first late fee
is properly assessed, servicers may
apply future payments to the late fee
first. Doing so results in future
payments being deemed late even if
they are, in fact, paid in full within the
required time period, thus permitting
the servicer to charge additional late
fees—a practice commonly referred to as
‘‘pyramiding’’ of late fees. These
practices can cause the account to
appear to be in default, and thus can
give rise to charging excessive or
unwarranted fees to consumers, who
may not even be aware of the default or
fees if they do not receive statements.
Once consumers are in default, these
practices can make it difficult for
consumers to catch up on payments.
These practices also may improperly
trigger negative credit reports, which
can cause consumers to be denied other
credit or pay more for such credit, and
114 See, e.g., Jones v. Wells Fargo (In re Jones), 366
B.R. 584 (E.D. La 2007) (‘‘In this Court’s experience,
few, if any, lenders make the adjustments necessary
to properly account for a reorganized debt
repayment plan. As a result, it is common to see
late charges, fees, and other expenses assessed to a
debtor’s loan as a result of post-petition accounting
mistakes made by lenders.’’). See also Payne v.
Mortg. Elec. Reg. Sys. (In re Payne), 2008 Bankr.
LEXIS 1340 (Bankr. Kan. May 6, 2008); Sanchez v.
Ameriquest (In re Sanchez), 372 B.R. 289 (S.D. Tx.
2007); Harris v. First Union Mortg. Corp. (In re
Harris), 2002 Bankr. LEXIS 771 (Bankr. D. Ala.
2002); In Re Tate, 253 B.R. 653.
115 See, e.g., Maxwell v. Fairbanks Capital Corp.
(In re Maxwell), 281 B.R. 101, 114 (D. Mass 2002)
(servicer ‘‘repeatedly fabricated the amount of the
Debtor’s obligation to it out of thin air’’).
116 See, e.g. Holland v. GMAC Mortg. Corp., 2006
U.S. Dist. LEXIS 25723 (D. Kan. 2006) (servicer’s
misapplication of borrower’s payment to the wrong
account resulted in improper late fees and negative
credit reports, despite borrower’s proof of canceled
checks); In re Payne, 2008 Bankr. LEXIS at *30
(servicer’s failure to properly and timely account for
payments and failure to distinguish between prepetition and post-petition payments caused its
accounting system and payment history to
improperly show borrowers as delinquent in their
payments).

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require consumers to engage in timeconsuming credit report correction
efforts.
In addition, a servicer’s failure to
provide accurate payoff statements in a
timely fashion can cause substantial
injury to consumers. One state attorney
general commented that its office often
receives complaints about unreasonable
delays in the provision of payoff
statements. Consumers may want to
refinance a loan to obtain a lower
interest rate or to avoid default or
foreclosure, but may be impeded from
doing so due to inaccurate or untimely
payoff statements. These consumers
thus incur additional costs and may be
subject to financial problems or even
foreclosure. In addition to the injuries
caused by delayed payoff statements,
consumers are injured by inaccurate
payoff statements. As described above,
some servicers assess inaccurate or false
fees on the payoff statement without the
consumer’s knowledge. Even when the
consumer requests clarification, a
servicer may provide an invalid
accounting of fees or charges.117 Or, a
servicer may provide the payoff
statement too late in the refinancing
process for the consumer to obtain
clarification without risking losing his
or her new loan commitment.118
Injury not reasonably avoidable. The
injuries caused by servicer abuses are
not reasonably avoidable because
market competition is not adequate to
prevent abusive practices, particularly
when mortgages are securitized and
servicing rights are sold. Historically,
under the mortgage loan process, a
lender would often act as both
originator and collector—that is, it
would service its own loans. Although
some creditors sold servicing rights,
they remained vested in the customer
service experience in part due to
reputation concerns and in part because
payment streams continued to flow
directly to them. However, with rise of
the ‘‘originate to distribute’’ model
discussed in part II.B above, the original
creditor has become removed from
future direct involvement in a
consumer’s loan, and thus has less
incentive and ability to detect or deter
servicing abuses or respond to consumer
complaints about servicing abuses.
When loans are securitized, servicers
117 See, e.g., In re Maxwell, 281 B.R. 101, 114 (D.
Mass 2002).
118 See, e.g., In re Jones, 366 B.R. at 587–588
(consumer in bankruptcy forced to remit improper
sums demanded on payoff statement or lose loan
commitment from new lender. ‘‘Although Debtor
questioned the amounts [servicer] alleged were due,
he was unable to obtain an accounting from
[servicer] explaining its calculations or any other
substantiation for the payoff.’’).

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contract directly with investors to
service the loan, and consumers are not
a party to the servicing contract.
Today, separate servicing companies
play a key role: they are chiefly
responsible for account maintenance,
including collecting payments,
remitting amounts due to investors,
handling interest rate adjustments on
variable rate loans, and managing
delinquencies and foreclosures.
Servicers also act as the primary point
of contact for consumers after
origination, because in most cases the
original creditor has securitized and
sold the loan shortly after origination. In
exchange for performing these services,
servicers generally receive a fixed perloan or monthly fee, float income, and
ancillary fees—including default
charges—that consumers must pay.
Investors are principally concerned
with maximizing returns on the
mortgage loans and are generally
indifferent to the fees the servicer
charges the consumer so long as the fees
do not reduce the investor’s return (e.g.,
by prompting an unwarranted
foreclosure). Consumers are not able to
choose their servicers. Consumers also
are not able to change servicers without
refinancing, which is a time-consuming,
expensive undertaking. Moreover, if
interest rates are rising, refinancing may
only be possible if the consumer accepts
a loan with a higher interest rate. After
refinancing, consumers may find their
loans assigned back to the same servicer
as before, or to another servicer
engaging in the same practices. As a
result, servicers do not have to compete
in any direct sense for consumers. Thus,
there may not be sufficient market
pressure on servicers to ensure
competitive practices.119
Injury not outweighed by
countervailing benefits to consumers or
to competition. The injuries described
above also are not outweighed by any
countervailing benefits to consumers or
competition. Commenters did not cite,
and the Board is not aware of, any
benefit to consumers from delayed
crediting of payments, pyramided fees,
or delayed issuance of payoff
statements.
For these reasons, the Board finds the
acts and practices prohibited under
§ 226.36(c) for closed-end consumer
credit transactions secured by a
119 In one survey, J.D. Power found that
consumers whose loans have been sold have
customer satisfaction scores 32 points lower than
those who have remained with the loan originator.
J.D. Power and Associates Reports: USAA Ranks
Highest in Customer Satisfaction with Primary
Mortgage Servicing. Press Release (July 19, 2006),
available at http://www.jdpower.com/corporate/
news/releases/pdf/2006117.pdf.

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consumer’s principal dwelling to be
unfair. As described in part V.A above,
TILA Section 129(l)(2) authorizes
protections against unfair practices ‘‘in
connection with mortgage loans’’ that
the Board finds to be unfair or
deceptive. 15 U.S.C. 1639(l)(2).
Therefore, the Board may take action
against unfair or deceptive practices by
non-creditors and against unfair or
deceptive practices outside of the
origination process, when such
practices are ‘‘in connection with
mortgage loans.’’ The Board believes
that unfair or deceptive servicing
practices fall squarely within the
purview of Section 129(l)(2) because
servicing is an integral part of the life of
a mortgage loan and as such is ‘‘in
connection with mortgage loans.’’
Accordingly, the final rule prohibits
certain unfair or deceptive servicing
practices under Section 129(l)(2), 15
U.S.C. 1639(l)(2).
The Final Rule
Section 226.36(c) prohibits three
servicing practices. First, the rule
prohibits a servicer from failing to credit
a payment to a consumer’s account as of
the date received. Second, the rule
prohibits ‘‘pyramiding’’ of late fees by
prohibiting a servicer from imposing a
late fee on a consumer for making a
payment that constitutes the full
amount due and is timely, but for a
previously assessed late fee. Third, the
rule prohibits a servicer from failing to
provide, within a reasonable time after
receiving a request, an accurate
statement of the amount currently
required to pay the obligation in full,
often referred to as a payoff statement.
Under § 226.36(c)(3), the term
‘‘servicer’’ and ‘‘servicing’’ are given the
same meanings as provided in
Regulation X, 24 CFR 3500.2. As
described in more detail below, the
Board is not adopting the proposed rule
that would prohibit a servicer from
failing to provide to a consumer, within
a reasonable time after receiving a
request, a schedule of all fees and
charges it imposes in connection with
mortgage loans it services.
The Board recognizes that servicers
will incur additional costs to alter their
systems to comply with some aspects of
the final rule. For example, in some
instances some servicers may incur
costs in investing in systems to produce
payoff statements within a shorter
period of time than their current
technology affords. As a result, some
servicers will, directly or indirectly,
pass those costs on to consumers. The
Board believes, however, that these
costs to consumers are outweighed by

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the consumer benefits provided by the
rules as adopted.
Prompt Crediting
The Board proposed §§ 226.36(d)(1)(i)
and 226.36(d)(2) to prohibit a servicer
from failing to credit payments as of the
date received. The proposed prompt
crediting rule and accompanying
commentary are substantially similar to
the existing provisions requiring prompt
crediting of payment on open-end
transactions in § 226.10. The final rule
adopts, as §§ 226.36(c)(1)(i) and
226.36(c)(2), the rule substantially as
proposed, but with revisions to the
proposed commentary to address the
questions of partial payments and
payment cut-off times. Commentary has
also been added or modified in response
to commenters’ concerns.
Commenters generally favored, or did
not oppose, the prompt crediting rule.
In particular, consumer advocacy
groups, federal and state regulators and
officials, and others supported the rule.
One state attorney general and several
consumer advocacy groups stated that
failure to properly credit payments is
one of the most common servicing
problems they see consumers face.
However, as described in more detail
below, some industry commenters and
others requested clarification on certain
implementation details. Commenters
also generally disagreed on whether and
how to address partial payments.
Method and timing of payments.
Section 226.36(c)(1)(i) requires a
servicer to credit a payment to the
consumer’s loan account as of the date
of receipt, except when a delay in
crediting does not result in any charge
to the consumer or in the reporting of
negative information to a consumer
reporting agency, or except as provided
in § 226.36(c)(2). Many industry
commenters, as well as the GSEs
requested clarifications on the timing
and method of crediting payments, and
the final staff commentary has been
revised accordingly.
For example, final comment
36(c)(1)(i)–1 makes clear that the rule
does not require a servicer to physically
enter the payment on the date received,
but requires only that it be credited as
of the date received. The proposed
comment explained that a servicer does
not violate the rule if it receives a
payment on or before its due date and
enters the payment on its books or in its
system after the due date if the entry
does not result in the imposition of a
late charge, additional interest, or
similar penalty to the consumer, or in
the reporting of negative information to
a consumer reporting agency. Because
consumers are often afforded a grace

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period before a late fee accrues, the
Board has revised the comment to
reference grace periods. The final
comment thus states that a servicer that
receives a payment on or before the due
date (or within any grace period), and
does not enter the payment on its books
or in its system until after the payment’s
due date (or expiration of any grace
period) does not violate the rule as long
as the entry does not result in the
imposition of a late charge, additional
interest, or similar penalty to the
consumer, or in the reporting of
negative information to a consumer
reporting agency. If a payment is
received after the due date and any
grace period, § 226.36(c)(1)(i) does not
prohibit the assessment of late charges
or reporting negative information to a
consumer reporting agency.
Some industry commenters were
concerned that the rule would affect
their monthly interest accrual
accounting systems. Many closed-end
mortgage loan agreements require
calculation of interest based on an
amortization schedule where payments
are deemed credited as of the due date,
whether the payment was actually
received prior to the scheduled due date
or within any grace period. Thus,
making the scheduled payment early
does not decrease the amount of interest
the consumer owes, nor does making
the scheduled payment after the due
date (but within a grace period) increase
the interest the consumer owes.
According to these commenters, this socalled ‘‘monthly interest accrual
amortization method’’ provides
certainty to consumers (about payments
due) and to investors (about expected
yields). The final rule is not intended to
prohibit or alter use of this method, so
long as the servicer recognizes on its
books or in its system that payments
have been timely made for purposes of
determining late fees or triggering
negative credit reporting.
The final rule also adopts proposed
comment 36(d)(2)–1, redesignated as
36(c)(2)–1, which states that the servicer
may specify in writing reasonable
requirements for making payments. One
commenter expressed concern that late
fees or negative credit reports may be
triggered when a timely payment
requires extensive research, and the
creditor may inadvertently violate
§ 226.36(c)(1)(i). Such research might be
required, for example, when a check
does not include the account number for
the mortgage loan and is written by
someone other than the consumer.
However, in this scenario, the check
would typically constitute a payment
that does not conform to the servicer’s
reasonable payment requirements. If a

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payment is non-conforming, and the
servicer nonetheless accepts the
payment, then § 226.36(c)(2) provides
that the servicer must credit the account
within five days of receipt. If the
servicer chooses not to accept the nonconforming payment, it would not
violate the rule by returning the check.
Comment 36(c)(2)–1 provides
examples of reasonable payment
requirements. Although the list of
examples is non-exclusive, at the
request of several commenters, payment
coupons have been added to the list of
examples because they can assist
servicers in expediting the crediting
process to consumers’ benefit.
The Board sought comment on
whether it should provide a safe harbor
as to what constitutes a reasonable
payment requirement, for example, a
cut-off time of 5 p.m. for receipt of a
mailed check. Commenters generally
supported including safe harbors;
accordingly, new comment 32(c)(2)–2
provides that it would be reasonable to
require a cut-off time of 5 p.m. for
receipt of a mailed check at the location
specified by the creditor for receipt of
such check.
Partial payments. The Board sought
comment on whether (and if so, how)
partial payments should be addressed in
the prompt crediting rule. Consumer
advocate and industry commenters
disagreed on whether partial payments
should be credited, if the consumer’s
payment covers at least the principal
and interest due but not amounts due
for escrows or late or other service fees.
Consumer groups argued that servicers
should be required to credit partial
payments under the rule, when the
payment would cover at least the
principal and interest due. They
expressed concern that servicers
routinely place such partial payments
into suspense accounts, triggering the
accrual of late fees and other default
fees. On the other hand, most industry
commenters urged the Board not to
require crediting of partial payments,
because doing so would contradict the
structure of uniform loan documents,
would violate servicing agreements,
would be contrary to monthly interest
accrual accounting methods, and would
require extensive systems and
accounting changes. They also argued
that crediting partial payments could
cause the consumer’s loan balance to
increase. After crediting the partial
payment, the servicer would add the
remaining payment owed to the
principal balance; thus, the principal
balance would be greater than the
amount scheduled (and the interest
calculated on that larger principal
balance that would be due would be

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greater than the scheduled interest). As
a result, subsequent regularly scheduled
payments would no longer cover the
actual outstanding principal and
interest due.
New comment 36(c)(1)(i)–2 makes
clear that whether a partial payment
must be credited depends on the
contract between the parties.
Specifically, the new comment states
that payments should be credited based
on the legal obligation between the
creditor and consumer. The comment
also states that the legal obligation is
determined by applicable state law or
other law. Thus, if under the terms of
the legal obligations governing the loan,
the required monthly payment includes
principal, interest, and escrow, then
consistent with those terms, servicers
would not be required to credit
payments that include only principal
and interest payments. Concerns about
partial payments may be addressed in
part by the fee pyramiding rule,
discussed below, which prohibits
servicers from charging late fees if a
payment due is short solely by the
amount of a previously assessed late fee.
Pyramiding Late Fees
The Board proposed to adopt a
parallel approach to the existing
prohibition on late fee pyramiding
contained in the ‘‘credit practices rule,’’
under section 5 of the FTC Act, 15
U.S.C. 45. See, e.g., 12 CFR 227.15
(Board’s Regulation AA). Proposed
§ 226.36(c)(1)(ii) would have prohibited
servicers from imposing any late fee or
delinquency charge on the consumer in
connection with a payment, when the
consumer’s payment was timely and
made in full but for any previously
assessed late fees. The proposed
commentary provided that the
prohibition should be construed
consistently with the credit practices
rule. The final rule adopts the proposal
and accompanying staff commentary.
Commenters generally supported
prohibiting fee pyramiding. Several
commenters argued, however, that a
new rule would be unnecessary because
servicers are subject to a regulation
prohibiting fee pyramiding, whether
they are banks (12 CFR 227.15), thrifts
(12 CFR 535.4), credit unions (12 CFR
706.4) or other institutions (16 CFR
444.4). However, the Board believes that
adopting a fee pyramiding prohibition
under TILA Section 129(l)(2), 15 U.S.C.
1639(l)(2), would extend greater
protections to consumers than currently
provided by regulation. While fee
pyramiding is impermissible for all
entities under either the Board, OTS, or
FTC rules, state officials are not granted
authority under the FTC Act to bring

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enforcement actions against institutions.
By bringing the fee pyramiding rule
under TILA Section 129(l)(2), state
attorneys general would be able to
enforce the rule through TILA, where
currently they may be limited to
enforcing the rule solely through state
statutes (which statutes may not be
uniform). Accordingly, the antipyramiding rule adopted today would
provide state attorneys general an
additional means of enforcement against
servicers, thus providing an additional
consumer protection against an unfair
practice.
Schedule of Fees and Charges
Proposed 226.36(d)(1)(iii) would have
required a servicer to provide to a
consumer upon request a schedule of all
specific fees and charges that may be
imposed in connection with the
servicing of the consumer’s account,
including a dollar amount and an
explanation of each and the
circumstances under which each fee
may be imposed. The proposal would
have required a fee schedule that is
specific both as to the amount and type
of each charge, to prevent servicers from
disguising fees by lumping them
together or giving them generic names.
The proposal also would have required
the disclosure of third party fees
assessed on consumers by servicers. The
rule was intended to bring transparency
to the market, to enhance consumer
understanding of servicer charges, and
to make it more difficult for
unscrupulous servicers to camouflage or
inflate fees. The Board sought comment
on the effectiveness of this approach,
and solicited suggestions on alternative
methods to achieve the same objective.
Given servicers’ potential difficulty in
identifying the specific amount of third
party charges prior to imposition of
such charges, the Board also sought
comment on whether the benefit of
increasing the transparency of third
party fees would outweigh the costs
associated with a servicer’s uncertainty
as to such fees.
Most commenters opposed the fee
schedule proposal. One consumer
advocate group argued that the
disclosure would not help because
consumers cannot shop for and select
servicers. Other consumer advocates
urged the Board to adopt alternative
measures they argued would be more
effective to prevent servicer abuses.
Industry commenters also objected to
the proposal as impracticable and
unnecessarily burdensome. Some stated
that they currently provide limited fee
schedules upon request, but that they
would incur a substantial time and cost
burden to reprint schedules or add

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addenda when fees change. Many
industry commenters strongly opposed
disclosure of third party fees. These
commenters argued that fees can vary
greatly by geography (inter- and intrastate) and over the life of the loan, and
are not within the servicer’s control,
particularly when the consumer is in
default. Moreover, they stated, some
charges relating to foreclosure or other
legal actions cannot be determined in
advance. For example, newspaper
publication costs will vary depending
on the newspaper and length of the
notice required; third party service
providers may charge varying prices
based on the cost of labor, materials,
and scope of work required.120 Industry
commenters maintained that servicers
would pass on to consumers the costs of
the increased burden and risk incurred.
At a minimum, they argued, the fee
schedule should be limited to standard
or common fees, such as nonsufficient
fund fees or duplicate statement fees.
The Board has considered the
concerns raised by commenters and has
concluded that the transparency benefit
of the schedule does not sufficiently
offset the burdens of producing such a
schedule. Thus, the Board is not
adopting proposed § 226.36(d)(1)(iii).
First, the transparency benefit is
limited. It is not clear that consumers
would request fee schedules sufficiently
in advance of being charged any fees so
as to provide consumers the benefit of
the notice intended by the proposed
rule. In addition, any schedules
provided to consumers may be out of
date by the time the consumer is
assessed fees. Many third party fees
would also be impractical to specify.
Even if third party fees are simply listed
as ‘‘actual charge’’ or ‘‘market price,’’
the fee schedules may be too long—
possibly dozens of pages— and detailed
to be meaningful or useful to
consumers. The Board considered
limiting fee schedules to the servicer’s
own standard fees. However, while such
schedules might assist consumers who
are current, they would be of limited
utility to delinquent consumers, who
are often subject to substantial third
party fees. For the foregoing reasons, the
Board is not adopting proposed
§ 226.36(d)(1)(iii).
The Board solicited suggestions on
alternative methods to address servicer
charges and fees. Commenters urged the
Board to consider a variety of
alternatives to combat abusive servicing
120 See, e.g., Vikas Bajaj, Contractors Are Kept
Busy Maintaining Abandoned Homes, N.Y. Times
(May 26, 2008), available at http://
www.nytimes.com/2008/05/27/business/
27home.html?_r=1&scp=1&sq=florida+foreclosure
&st=nyt&oref=slogin.

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practices, including prohibiting
servicers from imposing fees unless the
fee is authorized by law, agreed to in the
note, and bona fide and reasonable;
prohibiting servicers from misstating the
amounts consumers owe; and requiring
servicers to provide monthly statements
to consumers to permit consumers to
monitor charges. The Board continues to
have concerns about transparency and
abuse of servicer fees. The Board will
continue to evaluate the issue, and may
consider whether to propose additional
rules in this area in connection with its
comprehensive review of Regulation Z’s
closed-end mortgage disclosure rules.
Loan Payoff Statements
Proposed § 226.36(d)(1)(iv) would
have prohibited a servicer from failing
to provide, within a reasonable time
after receiving a request from the
consumer or any person acting on behalf
of the consumer, an accurate statement
of the full amount required to pay the
obligation in full as of a specified date,
often referred to as a payoff statement.
The proposed commentary stated that
under normal market conditions, three
business days would be a reasonable
time to provide the payoff statements;
however, a longer time might be
reasonable when the market is
experiencing an unusually high volume
of refinancing requests.
Consumer advocates strongly
supported the proposed rule, and most
community banks stated that three
business days would be adequate for
production of payoff statements.
However, large financial institutions
and their trade associations urged the
Board to adopt a longer time period in
the commentary than three business
days. Large financial institutions and
their trade associations also requested
clarification on requests from third
parties, citing privacy concerns. Further,
they urged the Board to refine the rule
to provide that statements should be
accurate when issued, because events
could occur after issuance that would
make the payoff statement inaccurate.
The Board is adopting the rule
substantially as proposed, renumbered
as § 226.36(c)(1)(iii), with clarifications
and changes to the commentary. The
Board has revised the accompanying
staff commentary to provide that five
business days would normally be a
reasonable time to provide the
statements under most circumstances,
and to make several other clarifications
in response to commenters’ concerns.
Servicers’ delays in providing payoff
statements can impede consumers from
refinancing existing loans or otherwise
clearing title and increase transaction
costs. Promptly delivered payoff

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statements also help consumers to
monitor inflated payoff claims. Thus,
the Board is adopting a rule requiring
servicers to provide an accurate payoff
statement within a reasonable time after
receiving a request.
As noted above, the proposed
commentary stated that under normal
market conditions, three business days
would be a reasonable time to provide
the payoff statements. Large financial
institutions and their trade associations
encouraged the Board to extend the
three business day time frame to
anywhere from five business days to
fifteen calendar days to provide
servicers enough time to compile the
necessary payoff information. While the
Board notes that the commentary’s time
frame is a safe harbor and not a
requirement, the Board is extending the
time frame from three to five business
days to address commenters’ concerns.
Several industry commenters also
requested special time periods for
homes in foreclosure or loss mitigation.
Some argued that emergency
circumstances (such as imminent
foreclosure) require swifter servicer
action; on the contrary, others argued
that such circumstances are inherently
complicated and require additional
servicer time and effort. However, the
Board believes five business days
should provide sufficient time to handle
most payoff requests, including most
requests where the loan is delinquent,
in bankruptcy, or the servicer has
incurred an escrow advance. As
discussed below, there may be
circumstances under which a longer
time period is reasonable; the response
time would simply not fall under the
five business day safe harbor.
The commentary retains the proposal
that the time frame might be longer in
some instances. The example has been
revised, however, from when ‘‘the
market’’ is experiencing an unusually
high volume of refinancing requests to
‘‘the servicer.’’ A particular servicer’s
experience may not correspond
perfectly with general market
conditions. The example is intended to
recognize that more time may be
reasonable where a servicer is
experiencing temporary constraints on
its ability to respond to payoff requests.
The example is not intended, however,
to enable servicers to take an
unreasonable amount of time to provide
payoff statements if it is due to a failure
to devote adequate staffing to handling
requests. The Board believes that the
revised commentary balances servicers’
operational needs with consumers’
interests in promptly obtaining a payoff
statement.

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Under the proposed rule, the servicer
would be required to respond to the
request of a person acting on behalf of
the consumer. Thus, for example, a
creditor with which a consumer is
refinancing may request a payoff
statement. Others who act on the
consumer’s behalf, such as a non-profit
homeownership counselor, also may
wish to obtain a payoff statement for the
consumer. Some industry commenters
expressed concern about the privacy
implications of such a requirement, and
requested that the Board permit
additional time to confirm the
consumer’s permission prior to
releasing account information. To
address these concerns, the Board has
revised the commentary to state that the
servicer may first take reasonable
measures to verify the identity of
persons purporting to act on behalf of
the consumer and to obtain the
consumer’s authorization to release
information to any such persons before
the ‘‘reasonable time’’ frame begins to
run.
Industry commenters also requested
that, as in the prompt crediting rule,
servicers be permitted to specify
reasonable requirements to ensure
payoff requests may be promptly
processed. The Board believes clear
procedures for consumer requests for
loan payoff statements will benefit
consumers, as these procedures will
expedite processing of a consumer’s
request. Therefore, the Board is adding
new commentary 226.36(c)(1)(iii)–3 to
clarify that the servicer may specify
reasonable requirements for making
payoff requests, such as requiring
requests to be in writing and directed to
a specific address, e-mail address or fax
number specified by the servicer, or
orally to a specified telephone number,
or any other reasonable requirement or
method. If the consumer does not follow
these requirements, a longer time frame
for responding to the request would be
reasonable.
Finally, industry commenters
requested clarification that the
statement must be accurate when
issued. They maintained that events
occurring after issuance of the statement
cause a statement to become inaccurate,
such as when a consumer’s previous
payment is returned for insufficient
funds after the servicer has issued the
loan payoff statement. The Board is
adding new comment 226.36(c)(1)(iii)–4
to explain that payoff statements must
be accurate when issued. The payoff
statement amount should reflect all
payments due and all fees and charges
incurred as of the date of issuance.
However, the Board recognizes that
events occurring after issuance and

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outside the servicer’s control, such as a
returned check and nonsufficient funds
fee, or an escrow advance, may cause
the payoff statement to become
inaccurate. If the statement was accurate
when it was issued, subsequent events
that change the payoff amount do not
result in a violation of the rule.

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D. Coverage—§ 226.36(d)
The Board proposed to exclude
HELOCs from § 226.36(d) because most
originators of HELOCs hold them in
portfolio rather than sell them, which
aligns these originators’ interests in loan
performance more closely with their
borrowers’ interests, and HELOC
originations are concentrated in the
banking and thrift industries, where the
federal banking agencies can use
supervisory authorities to protect
borrowers. As described in more detail
in part IX.E above, the proposed
exclusion of HELOCs drew criticism
from several consumer and civil rights
groups but strong support from industry
commenters. For the reasons discussed
in part VIII.H above, the Board is
adopting the exclusion as proposed,
renumbered as § 226.36(d).
XI. Advertising
The Board proposed to amend the
advertising rules for open-end homeequity plans under § 226.16, and for
closed-end credit under § 226.24, to
address advertisements for homesecured loans. For open-end homeequity plan advertisements, the two
most significant proposed changes
related to the clear and conspicuous
standard and the advertisement of
promotional terms. For advertisements
for closed-end credit secured by a
dwelling, the three most significant
proposed changes related to
strengthening the clear and conspicuous
standard for advertising disclosures,
regulating the disclosure of rates and
payments in advertisements to ensure
that low promotional or ‘‘teaser’’ rates or
payments are not given undue
emphasis, and prohibiting certain acts
or practices in advertisements as
provided under Section 129(l)(2) of
TILA.
The final rule is substantially similar
to the proposed rule and adopts, with
some modifications, each of the
proposed changes discussed above. The
most significant changes are: Modifying
when an advertisement is required to
disclose certain information about tax
implications; using the term
‘‘promotional’’ rather than
‘‘introductory’’ to describe certain openend credit rates or payments applicable
for a period less than the term of the
loan and removing the requirement that

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advertisements with promotional rates
or payments state the word
‘‘introductory;’’ excluding radio and
television advertisements for homeequity plans from the requirements
regarding promotional rates or
payments; allowing advertisements for
closed-end credit to state that payments
do not include mortgage insurance
premiums rather than requiring
advertisements to state the highest and
lowest payment amounts; and removing
the prohibition on the use of the term
‘‘financial advisor’’ by a for-profit
mortgage broker or mortgage lender.
Public Comment
Most commenters were generally
supportive of the Board’s proposed
advertising rules. Lenders and their
trade associations made a number of
requests for clarification or modification
of the rules, and a few cautioned that
requiring too much information be
disclosed in advertisements could cause
creditors to avoid advertising specific
credit terms, thereby depriving
consumers of useful information. By
contrast, consumer and community
groups as well as state and local
government officials made some
suggestions for tightening the
application of the rules. The comments
are discussed in more detail throughout
this section as applicable.
A. Advertising Rules for Open-End
Home-Equity Plans—§ 226.16
Overview
The Board is revising the open-end
home-equity plan advertising rules in
§ 226.16. As in the proposal, the two
most significant changes relate to the
clear and conspicuous standard and the
advertisement of promotional terms in
home-equity plans. Each of these
proposed changes is summarized below.
First, as proposed, the Board is
revising the clear and conspicuous
standard for home-equity plan
advertisements, consistent with the
approach taken in the advertising rules
for consumer leases under Regulation
M. See 12 CFR 213.7(b). New
commentary provisions clarify how the
clear and conspicuous standard applies
to advertisements of home-equity plans
with promotional rates or payments,
and to Internet, television, and oral
advertisements of home-equity plans.
The rule also allows alternative
disclosures for television and radio
advertisements for home-equity plans
by revising the Board’s earlier proposal
for open-end plans that are not homesecured to apply to home-equity plans
as well. See 12 CFR 226.16(e) and 72 FR
32948, 33064 (June 14, 2007).

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Second, the Board is amending the
regulation and commentary to ensure
that advertisements adequately disclose
not only promotional plan terms, but
also the rates and payments that will
apply over the term of the plan. The
changes are modeled after proposed
amendments to the advertising rules for
open-end plans that are not homesecured. See 73 FR 28866, 28892 (May
19, 2008) and 72 FR 32948, 33064 (June
14, 2007).
The Board is also implementing
provisions of the Bankruptcy Abuse
Prevention and Consumer Protection
Act of 2005 which requires disclosure of
the tax implications of certain homeequity plans. See Public Law 109–8, 119
Stat. 23. Other technical and conforming
changes are also being made.
The Board proposed to prohibit
certain acts or practices connected with
advertisements for closed-end mortgage
credit under TILA section 129(l)(2) and
sought comment on whether it should
extend any or all of the prohibitions
contained in proposed § 226.24(i) to
home-equity plans, or whether there
were other acts or practices associated
with advertisements for home-equity
plans that should be prohibited. The
final rule does not apply the
prohibitions contained in § 226.24(i) to
home-equity plans for the reasons
discussed below in connection with the
final rule for closed-end mortgage credit
advertisements. See discussion of
§ 226.24(i) below.
Current Statute and Regulation
TILA Section 147, implemented by
the Board in § 226.16(d), governs
advertisements of open-end homeequity 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 credit
plan, whether or not they meet the
definition of creditor. See comment
2(a)(2)–2. Under the statute, if an openend credit advertisement sets forth,
affirmatively or negatively, any of the
specific terms of the plan, including any
required periodic payment amount, then
the advertisement must also clearly and
conspicuously state: (1) 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; (2)
in any case in which periodic rates may
be used to compute the finance charge,
the periodic rates expressed as an
annual percentage rate; (3) the highest
annual percentage rate which may be
imposed under the plan; and (4) any

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other information the Board may by
regulation require.
The specific terms of an open-end
plan that ‘‘trigger’’ additional
disclosures, which are commonly
known as ‘‘triggering terms,’’ are the
payment terms of the plan, or finance
charges and other charges required to be
disclosed under §§ 226.6(a) and
226.6(b). If an advertisement for a homeequity plan states a triggering term, the
regulation requires that the
advertisement also state the terms
required by the statute. See 12 CFR
226.16(d)(1); see also comments 16(d)–
1 and –2.

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Authority
The Board is exercising the following
authorities in promulgating final rules.
TILA Section 105(a) authorizes the
Board 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). TILA Section 122 authorizes
the Board to require that information,
including the information required
under Section 147, be disclosed in a
clear and conspicuous manner. 15
U.S.C. 1632. TILA Section 147 also
requires that information, including any
other information required by regulation
by the Board, be clearly and
conspicuously set forth in such form
and manner as the Board may by
regulation require. 15 U.S.C. 1665b.
Discussion
Clear and conspicuous standard. The
Board is adopting as proposed new
comments 16–2 to –5 to clarify how the
clear and conspicuous standard applies
to advertisements for home-equity
plans.
Comment 16–1 explains that
advertisements for open-end credit are
subject to a clear and conspicuous
standard set forth in § 226.5(a)(1). The
Board is not prescribing specific rules
regarding the format of advertisements.
However, new comment 16–2 elaborates
on the requirement that certain
disclosures about promotional rates or
payments in advertisements for homeequity plans be prominent and in close
proximity to the triggering terms in
order to satisfy the clear and
conspicuous standard when
promotional rates or payments are
advertised and the disclosure
requirements of new § 226.16(d)(6)
apply. The disclosures are deemed to
meet this requirement if they appear
immediately next to or directly above or
below the trigger terms, without any
intervening text or graphical displays.
Terms required to be disclosed with

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equal prominence to the promotional
rate or payment are deemed to meet this
requirement if they appear in the same
type size as the trigger terms. A more
detailed discussion of the requirements
for promotional rates or payments is
found below.
The equal prominence and close
proximity requirements of § 226.16(d)(6)
apply to all visual text advertisements
except for television advertisments.
However, comment 16–2 states that
electronic advertisements that disclose
promotional rates or payments in a
manner that complies with the Board’s
recently amended rule for electronic
advertisements under § 226.16(c) are
deemed to satisfy the clear and
conspicuous standard. See 72 FR 63462
(Nov. 9, 2007). Under the rule, if an
electronic advertisement provides the
required disclosures in a table or
schedule, any statement of triggering
terms elsewhere in the advertisement
must clearly direct the consumer to the
location of the table or schedule. For
example, a triggering term in an
advertisement on an Internet Web site
may be accompanied by a link that
directly takes the consumer to the
additional information. See comment
16(c)(1)–2.
The Board sought comment on
whether it should amend the rules for
electronic advertisements for homeequity plans to require that all
information about rates or payments
that apply for the term of the plan be
stated in close proximity to promotional
rates or payments in a manner that does
not require the consumer to click a link
to access the information. The majority
of commenters who addressed this issue
urged the Board to adopt comment 16–
2 as proposed. They noted that many
electronic advertisements on the
Internet are displayed in small areas,
such as in banner advertisements or
next to search engine results, and
requiring information about the rates or
payments that apply for the term of the
plan to be in close proximity to the
promotional rates or payments would
not be practical. These commenters also
suggested that Internet users are
accustomed to clicking on links in order
to find further information. Commenters
also expressed concern about the
practicality of requiring closely
proximate disclosures in electronic
advertisements that may be displayed
on devices with small screens, such as
on Internet-enabled cellular phones or
personal digital assistants, that might
necessitate scrolling or clicking on links
in order to view additional information.
The Board is adopting comment 16–
2 as proposed. The Board agrees that
requiring disclosures of information

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about rates or payments that apply for
the term of the plan to be in close
proximity to promotional rates or
payments would not be practical for
many electronic advertisements and that
the requirements of § 226.16(c)
adequately ensure that consumers
viewing electronic advertisements have
access to important additional
information about the terms of the
advertised product.
The Board is also adopting as
proposed new comments to interpret the
clear and conspicuous standards for
Internet, television, and oral
advertisements of home-equity plans.
New comment 16–3 explains that
disclosures in the context of visual text
advertisements on the Internet must not
be obscured by techniques such as
graphical displays, shading, coloration,
or other devices, and must comply with
all other requirements for clear and
conspicuous disclosures under
§ 226.16(d). New comment 16–4
likewise explains that textual
disclosures in television advertisements
must not be obscured by techniques
such as graphical displays, shading,
coloration, or other devices, must be
displayed in a manner that allows the
consumer to read the information, and
must comply with all other
requirements for clear and conspicuous
disclosures under § 226.16(d). The
Board believes, however, that this rule
can be applied with some flexibility to
account for variations in the size of
television screens. For example, a
lender would not violate the clear and
conspicuous standard if the print size
used was not legible on a handheld or
portable television. New comment 16–5
explains that oral advertisements, such
as by radio or television, must provide
disclosures at a speed and volume
sufficient for a consumer to hear and
comprehend them. In this context, the
word ‘‘comprehend’’ means that the
disclosures must be intelligible to
consumers, not that advertisers must
ensure that consumers understand the
meaning of the disclosures. The Board
is also allowing the use of a toll-free
telephone number as an alternative to
certain disclosures in radio and
television advertisements.
Section 226.16(d)(2)—Discounted and
Premium Rates
If an advertisement for a variable-rate
home-equity plan states an initial
annual percentage rate that is not based
on the index and margin used to make
later rate adjustments, the advertisement
must also state the period of time the
initial rate will be in effect, and a
reasonably current annual percentage
rate that would have been in effect using

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the index and margin. See 12 CFR
226.16(d)(2). The Board is adopting as
proposed revisions to this section to
require that the triggered disclosures be
stated with equal prominence and in
close proximity to the statement of the
initial APR. The Board believes that this
will enhance consumers’ understanding
of the cost of credit for the home-equity
plan being advertised.
As proposed, new comment 16(d)–6
provides safe harbors for what
constitutes a ‘‘reasonably current index
and margin’’ as used in § 226.16(d)(2) as
well as § 226.16(d)(6). Under the
comment, the time period during which
an index and margin are considered
reasonably current depends on the
medium in which the advertisement
was distributed. For direct mail
advertisements, a reasonably current
index and margin is one that was in
effect within 60 days before mailing. For
printed advertisements made available
to the general public and for
advertisements in electronic form, a
reasonably current index and margin is
one that was in effect within 30 days
before printing, or before the
advertisement was sent to a consumer’s
e-mail address, or for advertisements
made on an Internet Web site, when
viewed by the public.
Section 226.16(d)(3)–Balloon Payment
Existing § 226.16(d)(3) requires that if
an advertisement for a home-equity plan
contains a statement about any
minimum periodic payment, the
advertisement must also state, if
applicable, that a balloon payment may
result. As proposed, the Board is
revising this section to clarify that only
statements of the amount of any
minimum periodic payment trigger the
required disclosure, and to require that
the disclosure of a balloon payment be
equally prominent and in close
proximity to the statement of a
minimum periodic payment. Consistent
with comment 5b(d)(5)(ii)–3, the Board
is clarifying that the disclosure is
triggered when an advertisement
contains a statement of any minimum
periodic payment amount and a balloon
payment may result if only minimum
periodic payments are made, even if a
balloon payment is uncertain or
unlikely. Additionally, the Board is
clarifying that a balloon payment results
if paying the minimum periodic
payments would not fully amortize the
outstanding balance by a specified date
or time, and the consumer must repay
the entire outstanding balance at such
time.
The final rule, as proposed,
incorporates the language from existing
comment 16(d)–7 into the text of

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§ 226.16(d)(3) with technical revisions.
The comment is revised and
renumbered as comment 16(d)–9. The
required disclosures regarding balloon
payments must be stated with equal
prominence and in close proximity to
the minimum periodic payment. The
Board believes that this will enhance
consumers’ ability to notice and
understand the potential financial
impact of making only minimum
payments.
Section 226.16(d)(4)—Tax Implications
Section 1302 of the Bankruptcy Act
amends TILA Section 147(b) to require
additional disclosures for
advertisements that are disseminated in
paper form to the public or through the
Internet, relating to an extension of
credit secured by a consumer’s principal
dwelling that may exceed the fair
market value of the dwelling. Such
advertisements must include a
statement that the interest on the
portion of the credit extension that is
greater than the fair market value of the
dwelling is not deductible for Federal
income tax purposes. 15 U.S.C.
1665b(b). The statute also requires a
statement that the consumer should
consult a tax adviser for further
information on the tax deductibility of
the interest.
The Bankruptcy Act also requires that
disclosures be provided at the time of
application in cases where the extension
of credit may exceed the fair market
value of the dwelling. See 15 U.S.C.
1637a(a)(13). The Board intends to
implement the application disclosure
portion of the Bankruptcy Act during its
forthcoming review of closed-end and
HELOC disclosures under TILA.
However, the Board requested comment
on the implementation of both the
advertising and application disclosures
under this provision of the Bankruptcy
Act for open-end credit in its October
17, 2005, ANPR. 70 FR 60235, 60244
(Oct. 17, 2005). A majority of comments
on this issue addressed only the
application disclosure requirement, but
some commenters specifically
addressed the advertising disclosure
requirement. One industry commenter
suggested that the advertising disclosure
requirement apply only in cases where
the advertised product allows for the
credit to exceed the fair market value of
the dwelling. Other industry
commenters suggested that the
requirement apply only to
advertisements for products that are
intended to exceed the fair market value
of the dwelling.
The Board proposed to revise
§ 226.16(d)(4) and comment 16(d)–3 to
implement TILA Section 147(b). The

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Board’s proposal applied the new
requirements to advertisements for
home-equity plans where the advertised
extension of credit may, by its terms,
exceed the fair market value of the
dwelling. The Board sought comment
on whether the new requirements
should instead apply to only
advertisements that state or imply that
the creditor provides extensions of
credit greater than the fair market value
of the dwelling. Of the few commenters
who addressed this issue, the majority
were in favor of the alternative approach
because many home-equity plans may,
in some circumstances, allow for
extensions of credit greater than the fair
market value of the dwelling and
advertisers would likely include the
disclosure in nearly all advertisements.
The final rule differs from the
proposed rule and requires that the
additional tax implication disclosures
be given only when an advertisement
states that extensions of credit greater
than the fair market value of the
dwelling are available. The rule does
not apply to advertisements that merely
imply that extensions of credit greater
than the fair market value of the
dwelling may occur. By limiting the
required disclosures to only those
advertisements that state that extensions
of credit greater than the fair market
value of the dwelling are available, the
Board believes the rule will provide the
required disclosures to consumers when
they are most likely to be receptive to
the information while avoiding
overloading consumers with
information about the tax consequences
of home-equity plans when it is less
likely to be meaningful to them.
Comment 16(d)–3 is revised to
conform to the final rule and to clarify
when an advertisement must give the
disclosures required by § 226.16(d)–4
for all home-equity plan advertisements
that refer to tax deductibility and when
an advertisement must give the new
disclosures relating to extensions of
credit greater than the fair market value
of the consumer’s dwelling.
Section 226.16(d)(6)—Promotional Rates
and Payments
The Board proposed to add
§ 226.16(d)(6) to address the
advertisement of promotional (termed
‘‘introductory’’ in the proposal) rates
and payments in advertisements for
home-equity plans. The proposed rule
provided that if an advertisement for a
home-equity plan stated a promotional
rate or payment, the advertisement must
use the term ‘‘introductory’’ or ‘‘intro’’
in immediate proximity to each mention
of the promotional rate or payment. The
proposed rule also provided that such

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advertisements must disclose the
following information in a clear and
conspicuous manner with each listing of
the promotional rate or payment: The
period of time during which the
promotional rate or promotional
payment will apply; in the case of a
promotional rate, any annual percentage
rate that will apply under the plan; and,
in the case of a promotional payment,
the amount and time periods of any
payments that will apply under the
plan. In variable-rate transactions,
payments determined based on
application of an index and margin to
an assumed balance would be required
to be disclosed based on a reasonably
current index and margin.
The final rule excludes radio and
television advertisements for homeequity plans from the requirements of
§ 226.16(d)(6). This modification is
consistent with the approach the Board
proposed, and is adopting, for
§ 226.24(f) which contains similar
requirements for advertisements for
closed-end credit that is home-secured.
See § 226.24(f)(1). As the Board noted in
the supplementary information to the
proposal for advertisements for homesecured closed-end loans, the Board
does not believe it is feasible to apply
the requirements of this section, notably
the close proximity and prominence
requirements, to oral advertisements.
The Board also sought comment in
connection with closed-end homesecured loans on whether these or
different standards should be applied to
oral advertisements for home-secured
loans but commenters did not address
this issue.
The final rule also differs from the
proposed rule in using the term
‘‘promotional’’ rather than
‘‘introductory’’ to describe the rates and
payments covered by § 226.16(d)(6). The
final rule also does not adopt proposed
§ 226.16(d)(6)(ii) and proposed
comment 16(d)–5.ii which required that
advertisements with promotional rates
or payments state the term
‘‘introductory’’ or ‘‘intro’’ in immediate
proximity to each listing of a
promotional rate or payment. Some
industry commenters noted that
consumers might be confused by the use
of the term ‘‘introductory’’ in cases
where it applied to a promotional rate
or payment that was not the initial rate
or payment.
The Board received similar comments
in response to its earlier proposal for
open-end plans that are not homesecured, and the Board subsequently
issued a new proposal for those plans
that would use the term ‘‘promotional’’
rather than ‘‘introductory’’ and require
that advertisements state the word

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‘‘introductory’’ only for promotional
rates offered in connection with an
account opening. 73 FR 28866, 28892
(May 9, 2008). The Board is adopting
the term ‘‘promotional’’ rather than
‘‘introductory’’ in the rule, but the
Board is not requiring open-end homeequity plans to state the word
‘‘introductory’’ for promotional rates or
payments offered in connection with the
opening of an account. While the term
‘‘introductory’’ is common in other
consumer credit contexts, such as credit
cards, it may not be as meaningful to
consumers in the context of
advertisements for home-equity plans
and may be confusing to some
consumers in that context. The Board
believes that the information required to
be disclosed under § 226.16(d)(6) is
sufficient to inform consumers that
advertised promotional terms will not
apply for the full term of the plan.
Commenters also expressed confusion
about the distinction between
promotional rates under § 226.16(d)(6)
and discounted and premium rates
under § 226.16(d)(2). While some
advertised rates may be covered under
both § 226.16(d)(2) and § 226.16(d)(6),
each rule covers some rates that the
other does not. The definition of a
promotional rate under § 226.16(d)(6) is
not limited to initial rates; a rate that is
not based on the index and margin used
to make rate adjustments under the plan
may be a promotional rate even if it is
not the first rate that applies. At the
same time, § 226.16(d)(6) applies to a
rate that is not based on the index and
margin that will be used to make later
rate adjustments under the plan only if
that rate is less than a reasonably
current annual percentage rate that
would be in effect under the index and
margin used to make rate adjustments.
By contrast, § 226.16(d)(2) applies to an
initial annual percentage rate that is not
based on the index and margin used to
make later rate adjustments regardless of
whether the later rate would be greater
or less than the initial rate.
Section 226.16(d)(6)(i)—Definitions.
The Board proposed to define the terms
‘‘introductory rate,’’ ‘‘introductory
payment,’’ and ‘‘introductory period’’ in
§ 226.16(d)(6)(i). The final rule uses the
terms ‘‘promotional rate,’’ ‘‘promotional
payment,’’ and ‘‘promotional period’’
instead and the definition of
‘‘promotional payment’’ is clarified to
refer to the minimum payments under a
home-equity plan, but the final rule is
otherwise as proposed. In a variable-rate
plan, the term ‘‘promotional rate’’
means any annual percentage rate
applicable to a home-equity plan that is
not based on the index and margin that
will be used to make rate adjustments

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44577

under the plan, if that rate is less than
a reasonably current annual percentage
rate that would be in effect based on the
index and margin that will be used to
make rate adjustments under the plan.
The term ‘‘promotional payment’’
means, in the case of a variable-rate
plan, the amount of any minimum
payment applicable to a home-equity
plan for a promotional period that is not
derived from the index and margin that
will be used to determine the amount of
any other minimum payments under the
plan and, given an assumed balance, is
less than any other minimum payment
that will be in effect under the plan
based on a reasonably current
application of the index and margin that
will be used to determine the amount of
such payments. For a non-variable-rate
plan, the term ‘‘promotional payment’’
means the amount of any minimum
payment applicable to a home-equity
plan for a promotional period if that
payment is less than the amount of any
other payments required under the plan
given an assumed balance. The term
‘‘promotional period’’ means a period of
time, less than the full term of the loan,
that the promotional rate or payment
may be applicable.
As proposed, comment 16(d)–5.i
clarifies how the concepts of
promotional rates and promotional
payments apply in the context of
advertisements for variable-rate plans.
Specifically, the comment provides that
if the advertised annual percentage rate
or the advertised payment is based on
the index and margin that will be used
to make rate or payment adjustments
over the term of the loan, then there is
no promotional rate or promotional
payment. On the other hand, if the
advertised annual percentage rate, or the
advertised payment, is not based on the
index and margin that will be used to
make rate or payment adjustments, and
a reasonably current application of the
index and margin would result in a
higher annual percentage rate or, given
an assumed balance, a higher payment,
then there is a promotional rate or
promotional payment.
The revisions generally assume that a
single index and margin will be used to
make rate or payment adjustments
under the plan. The Board sought
comment on whether and to what extent
multiple indexes and margins are used
in home-equity plans and whether
additional or different rules are needed
for such products. Commenters stated
that multiple indexes and margins
generally are not used within the same
plan, but requested clarification on how
the requirements of § 226.16(d)(6)
would apply to advertisements that
contain information about rates or

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payments based on an index and margin
available under the plan to certain
consumers, such as those with certain
credit scores, but where a different
margin may be offered to other
consumers. The definitions of
promotional rate and promotional
payment refer to the rates or payments
under the advertised plan. If rate
adjustments will be based on only one
index and margin for each consumer,
the fact that the advertised rate or
payment may not be available to all
borrowers does not make the advertised
rate or payment a promotional one.
However, an advertisement for openend credit may state only those terms
that actually are or will be arranged or
offered by the creditor. See 12 CFR
226.16(a).
One banking industry trade group
commenter sought an exception from
the definition of promotional rate and
promotional payment for initial rates
that are derived by applying the index
and margin used to make rate
adjustments under the loan, but
calculated in a slightly different manner
than will be used to make later rate
adjustments. For example, an initial rate
may be calculated based on the index in
effect as of the closing or lock-in date,
rather than another date which will be
used to make other rate adjustments
under the plan such as the 15th day of
the month preceding the anniversary of
the closing date. The Board is not
adopting an exception from the
definition of promotional rate and
promotional payment. However, the
Board believes that an initial rate in the
example described above would still be
‘‘based on’’ the index and margin used
to make other rate adjustments under
the plan and therefore would not be a
promotional rate.
Some industry commenters sought an
exclusion from the definition of
promotional rate and promotional
payment for plans that apply different
rates or payments to a draw period and
to a repayment period. For example,
some plans may provide for interestonly payments during a draw period
and fully-amortizing payments during a
repayment period. Consistent with the
requirements for application disclosures
under § 226.5b, the Board is not
adopting exceptions for plans with draw
periods and repayment periods. If an
advertisement states a promotional rate
or payment offered during a draw
period it must provide the required
disclosures about the rates or payments
that apply for the term of the plan. The
Board believes that such information
will help consumers understand the full
cost of the credit over the term of the
plan.

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Commenters also sought to exclude
advertisements for plans that permit the
consumer to repay all or part of the
balance during the draw period at a
fixed rate, rather than a variable rate,
from the promotional rate and payment
requirements. These commenters
expressed concern that they did not
know at the advertising stage whether
consumers would choose the fixed-rate
conversion option and that disclosing
plans that offer the option as though a
consumer had chosen it could lead to
confusion. Regulation Z already requires
fixed-rate conversion options to be
disclosed in applications for variablerate home-equity plans. See comment
5b(d)(5)(ii)–2. The Board believes that
requiring information about fixed-rate
conversion options to be disclosed in
advertisements could confuse
consumers about a feature that is
optional. New comment 16(d)–5.v states
that the presence of a fixed-rate
conversion option does not, by itself,
make a rate (or payment) a promotional
one.
Similarly, some industry commenters
also sought an exception from the
definition of promotional rate and
payment for plans with preferred-rate
provisions, where the rate will increase
upon the occurrence of some event. For
example, the consumer may be given a
preferred rate for electing to make
automated payments but that preferredrate would end if the consumer later
ceases that election. Regulation Z
already requires preferred-rate
provisions to be disclosed in
applications for variable-rate homeequity plans. See comment
5b(d)(12)(viii)–1. The Board believes
that requiring information about
preferred-rate provisions to be disclosed
at the advertising stage is less likely to
be meaningful to consumers who are
usually gathering general rate and
payment information about multiple
plans and are less likely to focus on
disclosures about preferred-rate terms
and conditions. New comment 16(d)–
5.vi states that the presence of a
preferred-rate provision does not, by
itself, make a rate (or payment) a
promotional one.
Comment 16(d)–5.iv, renumbered but
otherwise adopted as proposed, clarifies
how the concept of promotional
payments applies in the context of
advertisements for non-variable-rate
plans. Specifically, the comment
provides that if the advertised payment
is calculated in the same way as other
payments under the plan based on an
assumed balance, the fact that the
minimum payment could increase
solely if the consumer made an
additional draw does not make the

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payment a promotional payment. For
example, if a minimum payment of $500
results from an assumed $10,000 draw,
and the minimum payment would
increase to $1,000 if the consumer made
an additional $10,000 draw, the
payment is not a promotional payment.
Section 226.16(d)(6)(ii)—Stating the
promotional period and postpromotional rate or payments. Section
226.16(d)(6)(ii), renumbered and
modified to exclude radio and television
advertisements, but otherwise adopted
as proposed, provides that if an
advertisement states a promotional rate
or promotional payment, it must also
clearly and conspicuously disclose,
with equal prominence and in close
proximity to the promotional rate or
payment, the following, as applicable:
The period of time during which the
promotional rate or promotional
payment will apply; in the case of a
promotional rate, any annual percentage
rate that will apply under the plan; and,
in the case of a promotional payment,
the amount and time periods of any
payments that will apply under the
plan. In variable-rate transactions,
payments that will be determined based
on application of an index and margin
to an assumed balance must be
disclosed based on a reasonably current
index and margin.
Proposed comment 16(d)–5.iii
provided safe harbors for satisfying the
closely proximate or equally prominent
requirements of proposed
§ 226.16(d)(6)(iii). Specifically, the
required disclosures would be deemed
to be closely proximate to the
promotional rate or payment if they
were in the same paragraph as the
promotional rate or payment.
Information disclosed in a footnote
would not be deemed to be closely
proximate to the promotional rate or
payment. Some commenters noted that
the safe harbor definition of ‘‘closely
proximate’’ in this comment (that the
required disclosures be in the same
paragraph as the promotional rate or
payment) differed from the definition of
‘‘closely proximate’’ in comment 16–2
(that the required disclosures be
immediately next to or directly above or
below the promotional rate or payment).
The Board is modifying final comment
16(d)–5.ii, as renumbered, to match the
definition of ‘‘closely proximate’’ in
comment 16–2. However, the Board is
retaining the part of the safe harbor that
disallows the use of footnotes.
Consumer testing of account-opening
and other disclosures undertaken in
conjunction with the Board’s open-end
Regulation Z proposal suggests that
placing information in a footnote makes
it much less likely that the consumer

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will notice it. As proposed, the required
disclosures will be deemed equally
prominent with the promotional rate or
payment if they are in the same type
size as the promotional rate or payment.
Comment 16(d)–5.iii clarifies that the
requirement to disclose the amount and
time periods of any payments that will
apply under the plan may require the
disclosure of several payment amounts,
including any balloon payments. The
comment provides an example of a
home-equity plan with several payment
amounts over the repayment period to
illustrate the disclosure requirements.
The comment has been modified from
the proposal, in response to public
comment, to add a clarification that the
final payment need not be disclosed if
it is not greater than two times the
amount of any other minimum
payments under the plan. Comment
16(d)–6, which is discussed above,
provides safe harbor definitions for the
phrase ‘‘reasonably current index and
margin.’’
Section 226.16(d)(6)(iii)—Envelope
excluded. Section 226.16(d)(6)(iii),
renumbered but otherwise adopted as
proposed, provides that the
requirements of § 226.16(d)(6)(ii) do not
apply to envelopes, or to banner
advertisements and pop-up
advertisements that are linked to an
electronic application or solicitation
provided electronically. In the Board’s
view, because banner advertisements
and pop-up advertisements are used to
direct consumers to more detailed
advertisements, they are similar to
envelopes in the direct mail context.
Section 226.16(e)—Alternative
Disclosures—Television or Radio
Advertisements
The Board is adopting § 226.16(e), as
renumbered, to allow for alternative
disclosures of the information required
for home-equity plans under
§ 226.16(d)(1), where applicable. The
supplementary information to the
proposal referred to these as alternative
disclosures for oral advertisements, but
the proposed regulation text did not
limit the alternative disclosures to oral
advertisements. The proposed
regulation text was consistent with the
Board’s proposal for credit cards and
other open-end plans. See proposed
§ 226.16(f) and 72 FR 32948, 33064
(June 14, 2007). The final rule does not
limit the alternative disclosures to oral
advertisements. The final rule does,
however, limit § 226.16(e)’s application
to advertisements for home-equity plans
and redesignates it from § 226.16(f) to
§ 226.16(e). These changes are meant to
conform the rule to the existing
regulation, but the Board notes that its

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proposal for open-end plans that are not
home-secured, if adopted, would
expand the rule to allow for alternative
disclosures for all advertisements for
open-end credit. In addition, § 226.16(e)
permits an advertisement to provide
either a toll-free telephone number or a
telephone number that allows a
consumer to reverse the telephone
charges when calling for information.
The final rule also adds new
commentary clarifying the alternative
disclosure option. This commentary was
included in the Board’s earlier proposal
for credit cards and other open-end
plans, and is substantively the same as
the commentary for alternative
disclosures for advertisements for
closed-end credit under § 226.24(g). See
72 FR 32948, 33144 (June 14, 2007), and
comments 24(g)–1 and 24(g)–2.
The Board’s revision follows the
general format of the Board’s earlier
proposal for alternative disclosures for
television and radio advertisements. If a
triggering term is stated in the
advertisement, one option is to state
clearly and conspicuously each of the
disclosures required by §§ 226.16(b)(1)
and (d)(1). Another option is for the
advertisement to state clearly and
conspicuously the APR applicable to the
home-equity plan, and the fact that the
rate may be increased after
consummation, and provide a telephone
number that the consumer may call to
receive more information. Given the
space and time constraints on television
and radio advertisements, the required
disclosures may go unnoticed by
consumers or be difficult for them to
retain. Thus, providing an alternative
means of disclosure may be more
effective in many cases given the nature
of the media.
This approach is also similar to the
approach taken in the advertising rules
for consumer leases under Regulation
M, which also allows the use of toll-free
numbers in television and radio
advertisements. See 12 CFR
213.7(f)(1)(ii).
B. Advertising Rules for Closed-End
Credit—§ 226.24
Overview
The Board proposed to amend the
closed-end credit advertising rules in
§ 226.24 to address advertisements for
home-secured loans. The three most
significant aspects of the proposal
related to strengthening the clear and
conspicuous standard for advertising
disclosures, regulating the disclosure of
rates and payments in advertisements to
ensure that low promotional or ‘‘teaser’’
rates or payments are not given undue
emphasis, and prohibiting certain acts

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or practices in advertisements as
provided under TILA Section 129(l)(2),
15 U.S.C. 1639(l)(2).
The final rule is substantially similar
to the proposed rule and adopts, with
some modifications, each of the
proposed changes discussed above.
First, the Board is adding a provision
setting forth the clear and conspicuous
standard for all closed-end
advertisements and a number of new
commentary provisions applicable to
advertisements for home-secured loans.
The regulation is being revised to
include a clear and conspicuous
standard for advertising disclosures,
consistent with the approach taken in
the advertising rules for Regulation M.
See 12 CFR 213.7(b). New staff
commentary provisions are added to
clarify how the clear and conspicuous
standard applies to rates or payments in
advertisements for home-secured loans,
and to Internet, television, and oral
advertisements of home-secured loans.
The final rule also adds a provision to
allow alternative disclosures for
television and radio advertisements that
is modeled after a proposed revision to
the advertising rules for open-end (not
home-secured) plans. See 72 FR 32948,
33064 (June 14, 2007).
Second, the Board is amending the
regulation and commentary to address
the advertisement of rates and payments
for home-secured loans. The revisions
are designed to ensure that
advertisements adequately disclose all
rates or payments that will apply over
the term of the loan and the time
periods for which those rates or
payments will apply. Many
advertisements for home-secured loans
emphasize low, promotional ‘‘teaser’’
rates or payments that will apply for a
limited period of time. Such
advertisements often do not give
consumers accurate or balanced
information about the costs or terms of
the products offered.
The revisions also prohibit
advertisements from disclosing an
interest rate lower than the rate at which
interest is accruing. Instead, the only
rates that may be included in
advertisements for home-secured loans
are the APR and one or more simple
annual rates of interest. Many
advertisements for home-secured loans
promote very low rates that do not
appear to be the rates at which interest
is accruing. The advertisement of
interest rates lower than the rate at
which interest is accruing is likely
confusing for consumers. Taken
together, the Board believes that the
changes regarding the disclosure of rates
and payments in advertisements for
home-secured loans will enhance the

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accuracy of advertising disclosures and
benefit consumers.
Third, pursuant to TILA Section
129(l)(2), 15 U.S.C. 1639(l)(2), the Board
is prohibiting seven specific acts or
practices in connection with
advertisements for home-secured loans
that the Board finds to be unfair,
deceptive, associated with abusive
lending practices, or otherwise not in
the interest of the borrower.
Bankruptcy Act changes. The Board is
also making several changes to clarify
certain provisions of the closed-end
advertising rules, including the scope of
certain triggering terms, and to
implement provisions of the Bankruptcy
Abuse Prevention and Consumer
Protection Act of 2005 requiring
disclosure of the tax implications of
home-secured loans. See Public Law
109–8, 119 Stat. 23. Technical and
conforming changes to the closed-end
advertising rules are also made.

states a triggering term, then the
advertisement must also state any
downpayment, the terms of repayment,
and the rate of the finance charge
expressed as an APR. See 12 CFR
226.24(c)–(d) (as redesignated from
§§ 226.24(b)–(c)) and the staff
commentary thereunder.

Public Comment
As discussed above, the Board
received numerous, mostly positive,
comments on the proposed revisions.
Specific comments requesting
modifications or clarifications to the
proposed requirements for
advertisements for closed-end homesecured credit are discussed below as
applicable.

Authority
The Board is exercising the following
authorities in promulgating final rules.
TILA Section 105(a) authorizes the
Board 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). TILA Section 122 authorizes
the Board to require that information,
including the information required
under Section 144, be disclosed in a
clear and conspicuous manner. 15
U.S.C. 1632. 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
or deceptive. TILA Section 129(l)(2) also
authorizes the Board to prohibit acts or
practices in connection with the
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. 15 U.S.C. 1639(l)(2).

Current Statute and Regulation
TILA Section 144, implemented by
the Board in § 226.24, governs
advertisements of credit other than
open-end plans. 15 U.S.C. 1664. TILA
Section 144 thus applies to
advertisements of closed-end credit,
including advertisements for closed-end
credit secured by a dwelling (also
referred to as ‘‘home-secured loans’’).
The statute applies to the advertisement
itself, and therefore, the statutory and
regulatory requirements apply to any
person advertising closed-end credit,
whether or not such person meets the
definition of creditor. See comment
2(a)(2)–2. Under the statute, if an
advertisement states the rate of a finance
charge, the advertisement must state the
rate of that charge as an APR. In
addition, closed-end credit
advertisements that contain certain
terms must also include additional
disclosures. The specific terms of
closed-end credit that ‘‘trigger’’
additional disclosures, which are
commonly known as ‘‘triggering terms,’’
are (1) the amount of the downpayment,
if any, (2) the amount of any installment
payment, (3) the dollar amount of any
finance charge, and (4) the number of
installments or the period of repayment.
If an advertisement for closed-end credit

Section 226.24(b)—Clear and
Conspicuous Standard
As proposed, the Board is adding a
clear and conspicuous standard in
§ 226.24(b) that applies to all closed-end
advertising. This provision
supplements, rather than replaces, the
clear and conspicuous standard that
applies to all closed-end credit
disclosures under Subpart C of
Regulation Z and that requires all
disclosures to be in a reasonably
understandable form. See 12 CFR
226.17(a)(1); comment 17(a)(1)–1. The
new provision provides a framework for
clarifying how the clear and
conspicuous standard applies to
advertisements that are not in writing or
in a form that the consumer may keep,
or that emphasize promotional rates or
payments.
Existing comment 24–1 explains that
advertisements for closed-end credit are
subject to a clear and conspicuous
standard based on § 226.17(a)(1). The
comment is renumbered as comment
24(b)–1 and revised to reference the
format requirements for advertisements
of rates or payments for home-secured
loans. The Board is not prescribing
specific rules regarding the format of
advertising disclosures generally.
However, comment 24(b)–2 elaborates

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on the requirement that certain
disclosures about rates or payments in
advertisements for home-secured loans
be prominent and in close proximity to
other information about rates or
payments in the advertisement in order
to satisfy the clear and conspicuous
standard and the disclosure
requirements of § 226.24(f). Terms
required to be disclosed in close
proximity to other rate or payment
information are deemed to meet this
requirement if they appear immediately
next to or directly above or below the
trigger terms, without any intervening
text or graphical displays. Terms
required to be disclosed with equal
prominence to other rate or payment
information are deemed to meet this
requirement if they appear in the same
type size as other rates or payments. The
requirements for disclosing rates or
payments are discussed in more detail
below.
The equal prominence and close
proximity requirements of § 226.24(f)
apply to all visual text advertisements
except for television advertisements.
However, comment 24(b)–2 states that
electronic advertisements that disclose
rates or payments in a manner that
complies with the Board’s recently
amended rule for electronic
advertisements under § 226.24(e) are
deemed to satisfy the clear and
conspicuous standard. See 72 FR 63462
(Nov. 9, 2007). Under the existing rule
for electronic advertisements, if an
electronic advertisement provides the
required disclosures in a table or
schedule, any statement of triggering
terms elsewhere in the advertisement
must clearly direct the consumer to the
location of the table or schedule. For
example, a triggering term in an
advertisement on an Internet Web site
may be accompanied by a link that takes
the consumer directly to the additional
information. See comment 24(e)–4.
The Board sought comment on
whether it should amend the rules for
electronic advertisements for homesecured loans to require that
information about rates or payments
that apply for the term of the loan be
stated in close proximity to other rates
or payments in a manner that does not
require the consumer to click on a link
to access the information. The Board
also solicited comment on the costs and
practical limitations, if any, of imposing
this close proximity requirement on
electronic advertisements. The majority
of commenters who addressed this issue
urged the Board to adopt comment
24(b)–2 as proposed. They noted that
many electronic advertisements on the
Internet are displayed in small areas,
such as in banner advertisements or

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next to search engine results, and
requiring information about the rates or
payments that apply for the term of the
loan in close proximity to all other
applicable rates or payments would not
be practical. These commenters also
suggested that Internet users are
accustomed to clicking on links in order
to find further information. Commenters
also expressed concern about the
practicality of requiring closely
proximate disclosures in electronic
advertisements that may be displayed
on devices with small screens, such as
on Internet-enabled cellular telephones
or personal digital assistants, that might
necessitate scrolling or clicking on links
in order to view additional information.
The Board is adopting comment
24(b)–2 as proposed. The Board agrees
that requiring disclosures of information
about rates or payments that apply for
the term of the loan to be in close
proximity to information about all other
rates or payments would not be
practical for many electronic
advertisements, and that the
requirements of § 226.24(e) adequately
ensure that consumers viewing
electronic advertisements have access to
important additional information about
the terms of the advertised product.
The Board is also adopting as
proposed new comments to interpret the
clear and conspicuous standards for
Internet, television, and oral
advertisements of home-secured loans.
Comment 24(b)–3 explains that
disclosures in the context of visual text
advertisements on the Internet must not
be obscured by techniques such as
graphical displays, shading, coloration,
or other devices, and must comply with
all other requirements for clear and
conspicuous disclosures under § 226.24.
Comment 24(b)–4 likewise explains that
visual text advertisements on television
must not be obscured by techniques
such as graphical displays, shading,
coloration, or other devices, must be
displayed in a manner that allows a
consumer to read the information
required to be disclosed, and must
comply with all other requirements for
clear and conspicuous disclosures
under § 226.24. The Board believes,
however, that this rule can be applied
with some flexibility to account for
variations in the size of television
screens. For example, a lender would
not violate the clear and conspicuous
standard if the print size used was not
legible on a handheld or portable
television. Comment 24(b)–5 explains
that oral advertisements, such as by
radio or television, must provide the
disclosures at a speed and volume
sufficient for a consumer to hear and
comprehend them. In this context, the

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word ‘‘comprehend’’ means that the
disclosures must be intelligible to
consumers, not that advertisers must
ensure that consumers understand the
meaning of the disclosures. Section
226.24(g) provides an alternative
method of disclosure for television or
radio advertisements when triggering
terms are stated and is discussed more
fully below.
Section 226.24(c)—Advertisement of
Rate of Finance Charge
Disclosure of simple annual rate or
periodic rate. If an advertisement states
a rate of finance charge, it must state the
rate as an APR. See 12 CFR 226.24(c) (as
redesignated from § 226.24(b)). An
advertisement may also state, in
conjunction with and not more
conspicuously than the APR, a simple
annual rate or periodic rate that is
applied to an unpaid balance.
As proposed, the Board is
renumbering § 226.24(b) as § 226.24(c),
and revising it. The revised rule
provides that advertisements for homesecured loans shall not state any rate
other than an APR, except that a simple
annual rate that is applied to an unpaid
balance may be stated in conjunction
with, but not more conspicuously than,
the APR. Advertisement of a periodic
rate, other than the simple annual rate
of interest, or any other rates, is no
longer permitted in connection with
home-secured loans.
Also as proposed, comment 24(b)–2 is
renumbered as comment 24(c)–2 and
revised to clarify that a simple annual
rate or periodic rate is the rate at which
interest is accruing. A rate lower than
the rate at which interest is accruing,
such as an effective rate, payment rate,
or qualifying rate, is not a simple annual
rate or periodic rate. The example in
renumbered comment 24(c)–2 also is
revised to reference § 226.24(f), which
contains requirements regarding the
disclosure of rates and payments in
advertisements for home-secured loans.
Buydowns. As proposed, comment
24(b)–3, which addresses ‘‘buydowns,’’
is renumbered as comment 24(c)–3 and
revised. A buydown is where a seller or
creditor offers a reduced interest rate
and reduced payments to a consumer
for a limited period of time. Previously,
this comment provided that the seller or
creditor, in the case of a buydown,
could advertise the reduced simple
interest rate, the limited term to which
the reduced rate applies, and the simple
interest rate applicable to the balance of
the term. The advertisement also could
show the effect of the buydown
agreement on the payment schedule for
the buydown period. The Board is
revising the comment to explain that

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additional disclosures are required
when an advertisement includes
information showing the effect of the
buydown agreement on the payment
schedule. Such advertisements must
provide the disclosures required by
§ 226.24(d)(2) because showing the
effect of the buydown agreement on the
payment schedule is a statement about
the amount of any payment, and thus is
a triggering term. See 12 CFR
226.24(d)(1)(iii). In these circumstances,
the additional disclosures are necessary
for consumers to understand the costs of
the loan and the terms of repayment.
Consistent with these changes, and as
proposed, the examples of statements
about buydowns that an advertisement
may make without triggering additional
disclosures are being removed.
Effective rates. As proposed, the
Board is deleting what was previously
comment 24(b)–4. The comment had
allowed the advertisement of three rates:
the APR; the rate at which interest is
accruing; and an interest rate lower than
the rate at which interest is accruing,
which may be referred to as an effective
rate, payment rate, or qualifying rate.
The staff commentary also contained an
example of how to disclose the three
rates.
The Board proposed to delete this
staff commentary for the reasons stated
below. First, the disclosure of three rates
is unnecessarily confusing for
consumers and the disclosure of an
interest rate lower than the rate at which
interest is accruing does not provide
meaningful information to consumers
about the cost of credit. Second, when
the effective rates commentary was
adopted in 1982, the Board noted that
the commentary was designed ‘‘to
address the advertisement of special
financing involving ‘effective rates,’
‘payment rates,’ or ‘qualifying rates.’ ’’
See 47 FR 41338, 41342 (Sept. 20, 1982).
At that time, when interest rates were
quite high, these terms were used in
connection with graduated-payment
mortgages. Today, however, some
advertisers appear to rely on this
comment when advertising rates for a
variety of home-secured loans, such as
negative amortization loans and option
ARMs. In these circumstances, the
advertisement of rates lower than the
rate at which interest is accruing for
these products is not helpful to
consumers, particularly consumers who
may not fully understand how these
non-traditional home-secured loans
work.
Some industry commenters suggested
that the advertisement of rates lower
than the rate at which interest is
accruing might provide meaningful
information to some consumers.

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Specifically, some advertisements for
negative amortization loans and option
ARMs quote a payment amount that is
based on an effective rate. Commenters
suggested that if the corresponding
effective rate itself was not advertised,
consumers might be confused about the
rate on which the payment was based.
For the reasons stated above, the Board
believes that consumers are likely to be
confused by advertisements that state a
rate lower than the rate at which interest
is accruing. The Board is addressing the
advertisement of payments for homesecured loans in new § 226.24(f),
discussed below, to require that
advertisements contain information
about the payments that apply for the
term of the loan.
Discounted variable-rate transactions.
As proposed, comment 24(b)–5 is being
renumbered as comment 24(c)–4 and
revised to explain that an advertisement
for a discounted variable-rate
transaction which advertises a reduced
or discounted simple annual rate must
show with equal prominence and in
close proximity to that rate, the limited
term to which the simple annual rate
applies and the annual percentage rate
that will apply after the term of the
initial rate expires.
The comment is also being revised to
explain that additional disclosures are
required when an advertisement
includes information showing the effect
of the discount on the payment
schedule. Such advertisements must
provide the disclosures required by
§ 226.24(d)(2). Showing the effect of the
discount on the payment schedule is a
statement about the number of
payments or the period of repayment,
and thus is a triggering term. See 12 CFR
226.24(d)(1)(ii). In these circumstances,
the additional disclosures are necessary
for consumers to understand the costs of
the loan and the terms of repayment.
Consistent with these changes, the
examples of statements about
discounted variable-rate transactions
that an advertisement may make
without triggering additional
disclosures are being removed.
Section 226.24(d)—Advertisement of
Terms That Require Additional
Disclosures
Required disclosures. As proposed,
the Board is renumbering § 226.24(c) as
§ 226.24(d) and revising it. The rule
clarifies the meaning of the ‘‘terms of
repayment’’ required to be disclosed.
Specifically, the terms of repayment
must reflect ‘‘the repayment obligations
over the full term of the loan, including
any balloon payment,’’ not just the
repayment terms that will apply for a
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consistent with other changes and is
designed to ensure that advertisements
for closed-end credit, especially homesecured loans, adequately disclose the
terms that will apply over the full term
of the loan, not just for a limited period
of time.
Consistent with these changes, and as
proposed, comment 24(c)(2)–2 is
renumbered as comment 24(d)(2)–2 and
revised. As proposed, commentary
regarding advertisement of loans that
have a graduated-payment feature is
being removed from comment 24(d)(2)–
2.
The Board did not propose to make
substantive changes to commentary
regarding advertisements for homesecured loans where payments may vary
because of the inclusion of mortgage
insurance premiums. Under the existing
commentary, the advertisement could
state the number and timing of
payments, the amounts of the largest
and smallest of those payments, and the
fact that other payments will vary
between those amounts. Some industry
commenters noted, however, that
advertisers can only estimate the
amounts of mortgage insurance
premiums at the advertising stage, and
that the requirement to show the largest
and smallest of the payments that
include mortgage insurance premiums
may not be meaningful to consumers
because consumers’ actual payment
amounts may vary from the advertised
payment amounts. For this reason, the
commentary is being revised to no
longer require the advertisement to
show the amount of the largest and
smallest payments reflecting mortgage
insurance premiums. Rather, the
advertisement may state the number and
timing of payments, the fact that the
payments do not include amounts for
mortgage insurance premiums, and that
the actual payment obligation will be
higher.
In advertisements for home-secured
loans with one series of low monthly
payments followed by another series of
higher monthly payments, comment
24(d)(2)–2.iii explains that the
advertisement may state the number and
time period of each series of payments
and the amounts of each of those
payments. However, the amount of the
series of higher payments must be based
on the assumption that the consumer
makes the series of lower payments for
the maximum allowable period of time.
For example, if a consumer has the
option of making interest-only payments
for two years and an advertisement
states the amount of the interest-only
payment, the advertisement must state
the amount of the series of higher
payments based on the assumption that

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the consumer makes the interest-only
payments for the full two years. The
Board believes that without these
disclosures consumers may not fully
understand the cost of the loan or the
payment terms that may result once the
higher payments take effect.
As proposed, the revisions to
renumbered comment 24(d)(2)–2 apply
to all closed-end advertisements. The
Board believes that the terms of
repayment for any closed-end credit
product should be disclosed for the full
term of the loan, not just for a limited
period of time. The Board also does not
believe that this change will
significantly impact advertising
practices for closed-end credit products
such as auto loans and installment loans
that ordinarily have shorter terms than
home-secured loans.
As proposed, new comment 24(d)(2)–
3 is added to address the disclosure of
balloon payments as part of the
repayment terms. The commentary
notes that in some transactions, a
balloon payment will occur when the
consumer only makes the minimum
payments specified in an advertisement.
A balloon payment results if paying the
minimum payments does not fully
amortize the outstanding balance by a
specified date or time, usually the end
of the term of the loan, and the
consumer must repay the entire
outstanding balance at such time. The
commentary explains that if a balloon
payment will occur if the consumer
only makes the minimum payments
specified in an advertisement, the
advertisement must state with equal
prominence and in close proximity to
the minimum payment statement the
amount and timing of the balloon
payment that will result if the consumer
makes only the minimum payments for
the maximum period of time that the
consumer is permitted to make such
minimum payments. The Board believes
that disclosure of the balloon payment
in advertisements that promote such
minimum payments is necessary to
inform consumers about the repayment
terms that will apply over the full term
of the loan.
As proposed, comments 24(c)(2)–3
and –4 are renumbered as comments
24(d)(2)–4 and –5 without substantive
change.
Section 226.24(e)—Catalogs or Other
Multiple-Page Advertisements;
Electronic Advertisements
The Board is renumbering § 226.24(d)
as § 226.24(e) and making technical
changes to reflect the renumbering of
certain sections of the regulation and
commentary, as proposed.

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Section 226.24(f)—Disclosure of Rates
and Payments in Advertisements for
Credit Secured by a Dwelling
The Board proposed to add a new
subsection (f) to § 226.24 to address the
disclosure of rates and payments in
advertisements for home-secured loans.
The primary purpose of these provisions
is to ensure that advertisements do not
place undue emphasis on low
promotional ‘‘teaser’’ rates or payments,
but adequately disclose the rates and
payments that the will apply over the
term of the loan. The final rule is
adopted as proposed, but adds a number
of new commentary provisions to clarify
the rule in response to public comment.
One banking industry trade group
commenter sought an exception from
§§ 226.24(f)(2) and (f)(3)(i)(A) for
variable-rate loans with initial rates that
are derived by applying the index and
margin used to make rate adjustments
under the loan, but calculated in a
slightly different manner than will be
used to make later rate adjustments. For
example, an initial rate may be
calculated based on the index in effect
as of the closing or lock-in date, rather
than another date which will be used to
make other rate adjustments under the
plan such as the 15th day of the month
preceding the anniversary of the closing
date. The Board is not adopting an
exception from §§ 226.24(f)(2) and
(f)(3)(i)(A). However, the Board believes
that an initial rate in the example
described above would still be ‘‘based
on’’ the index and margin used to make
other rate adjustments under the plan
and therefore it would not, by itself,
trigger the required disclosures in
§ 226.24(f)(2). Likewise, an
advertisement need not disclose a
separate payment amount under
§ 226.24(f)(3)(i)(A) for payments that are
based on the same index and margin, if
even calculated differently.
Commenters also sought to exclude
advertisements for variable-rate loans
that permit the consumer to convert the
loan into a fixed rate loan. These
commenters expressed concern that
creditors do not know at the advertising
stage whether consumers would choose
the fixed-rate conversion option and
that disclosing loans that offer the
option as though a consumer had
chosen it could lead to confusion.
Regulation Z already requires fixed-rate
conversion options be disclosed before
consummation. See comment
19(b)(2)(vii)–3. The Board believes that
requiring information about fixed-rate
conversion options be disclosed in
advertisements could confuse
consumers about a feature that is
optional. New comment 24(f)–1.i states

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that the creditor need not assume that
a fixed-rate conversion option, by itself,
means that more than one simple
annual rate of interest will apply under
§ 226.24(f)(2) and the payments that
would apply if a consumer opted to
convert the loan to a fixed rate need not
be disclosed as separate payments under
§ 226.24(f)(3)(i)(A).
Similarly, some industry commenters
also sought an exception for loans with
preferred-rate provisions, where the rate
will increase upon the occurrence of
some event. For example, the consumer
may be given a preferred rate for
electing to make automated payments
but that preferred-rate would end if the
consumer later ceases that election.
Regulation Z already requires preferredrate provisions be disclosed before
consummation. See comment
19(b)(2)(vii)–4. The Board believes that
requiring information about preferredrate provisions to be disclosed at the
advertising stage is less likely to be
meaningful to consumers who are
usually gathering general rate and
payment information about multiple
loans and are less likely to focus on
disclosures about preferred-rate terms
and conditions. New comment 24(f)–1.ii
states that the creditor need not assume
a preferred-rate provision, by itself,
means that more than one simple
annual rate of interest will apply under
§ 226.24(f)(2) and need not disclose as
separate payments under
§ 226.24(f)(3)(i)(A) the payments that
would result upon the occurrence of the
event that causes a rate increase under
the preferred-rate provision.
Also, comment 24(f)–1.iii excludes
loan programs that offer a rate reduction
to consumers after the occurrence of a
specified event, such as the consumer
making a series of on-time payments.
Some industry commenters suggested,
and the Board agrees, that information
about decreases in rates or payments
upon the occurrence of a specified event
need not be disclosed with equal
prominence and in close proximity to
information about other rates and
payments. The advertisement may
disclose only the initial rate or payment
and it need not disclose the effect of the
rate reduction feature. Alternatively, the
advertisement may also disclose the
effect of the rate reduction feature, but
it would then have to comply with the
requirements of § 226.24(f).
Section 226.24(f)(1)—Scope. Section
226.24(f)(1), as proposed, provides that
the new section applies to any
advertisement for credit secured by a
dwelling, other than television or radio
advertisements, including promotional
materials accompanying applications.
The Board does not believe it is feasible

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to apply the requirements of this
section, notably the close proximity and
prominence requirements, to oral
advertisements. The Board sought
comment on whether these or different
standards should be applied to oral
advertisements for home-secured loans
but commenters did not address this
issue.
Section 226.24(f)(2)—Disclosure of
rates. As proposed, § 226.24(f)(2)
addresses the disclosure of rates. Under
the rule, if an advertisement for credit
secured by a dwelling states a simple
annual rate of interest and more than
one simple annual rate of interest will
apply over the term of the advertised
loan, the advertisement must disclose
the following information in a clear and
conspicuous manner: (a) Each simple
annual rate of interest that will apply.
In variable-rate transactions, a rate
determined by an index and margin
must be disclosed based on a reasonably
current index and margin; (b) the period
of time during which each simple
annual rate of interest will apply; and
(c) the annual percentage rate for the
loan. If the rate is variable, the annual
percentage rate must comply with the
accuracy standards in §§ 226.17(c) and
226.22.
Comment 24(f)–5, renumbered but
otherwise as proposed, specifically
addresses how this requirement applies
in the context of advertisements for
variable-rate transactions. For such
transactions, if the simple annual rate
that applies at consummation is based
on the index and margin that will be
used to make subsequent rate
adjustments over the term of the loan,
then there is only one simple annual
rate and the requirements of
§ 226.24(f)(2) do not apply. If, however,
the simple annual rate that applies at
consummation is not based on the index
and margin that will be used to make
subsequent rate adjustments over the
term of the loan, then there is more than
one simple annual rate and the
requirements of § 226.24(f)(2) apply.
The revisions generally assume that a
single index and margin will be used to
make rate or payment adjustments
under the loan. The Board solicited
comment on whether and to what extent
multiple indexes and margins are used
in home-secured loans and whether
additional or different rules are needed
for such products. Commenters stated
that multiple indexes and margins are
not used within the same loan, but
requested clarification on how the
requirements of § 226.24(f) apply to
advertisements that contain information
about rates or payments based on the
index and margin available under the
loan to certain consumers, such as those

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with certain credit scores, but where a
different margin may be offered to other
consumers. Section 226.24(f) applies to
advertisements for variable-rate loans if
the simple annual rate of interest (or the
payment) that applies at consummation
is not based on the index and margin
used to make subsequent rate (or
payment) adjustments over the term of
the loan. See comment §§ 226.24(f)–5
and 24(f)(3)–2. If a loan’s rate or
payment adjustments will be based on
only one index and margin for each
consumer, the fact that the advertised
rate or payment may not be available to
all consumers does trigger the
requirements of § 226.24(f). However, an
advertisement for open-end credit may
state only those terms that actually are
or will be arranged or offered by the
creditor. See 12 CFR 226.24(a).
Finally, as proposed, the rule
establishes a clear and conspicuous
standard for the disclosure of rates in
advertisements for home-secured loans.
Under this standard, the information
required to be disclosed by § 226.24(f)(2)
must be disclosed with equal
prominence and in close proximity to
any advertised rate that triggered the
required disclosures, except that the
annual percentage rate may be disclosed
with greater prominence than the other
information.
Proposed comment 24(f)–1 provided
safe harbors for compliance with the
equal prominence and close proximity
standards. Specifically, the required
disclosures would be deemed to be
closely proximate to the advertised rate
or payment if they were in the same
paragraph as the advertised rate or
payment. Information disclosed in a
footnote would not be deemed to be
closely proximate to the advertised rate
or payment. Some commenters noted
that the safe harbor definition of
‘‘closely proximate’’ in this comment
(that the required disclosures be in the
same paragraph as the advertised rate or
payment) differed from the definition of
‘‘closely proximate’’ in comment 24–2
(that the required disclosures be
immediately next to or directly above or
below the advertised rate or payment).
The Board is renumbering and
modifying final comment 24(f)–2 to
match the definition of ‘‘closely
proximate’’ in comment 24–2. However,
the Board is retaining the part of the safe
harbor that disallows the use of
footnotes. Consumer testing of accountopening and other disclosures
undertaken in conjunction with the
Board’s open-end Regulation Z proposal
suggests that placing information in a
footnote makes it much less likely that
the consumer will notice it. As
proposed, the required disclosures will

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be deemed equally prominent with the
advertised rate or payment if they are in
the same type size as the advertised rate
or payment.
Comment 24(f)–3, renumbered but
otherwise as proposed, provides a crossreference to comment 24(b)–2, which
provides further guidance on the clear
and conspicuous standard in this
context.
Section 226.24(f)(3)—Disclosure of
payments. New § 226.24(f)(3) addresses
the disclosure of payments. As under
the proposed rule, if an advertisement
for credit secured by a dwelling states
the amount of any payment, the
advertisement must disclose the
following information in a clear and
conspicuous manner: (a) The amount of
each payment that will apply over the
term of the loan, including any balloon
payment. In variable-rate transactions,
payments that will be determined based
on application of an index and margin
must be disclosed based on a reasonably
current index and margin; (b) the period
of time during which each payment will
apply; and (c) in an advertisement for
credit secured by a first lien on a
dwelling, the fact that the payments do
not include amounts for taxes and
insurance premiums, if applicable, and
that the actual payment obligation will
be greater. These requirements are in
addition to the disclosure requirements
of § 226.24(d).
As proposed, comment 24(f)(3)–2
specifically addresses how this
requirement applies in the context of
advertisements for variable-rate
transactions. For such transactions, if
the payment that applies at
consummation is based on the index
and margin that will be used to make
subsequent payment adjustments over
the term of the loan, then there is only
one payment that must be disclosed and
the requirements of § 226.24(f)(3) do not
apply. If, however, the payment that
applies at consummation is not based
on the index and margin that will be
used to make subsequent payment
adjustments over the term of the loan,
then there is more than one payment
that must be disclosed and the
requirements of § 226.24(f)(3) apply.
As discussed above in regard to
§ 226.24(f)(2), the revisions in
§ 226.24(f)(3) generally assume that a
single index and margin will be used to
make rate or payment adjustments
under the loan. If a loan’s rate or
payment adjustments will be based on
only one index and margin for each
consumer, the fact that the advertised
rate or payment may not be available to
all consumers does trigger the
requirements of § 226.24(f).

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The rule adopts the clear and
conspicuous standard for the disclosure
of payments in advertisements for
home-secured loans as proposed. Under
this standard, the information required
to be disclosed under § 226.24(f)(3)
regarding the amounts and time periods
of payments must be disclosed with
equal prominence and in close
proximity to any advertised payment
that triggered the required disclosures.
The information required to be
disclosed under § 226.24(f)(3) regarding
the fact that taxes and insurance
premiums are not included in the
payment must be prominently disclosed
and in close proximity to the advertised
payments. The Board believes that
requiring the disclosure about taxes and
insurance premiums to be equally
prominent could distract consumers
from the key payment and time period
information. As noted above, comment
24(f)–2 provides safe harbors for
compliance with the equal prominence
and close proximity standards.
Comment 24(f)–3 provides a crossreference to the comment 24(b)–2,
which provides further guidance
regarding the application of the clear
and conspicuous standard in this
context.
Comment 24(f)–4, renumbered but
otherwise as proposed, clarifies how the
rules on disclosures of rates and
payments in advertisements apply to the
use of comparisons in advertisements.
This commentary covers both rate and
payment comparisons, but in practice,
comparisons in advertisements usually
focus on payments.
Comment 24(f)(3)–1, clarifies that the
requirement to disclose the amounts
and time periods of all payments that
will apply over the term of the loan may
require the disclosure of several
payment amounts, including any
balloon payment. The comment
provides an illustrative example. The
commentary has been modified from the
proposal, in response to comment, to
add a clarification that the final
scheduled payment in a fully amortizing
loan need not be disclosed if the final
scheduled payment is not greater than
two times the amount of any other
regularly scheduled payment.
Comment 24(f)–6, renumbered but
otherwise as proposed, provides safe
harbors for what constitutes a
‘‘reasonably current index and margin’’
as used in § 226.24(f). Under the
commentary, the time period during
which an index and margin is
considered reasonably current depends
on the medium in which the
advertisement was distributed. For
direct mail advertisements, a reasonably
current index and margin is one that

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was in effect within 60 days before
mailing. For printed advertisements
made available to the general public and
for advertisements in electronic form, a
reasonably current index and margin is
one that was in effect within 30 days
before printing, or before the
advertisement was sent to a consumer’s
e-mail address, or for advertisements
made on an Internet Web site, when
viewed by the public.
Section 226.24(f)(4)—Envelope
excluded. As proposed, § 226.24(f)(4)
provides that the requirements of
§§ 226.24(f)(2) and (3) do not apply to
envelopes or to banner advertisements
and pop-up advertisements that are
linked to an electronic application or
solicitation provided electronically. In
the Board’s view, banner advertisements
and pop-up advertisements are similar
to envelopes in the direct mail context.
Section 226.24(g)—Alternative
Disclosures—Television or Radio
Advertisements
The Board proposed to add a new
§ 226.24(g) to allow alternative
disclosures to be provided in oral
television and radio advertisements
pursuant to its authority under TILA
§§ 105(a), 122, and 144. The final rule
is modified from the proposal in that it
allows alternative disclosures not only
for information provided orally, but also
for information provided in visual text
in television advertisements. Some
commenters noted a discrepancy
between the Board’s proposed
§ 226.24(g), which would not allow the
alternative disclosures for visual text in
television advertisements for closed-end
credit, and proposed § 226.16(f), which
would allow the alternative disclosures
for visual text in television
advertisements for open-end credit, and
urged the Board to follow the approach
found in § 226.16(f). The Board believes
that the same reasoning that applies to
allowing alternative disclosures in oral
radio and television advertisements also
applies to allowing alternative
disclosures for visual text television
advertisements and the final rule is
revised accordingly. With one
modification, § 226.24(g) follows the
proposal for allowing alternative
disclosures in radio and television
advertisements. One option is to state
clearly and conspicuously each of the
disclosures required by § 226.24(d)(2) if
a triggering term is stated in the
advertisement. Another option is for the
advertisement to state clearly and
conspicuously the APR applicable to the
loan, and the fact that the rate may be
increased after consummation, if
applicable. However, instead of
disclosing the required information

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about the amount or percentage of the
downpayment and the terms of
repayment, the advertisement could
provide a toll-free telephone number, or
a telephone number that allows a
consumer to reverse the phone charges,
that the consumer may call to receive
more information. (The language from
proposed comment 24(g)–1, which
permitted the use of a telephone number
that allows a consumer to reverse the
phone charges, has been incorporated
into the text of § 226.24(g), and
proposed comment 24(g)–1 has been
removed.) Given the space and time
constraints on television and radio
advertisements, the required disclosures
may go unnoticed by consumers or be
difficult for them to retain. Thus,
providing an alternative means of
disclosure is more effective in many
cases given the nature of television and
radio media.
This approach is consistent with the
approach taken in the proposed
revisions to the advertising rules for
open-end plans (other than homesecured plans). See 72 FR 32948, 33064
(June 14, 2007). This approach is also
similar, but not identical, to the
approach taken in the advertising rules
under Regulation M. See 12 CFR
213.7(f). Section 213.7(f)(1)(ii) of
Regulation M permits a leasing
advertisement made through television
or radio to direct the consumer to a
written advertisement in a publication
of general circulation in a community
served by the media station. The Board
has not proposed this option because it
may not provide sufficient, readilyaccessible information to consumers
who are shopping for a home-secured
loan and because advertisers,
particularly those advertising on a
regional or national scale, are not likely
to use this option.
Section 226.24(h)—Tax Implications
Section 1302 of the Bankruptcy Act
amends TILA Section 144(e) to address
advertisements that are disseminated in
paper form to the public or through the
Internet, as opposed to by radio or
television, and that relate to an
extension of credit secured by a
consumer’s principal dwelling that may
exceed the fair market value of the
dwelling. Such advertisements must
include a statement 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. 15 U.S.C.
1664(e). For such advertisements, the
statute also requires inclusion of a
statement that the consumer should
consult a tax adviser for further

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information on the deductibility of the
interest.
The Bankruptcy Act also requires that
disclosures be provided at the time of
application in cases where the extension
of credit may exceed the fair market
value of the dwelling. See 15 U.S.C.
1638(a)(15). The Board intends to
implement the application disclosure
portion of the Bankruptcy Act during its
forthcoming review of closed-end and
HELOC disclosures under TILA.
However, the Board requested comment
on the implementation of both the
advertising and application disclosures
under this provision of the Bankruptcy
Act for open-end credit in its October
17, 2005, ANPR. 70 FR 60235, 60244
(Oct. 17, 2005). A majority of comments
on this issue addressed only the
application disclosure requirement, but
some commenters specifically
addressed the advertising disclosure
requirement. One industry commenter
suggested that the advertising disclosure
requirement apply only in cases where
the advertised product allows for the
credit to exceed the fair market value of
the dwelling. Other industry
commenters suggested that the
requirement apply only to
advertisements for products that are
intended to exceed the fair market value
of the dwelling.
The Board proposed to add
§ 226.24(h) and comment 24(h)–1 to
implement TILA Section 144(e). The
Board’s proposal applied the new
requirements to advertisements for
home-secured loans where the
advertised extension of credit may, by
its terms, exceed the fair market value
of the dwelling. The Board sought
comment on whether the new
requirements should instead apply to
only advertisements that state or imply
that the creditor provides extensions of
credit greater than the fair market value
of the dwelling. Of the few commenters
who addressed this issue, the majority
were in favor of the alternative approach
because many home-secured loans may,
in some circumstances, allow for
extensions of credit greater than the fair
market value of the dwelling and
advertisers would likely include the
disclosure in nearly all advertisements.
The final rule differs from the
proposed rule and requires that the
additional tax implication disclosures
be given only when an advertisement
states that extensions of credit greater
than the fair market value of the
dwelling are available. The rule does
not apply to advertisements that merely
imply that extensions of credit greater
than the fair market value of the
dwelling may occur. By limiting the
required disclosures to only those

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advertisements that state that extensions
of credit greater than the fair market
value of the dwelling are available, the
Board believes the rule will provide the
required disclosures to consumers when
they are most likely to be receptive to
the information while avoiding
overloading consumers with
information about the tax consequences
of home-secured loans when it is less
likely to be meaningful to them.
Accordingly, proposed comment 24(h)–
1 is removed as no longer necessary.
Section 226.24(i)—Prohibited Acts or
Practices in Mortgage Advertisements
The Board proposed to add § 226.24(i)
to prohibit the following seven acts or
practices in connection with
advertisements of closed-end mortgage
loans: (1) The use of the term ‘‘fixed’’ to
refer to rates or payments of closed-end
home loans, unless certain conditions
are satisfied; (2) comparison
advertisements between actual and
hypothetical rates and payments, unless
certain conditions are satisfied; (3)
falsely advertising a loan as government
supported or endorsed; (4) displaying
the name of the consumer’s current
lender without disclosing that the
advertising mortgage lender is not
affiliated with such current lender; (5)
claiming debt elimination when one
debt merely replaces another debt; (6)
the use of the term ‘‘counselor’’ or
‘‘financial advisor’’ by for-profit brokers
or lenders; and (7) foreign language
advertisements that provide required
disclosures only in English.
Pursuant to its authority under TILA
Section 129(l)(2), 15 U.S.C. 1639(l)(2),
the Board is adopting § 226.24(i)
substantially as proposed with
modifications to § 226.24(i)(2) to clarify
that the information required to be
disclosed in comparison advertisements
is the information required under
§ 226.24(f), to § 226.24(i)(6) to withdraw
the prohibition on the use of the term
‘‘financial advisor,’’ and other
modifications to clarify the scope and
intent of the rule. The final rule applies
only to closed-end mortgage loans.
Section 129(l)(2) of TILA gives the
Board the authority to prohibit acts or
practices in connection with mortgage
loans that it finds to be unfair or
deceptive. Section 129(l)(2) of TILA also
gives the Board the authority to prohibit
acts or practices in connection with the
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. 15 U.S.C. 1639(l)(2). Through
an extensive review of advertising copy
and other outreach efforts, Board staff
identified a number of acts or practices

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connected with mortgage and mortgage
refinancing advertising that appear to be
inconsistent with the standards set forth
in Section 129(l)(2) of TILA.
The Board has sought to craft the
rules carefully to make compliance with
the requirements sufficiently clear and
has provided additional examples in
commentary to assist compliance with
this rule. As discussed above, the Board
is not extending the seven prohibitions
on misleading advertisements to
HELOCs because it has not been
provided with, or found, sufficient
evidence demonstrating that HELOC
advertisements contain deceptive
practices similar to those found in
advertisements for closed-end mortgage
loans. However, the Board may
consider, as part of its larger review of
HELOC rules, prohibiting certain
misleading or deceptive practices if
warranted. The Board notes that closedend mortgage loan advertisements (as
well as HELOCs) must continue to
comply with all applicable state and
federal laws, including Section 5 of the
FTC Act.121
Public comment. The Board
specifically sought comment on the
appropriateness of the seven proposed
prohibitions; whether the Board should
prohibit any additional misleading or
deceptive acts or practices; and whether
the prohibitions should be extended to
advertisements for open-end home
equity lines of credit (HELOCs).
Consumer and community advocacy
groups, associations of state regulators,
federal agencies, and most industry
commenters supported the Board’s
efforts to address misleading advertising
acts and practices. Many creditors and
their trade associations, however, urged
the Board to use its authority under
TILA Section 105(a), 15 U.S.C. 1604(a),
rather than Section 129(l)(2), 15 U.S.C.
1639(l)(2), to prohibit certain
advertising acts or practices for closedend mortgage loans. These commenters
expressed concern that promulgating
the prohibitions under Section 129(l)(2)
may expose creditors to extensive
private legal action for inadvertent
technical violations.
Commenters were divided on whether
to extend the proposed prohibitions to
HELOCs. Many community banks
agreed with the Board that the
misleading or deceptive acts often
associated with mortgage and mortgage
refinancing 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. One
large creditor offered specific

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suggestions on how to extend the
prohibitions to HELOCs, while another
sought extension of only the prohibition
on the misleading use of the current
lender’s name. Few commenters
suggested that the Board consider any
additional prohibitions on misleading
advertising either for closed-end
mortgage loans or HELOCs. A more
detailed discussion of the comments is
provided below.
Section 226.24(i)(1)—Misleading
advertising for ‘‘fixed’’ rates, payments
or loans. Proposed § 226.24(i)(1)
prohibited the use of the term ‘‘fixed’’
in advertisements for credit secured by
a dwelling, unless certain conditions are
satisfied, in three different scenarios: (i)
Advertisements for variable-rate
transactions; (ii) advertisements for nonvariable-rate transactions in which the
interest rate can increase; and (iii)
advertisements that promote both
variable-rate transactions and nonvariable-rate transactions. The proposed
rule prohibited the use of the term
‘‘fixed’’ in advertisements for variablerate transactions, unless two conditions
are satisfied. First, the phrase
‘‘Adjustable-Rate Mortgage’’ or
‘‘Variable-Rate Mortgage’’ must appear
in the advertisement before the first use
of the word ‘‘fixed’’ and be at least as
conspicuous as every use of the word
‘‘fixed.’’ Second, each use of the word
‘‘fixed’’ must be 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 also prohibited the
use of the term ‘‘fixed’’ to refer to the
payment in advertisements solely for
non-variable-rate transactions where the
payment will increase (for example,
fixed-rate mortgage transactions with an
initial lower payment that will
increase), unless each use of the word
‘‘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 will
increase after that period.
Finally, the proposed rule prohibited
the use of the term ‘‘fixed’’ in
advertisements that promote both
variable-rate transactions and nonvariable-rate transactions, unless certain
conditions are satisfied. First, the phrase
‘‘Adjustable-Rate Mortgage,’’ ‘‘VariableRate Mortgage,’’ or ‘‘ARM’’ must appear
in the advertisement with equal
prominence as any use of the word
‘‘fixed.’’ Second, each use of the term
‘‘fixed’’ to refer to a rate, payment, or to
the credit transaction, must clearly refer
solely to transactions for which rates are

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fixed and, if used to refer to a payment,
be 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 will increase after that
period. Third, if the term ‘‘fixed’’ refers
to the variable-rate transactions, it must
be accompanied by an equally
prominent and closely proximate
statement of a 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.
Many creditors and their trade
associations argued that the proposed
prohibition contained many formatting
and language requirements, and
therefore could easily generate liability
for technical, inadvertent errors. These
commenters opposed the possible risk
of civil liability for violations of this
proposed rule and instead, urged the
Board to use its authority under TILA
Section 105(a), 15 U.S.C. 1604(a). One
mortgage banking group suggested that
if the Board promulgated the rule it
should not prescribe detailed formatting
rules but rather state that compliance
with the rules governing trigger terms in
§ 226.24 satisfies compliance with this
rule. Another bank commented that
requiring disclosure after each use of the
word ‘‘fixed’’ is excessive and suggested
that the disclosure be required only
once after the first use of the word.
In contrast, a number of consumer
groups, as well as the FDIC and
associations of state regulators, urged
the Board to prohibit the use of the
word ‘‘fixed’’ in advertisements for
variable-rate mortgages, including ones
that have a fixed-rate for a specified
time period. They argued that the word
‘‘fixed’’ is confusing to consumers when
used to reference any loan other than
those that have rates (or payments) fixed
for their entire term.
The Board is adopting the prohibition
on the use of the term ‘‘fixed’’ to refer
to rates or payments of closed-end
home-secured loans as proposed with a
modification to § 226.24(i)(1)(ii) to
clarify application of the rule to nonvariable-rate transactions. Based on its
review of advertising copy, the Board
finds that some advertisements do not
adequately disclose that the interest rate
or payment amounts are ‘‘fixed’’ only
for a limited period of time, rather than
for the full term of the loan. For
example, some advertisements reviewed
prominently refer to a ‘‘30–Year Fixed
Rate Loan’’ or ‘‘Fixed Pay Rate Loan’’ on
the first page. A footnote on the last
page of the advertisements discloses in
small type that the loan product is a
payment option ARM in which the fully
indexed rate and fully amortizing

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payment will be applied after the first
five years.
The Board concludes that these types
of advertisements are associated with
abusive lending practices and also
deceptive under the three-part test for
deception set forth in Part V.A above.122
The use of the word ‘‘fixed’’ in these
advertisements is likely to mislead
consumers into believing that the
advertised product is a fixed-rate
mortgage with rates and payments that
will not change during the term of the
loan. Consumers often shop for loans
based on whether the term is fixed or
not. Indeed, some credit counselors
often encourage consumers to shop only
for fixed-rate mortgages. Therefore,
information about a mortgage loan’s
monthly payment or interest rate is
important to consumers. As a result, the
length of time for which the payment or
interest rate will remain fixed is likely
to affect a consumer’s decision about
whether to apply for a loan product.
The final rule does not, however,
prohibit use of the word ‘‘fixed’’ in
advertisements for home-secured loans
where the use of the term is not
misleading. Advertisements that refer to
a rate or payment, or to the credit
transaction, as ‘‘fixed’’ are appropriate
when used to denote a fixed-rate
mortgage in which the rate or payment
amounts do not change over the full
term of the loan. Use of the term ‘‘fixed’’
also is appropriate in an advertisement
where the interest rate or payment may
increase solely because the loan product
features a preferred-rate or fixed-rate
conversion provision (see comment
24(f)–1 for further guidance), or where
the final scheduled payment in a fully
amortizing loan is not greater than twice
the amount of other regularly scheduled
payments. The Board does not intend
that this rule apply to the use of the
word ‘‘fixed’’ in advertisements for
home-secured loans that refers to fees or
settlements costs.
The final rule does not ban the use of
the term ‘‘fixed’’ in advertisements for
variable rate products. The term ‘‘fixed’’
is used in connection with adjustablerate mortgages, or with fixed-rate
mortgages that include low initial
payments that will increase. These
advertisements make clear that the rate
or payment is only ‘‘fixed’’ for a defined
period of time, but after that the rate or
payment may increase. For example,
122 There must be a representation, omission or
practice that is likely to mislead the consumer; the
act or practice is examined from the perspective of
a consumer acting reasonably in the circumstances;
and 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.

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one advertisement reviewed
prominently discloses that the product
is an ‘‘Adjustable-Rate Mortgage’’ in
large type, and clearly discloses in
standard type that the rate is ‘‘fixed’’ for
the first three, five, or seven years
depending upon the product selected
and may increase after that time period.
Such an advertisement demonstrates
that there are legitimate and appropriate
circumstances for using the term
‘‘fixed’’ in advertisements for variablerate transactions.
Section 226.24(i)(2)—Misleading
comparisons in advertisements.
Proposed § 226.24(i)(2) prohibited any
advertisement for credit secured by a
dwelling from making any comparison
between actual or hypothetical
payments or rates and the payment or
simple annual rate that will be available
under the advertised product for less
than the term of the loan, unless two
conditions are satisfied. First, the
comparison must include with equal
prominence and in close proximity to
the ‘‘teaser’’ payment or rate, all
applicable payments or rates for the
advertised product that will apply over
the term of the loan and the period of
time for which each applicable payment
or simple annual rate will apply.
Second, the advertisement must
include a prominent statement in close
proximity to the advertised payments
that such payments do not include
amounts for taxes and insurance
premiums, if applicable. In the case of
advertisements for variable-rate
transactions where the advertised
payment or simple annual rate is based
on the index and margin that will be
used to make subsequent rate or
payment adjustments over the term of
the loan, the comparison must include:
(a) An equally prominent statement in
close proximity to the advertised
payment or rate that the payment or rate
is subject to adjustment and the time
period when the first adjustment will
occur; and (b) a prominent statement in
close proximity to the advertised
payment that the payment does not
include amounts for taxes and insurance
premiums, if applicable.
Proposed comment 24(i)–1 clarified
that a comparison includes a claim
about the amount that a consumer may
save under the advertised product. For
example, a statement such as ‘‘save $600
per month on a $500,000 loan’’
constitutes an implied comparison
between the advertised product’s
payment and a consumer’s current
payment.
The Board did not propose to prohibit
comparisons that take into account the
consolidation of non-mortgage credit,
such as auto loans, installment loans, or

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revolving credit card debt, into a single,
home-secured loan. However, the Board
specifically sought comment on whether
comparisons based on the assumed
refinancing of non-mortgage debt into a
new home-secured loan are associated
with abusive lending practices or
otherwise not in the interest of the
borrower and should therefore be
prohibited as well.
Creditors and their trade groups,
consumer and community advocacy
groups, federal agencies, and
associations of state regulators largely
supported the proposed requirement
that advertisements showing
comparisons between actual or
hypothetical rate or payments and the
advertised rate or payment disclose
information about the rates or payments
that would apply for the term of the
advertised loan and the period of time
for which such rates or payments would
be in effect. One mortgage banking trade
group suggested that the proposed
revisions to the trigger term
requirements would sufficiently address
issues with comparison advertisements
and that a separate rule was
unnecessary. Another commenter
requested an exception for subordinate
lien loans from the escrow disclosure
component of the rule noting that the
monthly payments of subordinate liens
do not generally include escrows for
taxes and insurance.
Commenters were divided on whether
comparisons between non-mortgage
debt and mortgage debt should be
allowed. Industry commenters generally
supported the Board’s decision to allow
debt consolidation advertisements that
compare home-secured debt payments
to other debt payments. They noted that
debt consolidation offers consumers
concrete benefits, such as increased
cash flow or reduced interest rates, and
that advertising communicated these
choices to consumers. One bank
commenter suggested that the Board
require additional disclosures to alert
consumers to the potential
consequences of such debt
consolidation, such as closing costs and
loan duration. On the other hand,
associations of state regulators urged the
Board to ban debt consolidation
comparison advertisements entirely.
They argued that consumers could be
misled about the risks and benefits of
consolidating short-term unsecured debt
into long-term secured debt.
One large bank, however, pointed out
that the interest rates that could be
disclosed for closed-end home-secured
debt would be different than the rates
for other kinds of secured debt in debt
consolidation comparison
advertisements. The commenter noted

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that under the proposed revisions to
§ 226.24(c), advertisements for homesecured loans would be allowed to use
only the APR, which would include
finance charges, while advertisements
for other closed-end loans, such as auto
loans, would be permitted to promote
simple annual rates of interest along
with APRs, and advertisements from
open-end credit would be able to
disclose APRs that did not have to
include any finance charges.
The Board is adopting the prohibition
proposed in § 226.24(i)(2) on the
comparison of actual and hypothetical
rates in advertisements unless certain
conditions are satisfied. The final rule is
modified to clarify that the information
required to be disclosed in conjunction
with the advertised rate or payment is
the information required under
§§ 226.24(f)(2) and (3). By referencing
§ 226.24(f), the final rule incorporates,
without repeating, the requirements of
that section. By referencing
§ 226.24(f)(3), the final rule exempts
subordinate lien loans from the escrow
disclosure component of the rule. In
addition, the final rule maintains the
proposed requirement that
advertisements making comparisons to a
variable-rate transaction, where the
advertised payment or simple annual
rate is based on the index and margin
that will be used to make subsequent
rate or payment adjustments over the
term of the loan, 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.
Some advertisements for homesecured loans make comparisons
between actual or hypothetical rate or
payment obligations and the rates or
payments that would apply if the
consumer obtains the advertised
product. The advertised rates or
payments used in these comparisons
frequently are low introductory ‘‘teaser’’
rates or payments that will not apply
over the full term of the loan, and do not
include amounts for taxes or insurance
premiums. In addition, the current rate
or payment obligations used in these
comparisons frequently include not
only the consumer’s mortgage payment,
but also possible payments for shortterm, non-home secured, or revolving
credit obligations, such as auto loans,
installment loans, or credit card debts.
The Board finds these types of
comparisons of rates and payments in
advertisements to be deceptive under
the three-part test for deception set forth
in part V.A above. Making comparisons
in advertisements can mislead a
consumer if the advertisement compares

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the consumer’s current payments or
rates to payments or rates available for
the advertised product that will only be
in effect for a limited period of time,
rather than for the term of the loan.
Similarly, the Board finds that such
comparisons can be misleading if the
consumer’s current payments include
amounts for taxes and insurance
premiums, but the payments for the
advertised product do not include those
amounts. Information about the terms of
the loan, such as rate and monthly
payment, are material and likely to
affect a consumer’s decision about
whether to apply for the advertised
mortgage loan. Consumers may compare
current obligations and the lower
advertised rates or payments and
conclude that the advertised loan
product will offer them a better interest
rate and/or monthly payment.
Some industry commenters requested
that, consistent with § 226.24(f), the rule
require information about amounts for
taxes and insurance premiums only for
advertisements for first-lien loans. By
incorporating the requirements of
§ 226.24(f), the final rule excludes
advertisements for subordinate lien
loans from the requirement that the
advertisement include a prominent
statement in close proximity to the
advertised payment that the payment
does not include amounts for taxes and
insurance premiums, if applicable.
Monthly payments of subordinate lien
loans do not generally require escrows
for taxes and insurance and therefore
are unable to include such amounts in
any monthly payment calculation.
Moreover, subordinate lien loans are
generally advertised for the purpose of
replacing or consolidating other
subordinate lien loans or non-home
secured obligations rather than homesecured first-lien loans.
The Board also is not banning debt
consolidation advertisements or
requiring additional disclosures about
the cost or consequences of
consolidating short term unsecured debt
into longer term secured debt. The
Board believes that debt consolidation
can be beneficial for some consumers.
Prohibiting the use of comparisons in
advertisements that are based solely on
low introductory ‘‘teaser’’ rates or
payments should address abusive
practices in advertisements focused on
debt consolidation. However, additional
disclosures are unlikely to provide
consumers with meaningful information
at the advertising stage or be effective
against aggressive push marketing
tactics inherent in many advertisements.
Last, the Board emphasizes that under
the final rule, the interest rate stated for
a home-secured loan must be the APR.

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The final rule permits, but does not
require, an interest rate for any secured
debt to be advertised also as a simple
annual rate of interest. The Board notes
that § 226.24(b) allows the simple
annual interest rate that is applied to an
unpaid balance to be stated so long as
it is not advertised more conspicuously
than the APR. Revisions to § 226.24(c)
also allow the use of a simple annual
rate of interest that is applied to an
unpaid balance to be stated in an
advertisement for a home-secured loan
so long as it is not advertised more
conspicuously than the APR. In
addition, the Board’s review of
advertisements shows that many of the
comparison advertisements compared
monthly payments rather than interest
rates, perhaps because comparison of
monthly payments resonate more for
consumers than comparison of interest
rates.
Section 226.24(i)(3)—
Misrepresentations about government
endorsement. Proposed § 226.24(i)(3)
prohibited statements about government
endorsement unless the advertisement
is for an FHA loan, VA loan, or similar
loan program that is, in fact, endorsed
or sponsored by a federal, state, or local
government entity. Proposed comment
24(i)–2 illustrated that a
misrepresentation about government
endorsement would include a statement
that the federal Community
Reinvestment Act entitles the consumer
to refinance his or her mortgage at the
new low rate offered in the
advertisement because it conveys to the
consumer a misleading impression that
the advertised product is endorsed or
sponsored by the federal government.
No commenters objected to this
prohibition.
The Board is adopting the rule as
proposed. Some advertisements for
home-secured loans characterize the
products offered as ‘‘government loan
programs,’’ ‘‘government-supported
loans,’’ or otherwise endorsed or
sponsored by a federal or state
government entity, even though the
advertised products are not governmentsupported loans, such as FHA or VA
loans, or otherwise endorsed or
sponsored by any federal, state, or local
government entity. Such advertisements
can mislead consumers into believing
that the government is guaranteeing,
endorsing, or supporting the advertised
loan product. Government-endorsed
loans often offer certain benefits or
features that may be attractive to many
consumers and not otherwise available
through private lenders. As a result, the
fact that a loan product is associated
with a government loan program can be
a material factor in the consumer’s

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decision to apply for that particular loan
product. For these reasons, the Board
finds these types of advertisements to be
deceptive under the three-part test for
deception set forth in part V.A above.
Section 226.24(i)(4)—Misleading use
of the current mortgage lender’s name.
Proposed § 226.24(i)(4) prohibited any
advertisement for a home-secured loan,
such as a letter, that is not sent by or
on behalf of the consumer’s current
lender from using the name of the
consumer’s current lender, unless the
advertisement also discloses with equal
prominence: (a) the name of the person
or creditor making the advertisement;
and (b) a clear and conspicuous
statement that the person making the
advertisement is not associated with, or
acting on behalf of, the consumer’s
current lender.
Many creditors and their trade groups,
state regulators, and other commenters
offered strong support for the proposed
prohibition on the misleading use of a
consumer’s current mortgage lender’s
name. State regulators noted that some
states have similar requirements already
in place and have a history of
enforcement in this area. A credit union
association suggested that the Board ban
the use of a mortgage lender’s name
without that lender’s permission
outright, as is currently done in some
states, rather than requiring a
disclosure. A mortgage banking trade
group and a large creditor suggested that
the regulation clarify that the envelope
or other mailing materials are part of
any advertisement and that the required
disclosure be closely proximate, as well
as equally prominent, to the statement
of the current lender’s name.
The Board is adopting the rule as
proposed. Some advertisements for
home-secured loans prominently
display the name of the consumer’s
current mortgage lender, while failing to
disclose or to disclose adequately the
fact that the advertisement is by a
mortgage lender that is not associated
with the consumer’s current lender. The
Board finds that such advertisements
may mislead consumers into believing
that their current lender is offering the
loan advertised or that the loan terms
stated in the advertisement constitute a
reduction in the consumer’s payment
amount or rate, rather than an offer to
refinance the current loan with a
different creditor. For these reasons, the
Board finds these types of
advertisements to be deceptive under
the three-part test for deception set forth
in part V.A above.
Section 226.24(i)(5)—Misleading
claims of debt elimination. Proposed
§ 226.24(i)(5) prohibited advertisements
for credit secured by a dwelling that

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offer to eliminate debt, or waive or
forgive a consumer’s existing loan terms
or obligations to another creditor.
Proposed comment 24(i)–3 provided
examples of claims that would be
prohibited. These include the following
claims: ‘‘Wipe Out Personal Debts!’’,
‘‘New DEBT-FREE Payment’’, ‘‘Set
yourself free; get out of debt today’’,
‘‘Refinance today and wipe your debt
clean!’’, ‘‘Get yourself out of debt * * *
Forever!’’, and, in the context of an
advertisement referring to a consumer’s
existing obligations to another creditor,
‘‘Pre-payment Penalty Waiver.’’ The
proposed comment also clarified that
this provision does not prohibit an
advertisement for a home-secured loan
from claiming that the advertised
product may reduce debt payments,
consolidate debts, or shorten the term of
the debt.
Most commenters supported the
Board’s proposal to prohibit misleading
claims of debt elimination. A number of
industry commenters also expressed
support for the proposed commentary
provision clarifying that advertisements
could still claim to consolidate or
reduce debt. However, one bank
suggested that there were examples of
non-misleading claims of debt
elimination, such as ‘‘eliminate high
interest credit card debt.’’
The Board is modifying the rule to
clarify that only misleading claims of
debt elimination are prohibited. Based
on the advertising copy reviewed, some
advertisements for home-secured loans
include statements that promise to
eliminate, cancel, wipe-out, waive, or
forgive debt. The Board finds that such
advertisements can mislead consumers
into believing that they are entering into
a debt forgiveness program rather than
merely replacing one debt obligation
with another. For these reasons, the
Board finds these types of
advertisements to be deceptive under
the three-part test for deception set forth
in part V.A above.
Section 226.24(i)(6)—Misleading use
of the term ‘‘counselor’’. Proposed
§ 226.24(i)(6) prohibited advertisements
for credit secured by a dwelling from
using the terms ‘‘counselor’’ or
‘‘financial advisor’’ to refer to a forprofit mortgage broker or creditor, its
employees, or persons working for the
broker or creditor that are involved in
offering, originating or selling
mortgages. Nothing in the proposed rule
prohibited 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. The final rule retains the

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prohibition on the use of the term
‘‘counselor’’ by for-profit brokers or
creditors in advertisements for homesecured credit, but does not adopt the
prohibition on the use of the term
‘‘financial advisor’’ for the reasons
stated below.
A few creditors and financial services
and securities industry associations
argued that the proposed prohibition on
the term ‘‘financial advisor’’ was too
broad. These commenters noted that
registered securities broker-dealers and
other licensed financial professionals,
who may also be licensed as mortgage
brokers if required under applicable
state law, may place advertisements for
mortgage loans, often in conjunction
with a range of other financial products.
One large securities firm noted that its
financial advisors routinely refer
customers to its credit corporation
subsidiary and that these financial
advisors may place advertisements
listing themselves as contact persons for
a range of services and products,
including residential mortgage loans.
These commenters suggested that the
Board provide a clear exception for
registered securities broker-dealers and
other investment advisors.
An association of certified mortgage
planning specialists suggested a safe
harbor for the use of the term ‘‘financial
advisor’’ for those advertisers who have
earned a title or designation that
requires an examination or experience,
adherence to a code of ethics, and
continuing education. This commenter
suggested that advertisers that did not
have fiduciary relationships with
consumers be required to include a
disclaimer in their ads so stating.
The Board is not adopting the
prohibition on the use of the term
‘‘financial advisor’’ as proposed in
§ 226.24(i)(6). The Board recognizes that
financial advisors play a legitimate role
in assisting consumers in selecting
appropriate home-secured loans. The
prohibition on the term ‘‘financial
advisor’’ was intended to prevent
creditors and brokers from falsely
implying to residential mortgage
consumers that they are acting in a
fiduciary capacity when, in fact, they
are not. However, the Board did not
intend to prevent the legitimate
business use of, or otherwise conflict or
intervene with federal and state laws
that contemplate the use of, the term
‘‘financial advisor.’’ 123
For example, securities broker-dealers
typically are registered by the U.S.
Securities and Exchange Commission

and/or licensed by a state regulatory
agency to provide a range of financial
advice and services on securities,
insurance, retirement planning and
other financial products, including
residential mortgage loans. These
registered securities broker-dealers
currently use the term ‘‘financial
advisor’’ in advertisements and
solicitations. There are also other
financial professionals who must meet
certain federal or state professional
standards, certifications or other
requirements and use the term
‘‘financial advisor’’ because they are in
the business of providing financial
planning and advice. Examples include
investment advisors, certified public
accountants, and certified financial
planners. Many of these professionals
are obligated to act in the client’s
interest and disclose conflicts of interest
(i.e., owe a fiduciary obligation) and
therefore, the use of the term ‘‘financial
advisor’’ by such individuals is not
misleading.124 Because it is not practical
to distinguish with sufficient clarity the
legitimate uses of the term ‘‘financial
advisor’’ in accordance with various
federal or state laws, from improper use,
the Board is withdrawing the
prohibition on the term ‘‘financial
advisor.’’ However, the Board notes that
the use of the term ‘‘financial advisor’’
in mortgage advertisements must
comply with all applicable state and
federal laws, including the FTC Act.125
The Board is retaining the prohibition
on the use of the term counselor. The
Board believes that the exception to this
prohibition for not-for-profit entities is
sufficient to capture the legitimate use
of this term. The use of the term
counselor outside of this context is
likely to mislead consumers into
believing that the lender or broker has
a fiduciary relationship with the
consumer and is considering only the
consumer’s best interest. For these
reasons, the Board finds these types of
advertisements to be deceptive under
the three-part test for deception set forth
in part V.A above.
Section 226.24(i)(7)—Misleading
foreign-language advertisements.
Proposed § 226.24(i)(7) prohibited
advertisements for home-secured loans
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

123 See, e.g., Investment Advisors Act of 1940, 14
U.S.C. 80b–1 et seq.; Securities Exchange Act of
1934, 15 U.S.C. 78a et seq.

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124 14
125 15

U.S.C. 80b–1 et seq.
U.S.C. 41 et seq.

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disclosures in both English and a
foreign language or advertisements that
provide disclosures entirely in English
or entirely in a foreign language would
not be affected by this prohibition.
Most commenters expressed support
for the prohibition on advertising
triggering information in a foreign
language and then providing
information about other trigger terms or
required disclosures in English.
The Board is adopting the rule as
proposed. Some advertisements for
home-secured loans are targeted to nonEnglish speaking consumers. In general,
this is an appropriate means of
promoting home ownership or offering
loans to under-served, immigrant
communities. Some of these
advertisements, however, 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 fullyindexed rate or fully amortizing
payment, only in English. The Board
finds that this practice can mislead nonEnglish speaking consumers who may
not be able to comprehend the
important English-language disclosures.
For these reasons, the Board finds these
types of advertisements to be deceptive
under the three-part test for deception
set forth in part V.A above.
XII. Mortgage Loan Disclosures
A. Early Mortgage Loan Disclosures—
§ 226.19
Pursuant to its authority under TILA
Section 105(a), 15 U.S.C. 1604(a), the
Board proposed to require creditors to
give consumers transaction-specific,
early mortgage loan disclosures for
closed-end loans secured by a
consumer’s principal dwelling,
including refinancings, home equity
loans (other than HELOCs) and reverse
mortgages. The proposed rule would
require that creditors deliver this
disclosure not later than three business
days after application and before a
consumer pays a fee to any person,
other than a fee for obtaining the
consumer’s credit history. The Board
also proposed corresponding changes to
the staff commentary and certain other
conforming amendments to Regulation
Z. Providing the mortgage loan
disclosure early for all mortgage
transactions, and before consumers have
paid significant fees, would help
consumers make informed use of credit
and better enable them to shop among
available credit alternatives.
The Board is adopting § 226.19(a)(1)
as proposed, with new commentary to

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address concerns about application of
the fee restriction to third parties, such
as mortgage brokers. The early mortgage
loan disclosure rule is effective for loans
for which a creditor has received an
application on or after October 1, 2009.

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Public Comment
The Board sought comment on
whether the benefits of requiring the
early mortgage loan disclosure would
outweigh operational or other costs, and
whether further guidance was necessary
to clarify what fees would be deemed in
connection with an application.
Many creditors and their trade
associations opposed the proposal,
arguing that the operational cost and
compliance difficulties (for example,
system reprogramming, testing,
procedural changes, and staff training)
outweigh the benefits of improving
consumers’ ability to shop among
alternative loans. They noted that the
burden may be significant for some
creditors, such as community banks.
Citing operational difficulties, many
industry commenters requested a
compliance period of up to 18 months
from the effective date of the final rule.
They also expressed concern about the
scope of the fee restriction and its
application to third party originators.
Consumer groups, state regulators and
enforcement agencies that commented
on proposed § 226.19(a)(1) generally
supported the proposed rule because it
would increase the availability of
information to consumers when they are
shopping for loans. Some, however,
argued for greater enforceability and
redisclosure before consummation of
the loan transaction to enhance the
accuracy of the information disclosed.
Discussion
TILA Section 128(b)(1), 15 U.S.C.
1638(b)(1), provides that the closed-end
credit disclosure (mortgage loan
disclosure), which includes the APR
and other material disclosures, must be
delivered ‘‘before the credit is
extended.’’ Regulation Z currently
implements this statutory provision by
allowing creditors to provide the
disclosures at any time before
consummation. TILA Section 128(b)(2)
and § 226.19 of Regulation Z apply to
‘‘residential mortgage transactions’’
subject to RESPA and require that ‘‘good
faith estimates’’ of the mortgage loan
disclosure be made before the credit is
extended, or delivered not later than
three business days after the creditor
receives the consumer’s written
application, whichever is earlier. 15
U.S.C. 1638(b)(2). A residential
mortgage transaction includes loans to
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construction of a consumer’s dwelling
but does not include refinance or homeequity loans. The Board proposed to
amend Regulation Z to implement TILA
Section 128(b)(1) in a manner that
would require the disclosures earlier in
the mortgage transaction, rather than at
any time before consummation, which
would result in a requirement similar to
TILA Section 128(b)(2).
The final rule is issued pursuant to
TILA Section 105(a), which mandates
that the Board prescribe regulations to
carry out TILA’s purposes. 15 U.S.C.
1604(a). TILA Section 102(a) provides,
in pertinent part, that TILA’s purposes
are to assure a meaningful disclosure of
credit terms so that the consumer is
better able to compare various credit
terms available and avoid the
uninformed use of credit. 15 U.S.C.
1601(a). The final rule is intended to
help consumers make informed use of
credit and shop among available credit
alternatives.
Under current Regulation Z, creditors
need not deliver a mortgage loan
disclosure on non-purchase mortgage
transactions until consummation. As a
practical matter, consumers commonly
do not receive disclosures until the
closing table. By that time consumers
may not be in a position to make
meaningful use of the disclosure. Once
consumers have reached the settlement
table, it is likely too late for them to use
the disclosure to shop for mortgages or
to inform themselves adequately of the
terms of the loan. Consumers receive at
settlement a large, often overwhelming,
number of documents, and may not
reasonably be able to focus adequate
attention on the mortgage loan
disclosure to verify that it reflects what
they believe to be the loan’s terms.
Moreover, by the time of loan
consummation, consumers may feel
committed to the loan because they are
accessing equity for an urgent need, may
be refinancing a loan to obtain a lower
rate (which may only be available for a
short time), or may have already paid
substantial application or other fees.
The early mortgage loan disclosure
required by the final rule will provide
information to consumers about the
terms of the loan, such as the payment
schedule, earlier in the shopping
process. For example, ARMs may have
a low, initial fixed rate period followed
by a higher variable rate based on an
index plus margin. Some fixed rate
loans also may have a temporary initial
rate that is discounted. These loans may
be marketed to consumers on the basis
of the low initial payment or the low
initial interest rate. The payment
schedule will show the increases in
monthly payments when the rate

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increases. It will also show an APR for
the full loan term based on the fully
indexed rate instead of the initial rate.
Providing this information not later than
three business days after application,
and before the consumer has paid a
substantial fee, will help ensure that
consumers have a genuine opportunity
to review the credit terms offered; that
the terms are consistent with their
understanding of the transaction; and
that the credit terms meet their needs
and are affordable. This information
will further enable the consumer to
decide whether to move forward with
the transaction or continue to shop
among alternative loan products and
sources of credit.
The Board recognizes that the early
mortgage loan disclosure rule will
impose additional costs on creditors,
some of which may be passed on in part
to consumers. Because early disclosures
currently are required for home
purchase loans, some creditors already
deliver early mortgage loan disclosures
on non-purchase mortgages. Not all
creditors, however, follow this practice,
and they will also incur one-time
implementation costs to modify their
systems in addition to ongoing costs to
originate loans. The Board believes,
however, that the benefits to consumers
of receiving early estimates of loan
terms, such as enhanced shopping and
competition, offset any additional costs.
The Final Rule
For the reasons discussed below, the
Board is adopting the rule as proposed
with new staff commentary to address,
through examples, the application of the
fee restriction to third parties, such as
mortgage brokers. The final rule applies
to all closed-end loans secured by a
consumer’s principal dwelling (other
than HELOCs) and requires creditors to
deliver the early mortgage loan
disclosure to consumers no later than
three business days after application
and before any fee is paid, other than a
fee for obtaining the consumer’s credit
history, such as a credit report.
Third party originators. The Board
proposed § 226.19(a)(1)(ii) to prohibit a
creditor or any other person from
collecting a fee, other than a fee for
obtaining the consumer’s credit history,
until the early mortgage loan disclosure
is received by the consumer.
Many creditors and their trade
associations argued that the fee
restriction would be difficult or
impossible to apply and monitor in the
wholesale channel, especially with
respect to appraisal fees. These
commenters noted that third parties,
such as mortgage brokers, submit
consumer applications to multiple

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creditors; they expressed concern that
under the proposal lenders might have
to refuse to accept a new application
where the consumer has already paid a
fee to a prior creditor but then withdrew
the first application or had it denied.
Most creditors also expressed concern
that the phrase ‘‘any other person’’
would require them to monitor the
timing of fees paid to brokers, and stated
that they could not track such
information accurately. Many creditors
requested that the Board clarify whether
creditors would have to refuse
applications submitted by a broker that
already had obtained a fee from the
consumer (other than a fee for obtaining
the consumer’s credit history) because it
would be too late for creditors to
comply with the timing requirement of
the early mortgage loan disclosure. A
few commenters urged the Board to
limit the fee restriction to fees collected
only by creditors.
The Board is adopting the proposed
rule without modification but is adding
comment 19(a)(1)(ii)–3 to clarify the
rule’s treatment of applications
submitted by third parties, such as
mortgage brokers, and to provide
examples of compliance with the rule.
A broker’s submission of a consumer’s
information (registration) to more than
one creditor, and the layered
underwriting and approval process that
occurs in the wholesale channel, may
complicate implementation of the fee
restriction. Generally a broker submits a
consumer’s written application (the
trigger for early TILA disclosures under
§ 226.19(a)(1)(i)) to only one creditor
based on product offerings, the
consumer’s choice, and other factors.
Under the final rule, once the creditor
receives the consumer’s written
application, the creditor must provide
the early mortgage loan disclosure after
which the creditor and/or the broker
may collect fees (other than a fee for
obtaining the consumer’s credit history)
from the consumer. However, after the
collection of fees, the creditor may
engage in further underwriting that
could result in a denial of the
consumer’s application. The broker may
then submit the application to a
different creditor who must also comply
with the final rule.
The Board proposed to regulate the
collection of fees by ‘‘any other person’’
in § 226.19(a)(1)(ii) to avoid
circumvention of the fee restriction.
However, in some circumstances it may
not be reasonable to expect creditors to
know whether the consumer paid a fee
to a broker before receiving the early
mortgage loan disclosure. Therefore, the
Board is adding new comment
19(a)(1)(ii)–3 to illustrate through

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examples when creditors are in
compliance with § 226.19(a)(1)(ii). The
new commentary addresses the
situation where a mortgage broker
submits a consumer’s written
application to a new creditor because a
prior creditor denied the consumer’s
mortgage application, or the consumer
withdrew the application, but the
consumer already paid a fee to the prior
creditor (aside from a fee for obtaining
the consumer’s credit history). The
comment clarifies that in this situation,
the new creditor or third party complies
with § 226.19(a)(1)(ii) if it does not
collect or impose any additional fee
until after the consumer receives an
early mortgage loan disclosure from the
new creditor.
Many creditors also stated that the
rule would inappropriately require them
to monitor the actions of third parties.
Although the rule does not require
creditors to take specific action with
respect to monitoring third parties,
creditors must comply with this rule
whether they deal with consumers
directly or indirectly through third
parties. Creditors that receive
applications through a third party may
choose to require through contractual
arrangement that the third party include
with a consumer’s written application a
certification, for example, that no fee
has been collected in violation of
§ 226.19(a)(1). The Board also notes that
the federal banking agencies have issued
guidance that addresses, among other
things, systems and controls that should
be in place for establishing and
maintaining relationship with third
parties.126
The Board recognizes that
unscrupulous third parties may not
comply with the fee restriction,
regardless of contractual obligations.
The Board may consider, as part of its
overall review of closed-end
disclosures, whether it should propose
rules that would directly prohibit third
parties from collecting a fee before the
consumer receives the early mortgage
loan disclosure, other than a fee for
obtaining the consumer’s credit history.
Scope of the fee restriction.
Regulation Z currently does not prohibit
creditors from collecting any fee before
giving consumers the closed-end credit
disclosures required by § 226.19(a)(1).
The Board proposed in § 226.19(a)(1)(ii)
to prohibit the collection of any fee,
other than a fee for obtaining the
consumer’s credit history, until after the
consumer receives the early mortgage
loan disclosure. Most industry
commenters urged the Board to broaden
the fee exception to include, for

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example, rate lock, appraisal and flood
certification fees. They argued that
prohibiting these fees could harm
consumers in a rising interest rate
environment, delay consumers’ access
to credit (for example, delay conditional
approvals, application processing,
closing and funding of loans), and
reverse the benefits of automated and
streamlined mortgage loan processing.
Some commenters urged alternatively
that the Board restrict only the
imposition of nonrefundable fees. In
contrast, state regulators urged the
Board to tighten the fee restriction,
noting that allowing the collection of
credit report fees will conflict with
many state laws.
The Board is adopting the rule
regarding the fee restriction as
proposed. Consumers typically pay fees
to apply for a mortgage loan, such as
fees for a credit report, a property
appraisal, or an interest rate lock, as
well as general ‘‘application’’ fees to
process the loan. If the fees are
significant, as they often are for
appraisals and for extended rate locks,
consumers may feel constrained from
shopping for alternative loans because
they feel financially committed to the
transaction. This risk is particularly
high in the subprime market, where
consumers often are cash-strapped and
where limited price transparency may
obscure the benefits of shopping for
mortgage loans, as discussed in more
detail in part II. The risk also applies to
the prime market, where many
consumers would find a fee of several
hundred dollars, such as the fee often
imposed for an appraisal and other
services, to be costly enough to deter
them from shopping further among
alternative loans and sources. Limiting
the fee restriction to nonrefundable fees
also would likely undermine the intent
of the rule. Consumers, especially those
in the subprime market, may not have
sufficient cash to pay ‘‘refundable fees’’
to multiple creditors, and therefore
would be discouraged from shopping or
otherwise unable to obtain multiple
early mortgage loan disclosures to
compare credit terms.
In addition, the definition of
‘‘business day’’ under § 226.2(a)(6) is
being revised for purposes of the
consumer’s receipt of early mortgage
loan disclosures under § 226.19(a)(1)(ii).
Existing § 226.2(a)(6) contains two
definitions of ‘‘business day.’’ Under the
standard definition, a business day
means a day on which the creditor’s
offices are open to the public for
carrying on substantially all of its
business functions. However, for
purposes of rescission under §§ 226.15
and 226.23, and for purposes of

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§ 226.31, a ‘‘business day’’ means all
calendar days except Sundays and
specified legal public holidays. The
definition of ‘‘business day’’ is being
revised to apply the second definition of
business day to the consumer’s receipt
of early mortgage loan disclosures under
§ 226.19(a)(1)(ii). The Board believes
that the definition of business day that
excludes Sundays and legal public
holidays is more appropriate because
consumers should not be presumed to
have received disclosures in the mail on
a day on which there is no mail
delivery.
Under the final rule, creditors may
presume that the consumer receives the
early mortgage loan disclosure three
business days after mailing. For
example, a creditor that puts the early
mortgage loan disclosure in the mail on
a Friday can presume that the consumer
receives such disclosure the following
Tuesday, and impose appraisal, ratelock and other application fees after
midnight on Tuesday (assuming there
are no intervening legal public
holidays). The Board does not believe
that the rule delaying the collection of
fees will have a significant negative
impact on the mortgage loan application
and approval process. Three business
days sets an appropriate timeframe for
the consumer to receive and review the
early mortgage loan disclosure. It is not
always practical for a creditor to know
when a consumer will actually receive
the early mortgage loan disclosure.
Creditors can choose among many
different methods to deliver the
disclosures to consumers, such as by
overnight delivery service, e-mail or
regular postal mail. In most instances
consumers will receive the early
mortgage loan disclosure within three
business days, and the Board notes that
it is common industry practice to
deliver mortgage disclosures by
overnight courier.
The Board contemplated providing a
longer timeframe for the presumption of
receipt of the early mortgage loan
disclosure. Some originators could
delay hiring an appraiser until after the
consumer pays an appraisal fee, which
would delay the appraisal report and
the processing time for the application.
Some creditors may refuse to lock-in the
interest rate until after the consumer
pays a rate lock fee, or alternatively
lock-in the interest rate and bear some
market risk or cost until it can impose
a rate lock fee on the consumer. The
Board believes the three business day
time frame for the fee restriction strikes
a proper balance between enabling
consumers to review their credit terms
before making a financial commitment
and maintaining the efficiency of

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automated and streamlined loan
processing.
Presumption of receipt. Proposed
§ 226.19(a)(1)(ii) provided that a fee may
not be imposed until after a consumer
has received the early mortgage loan
disclosure and that the consumer is
presumed to receive the disclosure three
business days after it is mailed.
Proposed comment 19(a)(1)(ii)–1
clarified further that creditors may
charge a consumer a fee, in all cases,
after midnight of the third business day
following mailing the disclosure, and
for disclosures delivered in person, fees
may be charged anytime after delivery.
One commenter addressed the receipt
of disclosures sent by mail and
suggested that the Board consider: (1) A
presumption that disclosures sent by
overnight courier are received by the
consumer the next day; and (2) a
presumption that disclosures delivered
by electronic communication in
compliance with applicable
requirements under the Electronic
Signatures in Global and National
Commerce Act (‘‘E–Sign Act’’), 15
U.S.C. 7001 et seq., are received by the
consumer immediately.
The Board considered but is not
adopting rules for overnight courier and
other delivery methods. For example,
overnight courier companies do not
appear to adhere to one generally
accepted definition for ‘‘overnight
delivery’’; it may mean next business
day or next calendar day. Recognized
holidays and business hours also affect
what is considered overnight delivery.
In light of these variations the Board
believes it is not feasible to define with
sufficient clarity what may be
considered acceptable ‘‘overnight
delivery’’ or to delineate a presumption
of receipt for all available methods of
delivery.
In addition, although the final rule
provides a presumption of receipt if the
early mortgage loan disclosure is
delivered by mail, it does not prevent
creditors from choosing any permissible
method available to deliver the early
mortgage loan disclosure, such as
overnight courier or e-mail if in
compliance with the E–Sign Act.
Creditors may impose such fees any
time after the consumer actually
receives the early mortgage loan
disclosure. Evidence of receipt by the
consumer, such as documentation that
the mortgage loan disclosure was
delivered by certified mail, overnight
delivery, or e-mail (if similar
documentation is available), is sufficient
to establish compliance with
§ 226.19(a)(1)(ii).
Exception to fee restriction. Proposed
§ 226.19(a)(1)(iii) provided that a fee for

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obtaining the consumer’s credit history
may be charged before the consumer
receives the early mortgage loan
disclosure, provided the fee is ‘‘bona
fide and reasonable in amount.’’ Many
creditors and their trade associations
noted that different pricing schedules
make it difficult to ascertain the exact
cost of a credit report and urged the
Board to allow creditors to charge a flat
or nominal fee for the credit report.
The Board is adopting
§ 226.19(a)(1)(iii) as proposed. The final
rule recognizes that creditors generally
cannot provide accurate transactionspecific cost estimates without having
considered the consumer’s credit
history. Requiring creditors to bear the
cost of reviewing credit history with
little assurance the consumer will apply
for a loan would be unduly
burdensome. Some creditors might
forego obtaining the consumer’s credit
history; disclosures made without any
credit risk assessment of the consumer
are likely to be of little value to the
consumer.
The language ‘‘bona fide and
reasonable in amount,’’ in
§ 226.19(a)(1)(iii) does not require the
creditor to charge the consumer the
actual cost incurred by the creditor for
that particular credit report, but rather
contemplates a reasonable and
justifiable fee. Many creditors enter into
arrangements where pricing varies
based on volume of business or other
legitimate business factors, which
makes the exact charge imposed on a
particular consumer difficult to
determine. The Board believes that a fee
that bears a reasonable relationship to
the actual charge incurred by the
creditor is ‘‘bona fide and reasonable in
amount.’’
Enhanced civil remedies and
redisclosure. The Board proposed the
early mortgage loan disclosure pursuant
to its authority under TILA Section
105(a), 15 U.S.C. 1604(a). Consumer
advocacy groups generally support the
early mortgage loan disclosure, but
urged the Board to allow for civil
enforcement to ensure compliance.
They argued that without enhanced
remedies, the disclosures could become
instruments for ‘‘bait and switch’’
schemes. Specifically, consumer groups
urged the Board to use its authority
under TILA Section 129(l)(2), 15 U.S.C.
1639(l)(2), in addition to Section 105(a),
and declare that failure to deliver timely
and accurate early disclosures is an
unfair and deceptive practice subject to
enhanced damages under Section
129(l)(2). Consumer groups also argued
that the early mortgage loan disclosure
should be considered a material
disclosure subject to remedies available

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under TILA Section 130(a)(4), 15 U.S.C.
1640(a)(4) and extended rescission
rights.
The Board is adopting the final rule
as proposed, pursuant to its authority
under TILA Section 105(a), 15 U.S.C.
1604(a). The early mortgage loan
disclosure is an early good faith
estimate of transaction-specific terms,
such as the APR and payment schedule.
Although the Board shares commenters’
concerns about bait and switch tactics,
responsible creditors may not know the
precise credit terms to disclose, and
therefore must provide estimates,
because the disclosure must be provided
before the underwriting process is
complete. However, through its review
of closed-end mortgage disclosures, the
Board may determine that some
requirement for accuracy of the early
disclosures is feasible.
Consumer groups and others also
suggested that the Board require
redisclosure of the early mortgage loan
disclosure some time period (e.g., at
least seven days) before consummation
if there have been material changes.
They asserted that an inaccurate or
misleading early disclosure could cause
consumers to stop shopping based on
erroneous credit terms. Under current
§ 226.19(a)(2), redisclosure already is
required no later than consummation
and industry practice is to give the
consumer a final TILA at closing, which
does not facilitate shopping. The final
rule does not revise the requirements for
redisclosure prior to consummation.
The Board may consider the need for
additional rules as part of its overall
review of closed-end mortgage
disclosures.
B. Plans To Improve Disclosure
Most creditors and their trade
associations, citing the HUD’s current
RESPA proposal and the 1998 Federal
Reserve Board and HUD Joint Report to
the Congress Concerning Reform to
TILA and RESPA, urged the Board to
delay the proposed early mortgage loan
disclosure rule and make it part of
broader disclosure reform, or at least
part of the comprehensive review of
Regulation Z’s closed-end rules that the
Board is conducting currently.
The Board believes that better
information in the mortgage market can
improve competition and help
consumers make better decisions. The
final rule is designed, in part, to prevent
incomplete or misleading mortgage loan
advertisements and solicitations, and to
require creditors to provide mortgage
disclosures earlier so that consumers
can get the information they need when
it is most useful to them. The Board
recognizes that the content and format

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of these required early mortgage loan
disclosures may need to be updated to
reflect the increased complexity of
mortgage products. The Board is
reviewing current TILA mortgage
disclosures and potential revisions to
these disclosures through consumer
testing. The Board expects that this
testing will identify potential
improvements for the Board to propose
for public comment in a separate
rulemaking. In addition, the Board will
continue to have discussions with HUD
to improve mortgage disclosures.
XIII. Mandatory Compliance Dates
Under TILA Section 105(d), certain of
the Board’s disclosure regulations are to
have an effective date of that October 1
which follows by at least six months the
date of promulgation. 15 U.S.C. 1604(d).
However, the Board may, at its
discretion, lengthen the implementation
period for creditors to adjust their forms
to accommodate new requirements, or
shorten the period where the Board
finds that such action is necessary to
prevent unfair or deceptive disclosure
practices. No similar effective date
requirement exists for non-disclosure
regulations.
The Board requested comment on
whether six months would be an
appropriate implementation period, and
on the length of time necessary for
creditors to implement the proposed
rules, as well as whether the Board
should specify a shorter implementation
period for certain provisions to prevent
unfair or deceptive practices. Three
organizations of state consumer credit
regulators who jointly commented
suggested that some of the proposed
revisions could be enacted quickly
without any burden to creditors, and
requested implementation as soon as
possible. Many industry commenters
and their trade associations stated that
although six months is an appropriate
time period to implement some parts of
the rule, creditors would need
additional time to make system
enhancements and to implement
compliance training for other parts of
the rule. For example, they stated that
extra time is needed to establish systems
to identify loans at or above the APR
trigger for higher-priced mortgage loans.
Most commenters who addressed the
effective date specifically requested a
compliance period longer than six
months for the proposed early mortgage
loan disclosure requirement and the
proposed escrow requirement. In light
of these concerns, the Board believes
additional compliance time beyond six
months is appropriate. Therefore,
compliance with the final rule will be
mandatory as specified below.

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Early TILA Disclosures
Pursuant to Section 105(d), the
requirement to provide consumers with
transaction-specific mortgage loan
disclosures under § 226.19 applies to all
applications received on or after
October 1, 2009. Although state
regulators noted that some creditors
already have systems in place to provide
early mortgage loan disclosures to
comply with state law requirements,
creditors and their trade groups
generally urged the Board to allow more
lead time than six months to comply to
provide sufficient time for system reprogramming, testing, procedural
changes, and staff training.
The early mortgage disclosure rule is
triggered by the date of receipt of a
consumer’s written application, and
therefore all written applications
received by creditors on or after October
1, 2009 must comply with § 226.19.
Existing comment 19(a)(1)–3
(redesignated as comment 19(a)(1)(i)–3)
states that a written application is
deemed received when it reaches the
creditor in any of the ways applications
are normally transmitted, such as mail,
hand delivery or through a broker.
For example, a creditor that receives
a consumer’s written application for a
mortgage refinancing on September 30,
2009, and which is consummated on
October 29, 2009, does not need to
deliver an early mortgage loan
disclosure to the consumer and
otherwise comply with the fee
restriction requirements of this rule. A
creditor that receives a consumer’s
written application on October 1, 2009
must deliver to the consumer an early
mortgage loan disclosure within three
business days and before the consumer
pays a fee to any person, other than a
fee for obtaining the consumer’s credit
history. The creditor may impose a fee
on the consumer, such as for an
appraisal or underwriting, after the
consumer receives the disclosure. Under
§ 226.19(a)(1)(ii) the consumer is
presumed to have received the early
mortgage loan disclosure three business
days after it is mailed, and therefore, the
creditor may impose a fee after midnight
on the third business day following
mailing.
Escrow Rules
As described in part IX.D, although
many creditors currently provide for
escrows, large creditor commenters and
their trade associations requested that
this provision be delayed by 12 to 24
months to allow creditors that currently
have no escrowing capacity or
infrastructure to implement the
necessary systems and processes.

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Manufactured housing industry
commenters were particularly
concerned because, as described in Part
IX.D, currently a limited infrastructure
is in place for escrowing on
manufactured housing loans.
Accordingly, the requirement to
establish an escrow account for taxes
and insurance (§ 226.35(b)(3)) for
higher-priced mortgage loans is effective
for such loans for which creditors
receive applications on or after April 1,
2010. For higher-priced mortgage loans
secured by manufactured housing,
however, compliance is mandatory for
such loans for which creditors receive
applications on or after October 1, 2010.

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Advertising Rules and Other Rules
Adopted Under TILA Section 129(l)(2)
The final advertising rules are
effective for advertisements occurring
on or after October 1, 2009. For
example, the advertising rules would be
applicable to radio advertisements
broadcast on or after October 1, 2009, or
for solicitations mailed on or after
October 1, 2009. The servicing rules are
effective for any loans serviced on or
after October 1, 2009, whether the
servicer obtained servicing rights on the
loan before or after that date. The
remaining rules are effective for loans
for which a creditor receives an
application on or after October 1, 2009.
Application of Mandatory Compliance
Dates; Pre-Existing Obligations
As described above, the final rule is
prospective in application. Sometimes a
change in the terms of an existing
obligation constitutes a refinancing,
which is a new transaction requiring
new disclosures. An assumption, where
the creditor agrees in writing to accept
a subsequent consumer as a primary
obligor, is also treated as a new
transaction. See 12 CFR 226.20(a) and
(b). A refinancing or assumption is
covered by a provision of the final rule
if the transaction occurs on or after that
provision’s effective date. For example,
if a creditor receives an application for
a refinancing on or after October 1,
2009, and the refinancing is
consummated on October 15, 2009, the
provision restricting prepayment
penalties in § 226.35(b)(2) applies, but
the escrow requirement in § 226.35(b)(3)
would not apply because the escrow
provision is only effective for new
transactions where the application is
received on or after April 1, 2010 (or
October 1, 2010 for manufactured
housing-secured loans). However, if a
modification of an existing obligation’s
terms that does not constitute a
refinancing under § 226.20(a) occurs on
October 15, 2009, the restriction on

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prepayment penalties would not apply.
Nevertheless, the loan servicing rules in
§ 226.36(c) will apply to loan servicers
as of October 1, 2009, regardless of
when the creditor received the
application or consummated the
transaction.
XIV. Paperwork Reduction Act
In accordance with the Paperwork
Reduction Act (PRA) of 1995 (44 U.S.C.
3506; 5 CFR part 1320 app. A.1), the
Board reviewed the final rule under the
authority delegated to the Board by the
Office of Management and Budget
(OMB). The collection of information
that is required by this final rulemaking
is found in 12 CFR part 226. The Board
may not conduct or sponsor, and an
organization is not required to respond
to, this information collection unless the
information collection displays a
currently valid OMB control number.
The OMB control number is 7100–0199.
This information collection is
required to provide benefits for
consumers and is mandatory (15 U.S.C.
1601 et seq.). The respondents/
recordkeepers are creditors and other
entities subject to Regulation Z,
including for-profit financial
institutions and small businesses. Since
the Board does not collect any
information, no issue of confidentiality
normally arises. However, in the event
the Board were to retain records during
the course of an examination, the
information may be protected from
disclosure under the exemptions (b)(4),
(6), and (8) of the Freedom of
Information Act (5 U.S.C. 522(b)).
TILA and Regulation Z are intended
to ensure effective disclosure of the
costs and terms of credit to consumers.
For open-end credit, creditors are
required, among other things, to
disclose information about the initial
costs and terms and to provide periodic
statements of account activity, notices of
changes in terms, and statements of
rights concerning billing error
procedures. Regulation Z requires
specific types of disclosures for credit
and charge card accounts and homeequity plans. For closed-end loans, such
as mortgage and installment loans, cost
disclosures are required to be provided
prior to consummation. Special
disclosures are required in connection
with certain products, such as reverse
mortgages, certain variable-rate loans,
and certain mortgages with rates and
fees above specified thresholds. TILA
and Regulation Z also contain rules
concerning credit advertising. Creditors
are required to retain evidence of
compliance for 24 months, 12 CFR
226.25, but Regulation Z does not

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specify the types of records that must be
retained.
Under the PRA, the Board accounts
for the paperwork burden associated
with Regulation Z for the state member
banks and other creditors supervised by
the Board that engage in lending
covered by Regulation Z and, therefore,
are respondents under the PRA.
Appendix I of Regulation Z defines the
Federal Reserve-regulated institutions
as: State member banks, branches and
agencies of foreign banks (other than
federal branches, federal agencies, and
insured state branches of foreign banks),
commercial lending companies owned
or controlled by foreign banks, and
organizations operating under section
25 or 25A of the Federal Reserve Act.
Other federal agencies account for the
paperwork burden on other creditors.
Paperwork burden associated with
entities that are not creditors will be
accounted for by other federal agencies.
To ease the burden and cost of
complying with Regulation Z
(particularly for small entities), the
Board provides model forms, which are
appended to the regulation.
As mentioned in the Preamble, on
January 9, 2008, a notice of proposed
rulemaking (NPR) was published in the
Federal Register (73 FR 1672). The
comment period for this notice expired
on April 8, 2008. No comments
specifically addressing the burden
estimate were received; therefore, the
burden estimates will remain
unchanged as published in the NPR.
The final rule will impose a one-time
increase in the total annual burden
under Regulation Z by 46,880 hours
from 552,398 to 599,278 hours. This
burden increase will be imposed on all
Federal Reserve-regulated institutions
that are deemed to be respondents for
the purposes of the PRA. Note that these
burden estimates do not include the
burden addressing changes to format,
timing, and content requirements for the
five main types of open-end credit
disclosures governed by Regulation Z as
announced in a separate proposed
rulemaking (Docket No. R–1286).
The Board has a continuing interest in
the public’s opinions of our collections
of information. At any time, comments
regarding the burden estimate, or any
other aspect of this collection of
information, including suggestions for
reducing the burden, may be sent to:
Secretary, Board of Governors of the
Federal Reserve System, 20th and C
Streets, NW., Washington, DC 20551;
and to the Office of Management and
Budget, Paperwork Reduction Project
(7100–0199), Washington, DC 20503.

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XV. Regulatory Flexibility Analysis
In accordance with section 4 of the
Regulatory Flexibility Act (RFA), 5
U.S.C. 601–612, the Board is publishing
a final regulatory flexibility analysis for
the proposed amendments to Regulation
Z. The RFA requires an agency either to
provide a final regulatory flexibility
analysis with a final rule or certify that
the final rule will not have a significant
economic impact on a substantial
number of small entities. An entity is
considered ‘‘small’’ if it has $165
million or less in assets for banks and
other depository institutions; and $6.5
million or less in revenues for non-bank
mortgage lenders, mortgage brokers, and
loan servicers.127
The Board received a large number of
comments contending that the proposed
rule would have a significant impact on
various businesses. In addition, the
Board received one comment on its
initial regulatory flexibility analysis.
Based on public comment, the Board’s
own analysis, and for the reasons stated
below, the Board believes that this final
rule will have a significant economic
impact on a substantial number of small
entities.
1. Statement of the Need for, and
Objectives of, the Final Rule
The Board is publishing final rules to
establish new regulatory protections for
consumers in the residential mortgage
market through amendments to
Regulation Z, which implements TILA
and HOEPA. As stated more fully above,
the amendments are intended to protect
consumers in the mortgage market from
unfair, abusive, or deceptive lending
and servicing acts or practices while
preserving responsible lending and
sustainable homeownership. Some of
the restrictions apply to only higherpriced mortgage loans, while others
apply to all mortgage loans secured by
a consumer’s principal dwelling. For
example, for higher-priced mortgage
loans, the amendments prohibit lending
based on the collateral without regard to
consumers’ ability to repay their
obligations from income, or from other
sources besides the collateral. In
addition, the amendments’ goals are to
ensure that advertisements for mortgage
credit provide accurate and balanced
information and do not contain
misleading or deceptive representations;
and to provide consumers transactionspecific disclosures early enough to use
while shopping for a mortgage.
127 U.S. Small Business Administration, Table of
Small Business Size Standards Matched to North
American Industry Classification System Codes,
available at http://www.sba.gov/idc/groups/public/
documents/sba_homepage/serv_sstd_tablepdf.pdf.

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2. Summary of Issues Raised by
Comments in Response to the Initial
Regulatory Flexibility Analysis
In accordance with section 3(a) of the
RFA, 5 U.S.C 603(a), the Board prepared
an initial regulatory flexibility analysis
(IRFA) in connection with the proposed
rule, and acknowledged that the
projected reporting, recordkeeping, and
other compliance requirements of the
proposed rule would have a significant
economic impact on a substantial
number of small entities. In addition,
the Board recognized that the precise
compliance costs would be difficult to
ascertain because they would depend on
a number of unknown factors,
including, among other things, the
specifications of the current systems
used by small entities to prepare and
provide disclosures and/or solicitations
and to administer and maintain
accounts, the complexity of the terms of
credit products that they offer, and the
range of such product offerings. The
Board sought information and comment
on any costs, compliance requirements,
or changes in operating procedures
arising from the application of the
proposed rule to small entities. The
Board recognizes that businesses often
pass compliance costs on to consumers
and that a less costly rule could benefit
both small business and consumers.
The Board reviewed comments
submitted by various entities in order to
ascertain the economic impact of the
proposed rule on small entities. A
number of financial institutions and
mortgage brokers expressed concern that
the Board had underestimated the costs
of compliance. In addition, the Office of
Advocacy of the U.S. Small Business
Administration (Advocacy) submitted a
comment on the Board’s IRFA.
Executive Order 13272 directs Federal
agencies to respond in a final rule to
written comments submitted by
Advocacy on a proposed rule, unless the
agency certifies that the public interest
is not served by doing so. The Board’s
response to Advocacy’s comment letter
is below.
Response to U.S. Small Business
Administration comment. Advocacy
supported the consumer protection
goals in the proposed rule, but
expressed concern that the Board’s IRFA
did not adequately assess the impact of
the proposed rule on small entities as
required by the RFA. Advocacy urged
the Board to issue a new proposal
containing a revised IRFA. For the
reasons stated below, the Board believes
that its IRFA complied with the
requirements of the RFA and the Board
is proceeding with a final rule.

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Advocacy suggested that the Board
failed to provide sufficient information
about the economic impact of the
proposed rule and that the Board’s
request for public comment on the costs
to small entities of the proposed rule
was not appropriate. Section 3(a) of the
RFA requires agencies to publish for
comment an IRFA which shall describe
the impact of the proposed rule on small
entities. 5 U.S.C 603(a). In addition,
section 3(b) requires the IRFA to contain
certain information including a
description of the projected reporting,
recordkeeping and other compliance
requirements of the proposed rule,
including an estimate of the classes of
small entities which will be subject to
the requirement and the type of
professional skills necessary for
preparation of the report or record. 5
U.S.C. 603(b).
The Board’s IRFA complied with the
requirements of the RFA. First, the
Board described the impact of the
proposed rule on small entities by
describing the rule’s proposed
requirements in detail throughout the
supplementary information for the
proposed rule. Second, the Board
described the projected compliance
requirements of the rule in its IRFA,
noting the need for small entities to
update systems, disclosures and
underwriting practices.128 The RFA
does not require the Board to undertake
an exhaustive economic analysis of the
proposal’s impact on small entities in
the IRFA. Instead, the IRFA procedure
is intended to evoke commentary from
small businesses about the effect of the
rule on their activities, and to require
agencies to consider the effect of a
regulation on those entities. Cement
Kiln Recycling Coalition v. EPA, 255
F.3d 855, 868 (D.C. Cir. 2001). The
Board described the projected impact of
the proposed rule and sought comments
from small entities themselves on the
effect the proposed rule would have on
their activities. The Board also notes
that the final rule does not adopt the
proposed rule on creditor payments to
mortgage brokers, reducing the final
rule’s impact on small mortgage broker
entities.
Advocacy also commented that the
Board failed to provide sufficient
information about the number of small
mortgage brokers that may be impacted
by the rule. Section 3(b)(3) of the RFA
requires the IRFA to contain a
description of and, where feasible, an
estimate of the number of small entities
to which the proposed rule will apply.
5 U.S.C. 603(b)(3) (emphasis added).
The Board provided a description of the
128 73

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small entities to which the proposed
rule would apply and provided an
estimate of the number of small
depository institutions to which the
proposed rule would apply.129 The
Board also provided an estimate of the
total number of mortgage broker entities
and estimated that most of these were
small entities.130 The Board stated that
it was not aware of a reliable source for
the total number of small entities likely
to be affected by the proposal.131 Thus,
the Board did not find it feasible to
estimate their number.
Advocacy also suggested that the
Board’s IRFA did not sufficiently
address alternatives to the proposed
rule. Section 3(c) of the RFA requires
that an IRFA contain a description of
any significant alternatives to the
proposed rule which accomplish the
stated objectives of applicable statutes
and which minimize any significant
economic impact of the proposed rule
on small entities. 5 U.S.C. 603(c). The
Board’s IRFA discusses the alternative
of improved disclosures and requests
comment on other alternatives.
Advocacy commented that the Board’s
IRFA does not discuss the economic
impact that the disclosure alternative
would have on small entities. Yet the
Board’s IRFA discussion of the
disclosure alternative indicates that the
Board does not believe that the
disclosure alternative would accomplish
the stated objectives of applicable
statutes.132 Advocacy also suggested
that the Board did not discuss other
alternatives such as a later
implementation date. However, the
Board specifically discussed and
requested comment on the effective date
in another section of the supplementary
information to the proposed rule.133
Section 5(a) of the RFA permits an
agency to perform the IRFA analysis
(among others) in conjunction with or as
part of any other analysis required by
any other law if such other analysis
satisfies the provisions of the RFA. 5
U.S.C. 605(a). Other alternatives were
discussed throughout the
129 Id.

at 1719.
at 1720. According to the National
Association of Mortgage Brokers, in 2004 there were
53,000 mortgage brokerage companies that
employed an estimated 418,700 people. The Board
believes that most of these companies are small
entities. In its comment letter, Advocacy noted that
the appropriate SBA size standard for mortgage
brokers is $6.5 million in average annual receipts
and that, of 15,590 mortgage broker firms in the
U.S. according to the 2002 Economic Census data,
15,195 would be classified as small using the $6.5
million standard.
131 73 FR 1672, 1719 (Jan. 9, 2008).
132 Id. at 1720.
133 Id. at 1717.

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supplementary information to the
Board’s proposal.
Other comments. In addition to
Advocacy’s comment letter, a number of
industry commenters expressed
concerns that the rule, as proposed,
would be costly to implement, would
not provide enough flexibility, and
would not adequately respond to the
needs or nature of their business. Many
commenters argued that improved
disclosures could protect consumers
against unfair acts or practices in
connection with closed-end mortgage
loans secured by a consumer’s principal
dwelling as well as the proposed rule.
As discussed in part XII, while the
Board anticipates proposing
improvements to mortgage loan
disclosures, the Board believes that
better disclosures alone would not
adequately address unfair, abusive or
deceptive practices in the mortgage
market, including the subprime market.
Since improved disclosures alone
would fail to accomplish the stated
objectives of TILA Section 129(l)(2),
which authorizes the Board to prohibit
unfair or deceptive practices in
connection with mortgage loans, the
Board concluded that improved
disclosures alone do not represent a
significant alternative to the proposed
rule, as a result of which the IRFA did
not discuss the economic impact of
improved disclosures.
Many of the issues raised by
commenters do not apply uniquely to
small entities and are addressed above
in other parts of the SUPPLEMENTARY
INFORMATION. The comments that
expressed specific concerns about the
effect of the proposed rule on small
entities are discussed below.
Defining loans as higher-priced. The
proposed rule defined higher-priced
mortgage loans as loans with an APR
that exceeds the comparable Treasury
security by three or more percentage
points for first-lien loans, or five or
more percentage points for subordinatelien loans. Some small banks,
community banks and manufactured
housing representatives expressed
concerns that, based on the proposed
definition of higher-priced mortgage
loans, some prime loans may be
classified as higher-priced, which could
have negative impact on their business.
Many of these commenters proposed
changing the definition of higher-priced
mortgage loans, and manufactured
housing industry representatives
proposed a separate standard for
personal property loans on
manufactured homes.
As discussed above, the Board is
adopting a definition of ‘‘higher-priced
mortgage loan’’ that is similar in

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44597

concept to the definition proposed, but
different in the particulars. The final
definition, like the proposed definition,
sets a threshold above a market rate to
distinguish higher-priced mortgage
loans from the rest of the mortgage
market. Instead of yields on Treasury
securities, the definition in the final rule
uses a survey-based estimate of market
rates for the lowest-risk prime
mortgages, referred to as the average
prime offer rate. The Board believes that
the final rule will more effectively meet
both goals of covering prime loans and
excluding prime, though it will cover
some prime loans under certain market
conditions.
Escrows. The proposed rule would
require creditors to establish escrow
accounts for taxes and insurance and
permitted them to allow borrowers to
opt out of escrows 12 months after loan
consummation. Several industry
commenters noted that the compliance
with the escrow proposal would be
costly and many small banks and
community banks commented that they
do not currently require escrows
because of this cost. A few small lenders
commented that the costs of setting up
escrow accounts are prohibitively
expensive but did not disclose what
such costs are. Manufactured housing
industry commenters were especially
concerned about the cost of requiring
escrows for manufactured homes that
are taxed as personal property because
there is no unified, systematic process
for the collection of personal property
taxes among various government
entities.
The final rule is adopted substantially
as proposed. As discussed above, the
Board does not believe that alternatives
to the final rule would achieve HOEPA’s
objectives. The Board has, however,
chosen effective dates for the final rule
that give creditors a longer
implementation period for establishing
escrow accounts. Comments on the
effective dates of the final rule are
discussed below.
Broker disclosures. The Board
proposed to prohibit creditors from
paying a mortgage broker more than the
consumer had agreed in advance that
the broker would receive. A large
number of mortgage brokers commented
that the proposal could lead to brokers
being less competitive in the
marketplace and may result in some
small brokers exiting the marketplace.
The Board tested the proposal in
several dozen one-on-one interviews
with a diverse group of consumers. On
the basis of this testing and other
information, the Board is withdrawing
its proposal to prohibit creditors from
paying a mortgage broker more than the

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consumer had agreed in advance that
the broker would receive. The Board is
concerned that the proposed agreement
and disclosures would confuse
consumers and undermine their
decision making rather than improve it.
The Board will continue to explore
available options to address potentially
unfair acts or practices associated with
originator compensation arrangements
such as yield spread premiums.
Servicing. The proposed rule
prohibited mortgage servicers from
‘‘pyramiding’’ late fees, failing to credit
payments as of the date of receipt,
failing to provide loan payoff statements
upon request within a reasonable time,
or failing to deliver a fee schedule to a
consumer upon request. Several
commenters noted that the fee schedule
disclosures would be very costly for a
servicer since fees vary by state, county,
city, investor and even product. The
Board has considered the concerns
raised by commenters and has
concluded that the transparency benefit
of the schedule does not sufficiently
offset the burdens of producing such a
schedule. Thus, the Board is not
adopting the proposed fee schedule
disclosure.
Early disclosures. The proposed rule
would require creditors to give
consumers transaction-specific, early
mortgage loan disclosures for certain
closed-end loans secured by a
consumer’s principal dwelling. The
proposed rule would require creditors to
deliver this disclosure within three
business days of application and before
a consumer pays a fee to any person,
other than a fee for obtaining the
consumer’s credit report. Many
creditors and their trade associations
opposed the proposal due to operational
cost and compliance difficulties (for
example, system reprogramming,
testing, procedural changes, and staff
training). They noted that the burden
may be significant for some small entity
creditors, such as community banks.
The Board is adopting
§ 226.19(a)(1)(iii) substantially as
proposed. The Board believes that
alternatives to the final rule would not
achieve TILA’s objectives. However, as
discussed below, the Board has chosen
an implementation period for the final
rule that responds to creditors’ concerns
about the time required to comply with
the rule.
Effective date. The Board requested
comment on whether six months would
be an appropriate implementation
period, and on the length of time
necessary for creditors to implement the
proposed rules, as well as whether the
Board should specify a shorter
implementation period for certain

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provisions in order to prevent unfair or
deceptive practices.
Many industry commenters and their
trade associations stated that six months
would be an appropriate
implementation period for some parts of
the rule, but that they would need
additional time to implement the
proposed early mortgage loan disclosure
requirement and the proposed escrow
requirement. Commenters requested
additional time to implement the early
mortgage loan disclosure rule in order to
provide sufficient time for system reprogramming, testing, procedural
changes, and staff training. And,
although many creditors currently
provide for escrows, other creditors,
including many that are small entities,
currently have no escrowing capacity or
infrastructure. These commenters
requested a period of 12 to 24 months
to implement the necessary systems and
processes. Manufactured housing
industry commenters were particularly
concerned because a limited
infrastructure is in place for escrowing
on manufactured housing loans.
In light of these concerns, the Board
believes additional compliance time
beyond six months is appropriate. With
two exceptions, the final rule is effective
for loans consummated on or after
October 1, 2009. The requirement to
establish an escrow account for taxes
and insurance for higher-priced
mortgage loans is effective for loans
consummated on or after April 1, 2010,
or, for loans secured by manufactured
housing, consummated on or after
October 1, 2010.
3. Description and Estimate of Small
Entities To Which the Proposed Rule
Would Apply
The final rule applies to all
institutions and entities that engage in
closed-end home-secured lending and
servicing. The Board acknowledged in
its IRFA the lack of a reliable source for
the total number of small entities likely
to be affected by the proposal, since the
credit provisions of TILA and
Regulation Z have broad applicability to
individuals and businesses that
originate, extend and service even small
numbers of home-secured credit.
Through data from Reports of
Condition and Income (‘‘call reports’’),
the Board identified approximate
numbers of small depository institutions
that would be subject to the proposed
rules. Based on March 2008 call report
data, approximately 8,393 small
institutions would be subject to the final
rule. Approximately 17,101 depository
institutions in the United States filed
call report data, approximately 12,237 of
which had total domestic assets of $165

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million or less and thus were
considered small entities for purposes of
the RFA. Of 4,554 banks, 401 thrifts and
7,318 credit unions that filed call report
data and were considered small entities,
4,259 banks, 377 thrifts, and 3,757
credit unions, totaling 8,393
institutions, extended mortgage credit.
For purposes of this analysis, thrifts
include savings banks, savings and loan
entities, co-operative banks and
industrial banks.
In its IRFA, the Board recognized that
it could not identify with certainty the
number of small nondepository
institutions that would be subject to the
proposed rule. Home Mortgage
Disclosure Act (HMDA) data indicate
that 2,004 non-depository institutions
filed HMDA reports in 2006. Based on
the small volume of lending activity
reported by these institutions, most are
likely to be small.
Certain parts of the final rule would
apply to mortgage brokers. The Board
provided an estimate of the number of
mortgage brokers in its IRFA, citing data
from the National Association of
Mortgage Brokers indicating that in
2004 there were 53,000 mortgage
brokerage companies.134 The Board
estimated in the IRFA that most of these
companies are small entities. A
comment letter received by the U.S.
Small Business Administration, citing
the 2002 Economic Census, stated that
there were 15,195 small mortgage broker
entities.
Certain parts of the final rule would
also apply to mortgage servicers. As
noted in IRFA, the Board is not aware,
however, of a source of data for the
number of small mortgage servicers. The
available data are not sufficient for the
Board to realistically estimate the
number of mortgage servicers that
would be subject to the final rule and
that are small as defined by the U.S.
Small Business Administration.
4. Reporting, Recordkeeping, and Other
Compliance Requirements
The compliance requirements of the
final rule are described in the
SUPPLEMENTARY INFORMATION. Some
small entities will be required, among
other things, to modify their
underwriting practices and homesecured credit disclosures to comply
with the revised rules. The precise costs
to small entities of updating their
systems, disclosures, and underwriting
practices are difficult to predict. These
costs will depend on a number of
unknown factors, including, among
other things, the specifications of the
134 http://www.namb.org/namb/
Industry_Facts.asp?SnID=719224934.

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current systems used by such entities to
prepare and provide disclosures and/or
solicitations and to administer and
maintain accounts, the complexity of
the terms of credit products that they
offer, and the range of such product
offerings. For some small entities,
certain parts of the rule may require the
type of professional skills already
necessary to meet other legal
requirements. For example, the Board
believes that final rule’s requirements
with regard to advertising will require
the same types of professional skills and
recordkeeping procedures that are
needed to comply with existing TILA
and Regulation Z advertising rules.
Other parts of the rule may require new
professional skills and recordkeeping
procedures for some small entities. For
example, creditors that do not currently
offer escrow accounts will need to
implement that capability. The Board
believes that costs of the final rule as a
whole will have a significant economic
effect on small entities.
5. Steps Taken To Minimize the
Economic Impact On Small Entities
The steps the Board has taken to
minimize the economic impact and
compliance burden on small entities,
including the factual, policy, and legal
reasons for selecting the alternatives
adopted and why each one of the other
significant alternatives was not
accepted, are described above in the
SUPPLEMENTARY INFORMATION and in the
summary of issues raised by the public
comments in response to the proposal’s
IRFA. The final rule’s modifications
from the proposed rule that minimize
economic impact on small entities are
summarized below.
First, the Board has provided a
different standard for defining higherpriced mortgage loans to more
accurately correspond to mortgage
market conditions and exclude from the
definition some prime loans that might
have been classified as higher-priced
under the proposed rule. The Board
believes that this will decrease the
economic impact of the final rule on
small entities by limiting their
compliance costs for prime loans the
Board does not intend to cover under
the higher-priced mortgage loan rules.
Second, the Board is providing an
implementation period that responds to
commenters’ concerns about the time
needed to comply with the final rule.
The Board is also providing later
effective dates for the escrow
requirement than for the other parts of
the final rule. As discussed above, the
Board believes that these effective dates
will decrease costs for small entities by
providing them with sufficient time to

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come into compliance with the final
rule’s requirements.
The Board also notes that it is
withdrawing two proposed rules for
which small entity commenters
expressed concern about the costs of
compliance. The Board is withdrawing
its proposal to prohibit creditors from
paying a mortgage broker more than the
consumer had agreed in advance that
the broker would receive, and its
proposal to require a servicer to provide
to a consumer upon request a schedule
of all specific fees and charges that may
be imposed in connection with the
servicing of the consumer’s account.
The Board believes that these changes
minimize the significant economic
impact on small entities while still
meeting the stated objectives of HOEPA
and TILA.
List of Subjects in 12 CFR Part 226
Advertising, Consumer protection,
Federal Reserve System, Mortgages,
Reporting and recordkeeping
requirements, Truth in lending.
Authority and Issuance

PART 226—TRUTH IN LENDING
(REGULATION Z)
1. The authority citation for part 226
is amended to read as follows:

■

Authority: 12 U.S.C. 3806; 15 U.S.C. 1604,
1637(c)(5), and 1639(l).

Subpart A—General
2. Section 226.1 is amended by
revising paragraph (d)(5) to read as
follows:

■

§ 226.1 Authority, purpose, coverage,
organization, enforcement and liability.

*
*
*
*
(d) * * *
*
*
*
*
*
(5) Subpart E contains special rules
for mortgage transactions. Section
226.32 requires certain disclosures and
provides limitations for loans that have
rates and fees above specified amounts.
Section 226.33 requires disclosures,
including the total annual loan cost rate,
for reverse mortgage transactions.
Section 226.34 prohibits specific acts
and practices in connection with
mortgage transactions that are subject to
§ 226.32. Section 226.35 prohibits
specific acts and practices in connection
with higher-priced mortgage loans, as
defined in § 226.35(a). Section 226.36
prohibits specific acts and practices in

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connection with credit secured by a
consumer’s principal dwelling.
*
*
*
*
*
■ 3. Section 226.2 is amended by
revising paragraph (a)(6) to read as
follows:
§ 226.2 Definitions and Rules of
Construction.

(a) * * *
(6) ‘‘Business Day’’ means a day on
which the creditor’s offices are open to
the public for carrying on substantially
all of its business functions. However,
for purposes of rescission under
§§ 226.15 and 226.23, and for purposes
of § 226.19(a)(1)(ii) and § 226.31, the
term means all calendar days except
Sundays and the legal public holidays
specified in 5 U.S.C. 6103(a), such as
New Year’s Day, the Birthday of Martin
Luther King, Jr., Washington’s Birthday,
Memorial Day, Independence Day,
Labor Day, Columbus Day, Veterans
Day, Thanksgiving Day, and Christmas
Day.
Subpart B—Open-End Credit
4. Section 226.16 is amended by
revising paragraphs (d)(2) through
(d)(4), and adding new paragraphs (d)(6)
and (e) to read as follows:

■

For the reasons set forth in the
preamble, the Board amends Regulation
Z, 12 CFR part 226, as set forth below:

■

*

44599

§ 226.16

Advertising.

*

*
*
*
*
(d) Additional requirements for homeequity plans
*
*
*
*
*
(2) Discounted and premium rates. If
an advertisement states an initial annual
percentage rate that is not based on the
index and margin used to make later
rate adjustments in a variable-rate plan,
the advertisement also shall state with
equal prominence and in close
proximity to the initial rate:
(i) The period of time such initial rate
will be in effect; and
(ii) A reasonably current annual
percentage rate that would have been in
effect using the index and margin.
(3) Balloon payment. If an
advertisement contains a statement of
any minimum periodic payment and a
balloon payment may result if only the
minimum periodic payments are made,
even if such a payment is uncertain or
unlikely, the advertisement also shall
state with equal prominence and in
close proximity to the minimum
periodic payment statement that a
balloon payment may result, if
applicable.36e A balloon payment
results if paying the minimum periodic
payments does not fully amortize the
outstanding balance by a specified date
36e [Reserved.]

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or time, and the consumer is required to
repay the entire outstanding balance at
such time. If a balloon payment will
occur when the consumer makes only
the minimum payments required under
the plan, an advertisement for such a
program which contains any statement
of any minimum periodic payment shall
also state with equal prominence and in
close proximity to the minimum
periodic payment statement:
(i) That a balloon payment will result;
and
(ii) The amount and timing of the
balloon payment that will result if the
consumer makes only the minimum
payments for the maximum period of
time that the consumer is permitted to
make such payments.
(4) Tax implications. An
advertisement that states that any
interest expense incurred under the
home-equity plan is or may be tax
deductible may not be misleading in
this regard. If an advertisement
distributed in paper form or through the
Internet (rather than by radio or
television) is for a home-equity plan
secured by the consumer’s principal
dwelling, and the advertisement states
that the advertised extension of credit
may exceed the fair market value of the
dwelling, the advertisement shall
clearly and conspicuously state that:
(i) 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
(ii) The consumer should consult a
tax adviser for further information
regarding the deductibility of interest
and charges.
*
*
*
*
*
(6) Promotional rates and payments—
(i) Definitions. The following definitions
apply for purposes of paragraph (d)(6) of
this section:
(A) Promotional rate. The term
‘‘promotional rate’’ means, in a variablerate plan, any annual percentage rate
that is not based on the index and
margin that will be used to make rate
adjustments under the plan, if that rate
is less than a reasonably current annual
percentage rate that would be in effect
under the index and margin that will be
used to make rate adjustments under the
plan.
(B) Promotional payment. The term
‘‘promotional payment’’ means—
(1) For a variable-rate plan, any
minimum payment applicable for a
promotional period that:
(i) Is not derived by applying the
index and margin to the outstanding
balance when such index and margin
will be used to determine other
minimum payments under the plan; and

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(ii) 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.
(2) For a plan other than a variablerate plan, any minimum payment
applicable for a promotional period if
that payment is less than other
payments required under the plan given
an assumed balance.
(C) Promotional period. A
‘‘promotional period’’ means a period of
time, less than the full term of the loan,
that the promotional rate or promotional
payment may be applicable.
(ii) Stating the promotional period
and post-promotional rate or payments.
If any annual percentage rate that may
be applied to a plan is a promotional
rate, or if any payment applicable to a
plan is a promotional payment, the
following must be disclosed in any
advertisement, other than television or
radio advertisements, in a clear and
conspicuous manner with equal
prominence and in close proximity to
each listing of the promotional rate or
payment:
(A) The period of time during which
the promotional rate or promotional
payment will apply;
(B) In the case of a promotional rate,
any annual percentage rate that will
apply under the plan. If such rate is
variable, the annual percentage rate
must be disclosed in accordance with
the accuracy standards in §§ 226.5b, or
226.16(b)(1)(ii) as applicable; and
(C) In the case of a promotional
payment, the amounts and time periods
of any payments that will apply under
the plan. In variable-rate transactions,
payments that will be determined based
on application of an index and margin
shall be disclosed based on a reasonably
current index and margin.
(iii) Envelope excluded. The
requirements in paragraph (d)(6)(ii) of
this section do not apply to an envelope
in which an application or solicitation
is mailed, or to a banner advertisement
or pop-up advertisement linked to an
application or solicitation provided
electronically.
(e) Alternative disclosures—television
or radio advertisements. An
advertisement for a home-equity plan
subject to the requirements of § 226.5b
made through television or radio stating
any of the terms requiring additional
disclosures under paragraph (b) or (d)(1)
of this section may alternatively comply
with paragraph (b) or (d)(1) of this
section by stating the information
required by paragraph (b)(2) of this
section or paragraph (d)(1)(ii) of this
section, as applicable, and listing a toll-

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free telephone number, or any telephone
number that allows a consumer to
reverse the phone charges when calling
for information, along with a reference
that such number may be used by
consumers to obtain additional cost
information.
Subpart C—Closed-End Credit
5. Section 226.17 is amended by
revising paragraphs (b) and (f) to read as
follows:

■

§ 226.17

General disclosure requirements.

*

*
*
*
*
(b) Time of disclosures. The creditor
shall make disclosures before
consummation of the transaction. In
certain mortgage transactions, special
timing requirements are set forth in
§ 226.19(a). In certain variable-rate
transactions, special timing
requirements for variable-rate
disclosures are set forth in § 226.19(b)
and § 226.20(c). In certain transactions
involving mail or telephone orders or a
series of sales, the timing of the
disclosures may be delayed in
accordance with paragraphs (g) and (h)
of this section.
*
*
*
*
*
(f) Early disclosures. If disclosures
required by this subpart are given before
the date of consummation of a
transaction and a subsequent event
makes them inaccurate, the creditor
shall disclose before consummation
(except that, for certain mortgage
transactions, § 226.19(a)(2) permits
redisclosure no later than
consummation or settlement, whichever
is later).39
*
*
*
*
*
■ 6. Section 226.19 is amended by
revising the heading and paragraph
(a)(1) to read as follows:
§ 226.19 Certain mortgage and variablerate transactions.

(a) Mortgage transactions subject to
RESPA—(1)(i) Time of disclosures. In a
mortgage transaction subject to the Real
Estate Settlement Procedures Act (12
U.S.C. 2601 et seq.) that is secured by
the consumer’s principal dwelling,
other than a home equity line of credit
subject to § 226.5b, the creditor shall
make good faith estimates of the
disclosures required by § 226.18 before
consummation, or shall deliver or place
them in the mail not later than three
business days after the creditor receives
the consumer’s written application,
whichever is earlier.
(ii) Imposition of fees. Except as
provided in paragraph (a)(1)(iii) of this
39 [Reserved.]

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section, neither a creditor nor any other
person may impose a fee on the
consumer in connection with the
consumer’s application for a mortgage
transaction subject to paragraph (a)(1)(i)
of this section before the consumer has
received the disclosures required by
paragraph (a)(1)(i) of this section. If the
disclosures are mailed to the consumer,
the consumer is considered to have
received them three business days after
they are mailed.
(iii) Exception to fee restriction. A
creditor or other person may impose a
fee for obtaining the consumer’s credit
history before the consumer has
received the disclosures required by
paragraph (a)(1)(i) of this section,
provided the fee is bona fide and
reasonable in amount.
*
*
*
*
*
7. Section 226.23 is amended by
revising footnote 48 to paragraph (a)(3)
to read ‘‘The term ‘material disclosures’
means the required disclosures of the
annual percentage rate, the finance
charge, the amount financed, the total of
payments, the payment schedule, and
the disclosures and limitations referred
to in §§ 226.32(c) and (d) and
226.35(b)(2).’’
■

8. Section 226.24 is amended by
redesignating paragraphs (b) through (d)
as paragraphs (c) through (e),
respectively, adding new paragraph (b),
revising newly designated paragraphs
(c) through (e), removing and reserving
footnote 49, and adding new paragraphs
(f) through (i), to read as follows:

■

§ 226.24

Advertising.

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*

*
*
*
*
(b) Clear and conspicuous standard.
Disclosures required by this section
shall be made clearly and
conspicuously.
(c) Advertisement of rate of finance
charge. If an advertisement states a rate
of finance charge, it shall state the rate
as an ‘‘annual percentage rate,’’ using
that term. If the annual percentage rate
may be increased after consummation,
the advertisement shall state that fact. If
an advertisement is for credit not
secured by a dwelling, the
advertisement shall not state any other
rate, except that a simple annual rate or
periodic rate that is applied to an
unpaid balance may be stated in
conjunction with, but not more
conspicuously than, the annual
percentage rate. If an advertisement is
for credit secured by a dwelling, the
advertisement shall not state any other
rate, except that a simple annual rate
that is applied to an unpaid balance
may be stated in conjunction with, but

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not more conspicuously than, the
annual percentage rate.
(d) Advertisement of terms that
require additional disclosures—(1)
Triggering terms. If any of the following
terms is set forth in an advertisement,
the advertisement shall meet the
requirements of paragraph (d)(2) of this
section:
(i) The amount or percentage of any
downpayment.
(ii) The number of payments or period
of repayment.
(iii) The amount of any payment.
(iv) The amount of any finance
charge.
(2) Additional terms. An
advertisement stating any of the terms
in paragraph (d)(1) of this section shall
state the following terms,49 as
applicable (an example of one or more
typical extensions of credit with a
statement of all the terms applicable to
each may be used):
(i) The amount or percentage of the
downpayment.
(ii) The terms of repayment, which
reflect the repayment obligations over
the full term of the loan, including any
balloon payment.
(iii) The ‘‘annual percentage rate,’’
using that term, and, if the rate may be
increased after consummation, that fact.
(e) Catalogs or other multiple-page
advertisements; electronic
advertisements—(1) If a catalog or other
multiple-page advertisement, or an
electronic advertisement (such as an
advertisement appearing on an Internet
Web site), gives information in a table
or schedule in sufficient detail to permit
determination of the disclosures
required by paragraph (d)(2) of this
section, it shall be considered a single
advertisement if—
(i) The table or schedule is clearly and
conspicuously set forth; and
(ii) Any statement of the credit terms
in paragraph (d)(1) of this section
appearing anywhere else in the catalog
or advertisement clearly refers to the
page or location where the table or
schedule begins.
(2) A catalog or other multiple-page
advertisement or an electronic
advertisement (such as an advertisement
appearing on an Internet Web site)
complies with paragraph (d)(2) of this
section if the table or schedule of terms
includes all appropriate disclosures for
a representative scale of amounts up to
the level of the more commonly sold
higher-priced property or services
offered.
(f) Disclosure of Rates and Payments
in Advertisements for Credit Secured by
a Dwelling.

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(1) Scope. The requirements of this
paragraph apply to any advertisement
for credit secured by a dwelling, other
than television or radio advertisements,
including promotional materials
accompanying applications.
(2) Disclosure of rates—(i) In general.
If an advertisement for credit secured by
a dwelling states a simple annual rate of
interest and more than one simple
annual rate of interest will apply over
the term of the advertised loan, the
advertisement shall disclose in a clear
and conspicuous manner:
(A) Each simple annual rate of interest
that will apply. In variable-rate
transactions, a rate determined by
adding an index and margin shall be
disclosed based on a reasonably current
index and margin;
(B) The period of time during which
each simple annual rate of interest will
apply; and
(C) The annual percentage rate for the
loan. If such rate is variable, the annual
percentage rate shall comply with the
accuracy standards in §§ 226.17(c) and
226.22.
(ii) Clear and conspicuous
requirement. For purposes of paragraph
(f)(2)(i) of this section, clearly and
conspicuously disclosed means that the
required information in paragraphs
(f)(2)(i)(A) through (C) shall be disclosed
with equal prominence and in close
proximity to any advertised rate that
triggered the required disclosures. The
required information in paragraph
(f)(2)(i)(C) may be disclosed with greater
prominence than the other information.
(3) Disclosure of payments—(i) In
general. In addition to the requirements
of paragraph (c) of this section, if an
advertisement for credit secured by a
dwelling states the amount of any
payment, the advertisement shall
disclose in a clear and conspicuous
manner:
(A) The amount of each payment that
will apply over the term of the loan,
including any balloon payment. In
variable-rate transactions, payments that
will be determined based on the
application of the sum of an index and
margin shall be disclosed based on a
reasonably current index and margin;
(B) The period of time during which
each payment will apply; and
(C) In an advertisement for credit
secured by a first lien on a dwelling, the
fact that the payments do not include
amounts for taxes and insurance
premiums, if applicable, and that the
actual payment obligation will be
greater.
(ii) Clear and conspicuous
requirement. For purposes of paragraph
(f)(3)(i) of this section, a clear and
conspicuous disclosure means that the

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required information in paragraphs
(f)(3)(i)(A) and (B) shall be disclosed
with equal prominence and in close
proximity to any advertised payment
that triggered the required disclosures,
and that the required information in
paragraph (f)(3)(i)(C) shall be disclosed
with prominence and in close proximity
to the advertised payments.
(4) Envelope excluded. The
requirements in paragraphs (f)(2) and
(f)(3) of this section do not apply to an
envelope in which an application or
solicitation is mailed, or to a banner
advertisement or pop-up advertisement
linked to an application or solicitation
provided electronically.
(g) Alternative disclosures—television
or radio advertisements. An
advertisement made through television
or radio stating any of the terms
requiring additional disclosures under
paragraph (d)(2) of this section may
comply with paragraph (d)(2) of this
section either by:
(1) Stating clearly and conspicuously
each of the additional disclosures
required under paragraph (d)(2) of this
section; or
(2) Stating clearly and conspicuously
the information required by paragraph
(d)(2)(iii) of this section and listing a
toll-free telephone number, or any
telephone number that allows a
consumer to reverse the phone charges
when calling for information, along with
a reference that such number may be
used by consumers to obtain additional
cost information.
(h) Tax implications. If an
advertisement distributed in paper form
or through the Internet (rather than by
radio or television) is for a loan secured
by the consumer’s principal dwelling,
and the advertisement states that the
advertised extension of credit may
exceed the fair market value of the
dwelling, the advertisement shall
clearly and conspicuously state that:
(1) 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
(2) The consumer should consult a tax
adviser for further information regarding
the deductibility of interest and charges.
(i) Prohibited acts or practices in
advertisements for credit secured by a
dwelling. The following acts or practices
are prohibited in advertisements for
credit secured by a dwelling:
(1) Misleading advertising of ‘‘fixed’’
rates and payments. Using the word
‘‘fixed’’ to refer to rates, payments, or
the credit transaction in an
advertisement for variable-rate
transactions or other transactions where
the payment will increase, unless:

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(i) In the case of an advertisement
solely for one or more variable-rate
transactions,
(A) The phrase ‘‘Adjustable-Rate
Mortgage,’’ ‘‘Variable-Rate Mortgage,’’ or
‘‘ARM’’ 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
(B) Each use of the word ‘‘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;
(ii) In the case of an advertisement
solely for non-variable-rate transactions
where the payment will increase (e.g., a
stepped-rate mortgage transaction with
an initial lower payment), each use of
the word ‘‘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 will increase after that
period; or
(iii) In the case of an advertisement
for both variable-rate transactions and
non-variable-rate transactions,
(A) The phrase ‘‘Adjustable-Rate
Mortgage,’’ ‘‘Variable-Rate Mortgage,’’ or
‘‘ARM’’ appears in the advertisement
with equal prominence as any use of the
term ‘‘fixed,’’ ‘‘Fixed-Rate Mortgage,’’ or
similar terms; and
(B) Each use of the word ‘‘fixed’’ to
refer to a rate, payment, or the credit
transaction either refers solely to the
transactions for which rates are fixed
and complies with paragraph (i)(1)(ii) of
this section, if applicable, or, if it refers
to the variable-rate transactions, 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.
(2) Misleading comparisons in
advertisements. Making any comparison
in an advertisement between actual or
hypothetical credit payments or rates
and any payment or simple annual rate
that will be available under the
advertised product for a period less than
the full term of the loan, unless:
(i) In general. The advertisement
includes a clear and conspicuous
comparison to the information required
to be disclosed under sections
226.24(f)(2) and (3); and
(ii) Application to variable-rate
transactions. If the advertisement is for
a variable-rate transaction, and the
advertised payment or simple annual

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rate is based on the index and margin
that will be used to make subsequent
rate or payment adjustments over the
term of the loan, the advertisement
includes 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.
(3) Misrepresentations about
government endorsement. Making any
statement in an advertisement that the
product offered 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 an FHA loan, VA
loan, or similar loan program that is, in
fact, endorsed or sponsored by a federal,
state, or local government entity.
(4) Misleading use of the current
lender’s name. Using the name of the
consumer’s current lender in an
advertisement that is not sent by or on
behalf of the consumer’s current lender,
unless the advertisement:
(i) Discloses with equal prominence
the name of the person or creditor
making the advertisement; and
(ii) Includes a clear and conspicuous
statement that the person making the
advertisement is not associated with, or
acting on behalf of, the consumer’s
current lender.
(5) Misleading claims of debt
elimination. Making any misleading
claim in an advertisement that the
mortgage product offered will eliminate
debt or result in a waiver or forgiveness
of a consumer’s existing loan terms
with, or obligations to, another creditor.
(6) Misleading use of the term
‘‘counselor’’. Using the term
‘‘counselor’’ in an advertisement 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.
(7) Misleading foreign-language
advertisements. Providing information
about some trigger terms or required
disclosures, such as an initial rate or
payment, only in a foreign language in
an advertisement, 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 in the same advertisement.
Subpart E—Special Rules for Certain
Home Mortgage Transactions
9. Section 226.32 is amended by
revising paragraphs (d)(6) and (d)(7) to
read as follows:

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§ 226.32 Requirements for certain closedend home mortgages.

*

*
*
*
*
(d) * * *
(6) Prepayment penalties. Except as
allowed under paragraph (d)(7) of this
section, a penalty for paying all or part
of the principal before the date on
which the principal is due. A
prepayment penalty includes computing
a refund of unearned interest by a
method that is less favorable to the
consumer than the actuarial method, as
defined by section 933(d) of the Housing
and Community Development Act of
1992, 15 U.S.C. 1615(d).
(7) Prepayment penalty exception. A
mortgage transaction subject to this
section may provide for a prepayment
penalty (including a refund calculated
according to the rule of 78s) otherwise
permitted by law if, under the terms of
the loan:
(i) The penalty will not apply after the
two-year period following
consummation;
(ii) The penalty will not apply if the
source of the prepayment funds is a
refinancing by the creditor or an affiliate
of the creditor;
(iii) At consummation, the consumer’s
total monthly debt payments (including
amounts owed under the mortgage) do
not exceed 50 percent of the consumer’s
monthly gross income, as verified in
accordance with § 226.34(a)(4)(ii); and
(iv) The amount of the periodic
payment of principal or interest or both
may not change during the four-year
period following consummation.
*
*
*
*
*
■ 10. Section 226.34 is amended by
revising the heading and paragraph
(a)(4) to read as follows:

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§ 226.34 Prohibited acts or practices in
connection with credit subject to § 226.32.

(a) * * *
(4) Repayment ability. Extend credit
subject to § 226.32 to a consumer based
on the value of the consumer’s collateral
without regard to the consumer’s
repayment ability as of consummation,
including the consumer’s current and
reasonably expected income,
employment, assets other than the
collateral, current obligations, and
mortgage-related obligations.
(i) Mortgage-related obligations. For
purposes of this paragraph (a)(4),
mortgage-related obligations are
expected property taxes, premiums for
mortgage-related insurance required by
the creditor as set forth in
§ 226.35(b)(3)(i), and similar expenses.
(ii) Verification of repayment ability.
Under this paragraph (a)(4) a creditor
must verify the consumer’s repayment
ability as follows:

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(A) A creditor must verify amounts of
income or assets that it relies on to
determine repayment ability, including
expected income or assets, by the
consumer’s Internal Revenue Service
Form W–2, tax returns, payroll receipts,
financial institution records, or other
third-party documents that provide
reasonably reliable evidence of the
consumer’s income or assets.
(B) Notwithstanding paragraph
(a)(4)(ii)(A), a creditor has not violated
paragraph (a)(4)(ii) if the amounts of
income and assets that the creditor
relied upon in determining repayment
ability are not materially greater than
the amounts of the consumer’s income
or assets that the creditor could have
verified pursuant to paragraph
(a)(4)(ii)(A) at the time the loan was
consummated.
(C) A creditor must verify the
consumer’s current obligations.
(iii) Presumption of compliance. A
creditor is presumed to have complied
with this paragraph (a)(4) with respect
to a transaction if the creditor:
(A) Verifies the consumer’s repayment
ability as provided in paragraph
(a)(4)(ii);
(B) Determines the consumer’s
repayment ability using the largest
payment of principal and interest
scheduled in the first seven years
following consummation and taking
into account current obligations and
mortgage-related obligations as defined
in paragraph (a)(4)(i); and
(C) Assesses the consumer’s
repayment ability taking into account at
least one of the following: The ratio of
total debt obligations to income, or the
income the consumer will have after
paying debt obligations.
(iv) Exclusions from presumption of
compliance. Notwithstanding the
previous paragraph, no presumption of
compliance is available for a transaction
for which:
(A) The regular periodic payments for
the first seven years would cause the
principal balance to increase; or
(B) The term of the loan is less than
seven years and the regular periodic
payments when aggregated do not fully
amortize the outstanding principal
balance.
(v) Exemption. This paragraph (a)(4)
does not apply to temporary or ‘‘bridge’’
loans with terms of twelve months or
less, such as a loan to purchase a new
dwelling where the consumer plans to
sell a current dwelling within twelve
months.
*
*
*
*
*
■ 11. New § 226.35 is added to read as
follows:

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§ 226.35 Prohibited acts or practices in
connection with higher-priced mortgage
loans.

(a) Higher-priced mortgage loans—(1)
For purposes of this section, a higherpriced mortgage loan is a consumer
credit transaction secured by the
consumer’s principal dwelling with an
annual percentage rate that exceeds the
average prime offer rate for a
comparable transaction as of the date
the interest rate is set by 1.5 or more
percentage points for loans secured by
a first lien on a dwelling, or by 3.5 or
more percentage points for loans
secured by a subordinate lien on a
dwelling.
(2) ‘‘Average prime offer rate’’ means
an annual percentage rate 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. The Board publishes
average prime offer rates for a broad
range of types of transactions in a table
updated at least weekly as well as the
methodology the Board uses to derive
these rates.
(3) Notwithstanding paragraph (a)(1)
of this section, the term ‘‘higher-priced
mortgage loan’’ does not include a
transaction to finance the initial
construction of a dwelling, a temporary
or ‘‘bridge’’ loan with a term of twelve
months or less, such as a loan to
purchase a new dwelling where the
consumer plans to sell a current
dwelling within twelve months, a
reverse-mortgage transaction subject to
§ 226.33, or a home equity line of credit
subject to § 226.5b.
(b) Rules for higher-priced mortgage
loans. Higher-priced mortgage loans are
subject to the following restrictions:
(1) Repayment ability. A creditor shall
not extend credit based on the value of
the consumer’s collateral without regard
to the consumer’s repayment ability as
of consummation as provided in
§ 226.34(a)(4).
(2) Prepayment penalties. A loan may
not include a penalty described by
§ 226.32(d)(6) unless:
(i) The penalty is otherwise permitted
by law, including § 226.32(d)(7) if the
loan is a mortgage transaction described
in § 226.32(a); and
(ii) Under the terms of the loan—
(A) The penalty will not apply after
the two-year period following
consummation;
(B) The penalty will not apply if the
source of the prepayment funds is a
refinancing by the creditor or an affiliate
of the creditor; and
(C) The amount of the periodic
payment of principal or interest or both

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may not change during the four-year
period following consummation.
(3) Escrows—(i) Failure to escrow for
property taxes and insurance. Except as
provided in paragraph (b)(3)(ii) of this
section, a creditor may not extend a loan
secured by a first lien on a principal
dwelling unless an escrow account is
established before consummation for
payment of property taxes and
premiums for mortgage-related
insurance required by the creditor, such
as insurance against loss of or damage
to property, or against liability arising
out of the ownership or use of the
property, or insurance protecting the
creditor against the consumer’s default
or other credit loss.
(ii) Exemptions for loans secured by
shares in a cooperative and for certain
condominium units—(A) Escrow
accounts need not be established for
loans secured by shares in a
cooperative; and
(B) Insurance premiums described in
paragraph (b)(3)(i) of this section need
not be included in escrow accounts for
loans secured by condominium units,
where the condominium association has
an obligation to the condominium unit
owners to maintain a master policy
insuring condominium units.
(iii) Cancellation. A creditor or
servicer may permit a consumer to
cancel the escrow account required in
paragraph (b)(3)(i) of this section only in
response to a consumer’s dated written
request to cancel the escrow account
that is received no earlier than 365 days
after consummation.
(iv) Definition of escrow account. For
purposes of this section, ‘‘escrow
account’’ shall have the same meaning
as in 24 CFR 3500.17(b) as amended.
(4) Evasion; open-end credit. In
connection with credit secured by a
consumer’s principal dwelling that does
not meet the definition of open-end
credit in § 226.2(a)(20), a creditor shall
not structure a home-secured loan as an
open-end plan to evade the
requirements of this section.
■ 12. New § 226.36 is added to read as
follows:

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§ 226.36 Prohibited acts or practices in
connection with credit secured by a
consumer’s principal dwelling.

(a) Mortgage broker defined. For
purposes of this section, the term
‘‘mortgage broker’’ means a person,
other than an employee of a creditor,
who for compensation or other
monetary gain, or in expectation of
compensation or other monetary gain,
arranges, negotiates, or otherwise
obtains an extension of consumer credit
for another person. The term includes a
person meeting this definition, even if

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the consumer credit obligation is
initially payable to such person, unless
the person provides the funds for the
transaction at consummation out of the
person’s own resources, out of deposits
held by the person, or by drawing on a
bona fide warehouse line of credit.
(b) Misrepresentation of value of
consumer’s dwelling—(1) Coercion of
appraiser. In connection with a
consumer credit transaction secured by
a consumer’s principal dwelling, no
creditor or mortgage broker, and no
affiliate of a creditor or mortgage broker
shall directly or indirectly coerce,
influence, or otherwise encourage an
appraiser to misstate or misrepresent the
value of such dwelling.
(i) Examples of actions that violate
this paragraph (b)(1) include:
(A) Implying to an appraiser that
current or future retention of the
appraiser depends on the amount at
which the appraiser values a consumer’s
principal dwelling;
(B) Excluding an appraiser from
consideration for future engagement
because the appraiser reports a value of
a consumer’s principal dwelling that
does not meet or exceed a minimum
threshold;
(C) Telling an appraiser a minimum
reported value of a consumer’s principal
dwelling that is needed to approve the
loan;
(D) Failing to compensate an
appraiser because the appraiser does not
value a consumer’s principal dwelling
at or above a certain amount; and
(E) Conditioning an appraiser’s
compensation on loan consummation.
(ii) Examples of actions that do not
violate this paragraph (b)(1) include:
(A) Asking an appraiser to consider
additional information about a
consumer’s principal dwelling or about
comparable properties;
(B) Requesting that an appraiser
provide additional information about
the basis for a valuation;
(C) Requesting that an appraiser
correct factual errors in a valuation;
(D) Obtaining multiple appraisals of a
consumer’s principal dwelling, so long
as the creditor adheres to a policy of
selecting the most reliable appraisal,
rather than the appraisal that states the
highest value;
(E) Withholding compensation from
an appraiser for breach of contract or
substandard performance of services as
provided by contract; and
(F) Taking action permitted or
required by applicable federal or state
statute, regulation, or agency guidance.
(2) When extension of credit
prohibited. In connection with a
consumer credit transaction secured by
a consumer’s principal dwelling, a

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creditor who knows, at or before loan
consummation, of a violation of
paragraph (b)(1) of this section in
connection with an appraisal shall not
extend credit based on such appraisal
unless the creditor documents that it
has acted with reasonable diligence to
determine that the appraisal does not
materially misstate or misrepresent the
value of such dwelling.
(3) Appraiser defined. As used in this
paragraph (b), an appraiser is a person
who engages in the business of
providing assessments of the value of
dwellings. The term ‘‘appraiser’’
includes persons that employ, refer, or
manage appraisers and affiliates of such
persons.
(c) Servicing practices. (1) In
connection with a consumer credit
transaction secured by a consumer’s
principal dwelling, no servicer shall—
(i) Fail to credit a payment to the
consumer’s loan account as of the date
of receipt, except when a delay in
crediting does not result in any charge
to the consumer or in the reporting of
negative information to a consumer
reporting agency, or except as provided
in paragraph (c)(2) of this section;
(ii) Impose on the consumer any late
fee or delinquency charge in connection
with a payment, when the only
delinquency is attributable to late fees
or delinquency charges assessed on an
earlier payment, and the payment is
otherwise a full payment for the
applicable period and is paid on its due
date or within any applicable grace
period; or
(iii) Fail to provide, within a
reasonable time after receiving a request
from the consumer or any person acting
on behalf of the consumer, an accurate
statement of the total outstanding
balance that would be required to satisfy
the consumer’s obligation in full as of a
specified date.
(2) If a servicer specifies in writing
requirements for the consumer to follow
in making payments, but accepts a
payment that does not conform to the
requirements, the servicer shall credit
the payment as of 5 days after receipt.
(3) For purposes of this paragraph (c),
the terms ‘‘servicer’’ and ‘‘servicing’’
have the same meanings as provided in
24 CFR 3500.2(b), as amended.
(d) This section does not apply to a
home equity line of credit subject to
§ 226.5b.
Supplement I to Part 226—Official Staff
Interpretations
Subpart A—General
13. In Supplement I to Part 226, under
Section 226.1—Authority, Purpose,
Coverage, Organization, Enforcement

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Federal Register / Vol. 73, No. 147 / Wednesday, July 30, 2008 / Rules and Regulations
Section 226.2—Definitions and Rules of
and Liability, new headings 1(d)
Organization and Paragraph 1(d)(5), and Construction
2(a) Definitions.
new paragraph 1(d)(5)–1 are added to
read as follows:
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Section 226.1—Authority, Purpose, Coverage,
Organization, Enforcement and Liability

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1(d) Organization.
Paragraph 1(d)(5).
1. Effective dates. The Board’s revisions to
Regulation Z published on July 30, 2008 (the
‘‘final rules’’), apply to covered loans
(including refinance loans and assumptions
considered new transactions under 226.20),
for which the creditor receives an application
on or after October 1, 2009, except for the
final rules on advertising, escrows, and loan
servicing. The final rules on escrows in
§ 226.35(b)(3) are effective for covered loans,
(including refinancings and assumptions in
226.20) for which the creditor receives an
application on or after April 1, 2010; but for
such loans secured by manufactured housing
on or after October 1, 2010. The final rules
applicable to servicers in § 226.36(c) apply to
all covered loans serviced on or after October
1, 2009. The final rules on advertising apply
to advertisements occurring on or after
October 1, 2009. For example, a radio ad
occurs on the date it is first broadcast; a
solicitation occurs on the date it is mailed to
the consumer. The following examples
illustrate the application of the effective
dates for the final rules.
i. General. A refinancing or assumption as
defined in 226.20(a) or (b) is a new
transaction and is covered by a provision of
the final rule if the creditor receives an
application for the transaction on or after that
provision’s effective date. For example, if a
creditor receives an application for a
refinance loan covered by 226.35(a) on or
after October 1, 2009, and the refinance loan
is consummated on October 15, 2009, the
provision restricting prepayment penalties in
§ 226.35(b)(2) applies. However, If the
transaction were a modification of an existing
obligation’s terms that does not constitute a
refinance loan under § 226.20(a), the final
rules, including for example the restriction
on prepayment penalties would not apply.
ii. Escrows. Assume a consumer applies for
a refinance loan to be secured by a dwelling
(that is not a manufactured home) on March
15, 2010, and the loan is consummated on
April 2, 2010, the escrow rule in 226.35(b)(3)
does not apply.
iii. Servicing. Assume that a consumer
applies for a new loan on August 1, 2009.
The loan is consummated on September 1,
2009. The servicing rules in 226.36(c) apply
to the servicing of that loan as of October 1,
2009.

14. In Supplement I to Part 226, under
Section 226.2—Definitions and Rules of
Construction, 2(a) Definitions, 2(a)(6)
Business day, paragraph 2(a)(6)–2 is
revised, and under 2(a)(24) Residential
mortgage transaction, paragraphs
2(a)(24)–1 and 2(a)(24)–5.ii are revised,
to read as follows:

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2(a)(6) Business day.

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2. Recission rule. A more precise rule for
what is a business day (all calendar days
except Sundays and the federal legal
holidays listed in 5 U.S.C. 6103(a)) applies
when the right of rescission, the receipt of
disclosures for certain mortgage transactions
under section 226.19(a)(1)(ii), or mortgages
subject to section 226.32 are involved. (See
also comment 31(c)(1)–1.) Four federal legal
holidays are identified in 5 U.S.C. 6103(a) by
a specific date: New Year’s Day, January 1;
Independence Day, July 4; Veterans Day,
November 11; and Christmas Day, December
25. When one of these holidays (July 4, for
example) falls on a Saturday, federal offices
and other entities might observe the holiday
on the preceding Friday (July 3). The
observed holiday (in the example, July 3) is
a business day for purposes of rescission, the
receipt of disclosures for certain mortgage
transactions under section 226.19(a)(1)(ii), or
the delivery of disclosures for certain highcost mortgages covered by section 226.32.

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2(a)(24) Residential mortgage transaction.
1. Relation to other sections. This term is
important in five provisions in the
regulation:
i. § 226.4(c)(7)—exclusions from the
finance charge.
ii. § 226.15(f)—exemption from the right of
rescission.
iii. § 226.18(q)—whether or not the
obligation is assumable.
iv. § 226.20(b)—disclosure requirements
for assumptions.
v. § 226.23(f)—exemption from the right of
rescission.

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5. Acquisition. * * *

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ii. Examples of new transactions involving
a previously acquired dwelling include the
financing of a balloon payment due under a
land sale contract and an extension of credit
made to a joint owner of property to buy out
the other joint owner’s interest. In these
instances, disclosures are not required under
§ 226.18(q) (assumability policies). However,
the rescission rules of §§ 226.15 and 226.23
do apply to these new transactions.

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Subpart B—Open-End Credit
15. In Supplement I to Part 226, under
Section 226.16—Advertising, paragraph
16–1 is revised, paragraph 16–2 is
redesignated as paragraph 16–6, and
new paragraphs 16–2 through 16–5 and
16–7 are added; under 16(d) Additional
requirements for home-equity plans,
paragraph 16(d)–3 is revised, paragraphs
16(d)–5, 16(d)–6, and 16(d)–7 are
redesignated as paragraphs 16(d)–7,
16(d)–8, and 16(d)–9, respectively, new
paragraphs 16(d)–5 and 16(d)–6 are
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44605

added, and newly designated
paragraphs 16(d)–7 and 16(d)–9 are
revised; and new heading 16(e)
Alternative disclosures—television or
radio advertisements is added, and new
paragraphs 16(e)–1 and 16(e)–2 are
added, to read as follows:
Section 226.16—Advertising
1. Clear and conspicuous standard—
general. Section 226.16 is subject to the
general ‘‘clear and conspicuous’’ standard for
subpart B (see § 226.5(a)(1)) but prescribes no
specific rules for the format of the necessary
disclosures, aside from the format
requirements related to the disclosure of a
promotional rate under § 226.16(d)(6). Aside
from the terms described in § 226.16(d)(6),
the credit terms need not be printed in a
certain type size nor need they appear in any
particular place in the advertisement.
2. Clear and conspicuous standard—
promotional rates or payments for homeequity plans. For purposes of § 226.16(d)(6),
a clear and conspicuous disclosure means
that the required information in
§ 226.16(d)(6)(ii)(A)–(C) is disclosed with
equal prominence and in close proximity to
the promotional rate or payment to which it
applies. If the information in
§ 226.16(d)(6)(ii)(A)–(C) is the same type size
and is located immediately next to or directly
above or below the promotional rate or
payment to which it applies, without any
intervening text or graphical displays, the
disclosures would be deemed to be equally
prominent and in close proximity.
Notwithstanding the above, for electronic
advertisements that disclose promotional
rates or payments, compliance with the
requirements of § 226.16(c) is deemed to
satisfy the clear and conspicuous standard.
3. Clear and conspicuous standard—
Internet advertisements for home-equity
plans. For purposes of this section, a clear
and conspicuous disclosure for visual text
advertisements on the Internet for homeequity plans subject to the requirements of
§ 226.5b means that the required disclosures
are not obscured by techniques such as
graphical displays, shading, coloration, or
other devices and comply with all other
requirements for clear and conspicuous
disclosures under § 226.16(d). See also
comment 16(c)(1)–2.
4. Clear and conspicuous standard—
televised advertisements for home-equity
plans. For purposes of this section, including
alternative disclosures as provided for by
§ 226.16(e), a clear and conspicuous
disclosure in the context of visual text
advertisements on television for home-equity
plans subject to the requirements of § 226.5b
means that the required disclosures are not
obscured by techniques such as graphical
displays, shading, coloration, or other
devices, are displayed in a manner that
allows for a consumer to read the information
required to be disclosed, and comply with all
other requirements for clear and conspicuous
disclosures under § 226.16(d). For example,
very fine print in a television advertisement
would not meet the clear and conspicuous
standard if consumers cannot see and read
the information required to be disclosed.

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Federal Register / Vol. 73, No. 147 / Wednesday, July 30, 2008 / Rules and Regulations

5. Clear and conspicuous standard—oral
advertisements for home-equity plans. For
purposes of this section, including
alternative disclosures as provided for by
§ 226.16(e), a clear and conspicuous
disclosure in the context of an oral
advertisement for home-equity plans subject
to the requirements of § 226.5b, whether by
radio, television, the Internet, or other
medium, means that the required disclosures
are given at a speed and volume sufficient for
a consumer to hear and comprehend them.
For example, information stated very rapidly
at a low volume in a radio or television
advertisement would not meet the clear and
conspicuous standard if consumers cannot
hear and comprehend the information
required to be disclosed.
6. Expressing the annual percentage rate in
abbreviated form. * * *
7. Effective date. For guidance on the
applicability of the Board’s revisions to
§ 226.16 published on July 30, 2008, see
comment 1(d)(5)–1.

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16(d) Additional requirements for homeequity plans.

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3. Statements of tax deductibility. An
advertisement that refers to deductibility for
tax purposes is not misleading if it includes
a statement such as ‘‘consult a tax advisor
regarding the deductibility of interest.’’ An
advertisement distributed in paper form or
through the Internet (rather than by radio or
television) that states that the advertised
extension of credit may exceed the fair
market value of the consumer’s dwelling is
not misleading if it clearly and
conspicuously states the required
information in §§ 226.16(d)(4)(i) and (ii).

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5. Promotional rates and payments in
advertisements for home-equity plans.
Section 226.16(d)(6) requires additional
disclosures for promotional rates or
payments.
i. Variable-rate plans. In advertisements for
variable-rate plans, if the advertised annual
percentage rate is based on (or the advertised
payment is derived from) the index and
margin that will be used to make rate (or
payment) adjustments over the term of the
loan, then there is no promotional rate or
promotional payment. If, however, the
advertised annual percentage rate is not
based on (or the advertised payment is not
derived from) the index and margin that will
be used to make rate (or payment)
adjustments, and a reasonably current
application of the index and margin would
result in a higher annual percentage rate (or,
given an assumed balance, a higher payment)
then there is a promotional rate or
promotional payment.
ii. Equal prominence, close proximity.
Information required to be disclosed in
§ 226.16(d)(6)(ii) that is immediately next to
or directly above or below the promotional
rate or payment (but not in a footnote) is
deemed to be closely proximate to the listing.
Information required to be disclosed in
§ 226.16(d)(6)(ii) that is in the same type size
as the promotional rate or payment is
deemed to be equally prominent.

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iii. Amounts and time periods of payments.
Section 226.16(d)(6)(ii)(C) requires disclosure
of the amount and time periods of any
payments that will apply under the plan.
This section may require disclosure of
several payment amounts, including any
balloon payment. For example, if an
advertisement for a home-equity plan offers
a $100,000 five-year line of credit and
assumes that the entire line is drawn
resulting in a minimum payment of $800 per
month for the first six months, increasing to
$1,000 per month after month six, followed
by a $50,000 balloon payment after five
years, the advertisement must disclose the
amount and time period of each of the two
monthly payment streams, as well as the
amount and timing of the balloon payment,
with equal prominence and in close
proximity to the promotional payment.
However, if the final payment could not be
more than twice the amount of other
minimum payments, the final payment need
not be disclosed.
iv. Plans other than variable-rate plans.
For a plan other than a variable-rate plan, 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 solely if the
consumer made an additional draw does not
make the payment a promotional payment.
For example, if a payment of $500 results
from an assumed $10,000 draw, and the
payment would increase to $1,000 if the
consumer made an additional $10,000 draw,
the payment is not a promotional payment.
v. Conversion option. Some home-equity
plans permit the consumer to repay all or
part of the balance during the draw period at
a fixed rate (rather than a variable rate) and
over a specified time period. The fixed-rate
conversion option does not, by itself, make
the rate or payment that would apply if the
consumer exercised the fixed-rate conversion
option a promotional rate or payment.
vi. Preferred-rate provisions. Some homeequity plans contain a preferred-rate
provision, where the rate will increase upon
the occurrence of some event, such as the
consumer-employee leaving the creditor’s
employ, the consumer closing an existing
deposit account with the creditor, or the
consumer revoking an election to make
automated payments. A preferred-rate
provision does not, by itself, make the rate
or payment under the preferred-rate
provision a promotional rate or payment.
6. Reasonably current index and margin.
For the purposes of this section, an index and
margin is considered reasonably current if:
i. For direct mail advertisements, it was in
effect within 60 days before mailing;
ii. For advertisements in electronic form it
was in effect within 30 days before the
advertisement is sent to a consumer’s e-mail
address, or in the case of an advertisement
made on an Internet Web site, when viewed
by the public; or
iii. For printed advertisements made
available to the general public, including
ones contained in a catalog, magazine, or
other generally available publication, it was
in effect within 30 days before printing.
7. Relation to other sections.
Advertisements for home-equity plans must

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comply with all provisions in § 226.16 not
solely the rules in § 226.16(d). If an
advertisement contains information (such as
the payment terms) that triggers the duty
under § 226.16(d) to state the annual
percentage rate, the additional disclosures in
§ 226.16(b) must be provided in the
advertisement. While § 226.16(d) does not
require a statement of fees to use or maintain
the plan (such as membership fees and
transaction charges), such fees must be
disclosed under § 226.16(b)(1) and (3).

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9. Balloon payment. See comment
5b(d)(5)(ii)–3 for information not required to
be stated in advertisements, and on situations
in which the balloon payment requirement
does not apply.
16(e) Alternative disclosures—television or
radio advertisements.
1. Multi-purpose telephone number. When
an advertised telephone number provides a
recording, disclosures should be provided
early in the sequence to ensure that the
consumer receives the required disclosures.
For example, in providing several options—
such as providing directions to the
advertiser’s place of business—the option
allowing the consumer to request disclosures
should be provided early in the telephone
message to ensure that the option to request
disclosures is not obscured by other
information.
2. Statement accompanying telephone
number. Language must accompany a
telephone number indicating that disclosures
are available by calling the telephone
number, such as ‘‘call 1–800–000–0000 for
details about credit costs and terms.’’

Subpart C—Closed-End Credit
16. In Supplement I to Part 226, under
Section 226.17—General Disclosure
Requirements, 17(c) Basis of disclosures
and use of estimates, Paragraph
17(c)(1), paragraph 17(c)(1)–8 is revised,
and under 17(f) Early disclosures,
paragraph 17(f)–4 is revised, to read as
follows:

■

Section 226.17—General Disclosure
Requirements

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17(c) Basis of disclosures and use of
estimates.

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Paragraph 17(c)(1).

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8. Basis of disclosures in variable-rate
transactions. The disclosures for a variablerate transaction must be given for the full
term of the transaction and must be based on
the terms in effect at the time of
consummation. Creditors should base the
disclosures only on the initial rate and
should not assume that this rate will
increase. For example, in a loan with an
initial rate of 10 percent and a 5 percentage
points rate cap, creditors should base the
disclosures on the initial rate and should not
assume that this rate will increase 5
percentage points. However, in a variablerate transaction with a seller buydown that
is reflected in the credit contract, a consumer

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buydown, or a discounted or premium rate,
disclosures should not be based solely on the
initial terms. In those transactions, the
disclosed annual percentage rate should be a
composite rate based on the rate in effect
during the initial period and the rate that is
the basis of the variable-rate feature for the
remainder of the term. (See the commentary
to § 226.17(c) for a discussion of buydown,
discounted, and premium transactions and
the commentary to § 226.19(a)(2) for a
discussion of the redisclosure in certain
mortgage transactions with a variable-rate
feature.)

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17(f) Early disclosures.

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4. Special rules. In mortgage transactions
subject to § 226.19, the creditor must
redisclose if, between the delivery of the
required early disclosures and
consummation, the annual percentage rate
changes by more than a stated tolerance.
When subsequent events occur after
consummation, new disclosures are required
only if there is a refinancing or an
assumption within the meaning of § 226.20.

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■ 17. In Supplement I to Part 226, under
Section 226.19—Certain Residential
Mortgage and Variable-Rate
Transactions, the heading is revised,
heading 19(a)(1) Time of disclosure is
redesignated as heading 19(a)(1)(i) Time
of disclosure, paragraphs 19(a)(1)(i)–1
and 19(a)(1)(i)–5 are revised, new
heading 19(a)(1)(ii) Imposition of fees
and new paragraphs 19(a)(1)(ii)–1
through 19(a)(1)(ii)–3 are added , and
new heading 19(a)(1)(iii) Exception to
fee restriction and new paragraph
19(a)(1)(iii)–1 are added, to read as
follows:

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Section 226.19—Certain Mortgage and
Variable-Rate Transactions
19(a)(1)(i) Time of disclosure.
1. Coverage. This section requires early
disclosure of credit terms in mortgage
transactions that are secured by a consumer’s
principal dwelling and also subject to the
Real Estate Settlement Procedures Act
(RESPA) and its implementing Regulation X,
administered by the Department of Housing
and Urban Development (HUD). To be
covered by § 226.19, a transaction must be a
federally related mortgage loan under
RESPA. ‘‘Federally related mortgage loan’’ is
defined under RESPA (12 U.S.C. 2602) and
Regulation X (24 CFR 3500.2), and is subject
to any interpretations by HUD. RESPA
coverage includes such transactions as loans
to purchase dwellings, refinancings of loans
secured by dwellings, and subordinate-lien
home-equity loans, among others. Although
RESPA coverage relates to any dwelling,
§ 226.19(a) applies to such transactions only
if they are secured by a consumer’s principal
dwelling. Also, home equity lines of credit
subject to § 226.5b are not covered by
§ 226.19(a). For guidance on the applicability
of the Board’s revisions to § 226.19(a)

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published on July 30, 2008, see comment
1(d)(5)–1

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5. Itemization of amount financed. In many
mortgage transactions, the itemization of the
amount financed required by § 226.18(c) will
contain items, such as origination fees or
points, that also must be disclosed as part of
the good faith estimates of settlement costs
required under RESPA. Creditors furnishing
the RESPA good faith estimates need not give
consumers any itemization of the amount
financed, either with the disclosures
provided within three days after application
or with the disclosures given at
consummation or settlement.
19(a)(1)(ii) Imposition of fees.
1. Timing of fees. The consumer must
receive the disclosures required by this
section before paying or incurring any fee
imposed by a creditor or other person in
connection with the consumer’s application
for a mortgage transaction that is subject to
§ 226.19(a)(1)(i), except as provided in
§ 226.19(a)(1)(iii). If the creditor delivers the
disclosures to the consumer in person, a fee
may be imposed anytime after delivery. If the
creditor places the disclosures in the mail,
the creditor may impose a fee after the
consumer receives the disclosures or, in all
cases, after midnight on the third business
day following mailing of the disclosures. For
purposes of § 226.19(a)(1)(ii), the term
‘‘business day’’ means all calendar days
except Sundays and legal public holidays
referred to in § 226.2(a)(6). See Comment
2(a)(6)–2. For example, assuming that there
are no intervening legal public holidays, a
creditor that receives the consumer’s written
application on Monday and mails the early
mortgage loan disclosure on Tuesday may
impose a fee on the consumer after midnight
on Friday.
2. Fees restricted. A creditor or other
person may not impose any fee, such as for
an appraisal, underwriting, or broker
services, until the consumer has received the
disclosures required by § 226.19(a)(1)(i). The
only exception to the fee restriction allows
the creditor or other person to impose a bona
fide and reasonable fee for obtaining a
consumer’s credit history, such as for a credit
report(s).
3. Collection of fees. A creditor complies
with § 226.19(a)(1)(ii) if—
i. The creditor receives a consumer’s
written application directly from the
consumer and does not collect any fee, other
than a fee for obtaining a consumer’s credit
history, until the consumer receives the early
mortgage loan disclosure.
ii. A third party submits a consumer’s
written application to a creditor and both the
creditor and third party do not collect any
fee, other than a fee for obtaining a
consumer’s credit history, until the consumer
receives the early mortgage loan disclosure
from the creditor.
iii. A third party submits a consumer’s
written application to a second creditor
following a prior creditor’s denial of an
application made by the same consumer (or
following the consumer’s withdrawal), and, if
a fee already has been assessed, the new
creditor or third party does not collect or
impose any additional fee until the consumer

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receives an early mortgage loan disclosure
from the new creditor.
19(a)(1)(iii) Exception to fee restriction.
1. Requirements. A creditor or other person
may impose a fee before the consumer
receives the required disclosures if it is for
obtaining the consumer’s credit history, such
as by purchasing a credit report(s) on the
consumer. The fee also must be bona fide
and reasonable in amount. For example, a
creditor may collect a fee for obtaining a
credit report(s) if it is in the creditor’s
ordinary course of business to obtain a credit
report(s). If the criteria in § 226.19(a)(1)(iii)
are met, the creditor may describe or refer to
this fee, for example, as an ‘‘application fee.’’

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18. In Supplement I to Part 226, under
Section 226.24—Advertising, paragraph
24–1 is revised; heading 24(d) Catalogs
or other multiple-page advertisements;
electronic advertisements and
paragraphs 24(d)–1 through 24(d)–4 are
redesignated as heading 24(e) Catalogs
or other multiple-page advertisements;
electronic advertisements and
paragraphs 24(e)–1 through 24(e)–4,
respectively; headings 24(c)
Advertisements of terms that require
additional disclosures, Paragraph
24(c)(1), and Paragraph 24(c)(2) and
paragraphs 24(c)–1, 24(c)(1)–1 through
24(c)(1)–4, and 24(c)(2)–1 through
24(c)(2)–4 are redesignated as headings
24(d) Advertisements of terms that
require additional disclosures,
Paragraph 24(d)(1), and Paragraph
24(d)(2) and paragraphs 24(d)–1,
24(d)(1)–1 through 24(d)(1)–4, and
24(d)(2)–1 through 24(d)(2)–4,
respectively; heading 24(b)
Advertisement of rate of finance charge
and paragraphs 24(b)–1 through 24(b)–
5 are redesignated as heading 24(c)
Advertisement of rate of finance charge
and paragraphs 24(c)–1 through 24(c)–5,
respectively; new heading 24(b) Clear
and conspicuous standard and new
paragraphs 24(b)–1 through 24(b)–5 are
added; newly designated paragraphs
24(c)–2 and 24(c)–3 are revised, newly
designated paragraph 24(c)–4 is
removed, and newly designated
paragraph 24(c)–5 is further
redesignated as 24(c)–4 and revised;
newly designated paragraphs 24(d)–1,
24(d)(1)–3, and 24(d)(2)–2 are revised,
newly designated paragraphs 24(d)(2)–3
and 24(d)(2)–4 are further redesignated
as 24(d)(2)–4 and 24(d)(2)–5,
respectively, new paragraph 24(d)(2)–3
is added, and newly designated
paragraph 24(d)(2)–5 is revised; newly
designated paragraph 24(e)–1, 24(e)–2,
and 24(e)–4 are revised; and new
headings 24(f) Disclosure of rates and
payments in advertisements for credit
secured by a dwelling, 24(f)(3)
Disclosure of payments, 24(g)
Alternative disclosures—television or
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radio advertisements, and 24(i)
Prohibited acts or practices in
advertisements for credit secured by a
dwelling and new paragraphs 24(f)–1
through 24(f)–6, 24(f)(3)–1, 24(f)(3)–2,
24(g)–1, 24(g)–2, and 24(i)–1 through
24(i)–3 are added, to read as follows:
Section 226.24—Advertising
1. Effective date. For guidance on the
applicability of the Board’s changes to
§ 226.24 published on July 30, 2008, see
comment 1(d)(5)–1.

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24(b) Clear and conspicuous standard.
1. Clear and conspicuous standard—
general. This section is subject to the general
‘‘clear and conspicuous’’ standard for this
subpart, see § 226.17(a)(1), but prescribes no
specific rules for the format of the necessary
disclosures, other than the format
requirements related to the advertisement of
rates and payments as described in comment
24(b)–2 below. The credit terms need not be
printed in a certain type size nor need they
appear in any particular place in the
advertisement. For example, a merchandise
tag that is an advertisement under the
regulation complies with this section if the
necessary credit terms are on both sides of
the tag, so long as each side is accessible.
2. Clear and conspicuous standard—rates
and payments in advertisements for credit
secured by a dwelling. For purposes of
§ 226.24(f), a clear and conspicuous
disclosure means that the required
information in §§ 226.24(f)(2)(i) and
226.24(f)(3)(i)(A) and (B) is disclosed with
equal prominence and in close proximity to
the advertised rates or payments triggering
the required disclosures, and that the
required information in § 226.24(f)(3)(i)(C) is
disclosed prominently and in close proximity
to the advertised rates or payments triggering
the required disclosures. If the required
information in §§ 226.24(f)(2)(i) and
226.24(f)(3)(i)(A) and (B) is the same type
size as the advertised rates or payments
triggering the required disclosures, the
disclosures are deemed to be equally
prominent. The information in
§ 226.24(f)(3)(i)(C) must be disclosed
prominently, but need not be disclosed with
equal prominence or be the same type size
as the payments triggering the required
disclosures. If the required information in
§§ 226.24(f)(2)(i) and 226.24(f)(3)(i) is located
immediately next to or directly above or
below the advertised rates or payments
triggering the required disclosures, without
any intervening text or graphical displays,
the disclosures are deemed to be in close
proximity. Notwithstanding the above, for
electronic advertisements that disclose rates
or payments, compliance with the
requirements of § 226.24(e) is deemed to
satisfy the clear and conspicuous standard.
3. Clear and conspicuous standard—
Internet advertisements for credit secured by
a dwelling. For purposes of this section, a
clear and conspicuous disclosure for visual
text advertisements on the Internet for credit
secured by a dwelling means that the
required disclosures are not obscured by
techniques such as graphical displays,

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shading, coloration, or other devices and
comply with all other requirements for clear
and conspicuous disclosures under § 226.24.
See also comment 24(e)–4.
4. Clear and conspicuous standard—
televised advertisements for credit secured by
a dwelling. For purposes of this section,
including alternative disclosures as provided
for by § 226.24(g), a clear and conspicuous
disclosure in the context of visual text
advertisements on television for credit
secured by a dwelling means that the
required disclosures are not obscured by
techniques such as graphical displays,
shading, coloration, or other devices, are
displayed in a manner that allows a
consumer to read the information required to
be disclosed, and comply with all other
requirements for clear and conspicuous
disclosures under § 226.24. For example,
very fine print in a television advertisement
would not meet the clear and conspicuous
standard if consumers cannot see and read
the information required to be disclosed.
5. Clear and conspicuous standard—oral
advertisements for credit secured by a
dwelling. For purposes of this section,
including alternative disclosures as provided
for by § 226.24(g), a clear and conspicuous
disclosure in the context of an oral
advertisement for credit secured by a
dwelling, whether by radio, television, or
other medium, means that the required
disclosures are given at a speed and volume
sufficient for a consumer to hear and
comprehend them. For example, information
stated very rapidly at a low volume in a radio
or television advertisement would not meet
the clear and conspicuous standard if
consumers cannot hear and comprehend the
information required to be disclosed.
24(c) Advertisement of rate of finance
charge.

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2. Simple or periodic rates. The
advertisement may not simultaneously state
any other rate, except that a simple annual
rate or periodic rate applicable to an unpaid
balance may appear along with (but not more
conspicuously than) the annual percentage
rate. An advertisement for credit secured by
a dwelling may not state a periodic rate,
other than a simple annual rate, that is
applied to an unpaid balance. For example,
in an advertisement for credit secured by a
dwelling, a simple annual interest rate may
be shown in the same type size as the annual
percentage rate for the advertised credit,
subject to the requirements of section
226.24(f). A simple annual rate or periodic
rate that is applied to an unpaid balance is
the rate at which interest is accruing; those
terms do not include a rate lower than the
rate at which interest is accruing, such as an
effective rate, payment rate, or qualifying
rate.
3. Buydowns. When a third party (such as
a seller) or a creditor wishes to promote the
availability of reduced interest rates
(consumer or seller buydowns), the
advertised annual percentage rate must be
determined in accordance with the
commentary to § 226.17(c) regarding the basis
of transactional disclosures for buydowns.
The seller or creditor may advertise the
reduced simple interest rate, provided the

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advertisement shows the limited term to
which the reduced rate applies and states the
simple interest rate applicable to the balance
of the term. The advertisement may also
show the effect of the buydown agreement on
the payment schedule for the buydown
period, but this will trigger the additional
disclosures under § 226.24(d)(2).
4. Discounted variable-rate transactions.
The advertised annual percentage rate for
discounted variable-rate transactions must be
determined in accordance with comment
17(c)(1)–10 regarding the basis of
transactional disclosures for such financing.
i. A creditor or seller may promote the
availability of the initial rate reduction in
such transactions by advertising the reduced
simple annual rate, provided the
advertisement shows with equal prominence
and in close proximity the limited term to
which the reduced rate applies and the
annual percentage rate that will apply after
the term of the initial rate reduction expires.
See § 226.24(f).
ii. Limits or caps on periodic rate or
payment adjustments need not be stated. To
illustrate using the second example in
comment 17(c)(1)–10, the fact that the rate is
presumed to be 11 percent in the second year
and 12 percent for the remaining 28 years
need not be included in the advertisement.
iii. The advertisement may also show the
effect of the discount on the payment
schedule for the discount period, but this
will trigger the additional disclosures under
§ 226.24(d).
24(d) Advertisement of terms that require
additional disclosures.
1. General rule. Under § 226.24(d)(1),
whenever certain triggering terms appear in
credit advertisements, the additional credit
terms enumerated in § 226.24(d)(2) must also
appear. These provisions apply even if the
triggering term is not stated explicitly but
may be readily determined from the
advertisement. For example, an
advertisement may state ‘‘80 percent
financing available,’’ which is in fact
indicating that a 20 percent downpayment is
required.
Paragraph 24(d)(1).

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3. Payment amount. The dollar amount of
any payment includes statements such as:
• ‘‘Payable in installments of $103’’.
• ‘‘$25 weekly’’.
• ‘‘$500,000 loan for just $1,650 per
month’’.
• ‘‘$1,200 balance payable in 10 equal
installments’’.
In the last example, the amount of each
payment is readily determinable, even
though not explicitly stated. But statements
such as ‘‘monthly payments to suit your
needs’’ or ‘‘regular monthly payments’’ are
not deemed to be statements of the amount
of any payment.

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Paragraph 24(d)(2).

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2. Disclosure of repayment terms. The
phrase ‘‘terms of repayment’’ generally has
the same meaning as the ‘‘payment schedule’’
required to be disclosed under § 226.18(g).
Section 226.24(d)(2)(ii) provides flexibility to

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creditors in making this disclosure for
advertising purposes. Repayment terms may
be expressed in a variety of ways in addition
to an exact repayment schedule; this is
particularly true for advertisements that do
not contemplate a single specific transaction.
Repayment terms, however, must reflect the
consumer’s repayment obligations over the
full term of the loan, including any balloon
payment, see comment 24(d)(2)–3, not just
the repayment terms that will apply for a
limited period of time. For example:
i. A creditor may use a unit-cost approach
in making the required disclosure, such as
‘‘48 monthly payments of $27.83 per $1,000
borrowed.’’
ii. In an advertisement for credit secured
by a dwelling, when any series of payments
varies because of the inclusion of mortgage
insurance premiums, a creditor may state the
number and timing of payments, the fact that
payments do not include amounts for
mortgage insurance premiums, and that the
actual payment obligation will be higher.
iii. In an advertisement for credit secured
by a dwelling, when one series of monthly
payments will apply for a limited period of
time followed by a series of higher monthly
payments for the remaining term of the loan,
the advertisement must state the number and
time period of each series of payments, and
the amounts of each of those payments. For
this purpose, the creditor must assume that
the consumer makes the lower series of
payments for the maximum allowable period
of time.
3. Balloon payment; disclosure of
repayment terms. In some transactions, a
balloon payment will occur when the
consumer only makes the minimum
payments specified in an advertisement. A
balloon payment results if paying the
minimum payments does not fully amortize
the outstanding balance by a specified date
or time, usually the end of the term of the
loan, and the consumer must repay the entire
outstanding balance at such time. If a balloon
payment will occur when the consumer only
makes the minimum payments specified in
an advertisement, the advertisement must
state with equal prominence and in close
proximity to the minimum payment
statement the amount and timing of the
balloon payment that will result if the
consumer makes only the minimum
payments for the maximum period of time
that the consumer is permitted to make such
payments.
4. Annual percentage rate. * * *
5. Use of examples. A creditor may use
illustrative credit transactions to make the
necessary disclosures under § 226.24(d)(2).
That is, where a range of possible
combinations of credit terms is offered, the
advertisement may use examples of typical
transactions, so long as each example
contains all of the applicable terms required
by § 226.24(d). The examples must be labeled
as such and must reflect representative credit
terms made available by the creditor to
present and prospective customers.
24(e) Catalogs or other multiple-page
advertisements; electronic advertisements.
1. Definition. The multiple-page
advertisements to which this section refers
are advertisements consisting of a series of

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sequentially numbered pages—for example, a
supplement to a newspaper. A mailing
consisting of several separate flyers or pieces
of promotional material in a single envelope
does not constitute a single multiple-page
advertisement for purposes of § 226.24(e).
2. General. Section 226.24(e) permits
creditors to put credit information together in
one place in a catalog or other multiple-page
advertisement or in an electronic
advertisement (such as an advertisement
appearing on an Internet Web site). The rule
applies only if the advertisement contains
one or more of the triggering terms from
§ 226.24(d)(1). A list of different annual
percentage rates applicable to different
balances, for example, does not trigger
further disclosures under § 226.24(d)(2) and
so is not covered by § 226.24(e).

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4. Electronic advertisement. If an electronic
advertisement (such as an advertisement
appearing on an Internet Web site) contains
the table or schedule permitted under
§ 226.24(e)(1), any statement of terms set
forth in § 226.24(d)(1) appearing anywhere
else in the advertisement must clearly direct
the consumer to the location where the table
or schedule begins. For example, a term
triggering additional disclosures may be
accompanied by a link that directly takes the
consumer to the additional information.
24(f) Disclosure of rates and payments in
advertisements for credit secured by a
dwelling.
1. Applicability. The requirements of
§ 226.24(f)(2) apply to advertisements for
loans where more than one simple annual
rate of interest will apply. The requirements
of § 226.24(f)(3)(i)(A) require a clear and
conspicuous disclosure of each payment that
will apply over the term of the loan. In
determining whether a payment will apply
when the consumer may choose to make a
series of lower monthly payments that will
apply for a limited period of time, the
creditor must assume that the consumer
makes the series of lower payments for the
maximum allowable period of time. See
comment 24(d)(2)–2.iii. However, for
purposes of § 226.24(f), the creditor may, but
need not, assume that specific events which
trigger changes to the simple annual rate of
interest or to the applicable payments will
occur. For example:
i. Fixed-rate conversion loans. If a loan
program permits consumers to convert their
variable-rate loans to fixed rate loans, the
creditor need not assume that the fixed-rate
conversion option, by itself, means that more
than one simple annual rate of interest will
apply to the loan under § 226.24(f)(2) and
need not disclose as a separate payment
under § 226.24(f)(3)(i)(A) the payment that
would apply if the consumer exercised the
fixed-rate conversion option.
ii. Preferred-rate loans. Some loans contain
a preferred-rate provision, where the rate will
increase upon the occurrence of some event,
such as the consumer-employee leaving the
creditor’s employ or the consumer closing an
existing deposit account with the creditor or
the consumer revoking an election to make
automated payments. A creditor need not
assume that the preferred-rate provision, by
itself, means that more than one simple

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annual rate of interest will apply to the loan
under § 226.24(f)(2) and the payments that
would apply upon occurrence of the event
that triggers the rate increase need not be
disclosed as a separate payments under
§ 226.24(f)(3)(i)(A).
iii. Rate reductions. Some loans contain a
provision where the rate will decrease upon
the occurrence of some event, such as if the
consumer makes a series of payments on
time. A creditor need not assume that the rate
reduction provision, by itself, means that
more than one simple annual rate of interest
will apply to the loan under § 226.24(f)(2)
and need not disclose the payments that
would apply upon occurrence of the event
that triggers the rate reduction as a separate
payments under § 226.24(f)(3)(i)(A).
2. Equal prominence, close proximity.
Information required to be disclosed under
§§ 226.24(f)(2)(i) and 226.24(f)(3)(i) that is
immediately next to or directly above or
below the simple annual rate or payment
amount (but not in a footnote) is deemed to
be closely proximate to the listing.
Information required to be disclosed under
§§ 226.24(f)(2)(i) and 226.24(f)(3)(i)(A) and
(B) that is in the same type size as the simple
annual rate or payment amount is deemed to
be equally prominent.
3. Clear and conspicuous standard. For
more information about the applicable clear
and conspicuous standard, see comment
24(b)–2.
4. Comparisons in advertisements. When
making any comparison in an advertisement
between actual or hypothetical credit
payments or rates and the payments or rates
available under the advertised product, the
advertisement must state all applicable
payments or rates for the advertised product
and the time periods for which those
payments or rates will apply, as required by
this section.
5. Application to variable-rate
transactions—disclosure of rates. In
advertisements for variable-rate transactions,
if a simple annual rate that applies at
consummation is not based on the index and
margin that will be used to make subsequent
rate adjustments over the term of the loan,
the requirements of § 226.24(f)(2)(i) apply.
6. Reasonably current index and margin.
For the purposes of this section, an index and
margin is considered reasonably current if:
i. For direct mail advertisements, it was in
effect within 60 days before mailing;
ii. For advertisements in electronic form it
was in effect within 30 days before the
advertisement is sent to a consumer’s e-mail
address, or in the case of an advertisement
made on an Internet Web site, when viewed
by the public; or
iii. For printed advertisements made
available to the general public, including
ones contained in a catalog, magazine, or
other generally available publication, it was
in effect within 30 days before printing.
24(f)(3) Disclosure of payments.
1. Amounts and time periods of payments.
Section 226.24(f)(3)(i) requires disclosure of
the amounts and time periods of all
payments that will apply over the term of the
loan. This section may require disclosure of
several payment amounts, including any
balloon payment. For example, if an

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advertisement for credit secured by a
dwelling offers $300,000 of credit with a 30year loan term for a payment of $600 per
month for the first six months, increasing to
$1,500 per month after month six, followed
by a balloon payment of $30,000 at the end
of the loan term, the advertisement must
disclose the amount and time periods of each
of the two monthly payment streams, as well
as the amount and timing of the balloon
payment, with equal prominence and in
close proximity to each other. However, if the
final scheduled payment of a fully amortizing
loan is not greater than two times the amount
of any other regularly scheduled payment,
the final payment need not be disclosed.
2. Application to variable-rate
transactions—disclosure of payments. In
advertisements for variable-rate transactions,
if the payment that applies at consummation
is not based on the index and margin that
will be used to make subsequent payment
adjustments over the term of the loan, the
requirements of § 226.24(f)(3)(i) apply.
24(g) Alternative disclosures—television or
radio advertisements.
1. Multi-purpose telephone number. When
an advertised telephone number provides a
recording, disclosures should be provided
early in the sequence to ensure that the
consumer receives the required disclosures.
For example, in providing several options—
such as providing directions to the
advertiser’s place of business—the option
allowing the consumer to request disclosures
should be provided early in the telephone
message to ensure that the option to request
disclosures is not obscured by other
information.
2. Statement accompanying telephone
number. Language must accompany a
telephone number indicating that disclosures
are available by calling the telephone
number, such as ‘‘call 1–800–000–0000 for
details about credit costs and terms.’’
24(i) Prohibited acts or practices in
advertisements for credit secured by a
dwelling.
1. Comparisons in advertisements. The
requirements of § 226.24(i)(2) apply to all
advertisements for credit secured by a
dwelling, including radio and television
advertisements. A comparison includes a
claim about the amount a consumer may save
under the advertised product. For example,
a statement such as ‘‘save $300 per month on
a $300,000 loan’’ constitutes an implied
comparison between the advertised product’s
payment and a consumer’s current payment.
2. Misrepresentations about government
endorsement. A statement that the federal
Community Reinvestment Act entitles the
consumer to refinance his or her mortgage at
the low rate offered in the advertisement is
prohibited because it conveys a misleading
impression that the advertised product is
endorsed or sponsored by the federal
government.
3. Misleading claims of debt elimination.
The prohibition against misleading claims of
debt elimination or waiver or forgiveness
does not apply to legitimate statements that
the advertised product may reduce debt
payments, consolidate debts, or shorten the
term of the debt. Examples of misleading
claims of debt elimination or waiver or

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forgiveness of loan terms with, or obligations
to, another creditor of debt include: ‘‘WipeOut Personal Debts!’’, ‘‘New DEBT-FREE
Payment’’, ‘‘Set yourself free; get out of debt
today’’, ‘‘Refinance today and wipe your debt
clean!’’, ‘‘Get yourself out of debt * * *
Forever!’’, and ‘‘Pre-payment Penalty
Waiver.’’

Subpart E—Special Rules for Certain
Home Mortgage Transactions
19. In Supplement I to Part 226, under
Section 226.32–Requirements for
Certain Closed-End Home Mortgages,
32(a) Coverage, new heading Paragraph
32(a)(2) and new paragraph 32(a)(2)–1
are added, under 32(d) Limitations, new
paragraphs 32(d)–1 and 32(d)–2 are
added, and under 32(d)(7) Prepayment
penalty exception, Paragraph
32(d)(7)(iii), paragraphs 32(d)(7)(iii)–1
and 32(d)(7)(iii)–2 are removed and new
paragraphs 32(d)(7)(iii)–1 through
32(d)(7)(iii)–3 are added, and new
heading Paragraph 32(d)(7)(iv) and new
paragraphs 32(d)(7)(iv)–1 and
32(d)(7)(iv)–2 are added, to read as
follows:

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Section 226.32—Requirements for Certain
Closed-End Home Mortgages 32(a) Coverage.

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Paragraph 32(a)(2).
1. Exemption limited. Section 226.32(a)(2)
lists certain transactions exempt from the
provisions of § 226.32. Nevertheless, those
transactions may be subject to the provisions
of § 226.35, including any provisions of
§ 226.32 to which § 226.35 refers. See 12 CFR
226.35(a).

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32(d) Limitations.
1. Additional prohibitions applicable
under other sections. Section 226.34 sets
forth certain prohibitions in connection with
mortgage credit subject to § 226.32, in
addition to the limitations in § 226.32(d).
Further, § 226.35(b) prohibits certain
practices in connection with transactions that
meet the coverage test in § 226.35(a). Because
the coverage test in § 226.35(a) is generally
broader than the coverage test in § 226.32(a),
most § 226.32 mortgage loans are also subject
to the prohibitions set forth in § 226.35(b)
(such as escrows), in addition to the
limitations in § 226.32(d).
2. Effective date. For guidance on the
application of the Board’s revisions
published on July 30, 2008 to § 226.32, see
comment 1(d)(5)–1.

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32(d)(7) Prepayment penalty exception.
Paragraph 32(d)(7)(iii).
1. Calculating debt-to-income ratio. ‘‘Debt’’
does not include amounts paid by the
borrower in cash at closing or amounts from
the loan proceeds that directly repay an
existing debt. Creditors may consider
combined debt-to-income ratios for
transactions involving joint applicants. For
more information about obligations and
inflows that may constitute ‘‘debt’’ or
‘‘income’’ for purposes of § 226.32(d)(7)(iii),

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see comment 34(a)(4)–6 and comment
34(a)(4)(iii)(C)–1.
2. Verification. Creditors shall verify
income in the manner described in
§ 226.34(a)(4)(ii) and the related comments.
Creditors may verify debt with a credit
report. However, a credit report may not
reflect certain obligations undertaken just
before or at consummation of the transaction
and secured by the same dwelling that
secures the transaction. Section 226.34(a)(4)
may require creditors to consider such
obligations; see comment 34(a)(4)–3 and
comment 34(a)(4)(ii)(C)–1.
3. Interaction with Regulation B. Section
226.32(d)(7)(iii) does not require or permit
the creditor to make inquiries or verifications
that would be prohibited by Regulation B, 12
CFR part 202.
Paragraph 32(d)(7)(iv).
1. Payment change. Section 226.32(d)(7)
sets forth the conditions under which a
mortgage transaction subject to this section
may have a prepayment penalty. Section
226.32(d)(7)(iv) lists as a condition that the
amount of the periodic payment of principal
or interest or both may not change during the
four-year period following consummation.
The following examples show whether
prepayment penalties are permitted or
prohibited under § 226.32(d)(7)(iv) in
particular circumstances.
i. Initial payments for a variable-rate
transaction consummated on January 1, 2010
are $1,000 per month. Under the loan
agreement, the first possible date that a
payment in a different amount may be due
is January 1, 2014. A prepayment penalty is
permitted with this mortgage transaction
provided that the other § 226.32(d)(7)
conditions are met, that is: provided that the
prepayment penalty is permitted by other
applicable law, the penalty expires on or
before Dec. 31, 2011, the penalty will not
apply if the source of the prepayment funds
is a refinancing by the creditor or its affiliate,
and at consummation the consumer’s total
monthly debts do not exceed 50 percent of
the consumer’s monthly gross income, as
verified.
ii. Initial payments for a variable-rate
transaction consummated on January 1, 2010
are $1,000 per month. Under the loan
agreement, the first possible date that a
payment in a different amount may be due
is December 31, 2013. A prepayment penalty
is prohibited with this mortgage transaction
because the payment may change within the
four-year period following consummation.
iii. Initial payments for a graduatedpayment transaction consummated on
January 1, 2010 are $1,000 per month. Under
the loan agreement, the first possible date
that a payment in a different amount may be
due is January 1, 2014. A prepayment penalty
is permitted with this mortgage transaction
provided that the other § 226.32(d)(7)
conditions are met, that is: provided that the
prepayment penalty is permitted by other
applicable law, the penalty expires on or
before December 31, 2011, the penalty will
not apply if the source of the prepayment
funds is a refinancing by the creditor or its
affiliate, and at consummation the
consumer’s total monthly debts do not
exceed 50 percent of the consumer’s monthly
gross income, as verified.

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iv. Initial payments for a step-rate
transaction consummated on January 1, 2010
are $1,000 per month. Under the loan
agreement, the first possible date that a
payment in a different amount may be due
is December 31, 2013. A prepayment penalty
is prohibited with this mortgage transaction
because the payment may change within the
four-year period following consummation.
2. Payment changes excluded. Payment
changes due to the following circumstances
are not considered payment changes for
purposes of this section:
i. A change in the amount of a periodic
payment that is allocated to principal or
interest that does not change the total amount
of the periodic payment.
ii. The borrower’s actual unanticipated late
payment, delinquency, or default; and
iii. The borrower’s voluntary payment of
additional amounts (for example when a
consumer chooses to make a payment of
interest and principal on a loan that only
requires the consumer to pay interest).

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20. In Supplement I to Part 226, under
Section 226.34—Prohibited Acts or
Practices in Connection with Credit
Secured by a Consumer’s Dwelling;
Open-end Credit, the heading is revised,
and under 34(a) Prohibited acts or
practices for loans subject to § 226.32,
34(a)(4) Repayment ability, paragraphs
34(a)(4)–1 through 34(a)(4)–4 are
removed, and new paragraphs 34(a)(4)–
1 through 34(a)(4)–7, new heading
34(a)(4)(i) Mortgage-related obligations
and new paragraph 34(a)(4)(i)–1, new
heading 34(a)(4)(ii) Verification of
repayment ability and new paragraphs
34(a)(4)(ii)–1 through 34(a)(4)(ii)–3, new
heading Paragraph 34(a)(4)(ii)(A) and
new paragraphs 34(a)(4)(ii)(A)–1
through 34(a)(4)(ii)(A)–5, new heading
Paragraph 34(a)(4)(ii)(B) and new
paragraphs 34(a)(4)(ii)(B)–1 and
34(a)(4)(ii)(B)–2, new heading
Paragraph 34(a)(4)(ii)(C) and new
paragraph 34(a)(4)(ii)(C)–1, new heading
34(a)(4)(iii) Presumption of compliance
and new paragraph 34(a)(4)(iii)–1, new
heading Paragraph 34(a)(4)(iii)(B) and
new paragraph 34(a)(4)(iii)(B)–1, new
heading Paragraph 34(a)(4)(iii)(C) and
new paragraph 34(a)(4)(iii)(C)–1, and
new heading 34(a)(4)(iv) Exclusions
from the presumption of compliance
and new paragraphs 34(a)(4)(iv)–1 and
34(a)(4)(iv)–2, are added to read as
follows:
■

Section 226.34—Prohibited Acts or Practices
in Connection with Credit Subject to § 226.32
34(a) Prohibited acts or practices for loans
subject to § 226.32.
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34(a)(4) Repayment ability.
1. Application of repayment ability rule.
The § 226.34(a)(4) prohibition against making
loans without regard to consumers’
repayment ability applies to mortgage loans
described in § 226.32(a). In addition, the

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§ 226.34(a)(4) prohibition applies to higherpriced mortgage loans described in
§ 226.35(a). See 12 CFR 226.35(b)(1). For
guidance on the application of the Board’s
revisions to § 226.34(a)(4) published on July
30, 2008, see comment 1(d)(5)–1.
2. General prohibition. Section 226.34(a)(4)
prohibits a creditor from extending credit
subject to § 226.32 to a consumer based on
the value of the consumer’s collateral
without regard to the consumer’s repayment
ability as of consummation, including the
consumer’s current and reasonably expected
income, employment, assets other than the
collateral, current obligations, and property
tax and insurance obligations. A creditor may
base its determination of repayment ability
on current or reasonably expected income
from employment or other sources, on assets
other than the collateral, or both.
3. Other dwelling-secured obligations. For
purposes of § 226.34(a)(4), current obligations
include another credit obligation of which
the creditor has knowledge undertaken prior
to or at consummation of the transaction and
secured by the same dwelling that secures
the transaction subject to § 226.32 or
§ 226.35. For example, where a transaction
subject to § 226.35 is a first-lien transaction
for the purchase of a home, a creditor must
consider a ‘‘piggyback’’ second-lien
transaction of which it has knowledge that is
used to finance part of the down payment on
the house.
4. Discounted introductory rates and nonamortizing or negatively-amortizing
payments. A credit agreement may determine
a consumer’s initial payments using a
temporarily discounted interest rate or
permit the consumer to make initial
payments that are non-amortizing or
negatively amortizing. (Negative amortization
is permissible for loans covered by
§ 226.35(a), but not § 226.32). In such cases
the creditor may determine repayment ability
using the assumptions provided in
§ 226.34(a)(4)(iv).
5. Repayment ability as of consummation.
Section 226.34(a)(4) prohibits a creditor from
disregarding repayment ability based on the
facts and circumstances known to the
creditor as of consummation. In general, a
creditor does not violate this provision if a
consumer defaults because of a significant
reduction in income (for example, a job loss)
or a significant obligation (for example, an
obligation arising from a major medical
expense) that occurs after consummation.
However, if a creditor has knowledge as of
consummation of reductions in income, for
example, if a consumer’s written application
states that the consumer plans to retire
within twelve months without obtaining new
employment, or states that the consumer will
transition from full-time to part-time
employment, the creditor must consider that
information.
6. Income, assets, and employment. Any
current or reasonably expected assets or
income may be considered by the creditor,
except the collateral itself. For example, a
creditor may use information about current
or expected salary, wages, bonus pay, tips,
and commissions. Employment may be fulltime, part-time, seasonal, irregular, military,
or self-employment. Other sources of income

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44611

could include interest or dividends;
retirement benefits; public assistance; and
alimony, child support, or separate
maintenance payments. A creditor may also
take into account assets such as savings
accounts or investments that the consumer
can or will be able to use.
7. Interaction with Regulation B. Section
226.34(a)(4) does not require or permit the
creditor to make inquiries or verifications
that would be prohibited by Regulation B, 12
CFR part 202.
34(a)(4)(i) Mortgage-related obligations.
1. Mortgage-related obligations. A creditor
must include in its repayment ability
analysis the expected property taxes and
premiums for mortgage-related insurance
required by the creditor as set forth in
§ 226.35(b)(3)(i), as well as similar mortgagerelated expenses. Similar mortgage-related
expenses include homeowners’ association
dues and condominium or cooperative fees.
34(a)(4)(ii) Verification of repayment
ability.
1. Income and assets relied on. A creditor
must verify the income and assets the
creditor relies on to evaluate the consumer’s
repayment ability. For example, if a
consumer earns a salary and also states that
he or she is paid an annual bonus, but the
creditor only relies on the applicant’s salary
to evaluate repayment ability, the creditor
need only verify the salary.
2. Income and assets—co-applicant. If two
persons jointly apply for credit and both list
income or assets on the application, the
creditor must verify repayment ability with
respect to both applicants unless the creditor
relies only on the income or assets of one of
the applicants in determining repayment
ability.
3. Expected income. If a creditor relies on
expected income, the expectation must be
reasonable and it must be verified with thirdparty documents that provide reasonably
reliable evidence of the consumer’s expected
income. For example, if the creditor relies on
an expectation that a consumer will receive
an annual bonus, the creditor may verify the
basis for that expectation with documents
that show the consumer’s past annual
bonuses and the expected bonus must bear a
reasonable relationship to past bonuses.
Similarly, if the creditor relies on a
consumer’s expected salary following the
consumer’s receipt of an educational degree,
the creditor may verify that expectation with
a written statement from an employer
indicating that the consumer will be
employed upon graduation at a specified
salary.
Paragraph 34(a)(4)(ii)(A).
1. Internal Revenue Service (IRS) Form W–
2. A creditor may verify a consumer’s income
using a consumer’s IRS Form W–2 (or any
subsequent revisions or similar IRS Forms
used for reporting wages and tax
withholding). The creditor may also use an
electronic retrieval service for obtaining the
consumer’s W–2 information.
2. Tax returns. A creditor may verify a
consumer’s income or assets using the
consumer’s tax return. A creditor may also
use IRS Form 4506 ‘‘Request for Copy of Tax
Return,’’ Form 4506–T ‘‘Request for
Transcript of Tax Return,’’ or Form 8821

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‘‘Tax Information Authorization’’ (or any
subsequent revisions or similar IRS Forms
appropriate for obtaining tax return
information directly from the IRS) to verify
the consumer’s income or assets. The creditor
may also use an electronic retrieval service
for obtaining tax return information.
3. Other third-party documents that
provide reasonably reliable evidence of
consumer’s income or assets. Creditors may
verify income and assets using documents
produced by third parties. Creditors may not
rely on information provided orally by third
parties, but may rely on correspondence from
the third party, such as by letter or e-mail.
The creditor may rely on any third-party
document that provides reasonably reliable
evidence of the consumer’s income or assets.
For example, creditors may verify the
consumer’s income using receipts from a
check-cashing or remittance service, or by
obtaining a written statement from the
consumer’s employer that states the
consumer’s income.
4. Information specific to the consumer.
Creditors must verify a consumer’s income or
assets using information that is specific to the
individual consumer. Creditors may use
third-party databases that contain individualspecific data about a consumer’s income or
assets, such as a third-party database service
used by the consumer’s employer for the
purpose of centralizing income verification
requests, so long as the information is
reasonably current and accurate. Information
about average incomes for the consumer’s
occupation in the consumer’s geographic
location or information about average
incomes paid by the consumer’s employer,
however, would not be specific to the
individual consumer.
5. Duplicative collection of documentation.
A creditor that has made a loan to a
consumer and is refinancing or extending
new credit to the same consumer need not
collect from the consumer a document the
creditor previously obtained if the creditor
has no information that would reasonably
lead the creditor to believe that document
has changed since it was initially collected.
For example, if the creditor has obtained the
consumer’s 2006 tax return to make a home
purchase loan in May 2007, the creditor may
rely on the 2006 tax return if the creditor
makes a home equity loan to the same
consumer in August 2007. Similarly, if the
creditor has obtained the consumer’s bank
statement for May 2007 in making the first
loan, the creditor may rely on that bank
statement for that month in making the
subsequent loan in August 2007.
Paragraph 34(a)(4)(ii)(B).
1. No violation if income or assets relied
on not materially greater than verifiable
amounts. A creditor that does not verify
income or assets used to determine
repayment ability with reasonably reliable
third-party documents does not violate
§ 226.34(a)(4)(ii) if the creditor demonstrates
that the income or assets it relied upon were
not materially greater than the amounts that
the creditor would have been able to verify
pursuant to § 226.34(a)(4)(ii). For example, if
a creditor determines a consumer’s
repayment ability by relying on the
consumer’s annual income of $40,000 but

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fails to obtain documentation of that amount
before extending the credit, the creditor will
not have violated this section if the creditor
later obtains evidence that would satisfy
§ 226.34(a)(4)(ii)(A), such as tax return
information, showing that the creditor could
have documented, at the time the loan was
consummated, that the consumer had an
annual income not materially less than
$40,000.
2. Materially greater than. Amounts of
income or assets relied on are not materially
greater than amounts that could have been
verified at consummation if relying on the
verifiable amounts would not have altered a
reasonable creditor’s decision to extend
credit or the terms of the credit.
Paragraph 34(a)(4)(ii)(C).
1. In general. A credit report may be used
to verify current obligations. A credit report,
however, might not reflect an obligation that
a consumer has listed on an application. The
creditor is responsible for considering such
an obligation, but the creditor is not required
to independently verify the obligation.
Similarly, a creditor is responsible for
considering certain obligations undertaken
just before or at consummation of the
transaction and secured by the same dwelling
that secures the transaction (for example, a
‘‘piggy back’’ loan), of which the creditor
knows, even if not reflected on a credit
report. See comment 34(a)(4)–3.
34(a)(4)(iii) Presumption of compliance.
1. In general. A creditor is presumed to
have complied with § 226.34(a)(4) if the
creditor follows the three underwriting
procedures specified in paragraph
34(a)(4)(iii) for verifying repayment ability,
determining the payment obligation, and
measuring the relationship of obligations to
income. The procedures for verifying
repayment ability are required under
paragraph 34(a)(4)(ii); the other procedures
are not required but, if followed along with
the required procedures, create a
presumption that the creditor has complied
with § 226.34(a)(4). The consumer may rebut
the presumption with evidence that the
creditor nonetheless disregarded repayment
ability despite following these procedures.
For example, evidence of a very high debtto-income ratio and a very limited residual
income could be sufficient to rebut the
presumption, depending on all of the facts
and circumstances. If a creditor fails to
follow one of the non-required procedures set
forth in paragraph 34(a)(4)(iii), then the
creditor’s compliance is determined based on
all of the facts and circumstances without
there being a presumption of either
compliance or violation.
Paragraph 34(a)(4)(iii)(B).
1. Determination of payment schedule. To
retain a presumption of compliance under
§ 226.34(a)(4)(iii), a creditor must determine
the consumer’s ability to pay the principal
and interest obligation based on the
maximum scheduled payment in the first
seven years following consummation. In
general, a creditor should determine a
payment schedule for purposes of
§ 226.34(a)(4)(iii)(B) based on the guidance in
the staff commentary to § 226.17(c)(1).
Examples of how to determine the maximum
scheduled payment in the first seven years

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are provided as follows (all payment amounts
are rounded):
i. Balloon-payment loan; fixed interest
rate. A loan in an amount of $100,000 with
a fixed interest rate of 8.0 percent (no points)
has a 7-year term but is amortized over 30
years. The monthly payment scheduled for 7
years is $733 with a balloon payment of
remaining principal due at the end of 7 years.
The creditor will retain the presumption of
compliance if it assesses repayment ability
based on the payment of $733.
ii. Fixed-rate loan with interest-only
payment for five years. A loan in an amount
of $100,000 with a fixed interest rate of 8.0
percent (no points) has a 30-year term. The
monthly payment of $667 scheduled for the
first 5 years would cover only the interest
due. After the fifth year, the scheduled
payment would increase to $772, an amount
that fully amortizes the principal balance
over the remaining 25 years. The creditor
will retain the presumption of compliance if
it assesses repayment ability based on the
payment of $772.
iii. Fixed-rate loan with interest-only
payment for seven years. A loan in an
amount of $100,000 with a fixed interest rate
of 8.0 percent (no points) has a 30-year term.
The monthly payment of $667 scheduled for
the first 7 years would cover only the interest
due. After the seventh year, the scheduled
payment would increase to $793, an amount
that fully amortizes the principal balance
over the remaining 23 years. The creditor
will retain the presumption of compliance if
it assesses repayment ability based on the
interest-only payment of $667.
iv. Variable-rate loan with discount for five
years. A loan in an amount of $100,000 has
a 30-year term. The loan agreement provides
for a fixed interest rate of 7.0 percent for an
initial period of 5 years. Accordingly, the
payment scheduled for the first 5 years is
$665. The agreement provides that, after 5
years, the interest rate will adjust each year
based on a specified index and margin. As of
consummation, the sum of the index value
and margin (the fully-indexed rate) is 8.0
percent. Accordingly, the payment scheduled
for the remaining 25 years is $727. The
creditor will retain the presumption of
compliance if it assesses repayment ability
based on the payment of $727.
v. Variable-rate loan with discount for
seven years. A loan in an amount of $100,000
has a 30-year term. The loan agreement
provides for a fixed interest rate of 7.125
percent for an initial period of 7 years.
Accordingly, the payment scheduled for the
first 7 years is $674. After 7 years, the
agreement provides that the interest rate will
adjust each year based on a specified index
and margin. As of consummation, the sum of
the index value and margin (the fullyindexed rate) is 8.0 percent. Accordingly, the
payment scheduled for the remaining years is
$725. The creditor will retain the
presumption of compliance if it assesses
repayment ability based on the payment of
$674.
vi. Step-rate loan. A loan in an amount of
$100,000 has a 30-year term. The agreement
provides that the interest rate will be 5
percent for two years, 6 percent for three
years, and 7 percent thereafter. Accordingly,

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the payment amounts are $537 for two years,
$597 for three years, and $654 thereafter. To
retain the presumption of compliance, the
creditor must assess repayment ability based
on the payment of $654.
Paragraph 34(a)(4)(iii)(C).
1. ‘‘Income’’ and ‘‘debt’’. To determine
whether to classify particular inflows or
obligations as ‘‘income’’ or ‘‘debt,’’ creditors
may look to widely accepted governmental
and non-governmental underwriting
standards, including, for example, those set
forth in the Federal Housing
Administration’s handbook on Mortgage
Credit Analysis for Mortgage Insurance on
One- to Four-Unit Mortgage Loans.
34(a)(4)(iv) Exclusions from the
presumption of compliance.
1. In general. The exclusions from the
presumption of compliance should be
interpreted consistent with staff comments
32(d)(1)(i)–1 and 32(d)(2)–1.
2. Renewable balloon loan. If a creditor is
unconditionally obligated to renew a balloonpayment loan at the consumer’s option (or is
obligated to renew subject to conditions
within the consumer’s control), the full term
resulting from such renewal is the relevant
term for purposes of the exclusion of certain
balloon-payment loans. See comment
17(c)(1)–11 for a discussion of conditions
within a consumer’s control in connection
with renewable balloon-payment loans.

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21. In Supplement I to Part 226, a new
Section 226.35—Prohibited Acts or
Practices in Connection with Higherpriced Mortgage Loans is added to read
as follows:

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Section 226.35—Prohibited Acts or Practices
in Connection With Higher-priced Mortgage
Loans
35(a) Higher-priced mortgage loans.
Paragraph 35(a)(2).
1. Average prime offer rate. Average prime
offer rates are annual percentage rates
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.
Other pricing terms include commonly used
indices, margins, and initial fixed-rate
periods for variable-rate transactions.
Relevant pricing characteristics include a
consumer’s credit history and transaction
characteristics such as the loan-to-value ratio,
owner-occupant status, and purpose of the
transaction. To obtain average prime offer
rates, the Board uses a survey of creditors
that both meets the criteria of § 226.35(a)(2)
and provides pricing terms for at least two
types of variable-rate transactions and at least
two types of non-variable-rate transactions.
An example of such a survey is the Freddie
Mac Primary Mortgage Market Survey.
2. Comparable transaction. A higherpriced mortgage loan is a consumer credit
transaction secured by the consumer’s
principal dwelling with an annual percentage
rate that exceeds the average prime offer rate
for a comparable transaction as of the date
the interest rate is set by the specified
margin. The table of average prime offer rates

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published by the Board indicates how to
identify the comparable transaction.
3. Rate set. A transaction’s annual
percentage rate is compared to the average
prime offer rate as of the date the
transaction’s interest rate is set (or ‘‘locked’’)
before consummation. Sometimes a creditor
sets the interest rate initially and then re-sets
it at a different level before consummation.
The creditor should use the last date the
interest rate is set before consummation.
4. Board table. The Board publishes on the
Internet, in table form, average prime offer
rates for a wide variety of transaction types.
The Board calculates an annual percentage
rate, consistent with Regulation Z (see
§ 226.22 and appendix J), for each transaction
type for which pricing terms are available
from a survey. The Board estimates annual
percentage rates for other types of
transactions for which direct survey data are
not available based on the loan pricing terms
available in the survey and other
information. The Board publishes on the
Internet the methodology it uses to arrive at
these estimates.
35(b) Rules for higher-priced mortgage
loans.
1. Effective date. For guidance on the
applicability of the rules in § 226.35(b), see
comment 1(d)(5)–1.
Paragraph 35(b)(2)(ii)(C).
1. Payment change. Section 226.35(b)(2)
provides that a loan subject to this section
may not have a penalty described by
§ 226.32(d)(6) unless certain conditions are
met. Section 226.35(b)(2)(ii)(C) lists as a
condition that the amount of the periodic
payment of principal or interest or both may
not change during the four-year period
following consummation. For examples
showing whether a prepayment penalty is
permitted or prohibited in connection with
particular payment changes, see comment
32(d)(7)(iv)–1. Those examples, however,
include a condition that § 226.35(b)(2) does
not include: the condition that, at
consummation, the consumer’s total monthly
debt payments may not exceed 50 percent of
the consumer’s monthly gross income. For
guidance about circumstances in which
payment changes are not considered payment
changes for purposes of this section, see
comment 32(d)(7)(iv)–2.
2. Negative amortization. Section
226.32(d)(2) provides that a loan described in
§ 226.32(a) may not have a payment schedule
with regular periodic payments that cause
the principal balance to increase. Therefore,
the commentary to § 226.32(d)(7)(iv) does not
include examples of payment changes in
connection with negative amortization. The
following examples show whether, under
§ 226.35(b)(2), prepayment penalties are
permitted or prohibited in connection with
particular payment changes, when a loan
agreement permits negative amortization:
i. Initial payments for a variable-rate
transaction consummated on January 1, 2010
are $1,000 per month and the loan agreement
permits negative amortization to occur.
Under the loan agreement, the first date that
a scheduled payment in a different amount
may be due is January 1, 2014 and the
creditor does not have the right to change
scheduled payments prior to that date even

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if negative amortization occurs. A
prepayment penalty is permitted with this
mortgage transaction provided that the other
§ 226.35(b)(2) conditions are met, that is:
provided that the prepayment penalty is
permitted by other applicable law, the
penalty expires on or before December 31,
2011, and the penalty will not apply if the
source of the prepayment funds is a
refinancing by the creditor or its affiliate.
ii. Initial payments for a variable-rate
transaction consummated on January 1, 2010
are $1,000 per month and the loan agreement
permits negative amortization to occur.
Under the loan agreement, the first date that
a scheduled payment in a different amount
may be due is January 1, 2014, but the
creditor has the right to change scheduled
payments prior to that date if negative
amortization occurs. A prepayment penalty is
prohibited with this mortgage transaction
because the payment may change within the
four-year period following consummation.
35(b)(3) Escrows.
Paragraph 35(b)(3)(i).
1. Section 226.35(b)(3) applies to principal
dwellings, including structures that are
classified as personal property under state
law. For example, an escrow account must be
established on a higher-priced mortgage loan
secured by a first-lien on a mobile home, boat
or a trailer used as the consumer’s principal
dwelling. See the commentary under
§§ 226.2(a)(19), 226.2(a)(24), 226.15 and
226.23. Section 226.35(b)(3) also applies to
higher-priced mortgage loans secured by a
first lien on a condominium or a cooperative
unit if it is in fact used as principal
residence.
2. Administration of escrow accounts.
Section 226.35(b)(3) requires creditors to
establish before the consummation of a loan
secured by a first lien on a principal dwelling
an escrow account for payment of property
taxes and premiums for mortgage-related
insurance required by creditor. Section 6 of
RESPA, 12 U.S.C. 2605, and Regulation X
address how escrow accounts must be
administered.
3. Optional insurance items. Section
226.35(b)(3) does not require that escrow
accounts be established for premiums for
mortgage-related insurance that the creditor
does not require in connection with the
credit transaction, such as an earthquake
insurance or debt-protection insurance.
Paragraph 35(b)(3)(ii)(B).
1. Limited exception. A creditor is required
to escrow for payment of property taxes for
all first lien loans secured by condominium
units regardless of whether the creditors
escrows insurance premiums for
condominium unit.

22. In Supplement I to Part 226, a new
Section 226.36—Prohibited Acts or
Practices in Connection with Credit
Secured by a Consumer’s Principal
Dwelling is added to read as follows:

■

Section 226.36—Prohibited Acts or Practices
in Connection With Credit Secured by a
Consumer’s Principal Dwelling
1. Effective date. For guidance on the
applicability of the rules in § 226.36, see
comment 1(d)(5)–1.

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36(a) Mortgage broker defined.
1. Meaning of mortgage broker. Section
226.36(a) provides that a mortgage broker is
any person who for compensation or other
monetary gain arranges, negotiates, or
otherwise obtains an extension of consumer
credit for another person, but is not an
employee of a creditor. In addition, this
definition expressly includes any person that
satisfies this definition but makes use of
‘‘table funding.’’ Table funding occurs when
a transaction is consummated with the debt
obligation initially payable by its terms to
one person, but another person provides the
funds for the transaction at consummation
and receives an immediate assignment of the
note, loan contract, or other evidence of the
debt obligation. Although § 226.2(a)(17)(1)(B)
provides that a person to whom a debt
obligation is initially payable on its face
generally is a creditor, § 226.36(a) provides
that, solely for the purposes of § 226.36, such
a person is considered a mortgage broker. In
addition, although consumers themselves
often arrange, negotiate, or otherwise obtain
extensions of consumer credit on their own
behalf, they do not do so for compensation
or other monetary gain or for another person
and, therefore, are not mortgage brokers
under this section.
36(b) Misrepresentation of value of
consumer’s principal dwelling.
36(b)(2) When extension of credit
prohibited.
1. Reasonable diligence. A creditor will be
deemed to have acted with reasonable
diligence under § 226.36(b)(2) if the creditor
extends credit based on an appraisal other
than the one subject to the restriction in
§ 226.36(b)(2).
2. Material misstatement or
misrepresentation. Section 226.36(b)(2)
prohibits a creditor who knows of a violation
of § 226.36(b)(1) in connection with an
appraisal from extending credit based on
such appraisal, unless the creditor
documents that it has acted with reasonable
diligence to determine that the appraisal does
not materially misstate or misrepresent the
value of such dwelling. A misstatement or
misrepresentation of such dwelling’s value is
not material if it does not affect the credit
decision or the terms on which credit is
extended.
36(c) Servicing practices.
Paragraph 36(c)(1)(i).
1. Crediting of payments. Under
§ 226.36(c)(1)(i), a mortgage servicer must
credit a payment to a consumer’s loan
account as of the date of receipt. This does
not require that a mortgage servicer post the
payment to the consumer’s loan account on

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a particular date; the servicer is only required
to credit the payment as of the date of
receipt. Accordingly, a servicer that receives
a payment on or before its due date (or
within any grace period), and does not enter
the payment on its books or in its system
until after the payment’s due date (or
expiration of any grace period), does not
violate this rule as long as the entry does not
result in the imposition of a late charge,
additional interest, or similar penalty to the
consumer, or in the reporting of negative
information to a consumer reporting agency.
2. Payments to be credited. Payments
should be credited based on the legal
obligation between the creditor and
consumer. The legal obligation is determined
by applicable state or other law.
3. Date of receipt. The ‘‘date of receipt’’ is
the date that the payment instrument or other
means of payment reaches the mortgage
servicer. For example, payment by check is
received when the mortgage servicer receives
it, not when the funds are collected. If the
consumer elects to have payment made by a
third-party payor such as a financial
institution, through a preauthorized payment
or telephone bill-payment arrangement,
payment is received when the mortgage
servicer receives the third-party payor’s
check or other transfer medium, such as an
electronic fund transfer.
Paragraph 36(c)(1)(ii).
1. Pyramiding of late fees. The prohibition
on pyramiding of late fees in this subsection
should be construed consistently with the
‘‘credit practices rule’’ of Regulation AA, 12
CFR 227.15.
Paragraph 36(c)(1)(iii).
1. Reasonable time. The payoff statement
must be provided to the consumer, or person
acting on behalf of the consumer, within a
reasonable time after the request. For
example, it would be reasonable under most
circumstances to provide the statement
within five business days of receipt of a
consumer’s request. This time frame might be
longer, for example, when the servicer is
experiencing an unusually high volume of
refinancing requests.
2. Person acting on behalf of the consumer.
For purposes of § 226.36(c)(1)(iii), a person
acting on behalf of the consumer may include
the consumer’s representative, such as an
attorney representing the individual, a nonprofit consumer counseling or similar
organization, or a creditor with which the
consumer is refinancing and which requires
the payoff statement to complete the
refinancing. A servicer may take reasonable
measures to verify the identity of any person
acting on behalf of the consumer and to

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obtain the consumer’s authorization to
release information to any such person before
the ‘‘reasonable time’’ period begins to run.
3. Payment requirements. The servicer may
specify reasonable requirements for making
payoff requests, such as requiring requests to
be in writing and directed to a mailing
address, e-mail address or fax number
specified by the servicer or orally to a
telephone number specified by the servicer,
or any other reasonable requirement or
method. If the consumer does not follow
these requirements, a longer time frame for
responding to the request would be
reasonable.
4. Accuracy of payoff statements. Payoff
statements must be accurate when issued.
Paragraph 36(c)(2).
1. Payment requirements. The servicer may
specify reasonable requirements for making
payments in writing, such as requiring that
payments be accompanied by the account
number or payment coupon; setting a cut-off
hour for payment to be received, or setting
different hours for payment by mail and
payments made in person; specifying that
only checks or money orders should be sent
by mail; specifying that payment is to be
made in U.S. dollars; or specifying one
particular address for receiving payments,
such as a post office box. The servicer may
be prohibited, however, from requiring
payment solely by preauthorized electronic
fund transfer. (See section 913 of the
Electronic Fund Transfer Act, 15 U.S.C.
1693k.)
2. Payment requirements—limitations.
Requirements for making payments must be
reasonable; it should not be difficult for most
consumers to make conforming payments.
For example, it would be reasonable to
require a cut-off time of 5 p.m. for receipt of
a mailed check at the location specified by
the servicer for receipt of such check.
3. Implied guidelines for payments. In the
absence of specified requirements for making
payments, payments may be made at any
location where the servicer conducts
business; any time during the servicer’s
normal business hours; and by cash, money
order, draft, or other similar instrument in
properly negotiable form, or by electronic
fund transfer if the servicer and consumer
have so agreed.
By order of the Board of Governors of the
Federal Reserve System, July 15, 2008.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. E8–16500 Filed 7–29–08; 8:45 am]
BILLING CODE 6210–01–P

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