Full text of District Notices (Federal Reserve Bank of Dallas) : Board Proposes Enhanced Consumer Protections & Disclosures for Home Mortgage Transactions, Notice 10-52 : Summary of Findings: Design and Testing of Periodic Statements for Home Equity Lines of Credit

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Summary of Findings:
Design and Testing of Periodic Statements
for Home Equity Lines of Credit, Disclosures about
Changes to Home Equity Line Credit Limits, and
Disclosures about Credit Protection Products

July 2010

Submitted to:
Board of Governors of the
Federal Reserve System

Submitted by:

ICF Macro
11785 Beltsville Drive
Calverton, Maryland 20705

Summary of Findings:

Design and Testing of Periodic Statements
for Home Equity Lines of Credit, Disclosures about
Changes to Home Equity Line Credit Limits, and
Disclosures about Credit Protection Products

July 2010

Submitted to:
Board of Governors of the
Federal Reserve System

Submitted by:
ICF Macro
11785 Beltsville Drive
Calverton, Maryland 20705

Table of Contents
Executive Summary

Chapter I: Introduction

Background

Summary of Methodology

Chapter II: Guiding Principles for Disclosure Design

Chapter III: Testing of Periodic Statements

Interviews in Bethesda, MD (November 2009)

Key Interview Findings

Subsequent Design Decisions

Interviews in Tampa, FL (January 2010)

Key Interview Findings

Subsequent Design Decisions

Interviews in Phoenix, AZ (March 2010)
Key Interview Findings
Subsequent Design Decisions
Chapter IV: Testing of Disclosures Related to Changes in Credit Limits
Interviews in Bethesda, MD (November 2009)

9
9
10
11
11

Key Interview Findings

Subsequent Design Decisions

Interviews in Tampa, FL (January 2010)

Key Interview Findings

Subsequent Design Decisions

Chapter V: Testing of Credit Insurance Disclosures
Interviews in Phoenix, AZ (March 2010)

14
14

Key Interview Findings

Subsequent Design Decisions

Interviews in Memphis, TN (April 2010)

Objectives and Methodology

Key Interview Findings

Subsequent Design Decisions

Chapter VI: Summary
Appendix A: Sample Recruitment Protocol (Rounds 1 through 3)
Appendix B: Recruitment Protocol (Round 4)
Appendix C: Participant Demographic and Background Information
Appendix D: Disclosure Forms Used in Testing

Executive Summary
Background
In 1968, Congress enacted the Truth in Lending Act (TILA) to protect consumers by requiring
creditors to provide key pieces of information to consumers at various points in time. Congress
assigned the Federal Reserve Board (the Board) the responsibility of implementing TILA, which the
Board currently does through Regulation Z.
Since 2004, the Board has been in the process of reviewing Regulation Z to determine whether
revisions are appropriate. One of the goals of this review is to ensure that disclosures that are
required by TILA are structured and worded in a way that consumers are most likely to understand
and use in their financial decision-making.
The Board contracted with ICF Macro in 2006 to assist with its review and revision of TILA
disclosure regulations. ICF Macro is a research and evaluation company with expertise in the design
and cognitive testing of effective consumer communication materials. ICF Macro worked with the
Board on its review of credit card disclosures and is currently contributing to its review of
disclosures for closed-end mortgages and home equity lines of credit (HELOCs).
This report describes ICF Macro’s work on three types of disclosures: a) periodic statements for
HELOCs; b) disclosures related to changes in credit limits for HELOCs; and c) disclosures related
to credit insurance for HELOCs and closed-end mortgages.
Since August 2009, ICF Macro has conducted four rounds of one-on-one cognitive interviews on
these topics with a total of 39 participants. For each round, ICF Macro developed a set of model
disclosure forms to be tested. Interview participants were asked to review these disclosures and
describe their reactions, and were then asked a series of questions designed to test their
understanding of the content. Data were collected on which elements and features of each
disclosure were most successful in communicating information clearly and effectively. The findings
from each round of interviews were incorporated in revisions to the model disclosures for the
following round of testing.
The findings from these interviews have informed the Board’s proposed revisions to Regulation Z
rules, which the Board intends to publish for public comment in July 2010.

Summary of Methodology
Testing of the disclosures was carried out through four rounds of interviews. Not all types of
disclosures were tested in each round; periodic statements were tested in three of the four rounds,
while notices related to changes in credit limits and notices related to credit insurance were tested in
two rounds each. Before each round of interviews, ICF Macro developed model disclosures for
testing. In some cases, multiple versions of each type of disclosure were developed so that the
impact of varying language or format could be studied. Board staff attended all rounds of testing.
After each round, ICF Macro briefed Board staff on key findings, as well as their implications for
disclosure design and layout.

Participants in each round were recruited by telephone using a structured screening instrument in
order to ensure the selection of a range of participants of different gender, age, ethnicity, and other
characteristics. Participants were disqualified if they worked for a financial institution, or in the real
estate or mortgage industry.
The first three rounds tested disclosures that would be given to borrowers opening a HELOC. Most
participants who were recruited for these rounds either had a HELOC or had considered opening a
HELOC in the past five years, although a few did not have any home equity product. The fourth
round tested a credit insurance disclosure that would be given to borrowers who were refinancing a
loan with their original creditor. For this round, participants must have had obtained a mortgage in
the past two years.
Individual interviews were approximately 75 minutes long. While the interview guide varied between
rounds, the general structure of these interviews was very similar. Participants were given a
disclosure and asked to “think aloud” while they reviewed the document, indicating whenever they
found something surprising, interesting, or confusing. Following this “think aloud” process,
participants were asked specific questions about the information on the disclosure to determine how
well they could find and interpret the content. The participants were then given a new disclosure to
review and the interviewer took them through the same process.

Summary of Key Findings
Periodic Statements for Home Equity Lines of Credit


Periodic statements were tested in a total of 31 interviews over three rounds. Participants in
these interviews were shown two versions of periodic statements. In the first version, fees in the
transaction list were separated from other transactions using a subcategory titled “Fees.” In the
second version, the fees were listed chronologically, along with all other transactions.
Overwhelmingly, participants indicated that they preferred to have fees broken out as a
subcategory on the transaction list, because this made it easier to notice and identify specific
charges. These findings are consistent with the Board’s August 2009 HELOC proposed rules to
require that fees must be broken out in this way on periodic statements for HELOCs, which is
also consistent with the Regulation Z requirements for credit card accounts that the Board
published in 2009.



Most participants did not understand how a creditor would calculate interest charges, and even
fewer understood the meaning of the daily interest rates shown on the statement. Participants
overwhelmingly indicated that they would be unlikely to ever use this information to calculate
interest charges on their own, even if they questioned the amount of interest they were charged.
These findings are consistent with the Board’s August 2009 HELOC proposed rules to no
longer require that daily interest rates be provided on periodic statements for HELOCs, which is
also consistent with the Regulation Z requirements for credit card accounts.



When shown the fee-inclusive annual percentage rate (APR) on the periodic statement, only two
of the 31 participants were able to explain what the term meant—even after being specifically
directed to read the explanation provided on the statement. Only one of the 31 participants
indicated that he would ever use this information, and the example that one participant provided
was an inappropriate use of the fee-inclusive APR. These findings are consistent with the
Board’s August 2009 HELOC proposed rules to amend Regulation Z to no longer require that

fee-inclusive APR be provided on periodic statements for HELOCs, which is also consistent
with the Regulation Z requirements for credit card accounts.

Disclosures Related to Changes in Credit Limits


Disclosures related to changes in credit limits for HELOCs were tested in two rounds of
interviews with a total of 21 participants. Participants in the first round of testing were presented
with a disclosure that would be provided to an existing HELOC customer if the creditor decided
to reduce the amount of that participant’s line of credit. 1 The notice showed a list of possible
reasons why the credit limit might have been reduced, with one option checked to indicate that
the value of the property securing the loan had declined significantly. In the first round of
testing, several participants were confused by the “checklist” format used on the notice. For
example, one participant thought that the blank lines next to other options meant that he was
supposed to complete this information himself, while another thought the lines meant that the
creditor would later provide additional information. Because of this confusion, ICF Macro and
Board staff decided to design and test a version of the form that did not include a checklist, but
instead described only the specific reason for the reduction in the credit limit.



In the second round of testing, the notice of reduction in credit limit was tested again, along
with a second notice informing participants that a request for reinstatement of the original credit
limit was denied. Both of these disclosures did not show a checklist of possible reasons for the
creditor’s action, but instead described the specific reason that was relevant. Participants found
these forms easier to understand than the first version that included a checklist.

Credit Insurance Disclosures


Credit insurance disclosures were tested in a total of 18 interviews over two rounds. In the first
round of testing, participants’ understanding of the cost of this coverage and the maximum
benefit amount was low. On the disclosure tested in that round, the cost of the product was
disclosed on a unit-cost basis, as is permitted in the current regulation. Even when provided with
a calculator, only a few participants could correctly calculate the cost. The maximum benefit was
disclosed at the bottom of the form, by the signature line, but only half of the participants
understood that their benefits would be capped and would not pay off the outstanding balance
on their account.



To make the disclosure easier to read and comprehend, ICF Macro and Board staff decided to
present the information in a tabular format based on previous testing of other financial
disclosures, such as HELOC disclosures, rescission notices and description of checking account
overdraft policies. 2 In addition, ICF Macro and Board staff decided to disclose the cost of the
product as a dollar figure rather than as a unit cost.

This notice included model clause G-23(A) that was published with the Board’s proposed HELOC rules in 2009.

Findings on these other disclosures have been reported to the Board in separate reports; see Design and Testing of Truth in
Lending Disclosures for Home Equity Lines of Credit, (available at http://www.federalreserve.gov/boarddocs/meetings/
2009/20090723/Full%20HELOC_Macro%20Report.pdf), Design and Testing of Rescission Notices (submitted July 2010),
and Design and Testing of Overdraft Disclosures: Phase Two (available at http://www.federalreserve.gov/newsevents/
press/bcreg/bcreg20091112a4.pdf).

iii



In the second round of testing participants were shown a disclosure that provided information
about credit insurance in a table that connected questions about the product in the left column to
answers about the product in the right column. All participants in this round understood both the
cost of the product disclosed as a dollar figure and the maximum benefit. Therefore, the Board is
proposing to amend Regulation Z to require creditors to disclose the cost of the product as a
dollar figure and the maximum benefit, and proposing model forms with a tabular format.

Chapter I: Introduction
Background
In 1968, Congress enacted the Truth in Lending Act (TILA) to protect consumers by requiring
creditors to provide key pieces of information to consumers at various points in time. Congress
assigned the Federal Reserve Board (the Board) the responsibility of implementing TILA, which the
Board currently does through Regulation Z.
Since 2004, the Board has been in the process of reviewing Regulation Z to determine whether
revisions are appropriate. One of the goals of this review is to ensure that the disclosures that are
required by TILA are structured and worded in a way that consumers are most likely to understand
and use in their financial decision-making.
The Board contracted with ICF Macro in 2006 to assist with its review and revision of TILA
disclosure regulations. ICF Macro is a research and evaluation company with expertise in the design
and cognitive testing of effective consumer communication materials. ICF Macro worked with the
Board on its review of credit card disclosures and is currently contributing to its review of
disclosures for closed-end mortgages and home equity lines of credit (HELOCs).
This report describes ICF Macro’s work on three types of disclosures:


Periodic statements for HELOCs. Regulation Z currently requires creditors to provide
periodic statements for HELOCs. In August 2009, the Board proposed certain formatting and
other changes to periodic statements, such as eliminating the requirements to disclose the
effective annual percentage rate (APR) and requiring disclosure of the total interest and total fees
for both the statement period and the year to date. The proposal included sample periodic
statements illustrating the proposed changes.



Disclosures related to changes in credit limit for HELOCs. Regulation Z currently requires
creditors to notify consumers when a creditor temporarily suspends advances on a HELOC or
reduces the credit limit. The regulation does not require disclosure when a creditor denies a
consumer’s request to reinstate advances or the previous credit limit, or when a creditor
permanently terminates an account. In August 2009, the Board proposed certain changes to the
disclosure requirements related to suspension of HELOC advances and reduction of the credit
limit, and proposed to add requirements to disclose account terminations and denials of
reinstatements.



Disclosures related to credit insurance products. Regulation Z requires creditors to provide
certain disclosures for credit insurance, debt cancellation coverage, or debt suspension coverage
written in connection with the credit transaction. In August 2009, the Board proposed to amend
Regulation Z to require creditors to provide revised disclosures related to the optional nature of
the product, and to add certain other disclosures such as eligibility restrictions.

Since August 2009, ICF Macro has conducted four rounds of one-on-one cognitive interviews on
these topics with a total of 39 participants. For each round, ICF Macro developed a set of model
disclosure forms to be tested. Interview participants were asked to review these disclosures and
describe their reactions, and were then asked a series of questions designed to test their

understanding of the content. Data were collected on which elements and features of each
disclosure were most successful in communicating information clearly and effectively. The findings
from each round of interviews were incorporated in revisions to the model disclosures for the
following round of testing.
The findings from these interviews have informed the Board’s proposed revisions to Regulation Z
rules, which the Board intends to publish for public comment in July 2010.

Summary of Methodology
Testing of the disclosures was carried out through four rounds of interviews, as shown in Table 1.
As shown in the table, different types of disclosures were tested in each round. 3 Before each round
of interviews, ICF Macro developed model disclosures for testing. In some cases, multiple versions
of each type of disclosure were developed so that the impact of varying language or format could be
studied. Board staff attended all rounds of testing. After each round, ICF Macro briefed Board staff
on key findings, as well as their implications for disclosure design and layout.
Table 1: Timeline of Cognitive Testing
Location

Dates

Number of
Interviews

Disclosures Tested
 Periodic statements

Round 1

Bethesda, MD

November 4–5, 2009

Round 2

Tampa, FL

January 19–20, 2010

Round 3

Phoenix, AZ

March 23–24, 2010

Round 4

Memphis, TN

April 16, 2010

 Disclosures related to changes in
credit limit
 Periodic statements
 Disclosures related to changes in
credit limit
 Periodic statements
 Credit insurance disclosures
 Credit insurance disclosures

In these four rounds of interviews ICF Macro also tested revised rescission notices, disclosures informing consumers of their
right to cancel a HELOC or refinanced mortgage. Findings related to rescission notices are being described in a separate
report to the Board (see Summary of Findings: Design and Testing of Rescission Notices, submitted in July 2010).

mortgage in the past two years. The screening instrument used in this round is included as Appendix
B of this report. A summary of the participants’ background and demographic information from all
four rounds is provided as Appendix C of this report.
Individual interviews were approximately 75 minutes long. While the interview guide varied between
rounds, the general structure of these interviews was very similar. Participants were given a
disclosure and asked to “think aloud” while they reviewed the document, indicating whenever they
found something surprising, interesting, or confusing. Following this “think aloud” process,
participants were asked specific questions about the information on the disclosure to determine how
well they could find and interpret the content. The participants were then given a new disclosure to
review and the interviewer took them through the same process.

Chapter II: Guiding Principles for Disclosure
Design
ICF Macro’s design of revised disclosures for the Board is based on findings from cognitive testing.
This reliance on direct consumer feedback is an important strategy for ensuring that disclosure forms
like those described in this report are useful and understandable to their intended audiences. At the
same time, there are a number of general principles to which ICF Macro’s designers try to adhere
whenever they engage in such projects. Relevant principles to this project included the following:


Use plain language. Jargon and technical language should be avoided whenever possible, and
replaced with words that are more easily understood by consumers. The use of simple language
is particularly important in the context of disclosures, because consumers who are at the greatest
risk of being taken advantage of are often those with lower literacy levels. While readability
metrics (such as the “grade level” of the writing) can be useful in this respect, the best way to
determine whether language is truly understandable is through direct consumer testing.



Prioritize information, and structure disclosures so that the most important information
for consumers is easiest to find. Consumers frequently do not read disclosures carefully; those
who review them often only skim them quickly to look for a few key pieces of information. If
consumers cannot quickly find the information they are looking for, they are likely to become
frustrated and give up. It is important to identify the most important pieces of information on
the form for consumers, so that these items can be most prominent on the disclosure.



Use headings and titles to make documents more navigable, and to help consumers find
the most important information. When large amounts of text are included, plain-language
headings should be used to distinguish sections on different topics. In tables, rows and columns
should have short, easy-to-read titles that accurately describe the information provided. This
allows consumers to find information that they are looking for quickly and efficiently, and
decreases the likelihood that they will become distracted by unrelated text.



Build upon prior research whenever possible. While each type of disclosure is different,
findings from cognitive testing can often translate between different documents. The
applicability of a previously tested disclosure format to a new situation should always be
confirmed through cognitive testing, but the previously tested format often provides a useful
starting point. For example, the tabular format of one of the credit insurance disclosures that
were tested was based on previous testing of other financial disclosures, such as HELOC
disclosures, rescission notices, and description of checking account overdraft policies. 4

4
Findings on these other disclosures have been reported to the Board in separate reports; see, Design and Testing of Truth in
Lending Disclosures for Home Equity Lines of Credit (available at http://www.federalreserve.gov/boarddocs/meetings/
2009/20090723/Full%20HELOC_Macro%20Report.pdf), Design and Testing of Rescission Notices (submitted July 2010),
and Design and Testing of Overdraft Disclosures: Phase Two (available at http://www.federalreserve.gov/newsevents/
press/bcreg/bcreg20091112a4.pdf).

Chapter III: Testing of Periodic Statements
Interviews in Bethesda, MD (November 2009)
Periodic statements for HELOCs were first tested in a round of 10 cognitive interviews in
Bethesda, MD on November 4 and 5, 2009. In this round, participants were shown two different
versions of a periodic statement for a HELOC. Both versions contained a summary of account activity,
payment information, a list of transactions, information about how interest was calculated and about
the fee-inclusive APR. These two forms (referred to as PS-1 and PS-2) were almost identical, except for
the list of transactions: the fees on PS-1 were separated from other transactions using a subcategory
titled “Fees,” while the fees on PS-2 were listed chronologically along with all other transactions.
Participants were shown both PS-1 and PS-2, with half of the participants seeing PS-1 first and the
other half seeing PS-2 first. They were asked to review each form while thinking aloud, and were
then asked to answer a series of questions to test their understanding of the content.
PS-1 and PS-2 are provided in Appendix D of this report.

Key Interview Findings
Prior Experience with HELOCs


Eight of the 10 participants had obtained HELOCs, while one said that she had applied for a
HELOC but was turned down because of her financial status.



All the participants who had HELOCs said that the process of obtaining a HELOC was
relatively easy.

Review of Periodic Statements (PS-1 and PS-2)
Initial Review of Statements


Almost all participants indicated that they do not closely or carefully read periodic statements on
their credit accounts, including HELOCs. Most either said that they glance quickly at their
statements, or that they file them without looking at them at all. Only one indicated that he reads
his periodic statements carefully each month.



When asked to identify what they consider the most important information on the periodic
statement, participants most commonly answered that they look for the following:


Was my last payment received?



When is my next payment due?



What is the minimum required payment?



What fees was I charged?



What is my current interest rate?



What transactions have taken place?



After reviewing the first periodic statement they were shown, all participants were able to
correctly identify their current balance; the amount of their last payment; the number and total
amount of fees they were charged, and how much interest they were charged.

Understanding of Calculation of Interest


When participants were asked what they would do if they thought the amount of interest
charged was incorrect, half said that they would call the creditor for an explanation. Two said
that they would assume their interest rate had changed, while two others indicated that they
would look at previous statements to see if they could figure out what happened. All said that it
was very unlikely they would ever try to calculate the interest charges themselves to doublecheck the amount on the statement.



One participant was able to describe accurately how the creditor calculates interest rates, while
two others said that interest was calculated “from the APR.” The remaining participants,
however, were unable to describe how the creditor calculated interest charges.



The back of the periodic statement provided a very detailed description of how the creditor
calculates interest charges. However, only one participant looked at the back of the statement at
any point in the interview, and she did not read the description provided there.



While looking at the statement, eight participants were able to correctly identify their interest
rate for fixed-rate advances. One confused the fee-inclusive APR with the interest rate, while
another did not seem to understand what an interest rate was.



Most participants did not understand what the daily interest rates represent and how they relate
to the APR. When asked how they would use the daily interest rates provided on the statement,
nine of the 10 participants indicated that they would not. The remaining participant said that he
would use the rates to “look for a trend to see if interest rates are increasing”—apparently not
realizing that the annual rates would be just as useful for this purpose.

Understanding and Perceived Usefulness of the Fee-Inclusive APR


Only two of the 10 participants understood the meaning of the fee-inclusive APR. 5 Others were
generally confused by the term, and could not explain how it differed from the APR.



Of all 10 participants, only one could envision any situation in which he would use the
fee-inclusive APR; others said they would not find this information useful. The one participant
who said he would use the fee-inclusive APR indicated that he would use it to determine which
balance to pay down—which would not be an appropriate use of the information.

Comparison of PS-1 and PS-2


Nine of the 10 participants preferred having the fees broken out separately on the transaction
list, as was done in PS-1. These participants generally said that they found this format clearer,
and that it made the fees more prominent and easier to identify. The remaining participant had
no preference between PS-1 and PS-2.

Participants in all rounds were considered to “understand” the fee-inclusive APR if they were able to answer a short series of
questions about it, such as why the fee-inclusive APR was higher than the APR for fixed-rate advances, why the two terms
were the same for variable rate advances, and what the fee-inclusive APR would be the following month if no more fixed-rate
advances were taken.

Subsequent Design Decisions
Participants in this round strongly preferred having the fees broken out into a separate category on
the transaction list, as was done in PS-1.
Participants did not understand how the creditor would calculate their interest charges, and did not
understand the daily interest rates shown on the statement. They also indicated that they would be
extremely unlikely to ever use this information to calculate interest charges on their own.
Almost all participants did not understand the fee-inclusive APR. One indicated that he would find
this information useful, but the way he proposed using the information would be inappropriate.
No significant changes were made to the forms following this round. However, ICF Macro and Board
staff made the decision to test the same forms again to see if participants’ responses would be similar.

Interviews in Tampa, FL (January 2010)
Periodic statements for HELOCs were tested again in 11 interviews conducted in Tampa, FL on
January 19 and 20, 2010. As in the first round, participants were shown two different versions of a
periodic statement for a HELOC. These versions (referred to as PS-3 and PS-4) were identical to
PS-1 and PS-2, except that the dates on the statement were changed. Again, PS-3 and PS-4 were
exactly the same, except for the list of transactions—the fees on PS-3 were separated from other
transactions using a subcategory titled “Fees,” while the fees on PS-4 were listed chronologically
along with all other transactions.
Participants were shown both PS-3 and PS-4, with half of the participants seeing PS-3 first and the
other half seeing PS-4 first. They were asked to review each form while thinking aloud, and were
then asked to answer a series of questions to test their understanding of the content.
PS-3 and PS-4 are provided in Appendix D of this report.

Key Interview Findings
Prior Experience with HELOCs


Seven of the 11 participants had obtained HELOCs. Two had home equity loans, but had
considered getting a HELOC instead. One did not have a HELOC or a home equity loan; this
participant considered getting a home equity loan, but instead refinanced the first mortgage and
took cash out in connection with that refinancing. The remaining participant was unsure of
whether he had a HELOC or a home equity loan.



All the participants who had HELOCs said that the process of obtaining a HELOC was
relatively easy.

Review of Periodic Statements (PS-3 and PS-4)
Initial Review of Statements


Only two of the 11 participants said that they closely or carefully read periodic statements on
their credit accounts, including HELOCs. Most said that they tend to glance at the statements

and look for the balance, due date, minimum payment, and whether or not they had taken out
any funds that month.




When asked to identify what they consider the most important information on the periodic
statement, participants’ most common responses were the same as in the previous round:


Was my last payment received?



When is my next payment due?



What is the minimum required payment?



What fees was I charged?



What is my current interest rate?



What transactions have taken place?

Understanding of Calculation of Interest


When participants were asked what they would do if they thought the amount of interest
charged was incorrect, five of the 11 said that they would call the creditor for an explanation.
One said she would try to use a calculator to check whether the interest charges were correct,
but she could not explain what calculation she would use. One person just said he would be
“unhappy,” but would probably do nothing.



Only one participant was able to describe accurately how the creditor calculates interest charges;
most stated bluntly that they did not know. None of the participants referred to the back of the
statement, which included a description of how the creditor calculates interest rates. Several
participants commented that knowing how creditors calculate their interest charges would not be
useful to them, because they would be unlikely to ever use this information to calculate charges
on their own.



While looking at the statement, only five of the 11 participants were able to correctly identify
their interest rate for fixed-rate advances. One participant confused the fee-inclusive APR with
the interest rate; the others indicated that they did not know what their interest rate was.



When the “daily interest rates” on the statement were pointed out to participants, only two of the
11 were able to explain what these rates were or how they were calculated. When asked how they
would use the daily interest rate information, all 11 participants said that they would not use it.

Understanding and Perceived Usefulness of the Fee-Inclusive APR


None of the participants understood the meaning of the fee-inclusive APR; most were very
confused and indicated that they had no idea how this term differed from the APR.



None of the participants thought they would use the fee-inclusive APR for any purpose (one
participant was not sure if he would use it or not, or how he would use it).

Comparison of PS-3 and PS-4


Ten of the 11 participants said that they preferred PS-3, which separates the fees into its own
subcategory. They said that this made it easier for them to find the fees charged for that period.

Subsequent Design Decisions


Results in this round were very similar to those from the first round of testing. Participants
continued to prefer the breakout of fees into its own category, as on PS-3. They generally did
not understand how a creditor would calculate interest charges and did not understand the “daily
interest rates” provided on the statement, but also indicated that they would be very unlikely to
ever use this information to calculate interest charges. All participants did not understand the
fee-inclusive APR and indicated that they would not find it useful.



No revisions were made to these forms following this round of testing; the decision was instead
made by ICF Macro and Board staff to test the same forms again in the following round to
verify these results.

Interviews in Phoenix, AZ (March 2010)
A third round of 10 cognitive interviews was conducted in Phoenix, AZ on March 23 and 24, 2010.
Participants in this round were shown the same two periodic statements (PS-3 and PS-4) that were used
in the previous round of testing in Tampa, FL. Again, PS-3 and PS-4 were exactly the same, except for
the list of transactions—the fees on PS-3 were separated from other transactions using a subcategory
titled “Fees,” while the fees on PS-4 were listed chronologically along with all other transactions.
As in the previous round, participants were shown both PS-3 and PS-4, with half of the participants
seeing PS-3 first and the other half seeing PS-4 first. They were asked to review each form while thinking
aloud, and were then asked to answer a series of questions to test their understanding of the content.

Key Interview Findings
Prior Experience with HELOCs


Eight of the 10 participants had previously obtained HELOCs. Of these eight, all indicated that
they found the process of obtaining a HELOC to be relatively easy.

Review of Periodic Statements (PS-3 and PS-4)
Initial Review of Statements


Participants who had HELOCs were divided on how closely they read the periodic statements
they receive from their creditors. Half indicated that they read these statements carefully each
month, while the other half said that they look at them only briefly, if at all. As in previous
rounds, those who said they look at their statements only briefly indicated that they are most
interested in the balance, the due date, and the amount of the next payment.



After reviewing the periodic statement, all participants were able to correctly identify their
current balance, the amount of their last payment, and the number of fees they were charged.
Eight of the 10 participants were able to identify the total amount of the fees they had been
charged, and eight were able to identify the amount of interest they were charged.

Understanding of Calculation of Interest


When asked what they would do if they thought the amount of interest they had been charged
was incorrect, most participants indicated that they would call their creditor. Three said that they
would try to calculate the amount of interest they owed themselves, although only one of the
three was able to give even a basic description of how they might do so. One participant said
that in this situation there would be “nothing [he] could do.”



Three participants were able to correctly identify the interest rate they were being charged on
fixed-rate advances. Most participants indicated that they did not know; one incorrectly stated
her fixed-rate balance rather than their interest rate.



Two participants were able to provide a basic explanation for what is meant by “daily interest
rate”; others indicated that they did not know what that term meant. None of the participants
believed there was any situation in which they would use this information.

Understanding and Perceived Usefulness of the Fee-Inclusive APR


As in the previous round, none of the participants understood the fee-inclusive APR, even after
being prompted to read the explanation provided on the statement.



As in previous rounds, none of the participants thought there was any situation in which they
would use the fee-inclusive APR.

Comparison of PS-3 and PS-4


All but one participant preferred the structure of the transaction list provided on PS-3 to that of
PS-4 because they felt it was clearer to have the fees broken out separately. The remaining
participant did not express a preference between the two.

Subsequent Design Decisions


Results in this round were very similar to those from the first two rounds of testing. Participants
continued to strongly prefer the breakout of fees into its own category in the transaction list, as
on PS-3. They generally did not understand how a creditor would calculate interest charges and
did not understand the “daily interest rates” provided on the statement, but they also indicated
that they would be very unlikely to ever use this information to calculate their own charges.
Participants continued to struggle to understand the fee-inclusive APR, and all indicated that
there was no situation in which they would use this information.



These findings are consistent with the Regulation Z requirements for credit cards that the Board
published in 2009 and support the Board’s August 2009 HELOC proposal to:




Require disclosure of fees under a separate heading in the transaction list (as shown on PS-1
and PS-3), as was clearly preferred by participants;
Not require disclosure of daily interest rates, because few participants understood them and
even fewer indicated they would use them; and
Not require disclosure of a fee-inclusive APR, because participants had very little
understanding of this term, did not find it useful, and may confuse it with their interest rates.

Chapter IV: Testing of Disclosures Related to
Changes in Credit Limits
Interviews in Bethesda, MD (November 2009)
The 10 cognitive interviews conducted in Bethesda, MD were also used to test a disclosure that
would be provided to existing HELOC customers if the creditor decided to reduce the amount of
their line of credit. The notice showed a list of possible reasons why the credit limit might have been
reduced, with one option checked to indicate that the value of the property securing the loan had
declined significantly. This notice included model clause G-23(A) that was published with the
Board’s proposed HELOC rules in 2009.
The notice of credit reduction that was shown to participants is provided in Appendix D of
this report.

Key Interview Findings


All participants understood that the purpose of the notice was to inform them that their credit
line was reduced because the value of their home had decreased.



The notice shown to participants was in the form of a checklist that the creditor could use to
indicate the reason that it had reduced the credit limit. Two participants were confused by the
other options listed on the notice and either thought that they were supposed to complete this
information themselves or that the creditor would be providing them additional information
about their circumstances. In addition to these two participants, several others initially seemed
confused by the format of the letter but eventually figured it out themselves.



All participants understood that they could ask for documentation of the creditor’s valuation of
their home.



All participants understood that they could ask for reinstatement of their original credit limit in
the future, and how to do so.



All participants understood that if they asked for reinstatement of their original credit limit, the
creditor would have to complete its investigation within 30 days.



All participants understood that they would not be charged for an investigation the first time
they asked for their original credit limit to be reinstated, but that they could be charged fees for
subsequent requests.

Subsequent Design Decisions


Comprehension of the notice of credit reduction that was shown to participants in this round
was generally high. However, several participants were confused by the “checklist” format used
on the notice. Therefore, ICF Macro and Board staff decided to design and test a version of the
form that did not include a checklist, but instead described only the specific reason for the
reduction in the credit limit.

Interviews in Tampa, FL (January 2010)
The notice of credit limit reduction was tested again in the subsequent round of 11 cognitive
interviews held in Tampa, FL. This notice was similar to that used in the first round of testing,
except that instead of providing a checklist of possible reasons that a customer’s credit limit might
have been reduced and indicating the relevant reason with a checkmark, the notice instead described
only the specific reason for the reduction in the credit limit.
In addition to the notice of credit limit reduction, participants in this round were also shown a
second notice, which indicated that a result for reinstatement of the original credit limit had been
denied. The notice indicated that while the creditor’s review had found that the value of the property
had not significantly declined, the request for reinstatement had been denied because the customer’s
financial circumstances had materially changed. This notice was based on model clause G-22(A) that
was published with the Board’s proposed HELOC rules in 2009.
Both of these notices are provided in Appendix D of this report.

Key Interview Findings
Review of Notice of Credit Limit Reduction


All participants understood that the purpose of the letter was to inform them that their credit
line was reduced because the value of their home had decreased.



All but one of the participants understood that the creditor used an “automated valuation
method” to determine that the value of their home had gone down. However, few participants
understood what an “automated valuation method” was; one guessed that the creditor was
“looking around for property value.”



All but one of the participants understood that they could ask for documentation of the
creditor’s valuation of their home.



All participants understood after reading the notice that they could ask for reinstatement of their
original credit limit in the future, and how to do so.



All participants understood that if they asked for reinstatement of their original credit limit, the
creditor would have to complete its investigation within 30 days.



Three participants incorrectly assumed that they would be charged for asking for reinstatement
of their original credit limit; the remaining participants saw from the notice that they would not
be charged fees for asking for reinstatement the first time.



All but one participant understood that they could be charged fees for subsequent requests
for reinstatement.

Review of Notice of Denial of Credit Limit Reinstatement


All participants were able to comprehend and clearly explain the purpose of this notice. All
understood after reading the notice that their credit limit would not be reinstated to the previous
limit because of factors other than a reduction in the value of their homes, which was the
original reason for the reduction.



All participants understood that the creditor’s decision to deny reinstatement was based on an
examination of the borrower’s credit report.



All participants understood that they could ask the creditor to reinstate their credit limit again,
but that they would be charged fees for subsequent requests. Everyone also understood that the
creditor would complete its investigation in response to an additional request for reinstatement
within 30 days.

Subsequent Design Decisions


Comprehension of these two notices was generally high, so few revisions were made to the
model form as a result of this testing.



Because the removal of the checklist of possible reasons for credit reduction improved
participants’ comprehension of the notice in this round, Board staff decided that any future
model forms for credit reduction notices should state the specific reason for credit reduction
instead of including a checklist of possible reasons.

Chapter V: Testing of Credit Insurance
Disclosures
Interviews in Phoenix, AZ (March 2010)
The round of 10 cognitive interviews conducted in Phoenix, AZ on March 23 and 24, 2010 was also
used to test a disclosure that creditors would be required to provide to consumers before they
purchased voluntary credit insurance. The purpose of this disclosure was to explain features of credit
insurance, such as the fact that purchasers might not qualify for benefits if they do not meet all
eligibility requirements. This disclosure (referred to as CI-1) was based on a credit life insurance sample
for a HELOC published by the Board in Appendix G-17(C) of the August 2009 proposed rules.
CI-1 is provided in Appendix D of this report.

Key Interview Findings


Five of the 10 participants understood before reading the disclosure that credit life insurance
was a product that could help pay off a mortgage loan in the event of death. The other five had
not heard of credit life insurance before reading the disclosure.



After reading the disclosure, all but one participant understood that credit life insurance was not
required on their line of credit.



CI-1 disclosed the cost of credit life insurance on a unit-cost basis. Although participants were
provided with a calculator, only three participants were able to determine the cost of the
insurance using the unit-cost disclosure. Other participants either did not know how to calculate
the cost based on the disclosure or made mathematical mistakes when doing so.



At the bottom of the form, by the signature line, CI-1 stated that the coverage would provide a
maximum benefit of $10,000. However, only half of the participants understood after reading
the notice that there was a $10,000 cap on their benefits. Others said they did not know what the
maximum benefit would be, or incorrectly assumed that their entire balance would be paid off.



In participants’ initial reading of the disclosure, eight of the 10 participants commented on the
fact that they might not receive benefits even after purchasing the product and making payments
for a number of years. In most cases, participants were surprised by this and indicated that it
made them less likely to purchase the insurance.



All but one participant saw from the form that they could cancel the insurance and receive a
refund within the first 30 days.



After reviewing the form, seven of the 10 participants indicated that they would not buy the
product. One said that she would buy the product, while two others indicated that they were
unsure. Those who were unsure said that they would call their broker or financial advisor for
additional information before making a decision.

Subsequent Design Decisions


While comprehension of most information on the notice was fairly high, there was some
information—such as the cost of the coverage and the maximum benefit—that less than half of
the participants understood. In addition, Board staff wanted to add disclosures regarding the
term of coverage and limitations on co-borrowers. To make the disclosure easier to read and
comprehend, ICF Macro and Board staff decided to present the information in a tabular format
based on previous testing of other financial disclosures, such as HELOC disclosures, rescission
notices, and description of checking account overdraft policies. 6



The two pieces of information that participants struggled with in this round—the cost of
coverage and maximum benefit—were given more prominence in the tabular disclosure used in
the next round. Also, ICF Macro and Board staff decided to disclose the cost of the product as a
dollar figure rather than as a unit cost.

Interviews in Memphis, TN (April 2010)
Objectives and Methodology
Credit insurance disclosures were tested again through eight cognitive interviews conducted in
Memphis, TN on April 16, 2010. The biggest difference between the disclosure tested in this round
(referred to as CI-2) and the notice used in the previous round (CI-1) was that the information in CI-2
was presented in a table, in which questions in the left-hand column (such as “Am I eligible for credit
life insurance?”) were answered in the right-hand column. Some additional information was also added
to CI-2 that was not in CI-1, including the term of coverage and limitations on co-borrowers.
CI-2 is provided in Appendix D of this report.

Key Interview Findings


Two of the eight participants understood before reading the disclosure that credit life insurance
was a product that could help pay off a mortgage loan in the event of death. One said that he
had heard of the product “in the context of car loans,” while another thought it was insurance
that would make mortgage payments if a borrower lost their job. The other four participants had
never heard of credit life insurance before reading the disclosure.



After reading the disclosure, five participants expressed surprise that they might not receive
benefits even after purchasing the product and making payments for a number of years. Five
also were surprised that the insurance lasted for only the first 10 years of their loan. Two
participants were surprised that benefits would be capped at $100,000, while two others were
surprised that their co-borrower would not be covered.



All participants understood that credit life insurance was not required on their loan.

Findings on these other disclosures have been reported to the Board in separate reports; see, Design and Testing of Truth in
Lending Disclosures for Home Equity Lines of Credit (available at http://www.federalreserve.gov/boarddocs/meetings/
2009/20090723/Full%20HELOC_Macro%20Report.pdf), Design and Testing of Rescission Notices (submitted July 2010),
and Design and Testing of Overdraft Disclosures: Phase Two (available at http://www.federalreserve.gov/newsevents/
press/bcreg/bcreg20091112a4.pdf).



CI-2 disclosed the cost of the product as a dollar figure based on the loan amount, rather than a
unit cost as in CI-1. All participants who saw CI-2 understood that the product would cost them
$72 a month if they purchased it.



On CI-2 the maximum benefit was disclosed in the question-and-answer table, rather than near
the signature line as in CI-1. When participants were asked how much the insurance company
would pay if they had a loan balance of $200,000 when they died, all participants who saw CI-2
understood that their benefits would be capped at $100,000.



Six of the eight participants understood that if they died after purchasing this insurance they
might not be eligible for benefits. The remaining two participants did not see this information in
the notice. When this information was pointed out to one of these two, he said that he might
not be eligible for benefits because he had not purchased the product.



All but one participant understood they could cancel the insurance after 30 days, and that if they
did they would receive a refund. The remaining participant did not see this information in the
notice. All but one participant also understood that they could cancel the insurance after a year if
they wished to do so. One participant incorrectly thought that he could still obtain a refund if he
did so; others understood that they could not.



All participants recognized that if their spouse died, they would receive no benefits unless they
had also purchased their own credit life insurance policy.



All participants indicated that based on what they had read in the disclosure, they would not
purchase credit life insurance.



When asked what they would do if they were unsure whether to purchase credit life insurance,
two participants said that they would use the website listed in the notice. Other participants said
they would research the product online (but did not mention the website in the disclosure), or
indicated that they would talk to a financial advisor or insurance agent.



When it was pointed out to them, all but one participant indicated that they might use the website
in the notice. When asked what information they would be looking for, most participants said they
would want to learn more about the eligibility requirements for the product. One said that she
would want to know the “pros and cons” of having credit life insurance.

Subsequent Design Decisions


Findings from this round showed that comprehension of the disclosure was high when the
information was presented in tabular question-and-answer format. As a result, the model forms
that will be proposed by the Board will use this format.



Because comprehension of the content of this disclosure was high, the Board intends to propose
model forms that include this content for the most part. However, because of the Board staff’s
concerns about “information overload,” the model forms will not include information about coborrowers and cancellation rights. To address concerns about eligibility based on age limits, the
model form will include a disclosure of the age limit for eligibility of the product in the section
describing how long the coverage will last.

Chapter VI: Summary
This report summarizes work conducted by ICF Macro in support of the Board’s efforts to amend
Regulation Z rules related to three types of disclosures: a) periodic statements for HELOCs that the
Board proposed in August 2009; b) disclosures related to changes in credit limits for HELOCs
based on model clauses that the Board proposed in August 2009; and c) disclosures related to credit
insurance based on model clauses that the Board proposed in August 2009. ICF Macro tested these
disclosures in four rounds of in-depth interviews between November 2009 and April 2010.
Consumer testing showed that consumers do not understand and are unlikely to use certain terms,
such as the daily interest rates and fee-inclusive APR on periodic statements. These findings suggested
that these terms could be removed from the statements with little, if any, harm to consumers.
In other cases consumer testing showed that revising the structure of the disclosure had a positive
impact on consumer comprehension. In the case of the credit insurance disclosure, testing showed
that presenting content in a tabular, Q&A structure led to increased understanding of the
information. In the case of notices of a reduction of credit limit, a checklist listing all possible
reasons for the reduction was confusing to consumers. Consumer testing showed that a revised
version of the notice, stating the specific reasons for a reduction of credit limit, is more effective and
easier for consumers to comprehend.
The Board intends to propose model forms related to credit insurance in connection with its
July 2010 Regulation Z proposed amendments. These model forms were developed, in large part,
based on consumer testing described in this report. Consumer testing results indicate that the
revised forms communicate important information in a clear and effective way, which should enable
consumers to comprehend complex information and make informed financial decisions.

Appendix A:
Sample Recruitment Protocol
(Rounds 1 through 3)

Participant Screener for Federal Reserve Board In-Depth Interviews
Phoenix, AZ
March 23 and 24, 2010
General Information and Recruiting Specifications
•

Interviews will be held on March 23 and 24 at the following times: 9:00, 10:30, 12:30, 2:00,
and 3:30.

•

INTERVIEWERS: Ask all participants to bring their reading glasses if necessary, because they
will be asked to read several sample mortgage documents as part of the interview or focus
group.
Recruiting Script

Hello, I am calling on behalf of the United States Federal Reserve Board. The Federal Reserve
Board is sponsoring a series of consumer interviews in your area so that we can learn more about
how people make financial decisions. We will use what we learn from these interviews to help
make sure that the information that banks provide to consumers about various financial products
is useful and easy to understand.
Q1: Do you currently own a home?



Yes  Continue
No  Thank respondent politely and end call.

Q2: Have you ever taken out a loan against equity in your home to pull money out for some
purpose, either as a second mortgage at the time you purchased your home, or for home
improvements, debt consolidation or to cover other expenses?



Yes  Continue
No  Participant qualifies for Group C: Skip to Q6

Q3: Was this loan related to a property for your own use, or a property you purchased solely as
an investment?



Own Use
 Continue
Investment  Thank respondent politely and end call.

Q4: There are at least two ways in which someone can borrow money against equity in his or
her home. One is a traditional mortgage where you borrow a fixed sum of money at once
and pay it back over time. The other is a home equity line of credit (also known as a
“HELOC”) which allows you to draw different amounts of money whenever you need it.
At any point in the past five years, have you had a home equity line of credit (or
“HELOC”)?



Yes  Continue
No  Thank respondent politely and end call.
Page 1 of 4

Q5a: Did you get your HELOC at the same time as your primary mortgage?



Yes  Continue
No  Participant qualifies for Group A: Skip to Q6

Q5b: Did you use money from your HELOC to help purchase your house?



Yes  Participant qualifies for Group B: continue to Q6
No  Participant qualifies for Group A: continue to Q6

Q6: Are you the person in your household who would be responsible for making decisions
related to a home equity line of credit or home equity loan?




Yes  Continue
Yes, in cooperation with my [spouse, partner, etc.]  Continue
No  Ask the respondent whether the primary decision maker is available to join the
call. If not, thank respondent politely and end call.

Great. We will be holding interviews in Phoenix on March 23rd and 24th. I was wondering if
you would be interested in attending.



Yes  Continue to screening questions
No  Record reason (not interested, not available on that date, etc.). If unavailable
on that date, retain their information because we may do additional rounds of testing in
the future. Thank them politely and end call.

That’s great. I just need to ask you a few more questions to see if you qualify for one of
our interviews.
Q7: Do you work, or have you ever worked, for a bank or other financial institution, or in the
real estate or mortgage industry?



Yes  Thank respondent politely and end call.
No  Continue

ARTICULATION QUESTION: In a few sentences, could you explain what a home equity line
of credit is?



If respondent gives a thoughtful, articulate answer  Continue
If respondent does not give a thoughtful, articulate answer  Thank respondent politely
and end call.

Page 2 of 4

Screening Criteria

Recruiting Quotas
•
•
•

At least two participants must be in
Group B.
Exactly four participants must be in
Group C.
Rest of participants must be in
Group A.

Q8a: Have you experienced any of the following
financial hardships in the past 7 years:
bankruptcy, foreclosure, repossession, or a tax
lien?
a) Yes
b) No

At least three (but no more than five)
recruits must answer:
•

Q8b: How would you rate your credit?
a)
b)
c)
d)

•

Excellent
Good
Fair
Poor

“a” to Q8a; or
“c” or “d” to Q8b.

Q9a: [Groups A and B only] Do you currently have
an outstanding balance on your HELOC?



Yes
No

Q9b: [Groups A and B only] What is the current
outstanding balance on your HELOC?





At least three (but no more than six)
recruits should answer “Yes” to Q9a

$70,000+
$30,000–$70,000
$10,000–$30,000
Less than $10,000

Q10: What is your age?
At least 3 recruits should respond “a”

a) 18 to 35
b) 36 or above

Page 3 of 4

Screening Criteria

Recruiting Quotas

Q11: Which of the following categories best reflects
your race or ethnicity? You can choose more
than one category. [Respondents who wish to
choose more than one category should be
counted as minorities, even if one race
mentioned is White.]
a)
b)
c)
d)
e)

White
Black or African-American
Hispanic or Latino
Asian or Pacific Islander
Native American or Alaska Native

Q12: What is the highest level that you reached in
school?
a) High school degree or less
b) Some college work
c) College graduate

•
•

•
•
•

Q13: Gender

At least 4 recruits should respond “a”
At least 4 recruits should respond “b,”
“c,” “d,” or “e”

At least 2 recruits should respond “a”
At least 3 recruits should respond “b”
At least 3 recruits should respond “c”

At least 3 recruits of each gender

Page 4 of 4

Appendix B:
Recruitment Protocol
(Round 4)

Participant Screener for Federal Reserve Board In-Depth Interviews
Memphis, TN
April 16, 2010
General Information and Recruiting Specifications
•

Interviews will be held on April 16 at the following times: 9:00, 10:00, 11:00, 12:00, 1:00,
2:00, 3:00, and 4:00.

•

INTERVIEWERS: Ask all participants to bring their reading glasses if necessary, because they
will be asked to read several sample mortgage documents as part of the interview.
Recruiting Script

Hello, I am c alling on behalf of t he U nited States F ederal R eserve B oard. As you m ay know ,
recently many A mericans ha ve had pr oblems w ith t heir m ortgages. In response t o t he r ecent
mortgage i ssues, the Federal R eserve Board i s sponsoring a s eries o f consumer i nterviews in
your area so that we can learn more about how people make decisions regarding their mortgages.
We will u se w hat we l earn from t hese interviews to he lp improve t he i nformation c onsumers
receive when they get a mortgage loan.
Q1: Have you obtained a new mortgage or refinanced a mortgage in the past two years?



Yes  Continue to Q2
No  Thank respondent politely and end call.

Great. We will be holding interviews in Memphis, Tennessee on Friday, April 16th. Participants
will receive a stipend in exchange for their time and input on this important topic. I was
wondering if you would be interested in attending.



Yes  Continue to screening questions
No  Record reason (not interested, not available on that date, etc); thank them
politely and end call.

Q2: Have you participated in any focus groups or in-person interviews in the past 6 months?



Yes  Thank respondent politely and end call.
No  Continue

Q3: Was this mortgage related to a property for your own use, or a property you purchased
solely as an investment?



Own use
 Continue
Investment  Thank respondent politely and end call.

Page 1 of 4

Q4: Were you the person in your household who was responsible for making decisions related
to this mortgage?




Yes  Continue
Yes, in cooperation with my [spouse, partner, etc.]  Continue
No  Thank respondent politely and end call.

Q5: Do you work or have you ever worked for a bank or other financial institution, or in the
real estate or mortgage industry?



Yes  Thank respondent politely and end call.
No  Continue

Q6: ARTICULATION QUESTION: In a few sentences, could you describe the process through
which you found your current mortgage lender?


If respondent indicates that he/she got their mortgage through a family member or close
friend who was a broker or worked at a bank  Thank respondent politely and end call.

In all other cases…




If respondent gives a thoughtful, articulate answer  Participant qualifies in
Category A; continue to Q7
If respondent does not give a thoughtful, articulate answer  Thank respondent politely
and end call.

At this point, I am going to ask you a few questions that pertain to financial information that you
might find personal or private. However, I want to assure you that none of this information will
be shared outside the group conducting this research, and all information will be kept
anonymous—your name will never be used in any reports.
Q7: How many mortgages do you currently have on your primary residence?



One (skip to Q9a)
Two or more

Page 2 of 4

Q8: Was the mortgage that you obtained in the past two years the larger or smaller of these
mortgages?




Larger (1st mortgage)
Smaller (2nd or 3rd mortgage) [NOTE: No more than 2 among interviews]
Both [Direct respondent to answer remaining questions based on larger (1st) mortgage]
If answer is
“a” or “c”

If answer is
“b”

Q9a: What is the current interest rate on
this mortgage?





Q9b: What is the current interest rate on
this mortgage?

7% or below
Above 7%  Qualifies as SP
(Subprime)
Don’t know





9% or below
Above 9%  Qualifies as SP
Don’t know

Q16: Have you experienced any of the following financial hardships in the past seven years:
bankruptcy, foreclosure, repossession, or a tax lien?



Yes  Respondent qualifies as SP
No

Q17: In the past two years, have you been turned down for credit or have you been discouraged
from applying for credit?



Yes  Respondent qualifies as SP
No
Screening Criteria

Recruiting Quotas

Does participant qualify as “SP”?
Q18: Was the mortgage that you obtained used to
re-finance an existing mortgage?
a) Yes (skip to Q20)
b) No

•

At least 3 recruits must be SP

•

At least 3 recruits must NOT be SP

•

No more than 3 recruits should answer “a”

•

At least 3 recruits should respond “a”

Q19: Was this the first home you ever purchased?
a) Yes
b) No

Page 3 of 4

Screening Criteria

Recruiting Quotas

Q20: Some mortgages have an adjustable interest
rate. Does your new mortgage have a rate that
is adjustable or will become adjustable in
the future?
a) Yes, adjustable
b) No, not adjustable  Have you had an
adjustable rate mortgage in the past five
years? If Yes, then count as “a”
c) Don’t know
Q21: What is your age?
a)
b)
c)
d)

18 to 25
26 to 35
36 to 50
51 or above

Q22: Which of the following categories best
reflects your race or ethnicity? You can
choose more than one category. [Respondents
who wish to choose more than one category
should be counted as minorities, even if one
race mentioned is White.]
a)
b)
c)
d)
e)

White
Black or African-American
Hispanic or Latino
Asian
Native American or Pacific Islander

•

No more than 2 recruits should respond
“b” or “c”

•

At least 2 recruits should respond “a”
or “b”

•

At least 2 recruits should respond “c”
or “d”

•

At least 2 recruits should respond “a”

•

At least 4 recruit should respond “b,” “c,”
“d,” or “e”

•

At least 2 recruits should respond “a”
or “b”

•

At least 2 recruits should be “c”

•

At least 3 recruits of each gender

Q23: What is the highest level that you reached in
school?
a)
b)
c)
d)
e)

Some high school
High school graduate
At least some college work
College graduate
At least some graduate school

Q24: Gender

Page 4 of 4

Appendix C:
Participant Demographic
and Background Information

Bethesda, MD
(November 2009
Interviews)

Tampa, FL
(January 2010
Interviews)

Phoenix, AZ
(March 2010
Interviews)

Memphis, TN
(April 2010
Interviews)

Total

Male

15 (38%)

Female

24 (62%)

18-35

10 (26%)

36+

29 (74%)

Gender

Age

Ethnicity
White

21 (54%)

African-American

11 (28%)

Latino

5 (13%)

Asian

2 (5%)

High school or less

8 (21%)

Education Level
Some college

20 (51%)

College graduate

11 (28%)

Financial Hardship (e.g., bankruptcy, foreclosure) in Past Seven Years?
Yes

5 (13%)

34 (87%)

Excellent

11 (28%)

Good

13 (33%)

Fair

8 (21%)

Poor

7 (18%)

Self-Reported Credit Rating

Bethesda, MD
(November 2009
Interviews)

Tampa, FL
(January 2010
Interviews)

Phoenix, AZ
(March 2010
Interviews)

Memphis, TN
(April 2010
Interviews)

Total

Had a HELOC in the past 5 years?

—

27 (87%)

Had home equity loan in past 5 years;
considered HELOC as an alternative

—

1 (3%)

No HELOC or home equity loan

—

3 (10%)

Yes

—

20 (65%)

—

7 (23%)

No HELOC

—

4 (13%)

$70,000+

—

3 (15%)

$30,000 - $70,000

—

5 (25%)

$10,000 - $30,000

—

7 (35%)

Less than $10,000

—

5 (25%)

Yes

—

4 (50%)

—

4 (50%)

Previous Experience with HELOCs 1

HELOC Balance

Current HELOC Balance

Mortgage Used to Refinance Existing

Loan 2

Participants in the fourth round of testing were not screened on the basis of experience with HELOCs, because that round tested a rescission notice that would be given in the context of a
refinanced mortgage loan, not a home equity line of credit.
2 Participants in the fourth round all had obtained a mortgage in the past two years, and were asked whether this mortgage was used to refinance an existing loan. Participants in the first three
rounds were not screened on the basis of this question.
1

Appendix D:
Disclosure Forms Used in Testing

Periodic Statements
for Home Equity Lines of Credit

PS-1
PS-2
PS-3
PS-4

Page 1

XXX Bank Home Equity Line of Credit Account Statement
Account Number XXXX XXXX XXXX XXXX
September 21, 2009 to October 22, 2009
Summary of Account Activity

Payment Information

Previous Balance

New Balance
Minimum Payment Due

$25,105.00

Payments

-$500.00

Other Credits

Payment Due Date

$0.00

Variable Rate Advances

+$3,000.00

Fixed Rate Advances

+$5,000.00

Total Interest and Fees Charged

$32,819.33

Credit Limit

$80,000.00

Available Credit

$47,180.67

Statement Closing Date

10/22/2009

Days in Billing Cycle

11/20/09

QUESTIONS?
Call Customer Service

+$214.33

New Balance

$32,819.33
$149.33

1-XXX-XXX-XXXX

Please send billing inquiries and correspondence to:
PO Box XXXX, Anytown, Anystate XXXXX

Transactions
Transactions
Reference Number
5884186PS0388W6YM

Trans Date
9/22

Post Date
9/23

Description of Transaction or Credit
Variable Rate Advance

Amount
$3,000.00

0544400060ZLV72VL

9/25

Fixed Rate Advance

$5,000.00

854338203FS8OO0Z5

9/25

Pymt Thank You

$500.00–

Fees
9525156489SFD4545Q

9/23

Late Fee

$15.00

56415615647OJSNDS

9/25

Fixed Rate Advance Fee *Transaction Fee*

$50.00

TOTAL FEES FOR THIS PERIOD
Interest Charged

$65.00

Interest Charge on Variable Rate Advances

$122.51

Interest Charge on Fixed Rate Advance

$26.82

TOTAL INTEREST FOR THIS PERIOD

$149.33

2009 Totals Year-to-Date
$80.00
$258.83

Total fees charged in 2009
Total interest charged in 2009

Interest Charge Calculation
Your Annual Percentage Rate (APR) is the annual interest rate on your account.
Annual Percentage
Rate (APR)

Daily
Interest Rates

Balance Subject to
Interest Rate

Interest Charge

Variable Rate Advances

5.25%

0.014%

$27,475.97

$122.51

Fixed Rate Advance

7.25%

0.020%

$4,354.84

$26.82

Type of Balance

Fee-Inclusive APR
The Fee-Inclusive APRs in this table are the APRs that you paid this period when transaction or ﬁxed fees are taken into
account as well as interest.
Type of Balance
Variable Rate Advances
Fixed Rate Advance

Interest Charges

Transaction or
Fixed Fees

$122.51

$0.00

5.25%

$26.82

$50.00

18.44%

Fee-Inclusive APR

NOTICE: SEE REVERSE SIDE FOR IMPORTANT INFORMATION
Page 1

Please detach this portion and return with your payment to insure proper credit. Retain upper portion for your records.

Please indicate address change and additional
requests on the reverse side.

Account Number:

XXXX XXXX XXXX XXXX

New Balance

$32,819.33

Minimum Payment Due

$149.33

Payment Due Date

11/20/09

AMOUNT ENCLOSED: $

XXX Bank
P.O. Box XXXX
Anytown, Anystate XXXXX

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ll ll

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PS-1

Interest Charge Calculation Method
Variable Rate Advances
A.

The “Daily Balances” of your Variable Rate Advances for each day
of the billing period equals the Variable Rate Advances due at the
beginning of that day, plus all new Variable Rate Advances taken
that day, including any Fixed Rate Advances that are converted to
Variable Rate Advances, less all payments and credits relating to
the Variable Rate Advances received that day.
If only one Daily Interest Rate applies to the billing period, the
interest charge is calculated by multiplying the “Balance Subject to
Interest Rate” for the billing period by the applicable Daily Interest
Rate and then multiplying that amount by the number of days in the
billing period. The “Balance Subject to Interest Rate” is the sum
of the Daily Balances of all days in the billing period divided by the
number of days in the billing period.
If more than one Daily Interest Rate applies to the billing period,
the interest charge is calculated by:
1.

Multiplying each Daily Interest Rate by the “Balance Subject to
Interest Rate” for the period of time that Daily Interest Rate is
in effect. The “Balance Subject to Interest Rate” for the period
of time that the Daily Interest Rate is in effect is the sum of the
Daily Balances of all days in the billing period during which the
Daily Interest Rate is in effect, divided by the number of days
that the Daily Interest Rate is in effect.

Multiplying each amount by the corresponding number of days
that the Daily Interest Rate is in effect during the billing period,
and

Adding together the resulting amounts.

Fixed Rate Advances
A.

The “Outstanding Principal Balance” of a Fixed Rate Advance
for each day of the billing period is calculated by starting with the
balance that day and then subtracting any payments or credits.

The “Balance Subject to Interest Rate” for each Daily Interest Rate
imposed during the billing period is the sum of the Outstanding
Principal Balances of the Fixed Rate Advance for each day that the
Daily Interest Rate is in effect divided by the number of days that
the Daily Interest Rate is in effect.

For each Fixed Rate Advance, the interest charge is calculated
by multiplying each Balance Subject to Interest Rate for the
Fixed Rate Advance by the number of days that the applicable
Daily Interest Rate is in effect, and multiplying that amount by the
applicable Daily Interest Rate.

The interest charges begin to accrue on the date of any purchase, cash
advance, or advance by any means is posted to your account, and
continues until the Line of Credit is paid in full.

Your Liability
Our records show that you are liable for any outstanding balance on
this account if your name appears on the front of this statement or you
otherwise agreed.
Report a Lost or Stolen Card Immediately
Call the 24-hour toll free number 1.800.555.6666. Do not use your
account after you report a lost or stolen card.
Cardholder Security PlanTM/Payment Protection Plan
If you have questions about your enrollment or need to ﬁle for beneﬁts,
please call the applicable toll free number below (Monday-Friday, 7:00
a.m.-10:00 p.m. Central Time): Cardholder Security Plan-1.888.668.6938;
Payment Protection Plan-1.888.838.0056.
Service for International Calling
Dial the AT&T Direct access code for the country you are in and dial
1.888.801.3723. You may also call us collect at 1.757.677.4701.
Service for Hearing-Impaired (TTY/TDD)
Contact our service for the hearing-impaired at 1.800.222.7365.
Pay on-line at www.XXXBank.com or mail your payment to:
XXX Bank, PO BOX XXX, ANYTOWN, ANYSTATE XXXXX-XXXX.
BILLING RIGHTS SUMMARY
STATEMENT DISCLOSURE:
In Case of Error or Billing Inquiries
If you think your bill is wrong, or if you need more information about a
transaction on your bill, you must write to us (on a separate sheet) at
XXX Bank, PO BOX XXX, ANYTOWN, ANYSTATE XXXXX-XXXX as
soon as possible to preserve your rights. We must hear from you no later
than 60 days after we sent you the ﬁrst bill on which the error or problem
appeared. In your letter, give us the following information:
- Your name and account number
- The dollar amount of the suspected error
- Describe the error and explain, if you can, why you believe there
is an error
You do not have to pay any amount in question while we are investigating,
but you are still obligated to pay the parts of your bill that are not in question.
While we investigate your questions, we cannot report you as delinquent or
take any action to collect the amount you question.
Special Rule for Credit Card Purchases
If you have a problem with the quality of goods or services that you
purchased with a credit card, and you have tried in good faith to correct
the problem with the merchant, you may not have to pay the remaining
amount due on the goods or services. You have this protection only when
the purchase price was more than $50 and the purchase was made in
your home state or within 100 miles of your mailing address (if we own
or operate the merchant, or if we mailed you the advertisement for the
property or service, all purchases are covered regardless of the amount
or location of purchase).

IMPORTANT CREDIT BUREAU REPORTING INFORMATION REQUIRED BY
FEDERAL LAW TO BE DISCLOSED TO YOU
WE MAY REPORT INFORMATION ABOUT YOUR ACCOUNT TO CREDIT BUREAUS. LATE PAYMENTS, MISSED
PAYMENTS OR OTHER DEFAULTS ON YOUR ACCOUNT MAY BE REFLECTED IN YOUR CREDIT REPORT.
For address changes, you may access your account online at: www.artesian.com, call 1.800.555.6666 or write your address changes below.
If you choose to call the 800# provided, you must have your account number with you. Please include your account number to ensure
accurate processing.
________________________________________________________________________________________________________________
Address
________________________________________________________________________________________________________________
City
State
Zip
________________________________________________________________________________________________________________
Home Phone
Work Phone
________________________________________________________________________________________________________________
E-mail Address
By providing us with your e-mail address, you agree that we may communicate with you by electronic mail.
Prompt Crediting of Payments
We will credit any payments as of the date we receive it as long as it is mailed with the enclosed payment coupon and received by us no
later than 5:00 PM at either the P.O. Box on the front or the P.O. Box above. Crediting of all other payments may be delayed up to 5 days. All
payments must be in the form of a check or money order drawn in U.S. dollars on a ﬁnancial institution located in the U.S. or the U.S. Post
Ofﬁce or made by electronic funds transfers, however cash payments may be made in person at our banking centers only.

Disclosures Related
to Changes to Credit Limits

Notice of Credit Limit Reduction (Round 1)
Notice of Credit Limit Reduction (Round 2)
Notice of Denial of Reinstatement (Round 2)

November 2, 2009
Pat Smith
11785 Beltsville Drive
Calverton, MD 20705
Re: Home Equity Credit Line #: 123456789
Dear Borrower(s):
This letter is notification that as of 10/29/09, the credit limit on your Home Equity Line of Credit has been reduced to
$40,000 for the following reason(s):
(x) The value of the property securing your loan has declined significantly. The value of your property as of 10/15/09 has
declined to $350,000. The property valuation method used to obtain your updated property value was an automated
valuation method. You have a right to receive a copy of information supporting this property value. You may send your
request to:
Solar Bank
P.O. Box 2222
Wilmington, DE 19711-0241
1-800-555-9876
( ) Your financial circumstances have materially changed. To review your financial circumstances, we relied on
_______________________.
( ) You defaulted on your obligation under your HELOC agreement to ________________________________.
( ) Other: _____________________________________________________.
You have the right to ask us to reinstate your credit privileges at any time by sending a request for reinstatement in writing
to: Solar Bank, P.O. Box 2222, Wilmington, DE 19711-0241. You also may call us at 1-800-555-9876.
We will complete an investigation within 30 days of receiving your request. If no reason for reducing your credit limit is
found, we will restore your credit privileges.
We do not charge you any fees to investigate the first time you ask us to reinstate your credit privileges after your credit
limit has been reduced. If you ask us to reinstate your account after the first request, we may charge you a fee for a credit
report or property valuation needed to investigate your request.
Sincerely,
Cheryl Deal
Assistant Vice President
Lending Services Division

CR-1

January 26, 2010
Pat Smith
11785 Beltsville Drive
Calverton, MD 20705
Re: Home Equity Credit Line # 123456789
Dear Borrower(s):
This letter is to notify you that as of 1/19/2010, the credit limit on your home equity line of credit has
been reduced to $40,000. We reduced the credit limit on your account because the value of your
property as of 1/15/2010 has declined to $350,000. The property valuation method used to obtain your
updated property value was an automated valuation method. You have a right to receive a copy of
information supporting this property value. You may send your request to the address below or call us
at 1-800-555-9876.
You have the right to ask us to reinstate your credit privileges by sending a written request for
reinstatement to:
Solar Bank
P.O. Box 2222
Wilmington, DE 19711-0241
We will not charge you any fees to investigate the first time you ask us to reinstate your credit
privileges. If you ask us again to reinstate your credit privileges, we may charge you fees for credit
report and property value information needed to investigate your request.
We will complete an investigation within 30 days of receiving your request and notify you of the
results. Our investigation may include a review of your property value, material changes in your
financial circumstances and whether you have defaulted on the terms of your agreement with us.
Sincerely,
Cheryl Deal
Assistant Vice President
Lending Services Division

G-23(A)

February 24, 2010
Pat Smith
11785 Beltsville Drive
Calverton, MD 20705

Re: Home Equity Credit Line # 123456789
Dear Borrower(s):
We received your request to reinstate your credit privileges on your home equity line of credit and
have investigated this matter. Based on the results of our investigation, we are not able to reinstate
your credit privileges at this time.
Our investigation showed that your property value as of 2/20/2010 is $390,000. However, our
investigation also showed that your financial circumstances have materially changed since you opened
your home equity line of credit. As a result, we will not be able to reinstate your credit privileges at
this time. To review your financial circumstances, we relied on your credit report information.
You have the right to ask us again to reinstate your credit privileges by sending a written request for
reinstatement to the address below or calling us at 1-800-555-9876:
Solar Bank
P.O. Box 2222
Wilmington, DE 19711-0241
If you ask us again to reinstate your credit privileges, we may charge you fees for credit report and
property value information to investigate your request.
We will complete an investigation within 30 days of receiving your request and notify you of the
results. Our investigation may include a review of your property value, material changes in your
financial circumstances and whether you have defaulted on the terms of your agreement with us.
Sincerely,
Cheryl Deal
Assistant Vice President
Lending Services Division

G-22(A)

Credit Insurance Disclosures

CI-1
CI-2

OPTIONAL COSTS
Option to Purchase Credit Life Insurance
STOP. You do not have to buy this product to get this line of credit.
•

If you already have enough life insurance or savings to pay off this debt, you may not
need this product.

•

Other types of life insurance can give you similar benefits and are often less expensive.

•

Note that you may not qualify for benefits if you buy this product. Based on our
review you meet the age and employment eligibility restrictions, but there are other
requirements that you may or may not meet. If you do not meet these eligibility
requirements, even if you purchase this product and pay the monthly premium you will
not receive any benefits.

•

You may cancel this product within 30 days and receive a full refund. If you cancel after
that, you will not receive a refund.

Go to www.frb.gov/creditlifeinsurance to learn more about whether this product is right for
you.
 Yes, I want to purchase optional credit life insurance at an additional cost of 72 cents per
month per $1,000 of monthly outstanding balance for a coverage of up to $10,000.

____________________________________________________

___________

Signature of Borrower(s)

Date

CI-1

OPTIONAL COSTS
Option to Purchase Credit Life Insurance
STOP. You do not have to buy this insurance to get this loan. Go to
www.frb.gov/creditlifeinsurance to learn more about whether this product is right for
you.
Do I need credit
life insurance?

If you already have enough life insurance to pay off this loan if you die, you may
not need this product.
Other types of life insurance can provide similar benefits and are often less
expensive.

Am I eligible for
credit life
insurance?

You may not be eligible for benefits even if you buy this product.

What is the
maximum benefit
amount?

This product covers only the first $100,000 of the outstanding balance on your
loan. You will be responsible for any balance above $100,000.

How much does
credit life
insurance cost?

This product will cost an additional $72 per month for coverage of up to $100,000.
This cost will decrease if your loan balance falls below $100,000.

Are co-borrowers
covered?

Your co-borrowers are not covered unless they also buy and are eligible for this
product. This means that if you buy this product and your co-borrower does not,
and he or she dies, you will not receive any benefits to help you pay off the loan.

How long does the
coverage last?

This product covers only the first 10 years of your loan.

Can I cancel?

You can cancel this product at any time. However, you will receive a refund only
if you cancel within 30 days of loan closing.

Based on our review you currently meet the age and employment eligibility
requirements, but there are other requirements that you may not meet. If you do
not meet these other requirements, you will not receive any benefits—even if you
buy this product and pay the monthly premium.

 Yes, I want to buy optional credit life insurance at an additional cost of $72 per month for
coverage of up to $100,000 and a term of 10 years.

____________________________________________________
Signature of Borrower

___________
Date

CR-2

ICF Macro
11785 Beltsville Drive
Calverton, Maryland 20705
icfmacro.com

Full text of District Notices (Federal Reserve Bank of Dallas) : Board Proposes Enhanced Consumer Protections & Disclosures for Home Mortgage Transactions, Notice 10-52 : Summary of Findings: Design and Testing of Periodic Statements for Home Equity Lines of Credit

FRASER