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Friday,
September 24, 2010

Part II

Federal Reserve
System

srobinson on DSKHWCL6B1PROD with PROPOSALS2

12 CFR Part 226
Regulation Z; Truth in Lending; Proposed
Rules, Interim Rule, Final Rules

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

FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Docket No. R–1366]

Regulation Z; Truth in Lending
Board of Governors of the
Federal Reserve System.
ACTION: Interim rule; request for public
comment.
AGENCY:

The Board is publishing for
comment an interim rule amending
Regulation Z, which implements the
Truth in Lending Act (TILA). The
interim rule implements certain
requirements of the Mortgage Disclosure
Improvement Act of 2008, which
amended TILA. The amendments and
this interim rule require creditors
extending consumer credit secured by
real property or a dwelling to disclose
certain summary information about
interest rates and payment changes, in
a tabular format, as well as a statement
that consumers are not guaranteed to be
able to refinance their transactions in
the future. The interest rate and
payment summary tables replace the
payment schedule previously required
as part of the TILA disclosure for
mortgage transactions. Disclosures for
non-mortgage, closed-end consumer
credit will continue to include the
current payment schedule.
DATES: This interim rule is effective
October 25, 2010. Compliance with its
requirements is optional, however, until
January 30, 2011; its requirements are
mandatory for transactions for which an
application for credit is received by the
creditor on or after that date. Comments
on this interim rule must be received on
or before November 23, 2010.
ADDRESSES: You may submit comments,
identified by Docket No. R–1366, by any
of the following methods:
• Agency Web site: http://
www.federalreserve.gov. Follow the
instructions for submitting comments at
http://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments.
• E-mail:
regs.comments@federalreserve.gov.
Include the docket number in the
subject line of the message.
• Fax: (202) 452–3819 or (202) 452–
3102.
• Mail: Address to Jennifer J. Johnson,
Secretary, Board of Governors of the
Federal Reserve System, 20th Street and
Constitution Avenue, NW., Washington,
DC 20551.
All public comments will be made
available on the Board’s Web site at

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SUMMARY:

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http://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical
reasons. Accordingly, comments will
not be edited to remove any identifying
or contact information. Public
comments may also be viewed
electronically or in paper in Room MP–
500 of the Board’s Martin Building (20th
and C Streets, NW.,) between 9 a.m. and
5 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Paul
Mondor, Senior Attorney, or Kathleen C.
Ryan, Senior Counsel, 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. Background
A. TILA and Regulation Z
Congress enacted the Truth in
Lending Act (TILA) based on findings
that economic stability would be
enhanced and competition among
consumer credit providers would be
strengthened by the informed use of
credit resulting from consumers’
awareness of the cost of credit. One of
the purposes of TILA is to provide
meaningful disclosure of credit terms to
enable consumers to compare credit
terms available in the marketplace more
readily and avoid the uninformed use of
credit.
TILA’s disclosures differ depending
on whether credit is an open-end
(revolving) plan or a closed-end
(installment) loan. TILA also contains
procedural and substantive protections
for consumers. TILA is implemented by
the Board’s Regulation Z. An Official
Staff Commentary interprets the
requirements of Regulation Z. By
statute, creditors that follow in good
faith Board or official staff
interpretations are insulated from civil
liability, criminal penalties, and
administrative sanction.
B. MDIA Amendments to TILA and
Regulation Z
On July 30, 2008, Congress enacted
the Mortgage Disclosure Improvement
Act of 2008 (the MDIA).1 The MDIA
requires transaction-specific TILA
disclosures to be provided within three
business days after an application is
1 The MDIA is contained in Sections 2501
through 2503 of the Housing and Economic
Recovery Act of 2008, Public Law 110–289, enacted
on July 30, 2008. The MDIA was later amended by
the Emergency Economic Stabilization Act of 2008,
Public Law 110–343, enacted on October 3, 2008.

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received and before the consumer has
paid a fee, other than a fee for obtaining
the consumer’s credit history.2 In
addition, the MDIA requires creditors to
mail or deliver early TILA disclosures at
least seven business days before
consummation and provide corrected
disclosures if the disclosed APR
changes in excess of a specified
tolerance. The consumer must receive
the corrected disclosures no later than
three business days before
consummation. The MDIA also
expanded coverage of the early
disclosure requirement to include loans
secured by a dwelling even when it is
not the consumer’s principal dwelling.
The Board implemented these MDIA
requirements in final rules published
May 19, 2009, and effective July 30,
2009. 74 FR 23289, May 19, 2009 (MDIA
Final Rule).
The MDIA also requires disclosure of
payment examples if the loan’s interest
rate or payments can change. Such
disclosures are to be formatted in
accordance with the results of consumer
testing conducted by the Board. And the
MDIA requires disclosure of a statement
that there is no guarantee the consumer
will be able to refinance the transaction
in the future. Those provisions of the
MDIA become effective on January 30,
2011, or any earlier compliance date
established by the Board. This interim
rule implements those MDIA
provisions.
C. The Board’s Review of Closed-End
Credit Rules
The Board’s current review of
Regulation Z was initiated in December
2004 with an advance notice of
proposed rulemaking. 69 FR 70925, Dec.
8, 2004. At that time, the Board
announced its intent to conduct its
review of Regulation Z in stages,
focusing first on the rules for open-end
(revolving) credit accounts that are not
home-secured, chiefly general-purpose
credit cards and retailer credit card
plans. In December 2008, the Board
approved final rules for open-end credit
that is not home-secured. 74 FR 5244,
Jan. 29, 2009. In May 2009, Congress
enacted the Credit Card Accountability
Responsibility and Disclosure Act of
2009 (Credit Card Act), which amended
TILA’s provisions for open-end credit.
The Board approved final rules
2 To ease discussion, the description of the
closed-end mortgage disclosure scheme includes
MDIA’s amendments to TILA and the disclosure
timing requirements implemented by the Board in
2008 through a final rule that preceded MDIA’s
enactment. 73 FR 44522, July 30, 2008 (2008
HOEPA Final Rule). The MDIA codified some of the
2008 HOEPA Final Rule and expanded its coverage
and its requirements. The MDIA also made these
requirements effective July 30, 2009.

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srobinson on DSKHWCL6B1PROD with PROPOSALS2

implementing the Credit Card Act in
January and June 2010. 75 FR 7658, Feb.
22, 2010; 75 FR 37526, June 29, 2010.
Beginning in 2007, the Board
proposed revisions to the rules for
home-secured credit in several phases.
In 2007, the Board proposed rules for
closed-end higher-priced mortgage loans
secured by the consumer’s principal
dwelling, leading to the HOEPA Final
Rule. On May 7, 2009, the Board
adopted the MDIA Final Rule for closedend loans secured by a dwelling. On
July 23, 2009, the Board issued a
proposed rule to revise the rules for
disclosures for closed-end credit
secured by real property or a consumer’s
dwelling. 74 FR 43232, Aug. 26, 2009
(2009 Closed-End Proposal). The Board
also issued a proposed rule to revise the
rules for disclosures for open-end lines
of credit secured by a dwelling. 74 FR
43428, Aug. 26, 2009. Concurrently with
this interim rule, the Board is
publishing another proposed rule that
would add and revise rules for
rescission, reverse mortgages, and
modifications to existing closed-end
mortgage loans (2010 Closed-End
Proposal).
D. Consumer Testing
A principal goal for the Regulation Z
review is to produce revised and
improved mortgage disclosures that
consumers will be more likely to
understand and use in their decisions,
while at the same time not creating
undue burdens for creditors. In 2007,
the Board retained a research and
consulting firm (ICF Macro) that
specializes in designing and testing
documents to conduct consumer testing
to help the Board’s review of mortgage
rules under Regulation Z. Working
closely with the Board, ICF Macro
conducted several tests in different
cities throughout the United States. The
testing consisted of four focus groups
and eleven rounds of one-on-one
cognitive interviews. The goals of these
focus groups and interviews were to
learn how consumers shop for
mortgages and what information
consumers read when they receive
mortgage disclosures, and to assess their
understanding of such disclosures.
The consumer testing groups
contained participants with a range of
ethnicities, ages, educational levels, and
mortgage-shopping behaviors, including
first-time mortgage shoppers, prime and
subprime borrowers, and consumers
who had obtained one or more closedend mortgages. For each round of
testing, ICF Macro developed a set of
model disclosure forms to be tested.
Interview participants were asked to
review model forms and provide their

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reactions, and were then asked a series
of questions designed to test their
understanding of the content. Data were
collected on which elements and
features of each form were most
successful in providing information
clearly and effectively. The findings
from each round of interviews were
incorporated in revisions to the model
forms for the following round of testing.
Several of the model forms included in
the 2009 Closed-End Proposal were
developed through the testing. A report
summarizing the results of the testing is
available on the Board’s public Web
site: http://www.federalreserve.gov/
boarddocs/meetings/2009/20090723/
Full%20Macro%20CE%20Report.pdf.

show the interest rate and payment at
consummation, the maximum interest
rate and payment at any time during the
first five years after consummation, and
the maximum interest rate and payment
possible during the life of the loan.
Additional special disclosures are
required for loans with negativelyamortizing payment options,
introductory interest rates, interest-only
payments, and balloon payments.
Finally, the interim rule requires the
disclosure of a statement that there is no
guarantee the consumer will be able to
refinance the loan with a new
transaction in the future.

II. Summary of the Interim Rule
MDIA requires creditors to disclose
examples of rates and payments,
including the maximum rate and
payment, for loans with variable rates or
payments. MDIA also requires creditors
to disclose a statement that consumers
should not assume they can refinance
their loans. The 2009 Closed-End
Proposal included provisions that
would implement these MDIA
requirements, including provisions
interpreting the statute’s requirement
that creditors disclose ‘‘examples’’ of
payment adjustments other than the
maximum during the life of the loan and
the ‘‘no-guarantee-to-refinance’’
statement. Those provisions, proposed
§§ 226.38(c) and 226.38(f)(3),
respectively, would require the TILA
disclosure to contain certain interest
rate and payment summary tables and
the ‘‘no-guarantee-to-refinance’’
statement. See 74 FR 43232, 43334–35
and 43337, Aug. 26, 2009. The Board
does not expect to finalize that proposal,
however, before the January 30, 2011
statutory effective date of the MDIA
requirement to disclose examples of
payment adjustments. Accordingly, this
interim rule implements the MDIA
requirements now, so that mortgage
creditors will have the guidance
necessary to comply with them by
January 30, 2011. This interim rule
adopts the provisions of the 2009
Closed-End Proposal requiring
disclosure of interest rate and payment
summary tables as proposed, except as
discussed below and with minor
modifications for clarity.
Under this interim rule, creditors will
be required to disclose in a tabular
format the contract interest rate together
with the corresponding monthly
payment, including any escrows for
taxes and property and/or mortgage
insurance. Special disclosure
requirements are imposed for
adjustable-rate or step-rate loans to

A. Rulemaking Authority
TILA Section 105(a) directs the Board
to prescribe regulations to carry out the
Act’s purposes. 15 U.S.C. 1604(a). TILA
also authorizes the Board to issue
regulations that contain such
classifications, differentiations, or other
provisions, or that provide for such
adjustments and exceptions for any
class of transactions, that in the Board’s
judgment are necessary or proper to
effectuate the purposes of TILA,
facilitate compliance with the act, or
prevent circumvention or evasion.
MDIA also specifically provides that the
disclosures shall be in accordance with
the Board’s implementing regulations,
as discussed above.

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III. Legal Authority

B. Authority To Issue Interim Rule
The Administrative Procedures Act
(APA), 5 U.S.C. 551 et seq., generally
requires public notice before
promulgation of regulations. See 5
U.S.C. 553(b). The 2009 Closed-End
Proposal provided the public with
notice and an opportunity to comment
on the Board’s proposed disclosure
changes, including the proposed interest
rate and payment summary tables. The
Board is now adopting only that aspect
of the 2009 Closed-End Proposal. The
Board therefore believes this action
complies with the APA’s public notice
and opportunity to comment
requirement. The Board is adopting the
provisions concerning interest rates and
payments as an interim rule, rather than
as a final rule, because the Board
intends to conduct additional testing of
this and other disclosure requirements,
including quantitative testing, and may
revise these interim provisions further
in light of further testing results. The
interim rule will permit further public
comment while also giving the
provisions effect so that creditors will
have the guidance they need and the
time to implement it by January 30,
2011, as discussed above.

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

C. Authority for October 25, 2010
Effective Date
TILA Section 105(d) generally
provides that a regulation requiring any
disclosure that differs from the
disclosures previously required shall
have an effective date no earlier than
‘‘that October 1 which follows by at least
six months the date of promulgation.’’
15 U.S.C. 1604(d). This interim rule
substitutes the interest rate and payment
summary tables for the existing payment
schedule in the TILA disclosure
requirements, effective October 25, 2010
and with compliance mandatory as of
January 30, 2011. The new requirements
will take effect, however, on January 30,
2011 pursuant to the MDIA, with or
without this rulemaking. To the extent
that the interim rule contains disclosure
requirements that are already in effect
on January 30, 2011 under the statute,
TILA Section 105(d) does not apply.
Moreover, the Board believes that the
effective date mandated by the MDIA for
the specific disclosures required under
TILA Section 128(b)(2)(C) overrides the
general provision in TILA Section
105(d).

srobinson on DSKHWCL6B1PROD with PROPOSALS2

IV. Overview of Comments Received on
the Interest Rate and Payment
Summary Tables
The Board received over 6,000
comments on the 2009 Closed-End
Proposal. The great majority of those,
however, were from mortgage brokers,
loan officers, and other mortgage
industry representatives that
commented exclusively on the proposed
regulation of loan originator
compensation. Those commenters who
commented on proposed § 226.38,
which contained the new disclosure
requirements, focused their comments
more extensively on other provisions in
the August 2009 Closed-End Proposal,
not on §§ 226.38(c) and 226.38(f)(3).
Consequently, the Board received little
comment specifically on the proposed
interest rate and payment summary
tables, and no commenters addressed
the proposed no guarantee to refinance
statement.
Six consumer and community groups
commented jointly on the proposal.
Regarding the interest rate and payment
summary proposal, they expressed
strong support for including a statement
of the maximum payment. These
commenters indicated that the table was
flawed, however, as applied to negative
amortization products because the
resulting table is too different to permit
comparison between amortizing and
negatively amortizing adjustable-rate
mortgages. The consumer groups also
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should reflect estimated taxes and
insurance regardless of whether an
escrow account is required because the
need for monthly budgeting for those
obligations should be emphasized.
These groups also criticized the manner
in which the maximum possible
payment was calculated for the sample
forms included in the proposal.
Mortgage creditors offered suggested
revisions to the proposed interest rate
and payment summary requirements,
including a revision that would
emphasize the fact that escrow amounts
are estimated. Most creditors, though
not all, agreed with the consumer
advocates that estimated taxes and
insurance should be included regardless
of whether an escrow account is
required. Some strongly questioned the
need for some of the graphical details of
the model forms, such as the large arrow
pointing downward to highlight the
additional amount borrowed by making
only minimum payments on a negative
amortization loan and the use of
shading and highlighting. One bank
indicated that the content of the table
would be duplicative of the information
presented in the good faith estimate of
settlement costs and the HUD–1
settlement statement required under
Regulation X, which implements the
Real Estate Settlement Procedures Act
(RESPA), but that the information is
presented differently. This commenter
also questioned the inclusion of taxes
and insurance in any but the initial
payment disclosed because of the fact
that those amounts can change
significantly over the life of the loan.
In general, as discussed below, the
Board has considered the comments
received and is adopting the interest
rate and payment summary table and
the no-guarantee-to-refinance statement
as proposed, with minimal
modification. As stated above, the Board
intends to conduct additional testing
and will consider the comments further
as part of the testing process. The Board
is reluctant at this time, however, to
make significant changes to the format
and content of the tables without the
benefit of such testing. To afford
guidance on how to comply with the
MDIA requirements by the January 30,
2011 statutory effective date, the Board
is adopting these requirements
substantially as proposed. The Board
also seeks additional comment on the
summary tables under this interim rule.

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V. Section-by-Section Analysis
Section 226.17 General Disclosure
Requirements
17(a) Form of Disclosures
17(a)(1)
Comment 17(a)(1)–1 provides
guidance on the general requirement
that the TILA disclosures be clear and
conspicuous. The comment currently
states that no minimum type size is
mandated for the disclosures. This
interim rule amends the comment by
adding a parenthetical exception to that
general rule, to conform to the fact that
new § 226.18(s), discussed below,
requires a minimum 10-point type size.
Section 226.18 Content of Disclosures
18(g) Payment Schedule
The interim rule makes a conforming
amendment to § 226.18(g). That section
imposes the current payment schedule
disclosure for closed-end consumer
credit. As discussed below, § 226.18(s)
replaces the payment schedule with the
new interest rate and payment summary
table for a transaction secured by real
property or a dwelling, other than a
transaction secured by a consumer’s
interest in a timeshare plan. Thus,
§ 226.18(g) is amended to exclude such
transactions from its coverage.
18(s) Interest Rate and Payment
Summary for Mortgage Transactions
This interim rule adopts a new
§ 226.18(s), which provides
requirements for disclosure of the
contract interest rate and the periodic
payment for most transactions secured
by real property or a dwelling. The
information required by § 226.18(s)(2)–
(4) must be in the form of a table, as
provided in § 226.18(s)(1), substantially
similar to Model Clause H–4(E), H–4(F),
H–4(G), or H–4(H) in Appendix H. As
noted above, some industry commenters
on the 2009 Closed-End Proposal
questioned the use of shading in the
proposed model forms. The Board
recognizes these commenters’ concern
that shading can undermine the forms’
legibility when they are photocopied or
faxed. By requiring that disclosures be
‘‘substantially similar’’ to the models,
however, the Board does not intend that
disclosures must include any shading
that the models contain. Comment
18(s)–1 therefore clarifies that a
disclosure that does not include the
shading shown in a model clause but
otherwise follows the model clause’s
headings and format is substantially
similar to that model clause.
The rules for disclosing the interest
rate and periodic payments for an
amortizing loan are provided in

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§§ 226.18(s)(2)(i) and 226.18(s)(3). Rules
for disclosing the interest rate and
periodic payments for a loan with
negative amortization are in
§§ 226.18(s)(2)(ii) and 226.18(s)(4).
Special rules for disclosing balloon
payments are found in § 226.18(s)(5).
Additional explanations of introductory
rates and negative amortization are
required by §§ 226.18(s)(2)(iii) and
226.18(s)(6), respectively. Finally,
§ 226.18(s)(7) provides definitions for
certain terms used in § 226.18(s).
Existing Requirements for Periodic
Payments
TILA Section 128(a)(6) requires the
creditor to disclose the number, amount,
and due dates or period of payments
scheduled to repay the total of
payments, for closed-end credit. 15
U.S.C. 1638(a)(6). Currently, § 226.18(g)
implements TILA Section 128(a)(6).
Under § 226.18(g), creditors must show
the number, amounts, and timing of
payments scheduled to repay the
obligation, except as provided in
§ 226.18(g)(2) for certain loans with
varying payments.3
Comment 18(g)–1 provides that the
payment schedule should include all
components of the finance charge, not
just interest. Thus, if mortgage
insurance is required, the payment
schedule must reflect the consumer’s
mortgage insurance payments until the
date on which the creditor must
automatically terminate coverage under
applicable law. See comment 18(g)–5.
Commentary to § 226.17(c) provides
that, for an adjustable-rate loan,
creditors should disclose the payments
and other disclosures based only on the
initial rate and should not assume that
the rate will increase. The disclosures
must reflect a discounted or premium
initial interest rate, however, for as long
as it is charged. The commentary
permits, but does not require, creditors
to include in the payments amounts that
are not finance charges or part of the
amount financed. Thus, creditors may,
but need not, include insurance
premiums excluded from the finance
charge under § 226.4(d), and ‘‘real estate
escrow amounts such as taxes added to
the payment in mortgage transactions.’’
Effect of MDIA amendments. TILA
Section 128(b)(2)(C), as added by the
MDIA, requires additional disclosures
for loans secured by a dwelling in
which the interest rate or payments may
vary. 15 U.S.C. 1638(b)(2)(C).
3 For a mortgage transaction with rates or fees that
exceed certain thresholds, TILA Section 129
requires special disclosures regarding payments
three business days before consummation of the
transaction. See § 226.32(c)(3), (4). The Board is not
revising those disclosures in this interim rule.

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Specifically, creditors must provide
‘‘examples of adjustments to the regular
required payment on the extension of
credit based on the change in the
interest rates specified by the contract
for such extension of credit. Among the
examples required * * * is an example
that reflects the maximum payment
amount of the regular required
payments on the extension of credit,
based on the maximum interest rate
allowed under the contract. * * *’’ 15
U.S.C. 1638(b)(2)(C).
TILA Section 128(b)(2)(C) provides
that these examples must be in
conspicuous type size and format and
that the payment schedule be labeled
‘‘Payment Schedule: Payments Will Vary
Based on Interest Rate Changes.’’ TILA
Section 128(b)(2)(C) requires the Board
to conduct consumer testing to
determine the appropriate format for
providing the disclosures to consumers
so that the disclosures can be easily
understood, including the fact that the
initial regular payments are for a
specific time period that will end on a
certain date, that payments will adjust
afterwards potentially to a higher
amount, and that there is no guarantee
that the borrower will be able to
refinance to a lower amount. 15 U.S.C.
1638(b)(2)(C). As discussed above, the
Board conducted the required testing
and, based on the results and other
analysis, developed the mortgage
disclosures contained in the 2009
Closed-End Proposal, including those
aspects now being adopted in this
interim rule.
The Interim Rule
The Board is adding new § 226.18(s)
to implement TILA Section 128(a)(6)
and Section 128(b)(2)(C) for most
closed-end transactions secured by real
property or a dwelling.4 For all other
closed-end credit transactions,
§ 226.18(g) continues to provide the
rules for disclosing payments. Section
226.18(s) requires creditors to disclose
the contract interest rate, regular
periodic payment, and balloon payment
if applicable. For adjustable-rate or steprate amortizing loans, up to three
interest rates and corresponding
periodic payments are required,
including the maximum possible
interest rate and payment. If payments
are scheduled to increase independent
of an interest-rate adjustment, the
increased payment must be disclosed.
Payments for amortizing loans must
4 TILA Section 128(b)(2)(C) also provides that the
Board’s testing should ensure that consumers can
understand that there is no guarantee that they will
be able to refinance. New § 226.18(t), discussed
below, implements this aspect of Section
128(b)(2)(C).

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separately itemize an estimate of the
amount for taxes and insurance if the
creditor will establish an escrow
account. If a borrower may make one or
more payments of interest only, all
payment amounts disclosed must be
itemized to show the amount that will
be applied to interest and the amount
that will be applied to principal. Special
rate and payment disclosures are
required for loans with negative
amortization. Creditors must provide
the information about interest rates and
payments in the form of a table, and
creditors are not permitted to include
other, unrelated information in the
table.
Scope of § 226.18(s). TILA Section
128(b)(2)(C) applies to all transactions
secured by a dwelling, other than
transactions secured by timeshare plans
(discussed below). The Board proposed
to expand the requirement in Section
128(b)(2)(C) to include loans secured by
real property that do not include a
dwelling and is now adopting that
proposal. Thus, transactions secured by
real property with no dwelling or other
structure built thereon would be subject
to the enhanced disclosures, assuming
such transactions are consumer credit.
Some creditors commented on the
proposed expansion of the scope of the
MDIA requirements, questioning its
necessity. As discussed in the 2009
Closed-End Proposal, however,
unimproved real property is likely to be
a significant asset for most consumers,
and consumers should receive the
disclosures required in Section
128(b)(2)(C) before they become
obligated on a loan secured by such an
asset. The disclosures will alert
consumers to the potential for interest
rate and payment increases and help
them to determine whether these risks
are appropriate to their circumstances.
The Board also believes that consistent
disclosure requirements for all
mortgage-secured, closed-end, consumer
credit transactions, whether they
include a dwelling or not, should ease
compliance burdens for mortgage
creditors.
The Board is adopting this adjustment
to TILA Section 128(b)(2)(C) pursuant to
its authority under TILA Section 105(a).
15 U.S.C. 1604(a). Section 105(a)
authorizes the Board to make exceptions
and adjustments to TILA for any class
of transactions to effectuate the statute’s
purposes, which include facilitating
consumers’ ability to compare credit
terms and helping consumers avoid the
uninformed use of credit. 15 U.S.C.
1601(a), 1604(a). The class of
transactions that would be affected is
transactions secured by real property or
a dwelling. As discussed, providing

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examples of increased interest rates and
payments will help consumers
understand the risks involved in certain
loans. The Board believes that this
adjustment is proper to ensure that
consumers receive meaningful
disclosures that facilitate their informed
use of credit.
Timeshare plans. TILA Section
128(b)(2)(G), as added by MDIA,
excludes from the coverage of Section
128(b)(2)(C) an extension of credit
secured by a timeshare plan. 15 U.S.C.
1638(b)(2)(G). Thus, the interim rule
excludes these transactions from
coverage of § 226.18(s).5 This exclusion
does not affect the determination of
whether such transactions are subject to
Regulation Z and § 226.18; if they are
subject to that section, they must
include the payment schedule under
§ 226.18(g).
Reverse mortgages. Section 226.18
currently applies to reverse mortgages.
Reverse mortgages have unique features
that make the disclosures in § 226.18,
including the current payment schedule
under § 226.18(g), difficult to apply and
potentially confusing to consumers. The
same is true of the new interest rate and
payment summary tables required by
this interim rule under § 226.18(s).
Simultaneously with this interim rule,
the Board is proposing improved
comprehensive disclosure requirements
tailored to closed- and open-end reverse
mortgages. When those disclosures are
adopted in final form, the Board
anticipates that it also will exclude
reverse mortgages from the coverage of
the closed-end mortgage disclosure
requirements. In the meantime, the
Board is excluding reverse mortgages
from the definition of ‘‘negative
amortization mortgage’’ under
§ 226.18(s)(7) because the special
interest rate and payment summary
requirements for negative amortization
mortgages, discussed below, would be
especially unworkable for reverse
mortgages and also especially likely to
cause consumer confusion. Virtually all
reverse mortgages being made in the
market currently are, to the Board’s
knowledge, fixed-rate loans.
Consequently, under the requirements
discussed below, reverse mortgages
would be disclosed under the relatively
straightforward fixed-rate summary
table requirements of §§ 226.18(s)(2)(i)
and 226.18(s)(3).
5 Credit secured by a timeshare plan is also
excluded from MDIA’s other requirements.
Accordingly, the MDIA Final Rule excluded from
the new timing, corrected disclosure, and related
requirements a transaction ‘‘that is secured by a
consumer’s interest in a timeshare plan described
in 11 U.S.C. 101(53D).’’ See § 226.19(a)(5).

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Fixed-rate, fixed-payment loans. TILA
Section 128(b)(2)(C) applies by its terms
only to mortgages where the rate,
payment, or both may change after
consummation. Accordingly, the Board
could apply the new interest rate and
payment summary requirements to only
such mortgages and leave fixed-rate,
fixed-payment mortgages subject to
§ 226.18(g). The Board believes,
however, that applying § 226.18(s) to all
mortgages will simplify compliance for
creditors and make comparing different
loan products more straightforward for
consumers. Accordingly, the interest
rate and payment summary table is
required for all transactions secured by
real property or a dwelling, including
fixed-rate, fixed-payment mortgages.
The Board is adopting this requirement
pursuant to its authority under TILA
Section 105(a) to effectuate the purposes
of TILA. 15 U.S.C. 1604(a).
Payment schedule label. The Board
proposed in the 2009 Closed-End
Proposal to revise the label for the
interest rate and payment information
from the text set out in the statute. The
Board proposed to replace the statutory
language, ‘‘Payment Schedule: Payments
Will Vary Based on Interest Rate
Changes,’’ with ‘‘Interest Rate and
Payment Summary’’ based on plain
language principles, to make the
disclosure more readily understandable.
The Board is now adopting that
proposal. The Board is making this
adjustment pursuant to the same TILA
Section 105(a) authority, and for the
same class of transactions, as discussed
above with respect to transactions
subject to § 226.18(s).
Disclosure of the interest rate.
Currently, TILA does not require
disclosure of the contract interest rate
for closed-end credit. In the consumer
testing conducted for the Board, when
consumers were asked what factors they
considered when looking for a mortgage,
the most common answers consumers
provided were that they wanted to
obtain the lowest interest rate possible
and that they wanted the loan with the
lowest possible monthly payment.
Nevertheless, as they described their
thought process, most consumers were
primarily focused on the initial rate and
payment, rather than how those terms
might vary over time.
In addition, testing indicated that the
current TILA payment schedule, which
does not show the relationship between
the interest rate and payments, is
ineffective at communicating to
consumers what could happen to their
payments over time with an adjustablerate mortgage. Most participants said
they liked the current presentation of
the payments because it was specific

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and detailed. When shown a payment
schedule for an adjustable-rate mortgage
with an introductory rate, however,
many incorrectly assumed that
payments shown were in fact their
future payments, rather than payments
based on the fully-indexed rate at
consummation.
Under the Board’s interim rule, the
interest rate and payment are shown
together in a table. The Board believes
that highlighting the relationship
between the interest rate and payment
will enhance consumers’ understanding
of loan terms. If the interest rate is
adjustable, the table indicates changes
in the interest rate over time. In
addition, payment changes that are not
based on adjustments to the interest rate
are indicated in the table. Highlighting
potential changes to the interest rate and
payment based on maximum interest
rate increases, rather than showing a set
payment schedule based on the
assumption that the index used to
calculate an adjustable interest rate will
not change, will clarify to consumers
not only that their interest rate and
payments may change, but also how the
interest rate and payment may change
over time. Consumers will be better able
to determine if an adjustable-rate loan
will be affordable and appropriate for
their individual circumstances.
Definitions for § 226.18(s). Section
226.18(s) uses several terms that are
defined in § 226.18(s)(7). Under
§ 226.18(s)(7), the term ‘‘adjustable-rate
mortgage’’ means a loan in which the
annual percentage rate may increase
after consummation. The term ‘‘step-rate
mortgage’’ means a loan in which the
interest rate will change after
consummation, and the rates and
periods in which they will apply are
known. The term ‘‘fixed-rate mortgage’’
means a loan that is not adjustable-rate
or step-rate. The term ‘‘interest-only’’
means that one or more periodic
payments may be applied solely to
interest and not to loan principal; an
‘‘interest-only loan’’ is a loan that
permits interest-only payments. An
‘‘amortizing loan’’ is defined as a loan in
which the regular periodic payments
cannot cause the principal balance to
increase; the term ‘‘negative
amortization’’ means the regular
periodic payments may cause the
principal balance to increase; the term
‘‘negative amortization loan’’ means a
loan with a negative amortization
feature but explicitly excludes a reverse
mortgage, as discussed above. Finally,
the term ‘‘fully-indexed rate’’ means the
interest rate calculated using the index
value and margin.

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18(s)(1)
Section 226.18(s)(1) requires the
interest rate and payment information to
be disclosed in the form of a table. This
will ensure that payment examples
required by the MDIA are in
conspicuous format as required by TILA
Section 128(b)(2)(C). The MDIA also
requires conspicuous type size for the
examples. Under § 226.18(s)(1), the table
must be in a minimum 10-point font to
ensure that it is clear and conspicuous.
The interim rule prescribes the
number of interest rates and payments
that may be shown in the table. The
number of columns and rows for the
table required by § 226.18(s) will vary
depending on whether the loan is an
amortizing loan and whether it has an
adjustable rate. In all cases,
§ 226.18(s)(1) provides that the tables
must have no more than five columns
across, to avoid information overload for
consumers. Creditors may not include
information in the table that is not
required under 226.18(s), to avoid
information overload. Model clauses are
provided in Appendix H.
18(s)(2) Interest Rates

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18(s)(2)(i) Amortizing Loans
Section 226.18(s)(2)(i) requires
disclosure of interest rates for
amortizing loans. For a fixed-rate
mortgage with no scheduled payment
increases or balloon payments, the
creditor discloses only one interest rate.
Fixed-rate loans with payment increases
require the creditor to disclose the
interest rate along with each payment
increase, even if the interest rate does
not change. For adjustable-rate
mortgages and step-rate mortgages, more
than one interest rate must be shown, as
discussed below.
Interest Rates for Fixed-Rate Mortgages
For fixed-rate mortgages,
§ 226.18(s)(2)(i)(A) requires creditors to
disclose the interest rate applicable at
consummation. If the transaction does
not provide for any payment increases,
only one interest rate is disclosed. Some
fixed rate mortgages, however, have
scheduled payment increases. In those
cases the creditor must show the
interest rate associated with such
payments, even though the rate has not
changed, as discussed under
§ 226.18(s)(2)(i)(C) below.
Interest Rates for Adjustable-Rate
Mortgages and Step-Rate Mortgages
As discussed above, TILA Section
128(b)(2)(C) requires creditors to
disclose examples of payment increases,
including the maximum possible
payment, for adjustable-rate mortgages

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and other mortgages where payments
may vary. Under § 226.18(s)(2)(i),
creditors must disclose more than one
interest rate for adjustable-rate
mortgages and step-rate mortgages
because the payments can vary.
Interest rates at consummation.
Under § 226.18(s)(2)(i)(B)(1), the
creditor must provide the interest rate at
consummation and the period of time
until the first adjustment, labeled as
‘‘introductory rate and monthly
payment.’’ Additional explanation of
discounted introductory rates is
required by § 226.18(s)(2)(iii), discussed
below.
Maximum during first five years. The
Board proposed in the 2009 Closed-End
Proposal to require disclosure of the
maximum rate and payment at first
adjustment, as one of the examples
required by TILA Section 128(b)(2)(C).
The proposal would have required the
creditor to provide the maximum
interest rate applicable at the first
interest rate adjustment and the
calendar month and year in which the
first scheduled adjustment occurs.
The Board is modifying this aspect of
the proposed rule. Instead of the
maximum rate at the first scheduled
adjustment, § 226.18(s)(2)(i)(B)(2)
requires disclosure of the maximum
possible rate at any time during the first
five years after consummation, even if
that is not the first adjustment, and the
earliest date that rate may apply. The
Board believes that requiring the
example to reflect the first adjustment
poses a risk that consumers would not
be adequately warned of significant
interest rate changes on a transaction
where the first adjustment will be fairly
modest under the transaction’s terms.
The limited first rate increase could be
followed quickly by a much greater
increase, which would not be disclosed
under the rule as proposed. The Board
solicits comment on whether five years
is the appropriate period to address this
concern. Consistent with the 2009
Closed-End Proposal, the creditor must
take into account any limitations on
interest rate increases when determining
the interest-rate to be disclosed under
§ 226.18(s)(2)(i)(B)(2). If the interest rate
may reach the maximum possible
during the loan’s term within the first
five years, the creditor should disclose
the rate as the maximum possible
interest rate, discussed below.
Maximum possible interest rate.
Section 226.18(s)(2)(i)(B)(3) requires
creditors to disclose the maximum
interest rate that could apply at any
time, and the earliest date on which that
rate could apply, as required by TILA
Section 128(b)(2)(C). The Board is
requiring this disclosure for step-rate

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mortgages as well, because the rate and
payment may increase in such loans. As
noted above, consumer advocates
strongly supported this requirement in
their comments. Consumer testing
conducted for the Board also suggests
that consumers find this information
about the maximum rate and payment
particularly important in evaluating a
loan offer for an adjustable-rate
mortgage. Participants indicated that
this information is most useful to them
in determining whether such a loan was
affordable. If an amortizing adjustablerate mortgage has intermediate
limitations on interest rate increases,
then the table required by proposed
§ 226.18(s) will have at least three
columns; if the transaction has no
intermediate limitations on interest
rates, then the table will have two
columns, one showing the rate at
consummation and the other showing
the maximum possible under the loan’s
terms.
Interest rate applicable at scheduled
payment increase. Some mortgages
provide for a payment increase that is
not attributable to an interest rate
adjustment or increase. For example, a
loan may permit the borrower to make
payments that cover only accrued
interest for some specified period, such
as the first five years following
consummation; at the end of the
interest-only period, the borrower must
begin making larger payments to cover
both interest accrued and principal.
Section 226.18(s)(2)(i)(C) provides that,
where such a payment increase will not
coincide with an interest rate
adjustment, the creditor must include a
column that discloses the interest rate
that would apply at the time the
adjustment is scheduled to occur, and
the date on which the increase would
occur. Thus, for a fixed-rate mortgage,
the creditor shows the same interest rate
twice (and the corresponding payments
as discussed below). The Board believes
this will help the consumer understand
that the increase in payment is due to
the requirement to begin repaying loan
principal and not to an interest-rate
adjustment.
The same is true for adjustable-rate
mortgages and step-rate mortgages. For
example, some adjustable-rate
mortgages permit the borrower to make
interest-only payments for a specified
period, such as the first five years
following consummation. A scheduled
payment increase may or may not
coincide with a scheduled interest rate
adjustment. Under § 226.18(s)(2)(i)(C), if
a scheduled payment increase does not
coincide with an interest rate
adjustment (or rate increase for a steprate mortgage), creditors must include a

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column that discloses the interest rate
that will apply at the time of the
increase, the date the increase is
scheduled to occur, and an appropriate
description such as ‘‘first increase’’ or
‘‘first adjustment,’’ as appropriate.
Comment 18(s)(2)(i)(C)–1 provides
clarifying examples.

srobinson on DSKHWCL6B1PROD with PROPOSALS2

18(s)(2)(ii) Negative Amortization Loans
For negative amortization loans, for
which any scheduled payment may
cause the principal balance to increase,
§ 226.18(s)(2)(ii) requires disclosure of
the interest rate applicable at
consummation. Some ARM loans do not
provide any limitations on interest rate
increases (‘‘interest rate caps’’); the only
cap is the maximum possible interest
rate required by § 226.30(a). For these
payment option loans, the creditor must
disclose the interest rate in effect at
consummation and assume that the
interest rate reaches the maximum at the
next adjustment—often the second
month after consummation. The creditor
must disclose that rate for the first and
second scheduled payment increases,
explained under the discussion of
§ 226.18(s)(4) below. And the creditor
must disclose that rate a third time, in
the last column, when the loan has
recast, i.e., converted to fully amortizing
payments over the remainder of the
loan’s term. This approach to interest
rates for negative amortization loans is
consistent with the MDIA, which
requires disclosure of the payment at
the maximum possible rate, and other
examples of payment increases.
Additional rules for disclosing the
interest rate on a loan with negative
amortization are found in § 226.18(s)(6),
discussed below.
18(s)(2)(iii) Introductory Rate Disclosure
for Amortizing Adjustable-Rate
Mortgages
Many adjustable-rate mortgages have
an introductory or ‘‘teaser’’ rate, set
below the sum of the index and margin
used for later adjustments. Section
226.18(s)(2)(iii) requires a special
disclosure of any introductory rate. In
consumer testing conducted for the
Board, many participants did not
understand the ramifications of an
introductory interest rate. Participants
understood that if market interest rates
increased, the interest rate and payment
on their loan would increase. In
contrast, participants did not
understand that, if they had an
introductory rate, their interest rate and
payment would increase when the
introductory rate expired, even if market
interest rates did not increase.
Several different disclosures designed
to show the impact of an introductory

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rate were tested in tabular form, with
mixed results. Therefore, the Board is
requiring an explanation of the
introductory rate below the table itself.
Section 226.18(s)(2)(iii) requires
disclosure of the introductory rate, how
long it will last, and that the interest
rate will increase at the first scheduled
adjustment even if market rates do not
increase. Creditors also must disclose
the fully indexed rate that otherwise
would apply at consummation. This
disclosure must be placed in a box
beneath the table, in a format
substantially similar to Model Clause
H–4(I).
Creditors commenting on the 2009
Closed-End Proposal expressed concern
over the requirement to disclose the
fully-indexed rate at consummation
because the value of the index at
consummation may be unknown when
disclosures are required to be delivered
within three business days after receipt
of an application under § 226.19(a)(1).
Comment 18(s)(2)(iii)(C)–1 would
clarify that, for early disclosures, the
fully-indexed rate disclosed under
§ 226.18(s)(2)(iii)(C) may be based on
the index in effect at the time the
disclosure is provided. ‘‘At
consummation,’’ as used in
§ 226.18(s)(2)(iii)(C), refers to
disclosures delivered at consummation,
or three business days before
consummation pursuant to
§ 226.19(a)(2)(ii). The comment also
adopts guidance for cases where the
contract provides for a delay in the
implementation of changes in an index
value. In such cases, the disclosure may
reflect an index value in effect anytime
during the contractual delay period
prior to the time of the disclosure. For
example, if the contract specifies that
rate changes are based on the index
value in effect 45 days before the change
date, creditors may use any index value
in effect during the 45 days before
consummation (or any earlier date of
disclosure) in calculating the fullyindexed rate to be disclosed. This
guidance is similar to existing comment
17(c)(1)–10.
18(s)(3) Payments for Amortizing Loans
18(s)(3)(i) Principal and Interest
Payments
Section 226.18(s)(3)(i) requires
disclosure of the principal and interest
payment that corresponds to each
interest rate disclosed under
§ 226.18(s)(2)(i). Under § 226.18(s)(3)(i),
if all regular periodic payments include
principal and interest, each disclosed
payment amount must be listed in a
single row in the table with a
description such as ‘‘principal and

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interest.’’ Separate rules apply to
amortizing loans with interest-only
payments under § 226.18(s)(3)(ii),
discussed below.
Regular periodic payments. Under
§ 226.18(s)(3)(i)(A), for transactions
where the regular periodic payment
fully amortizes the loan, the payment
amount including both principal and
interest must be disclosed. Section
226.18(s)(3)(i)(B) requires disclosure of
the payment amount at any scheduled
payment increase that does not coincide
with an interest rate adjustment, and the
date on which the increase is scheduled
to occur. For example, a fixed-rate loan
might have terms under which part of
the scheduled payment is applied to
principal for an initial period, thus it is
not an interest-only loan disclosed
under § 226.18(s)(3)(ii). The amount of
principal covered by such payments,
however, may be insufficient to
amortize the loan fully over its life. In
such cases, a scheduled increase in the
payment amount from such a partially
amortizing payment to a fully
amortizing payment would be required
to be disclosed.
Escrows; mortgage insurance
premiums. Section 226.18(s)(3)(i)(C)
provides that, if an escrow account will
be established, the creditor must
disclose the estimated payment amount
for taxes and insurance, including any
mortgage insurance. For transactions
secured by real property or a dwelling,
creditors no longer have the flexibility
provided in existing § 226.18(g) to
exclude escrow amounts. Consumer
testing conducted for the Board shows
that many consumers compare loans
based on the monthly payment amount.
The Board believes that, for consumers
to understand the monthly amount they
actually will be required to pay for a
particular loan, information about
payments for taxes and insurance is
necessary. Escrow information is
included in the table to make it easier
for consumers to identify whether there
is an escrow account and how much of
their payment applies to the escrow.
As noted above, both consumer
advocates and some industry
commenters argued that taxes and
insurance estimates should be included
even when no escrow account is
established. The Board believes there
may be valid reasons for such an
approach. For purposes of this interim
rule, however, the Board is adopting the
requirement as proposed. The Board is
concerned that disclosures of taxes and
insurance in all cases may leave
consumers confused as to whether an
escrow account is included with the
loan or not, in the absence of a clear and
effective notice indicating which is the

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Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations
case. After additional testing can be
conducted to determine whether such a
notice is feasible and helpful to
consumers, the Board will consider
such an approach when it adopts the
2009 Closed-End Proposal as a final
rule.
Comment 18(s)(3)(i)(C)–1 clarifies the
types of taxes and insurance that are
required to be included in the estimate.
The comment also clarifies that the
estimated escrow amounts disclosed
under § 226.18(s)(3)(i)(C), other than
mortgage insurance premiums, do not
affect any other disclosures, including
the finance charge and annual
percentage rate.
Comment 18(s)(3)(i)(C)–2 provides
guidance on how to determine the
length of time for which mortgage
insurance payments must be included
in the estimate. Under the comment, the
payment amount should reflect the
consumer’s mortgage insurance
payments until the date on which the
creditor must automatically terminate
coverage under applicable law, even
though the consumer may have a right
to request that the insurance be
canceled earlier. This guidance mirrors
existing comment 18(g)–5. Comment
18(s)(3)(i)(C)–2 also states that periodic
mortgage insurance payments should be
included in the escrow line of the
summary table even if they are not
escrowed and even if there is no escrow
account established for the transaction.
Credit insurance. The Board solicited
comment on whether premiums or other
amounts for credit life insurance, debt
suspension and debt cancellation
agreements, and other similar products
(‘‘credit protection products’’) should be
included or excluded from the
disclosure of escrows for taxes and
insurance. The Board expressed
concerns that inclusion of such amounts
may cause some consumers to believe
these products are required. Most
commenters that addressed this
question agreed with the Board’s
concern and favored excluding such
amounts from the escrow amount
disclosed. The Board is adopting the
escrow disclosure requirement as
proposed and is adding language to
comment 18(s)(3)(i)(C)–1 to clarify that
premiums or payments for credit
protection products should not be
included in the disclosed escrow
amounts.
Total periodic payments. Section
226.18(s)(3)(i)(D) requires disclosure of
the total estimated monthly payment.
The total estimated monthly payment is
the sum of the principal and interest
payments required under
§ 226.18(s)(3)(i)(A) or (B), as applicable,
and the estimated taxes and insurance

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payments required to be disclosed in
§ 226.18(s)(3)(i)(C).
18(s)(3)(ii) Interest-Only Payments
Like § 226.18(s)(3)(i), § 226.18(s)(3)(ii)
requires the disclosure of regular
periodic payments corresponding to the
amortizing loan interest rates disclosed
under § 226.18(s)(2)(i). In addition,
under § 226.18(s)(3)(ii), special
itemization of the payment is required
if the loan permits the consumer to
make any interest-only payments.
Comment 18(s)(3)(ii)–1 clarifies,
however, that these rules apply only if
the loan is not also a negative
amortization loan; if the loan is a
negative amortization loan, even if it
also has an interest-only feature,
payments are disclosed under the rules
in § 226.18(s)(4), discussed below.
Principal and interest payment
itemization. Under § 226.18(s)(3)(ii), if
any regular periodic payment amounts
will include interest but not principal,
all payments for the loan must be
itemized into principal and interest. For
a payment that includes no principal,
§ 226.18(s)(3)(ii)(A) requires the creditor
to indicate that none of the payment
amount will be applied to principal.
The creditor must label the dollar
amount to be applied to interest
‘‘interest payment.’’ The Board requires
this itemization and labeling to
highlight for consumers the impact of
making interest-only payments. Without
this emphasis, many participants in the
Board’s consumer testing did not clearly
understand that an ‘‘interest-only’’ loan
was different from a loan in which all
payments are applied to principal and
interest. Thus, even for later payments
that will be applied to both principal
and interest, § 226.18(s)(3)(ii)(B)
requires the creditor to itemize the
payment between the two.
Escrows and total periodic payments.
Section 226.18(s)(3)(ii)(C) requires
disclosure of an estimate of the amount
of taxes and insurance, including
mortgage insurance. Section
226.18(s)(3)(ii)(D) requires disclosure of
the estimated total payment including
principal, interest, and taxes and
insurance. These requirements parallel
the escrow and total payment
disclosures under § 226.18(s)(3)(i)(C)
and (D). Accordingly, comment
18(s)(3)(ii)(C)–1 refers to the
commentary under § 226.18(s)(3)(i)(C),
discussed above, for guidance on
escrows.
18(s)(4) Payments for Negative
Amortization Loans
Under § 226.18(s)(4), for each interest
rate disclosed under § 226.18(s)(2)(ii) for
a loan with negative amortization, the

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creditor must disclose payments in two
separate rows. One row of the table
shows the fully amortizing payment for
each interest rate; for purposes of
calculating these payments the creditor
would assume the interest rate reaches
the maximum at the earliest possible
date and that the consumer makes only
fully amortizing payments. The other
row of the table shows the minimum
required payment for each rate, until the
recast point. At the recast point, the
minimum payment row shows the fully
amortizing payment. For purposes of the
minimum payment row, creditors must
assume the interest rate reaches the
maximum at the earliest possible date
and that the consumer makes only the
minimum required payment for as long
as permitted under the terms of the legal
obligation.
The interest rate and payment
summary would display only two
payment options, even if the terms of
the legal obligation provide for others,
such as an option to make interest-only
payments. The table would show only
the option to make minimum payments
that would result in negative
amortization, and the option to make
fully amortizing payments. The Board
believes that displaying all of the
options in the table could cause
confusion and information overload for
consumers. Creditors would be free to
provide information on options not
displayed in the table, outside the
segregated information required under
this subsection.
Consumer advocates commented that
the Board’s proposed sample disclosure
for payment option adjustable-rate
mortgages (‘‘payment option ARMs’’),
proposed sample H–19(I), would not
show the maximum possible payment
for a typical payment option ARM
because the sample assumed the
transaction’s lifetime maximum interest
rate of 10.5% would be reached at the
second payment, which caused the loan
to recast to fully amortizing payments at
the earliest possible time. The
commenters noted that a payment
option ARM reaches the maximum
possible payment when it applies an
intervening rate for a period, so that the
onset of fully amortizing payments is
delayed as long as possible thus
maximizing the principal balance to
which the lifetime maximum rate is
applied after the loan recasts. The
proposed sample was intended to
illustrate the maximum payment
possible under certain assumed
transaction terms, which did not
include any rate adjustment caps other
than the lifetime cap. Thus, while it did
not show the maximum possible
payment under any payment option

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ARM, it showed the maximum payment
under the type of product it was
intended to illustrate. This interim rule
is publishing only model clauses, not
samples, thus it entails no assumptions
regarding sample transaction terms. In
all cases, however, these rules require
that creditors reflect all applicable
terms, including rate adjustment caps,
maximum negative amortization
amounts and periods, and maximum
interest rates.
Minimum payment amounts. The rule
requires a disclosure of the amount of
the minimum required payment
applicable for each interest rate required
to be disclosed under § 226.18(s)(2)(ii)
and the date on which that payment
becomes applicable. Section
226.18(s)(4)(i)(A) requires disclosure of
the minimum required payment at
consummation.
Payment increases. As noted above,
some payment option loans do not have
interest rate adjustment caps, and thus
the interest rate may reach its maximum
at the first interest rate adjustment. Such
loans may have limits, however, on the
amount that the minimum payment may
increase following an interest rate
adjustment. For example, a minimum
payment increase may be limited by a
certain percentage, such as 7.5% greater
than the previous minimum payment.
(Such limits are generally subject to
conditions and will apply only until a
specific time, such as at the fifth year of
the loan, or until the loan balance
reaches a certain maximum.) Under
§ 226.18(s)(4)(i)(B), if adjustments in the
minimum payment amount are limited
such that the payment will not fully
amortize the loan even after the interest
rate has reached the maximum, a
disclosure of the minimum payment
amount at the first and second payment
adjustments is required. That is, in cases
where the first interest rate adjustment
will be the only interest rate adjustment,
but payment adjustments will continue
to occur before the minimum payment
recasts to a fully amortizing payment, a
disclosure of up to two additional
minimum payment adjustments is
required.
Explanation of negative amortization.
Under § 226.18(s)(4)(i)(C), the creditor
must provide a statement that the
minimum payment will cover only
some of the accrued interest and none
of the principal and will cause the
principal balance to increase.
Participants in the Board’s consumer
testing were unfamiliar with the concept
of negative amortization and struggled
to understand why a loan’s balance
would increase when payments were
made. Thus, the Board is adopting this
required statement to ensure that

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consumers are informed about the
consequences of making such minimum
payments.
Payment after recast. Section
226.18(s)(4)(ii) requires disclosure of the
fully amortizing payment that will be
required when the loan recasts, i.e.,
when minimum payments no longer are
permitted and fully amortizing
payments are required under the terms
of the legal obligation. This payment
amount must reflect the maximum
possible interest rate that will be
applicable at that time, based on the
terms of the legal obligation, as
disclosed under § 226.18(s)(2)(ii)(B).
Fully amortizing payments. Section
226.18(s)(4)(iii) requires disclosure in a
separate row of the table of the fully
amortizing payment, assuming that the
consumer makes only fully amortizing
payments beginning at consummation.
The fully amortizing payment row must
be completed for each interest rate
required to be disclosed under
§ 226.18(s)(2)(ii). The Board believes
that contrasting the fully amortizing
payment with the minimum required
payment will help consumers to
understand the implications of making
the fully amortizing payment and the
minimum payment. In consumer
testing, participants understood from
the table that if they made the fully
amortizing payment each month they
would pay their loan off, and that if they
instead made the minimum payment
they would not pay the loan off and in
fact would increase the amount that
they owe.
18(s)(5) Balloon Payments
Under § 226.18(s)(5)(i), if a loan’s
terms provide for a balloon payment,
the payment must be disclosed in the
last row of the table rather than in a
column, unless it coincides with an
interest rate adjustment or other
payment increase such as the expiration
of an interest-only option. Section
226.18(s)(5)(i) provides that a payment
is a balloon payment if it is more than
twice the amount of other payments.
Under § 226.18(s)(5)(ii), if a balloon
coincides with an interest rate
adjustment or other payment increase,
the balloon payment is disclosed in the
table as that payment increase.
18(s)(6) Special Disclosures for Loans
With Negative Amortization
Statement of balance increase and
other information. Section 226.18(s)(6)
requires a statement of the amount of
the increase in the loan’s principal
balance if the consumer makes only
minimum payments and the earliest
month and year in which the minimum
payment will recast to a fully amortizing

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payment under the terms of the legal
obligation, assuming that the interest
rate reaches its maximum at the earliest
possible time. As noted, participants in
testing expressed confusion about
negative amortization; the Board
believes this disclosure and the other
required disclosures in the table will
help consumers understand the risks of
making such minimum payments. In
addition, to help consumers navigate
the information in the table,
§ 226.18(s)(6) requires a statement
directly above the interest rate and
payment summary table explaining that
the loan offers payment options. The
explanation preceding the table also
must state the maximum possible
interest rate and the smallest number of
months or years in which the interest
rate could reach its maximum.
The creditor also must disclose
whether an escrow account will be
established and, if so, an estimate of the
amount for taxes and insurance
included in each periodic payment.
Comment 18(s)(6)-1 refers to the
commentary under § 226.18(s)(3)(i)(C)
for guidance on escrows. The comment
notes that, under that guidance,
mortgage insurance payments decline
over a loan’s term, and the payment
amounts shown in the table should
reflect the mortgage insurance payment
that will be applicable at the time each
disclosed periodic payment will be in
effect. Accordingly, the disclosed
mortgage insurance payment will be
zero if it corresponds to a periodic
payment that will occur after the
creditor will be legally required to
terminate mortgage insurance. On the
other hand, because only one escrow
amount is disclosed under § 226.18(s)(6)
for negative amortization loans and
escrows are not itemized in the payment
amounts, the single escrow amount
disclosed should reflect the mortgage
insurance amount that will be collected
as of the outset of the loan’s term.
18(s)(7) Definitions
As noted above, § 226.18(s)(7)
provides definitions for several terms
used in § 226.18(s). Those definitions
are discussed at the beginning of this
section-by-section analysis to facilitate
the subsequent discussion of this
interim rule’s requirements.
18(t) ‘‘No-Guarantee-to-Refinance’’
Statement
The MDIA also amended Section
128(b) of TILA to require creditors to
disclose for variable rate transactions, in
conspicuous type size and format, that
there is no guarantee that the consumer
will be able to refinance the transaction
to lower the interest rate or monthly

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Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations
payments (‘‘MDIA refinancing
warning’’).6 15 U.S.C. 1638(b)(2)(C)(ii).
To implement the disclosure required
by the MDIA, the Board is adding a new
§ 226.18(t). Section 226.18(t)(1) requires
creditors to disclose a statement that
there is no guarantee that the consumer
will be able to refinance the loan to
obtain a lower interest rate and
payment. The Board believes that
including such a statement on the TILA
disclosure form will alert consumers to
consider the impact of future rate
adjustments and increased monthly
payments.
Although the MDIA requires this
refinancing warning only for variablerate transactions secured by a dwelling,
the Board proposed in the 2009 ClosedEnd Proposal to expand the scope of the
requirement to include fixed-rate
transactions secured by a dwelling, as
well as transactions secured by real
property without a dwelling. The Board
is now adopting this approach. The
Board is concerned that some
consumers may accept loan terms that
could present possible payment shock
concerns similar to variable-rate
transactions, such as a three-year, fixedrate mortgage with a balloon payment.
Based on consumer testing, the Board
believes all consumers, regardless of
transaction-type, would benefit from a
statement that encourages consideration
of future possible market rate increases.
Consistent with MDIA’s provisions,
however, § 226.18(t) does not apply to
transactions secured by timeshare plans.
Section 226.18(t)(2) provides format
requirements for the statement required
by § 226.18(t)(1). The statement must be
made in a form substantially similar to
Model Clause H–4(K) in Appendix H. In
the 2009 Closed-End Proposal, the
Board proposed to require that the
statement be made together with the
security interest disclosure. The Board
also proposed to modify the security
interest disclosure to provide a more
plain-language approach to the
significant potential consequences of a
creditor taking a security interest in a
consumer’s home. See 74 FR 43232,
43310, Aug. 26, 2009. The Board is not
adopting the proposed changes to the
security interest disclosure at this time
because that is not necessary to
implement the MDIA amendments that
take effect on January 30, 2011.
Accordingly, the Board also is not
adopting the requirement to link the
security interest disclosure to the new
6 Specifically, the MDIA requires that the Board
use consumer testing to develop disclosures for
variable-rate transactions, including the fact that
‘‘there is no guarantee that the borrower will be able
to refinance to a lower amount.’’ Public Law 109–
8, 119 Stat. 23, § 2502(a)(6).

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statement that there is no guarantee a
consumer will be able to refinance.
Appendixes G and H Open-End and
Closed-End Model Forms and Clauses
Comment App. G and H–1 discusses
permissible changes to the model forms
and clauses. It states that creditors may
make certain changes to the format or
content of the model forms without
losing TILA’s protection from liability
for their use. It also indicates, however,
that formatting changes may not be
made to certain model forms and
samples. This interim rule amends the
comment to add new model clauses
H–4(E), H–4(F), H–4(G), and H–4(H) to
the list of models whose formatting may
not be altered.
Appendix H Closed-End Model Forms
and Clauses
As noted above, the Board is adopting
several model clauses to illustrate the
new requirements under this interim
rule. Model Clause H–4(E) illustrates the
interest rate and payment summary
table required under § 226.18(s) for a
fixed-rate mortgage transaction. Model
Clause H–4(F) illustrates the table for an
adjustable-rate or a step-rate mortgage
transaction. Model Clause H–4(G)
illustrates the table for a mortgage
transaction with negative amortization.
Model Clause H–4(H) illustrates the
table for a fixed-rate loan with interestonly terms. Model Clause H–4(I)
illustrates the introductory rate
disclosure required by § 226.18(s)(2)(iii)
if an adjustable-rate mortgage has an
introductory rate. Model Clause H–4(J)
illustrates the balloon payment
disclosure required by § 226.18(s)(5) for
a mortgage with a balloon payment
term. Finally, Model Clause H–4(K)
illustrates the no-guarantee-to-refinance
statement required by § 226.18(t).
VI. Paperwork Reduction Act
In accordance with the Paperwork
Reduction Act (PRA) of 1995 (44 U.S.C.
3506; 5 CFR Part 1320 Appendix A.1),
the Board reviewed the interim 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
interim rule 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.). Since the Board does not

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collect any information, no issue of
confidentiality arises. The respondents/
recordkeepers are creditors and other
entities subject to Regulation Z.
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, notice 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 for 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 two years, see § 226.25,
but Regulation Z identifies only a few
specific types of records that must be
retained.7
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 Federal Reserve that engage in
consumer credit activities 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 imposed on the
entities for which they have
administrative enforcement authority.
The current total annual burden to
comply with the provisions of
Regulation Z is estimated to be
1,497,362 hours for the 1,138 Federal
Reserve-regulated institutions that are
deemed to be respondents for the
purpose of the PRA. A detailed
discussion of revised burden is
presented in the following two
paragraphs. To ease the burden and cost
of complying with Regulation Z
(particularly for small entities), the
7 See

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Board provides model forms, which are
appended to the regulation.
As discussed in the preamble, the
Board is adopting changes to format and
content requirements for disclosures for
closed-end mortgages that are required
within three days after application and
before consummation. The interim rule
will impose a one-time increase in the
total annual burden under Regulation Z
for all respondents regulated by the
Federal Reserve by 136,560 hours, from
1,497,362 to 1,633,922 hours. In
addition, the Board estimates that the
proposed revisions to the rules will
increase the total annual burden on a
continuing basis from 1,497,362 to
2,043,602 hours.
The Board estimates that 1,138
respondents regulated by the Federal
Reserve would take, on average, 120
hours (three business weeks) to update
their systems and internal procedure
manuals and to provide training for
relevant staff to comply with the new
disclosure requirements in § 226.18(s)
and (t). This one-time revision will
increase the burden by 136,560 hours.
On a continuing basis, the Board
estimates that 1,138 respondents
regulated by the Federal Reserve will
take, on average, 40 hours a month to
comply with the new disclosure
requirements and that the new
requirements will increase the ongoing
burden from 304,756 hours to 546,240
hours. To ease the burden and cost of
complying with the new requirements
under Regulation Z the Board is adding
several model clauses to Appendix H.
The total estimated burden increase
represents averages for all respondents
regulated by the Federal Reserve. The
Board expects that the amount of time
required to implement the changes for a
given institution may vary based on the
size and complexity of the respondent.
Further, the estimated burden increase
does not include the burden of
complying with other proposed and
final rules the Board is issuing
simultaneously with this interim rule.
The other federal financial agencies,
Office of the Comptroller of the
Currency (OCC), Office of Thrift
Supervision (OTS), the Federal Deposit
Insurance Corporation (FDIC), and the
National Credit Union Administration
(NCUA), are responsible for estimating
and reporting to OMB the total
paperwork burden for the domestically
chartered commercial banks, thrifts, and
federal credit unions and U.S. branches
and agencies of foreign banks for which
they have primary administrative
enforcement jurisdiction under TILA
Section 108(a), 15. U.S.C. 1607(a). These
agencies are permitted, but are not
required, to use the Board’s burden

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estimation methodology. Using the
Board’s method, the total current
estimated annual burden for the
approximately 16,200 domestically
chartered commercial banks, thrifts, and
federal credit unions and U.S. branches
and agencies of foreign banks
supervised by the Federal Reserve, OCC,
OTS, FDIC, and NCUA under TILA will
be approximately 19,610,245 hours. The
interim rule will impose a one-time
increase in the estimated annual burden
for such institutions by 1,944,000 hours
to 21,554,245 hours. On a continuing
basis, the interim rule will impose an
increase in the estimated annual burden
by 7,776,000 to 27,386,245 hours. The
above estimates represent an average
across all respondents; the Board
expects variations between institutions
based on their size, complexity, and
practices.
Comments are invited on: (1) Whether
the new collection of information is
necessary for the proper performance of
the Board’s functions; including
whether the information has practical
utility; (2) the accuracy of the Board’s
estimate of the burden of the
information collection, including the
cost of compliance; (3) ways to enhance
the quality, utility, and clarity of the
information to be collected; and (4)
ways to minimize the burden of
information collection on respondents,
including through the use of automated
collection techniques or other forms of
information technology. Comments on
the collection of information should be
sent to Michelle Shore, Federal Reserve
Board Clearance Officer, Division of
Research and Statistics, Mail Stop 95–A,
Board of Governors of the Federal
Reserve System, Washington, DC 20551,
with copies of such comments sent to
the Office of Management and Budget,
Paperwork Reduction Project (7100–
0199), Washington, DC 20503.
VII. Regulatory Flexibility Analysis
In accordance with Section 4 of the
Regulatory Flexibility Act (RFA), 5
U.S.C. 604, the Board is publishing a
final regulatory flexibility analysis for
the amendments to Regulation Z in this
interim rule. The RFA generally requires
an agency to perform an assessment of
the impact a rule is expected to have on
small entities.8 Under Section 5(b) of
8 Under standards set by the U.S. Small Business
Administration (SBA), an entity is considered
‘‘small’’ if it has $175 million or less in assets, for
banks and other depository institutions, or $7
million or less in revenues, for non-bank mortgage
lenders, mortgage brokers, and loan servicers. 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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the RFA, however, the regulatory
flexibility analysis otherwise required
under Section 4 of the RFA is not
required if an agency certifies that the
rule will not have a significant
economic impact on a substantial
number of small entities and states the
factual basis for such certification. 5
U.S.C. 605(b). The Board believes that
this interim rule will not have a
significant economic impact on a
substantial number of small entities.
The amendments to Regulation Z’s
disclosure requirements implement
revisions to TILA made by MDIA.
Creditors must comply with MDIA’s
requirements when they become
effective on January 30, 2011, whether
or not the Board amends Regulation Z
to conform the regulation to the statute.
The Board’s final rule is intended to
facilitate compliance by eliminating
inconsistencies between Regulation Z’s
existing requirements and the statutory
requirements imposed by the MDIA,
which are effective January 30, 2011.
A. Statement of the Need for, and
Objectives of, the Interim Rule
Congress enacted the TILA based on
findings that economic stability would
be enhanced and competition among
consumer credit providers would be
strengthened by the informed use of
credit resulting from consumers’
awareness of the cost of credit. One of
the stated purposes of TILA is to
provide meaningful disclosure of credit
terms to enable consumers to compare
credit terms available in the
marketplace more readily and avoid the
uninformed use of credit. TILA also
contains procedural and substantive
protections for consumers. TILA directs
the Board to prescribe regulations to
carry out the purposes of the statute.
The Board’s Regulation Z implements
TILA.
Congress enacted the MDIA in 2008 as
an amendment to TILA. The MDIA
amended TILA’s disclosure
requirements for closed-end mortgage
transactions that are secured by a
consumer’s dwelling. In May 2009, the
Board revised Regulation Z to
implement those requirements. The
MDIA also amended TILA to require
disclosure of examples for variable-rate
mortgage transactions of payment
changes, including the maximum
payment increase possible, and to
require disclosure to ensure that
consumers are aware that there is no
guarantee they will be able to refinance
to lower their payments in the future.
As discussed in part V of the
SUPPLEMENTARY INFORMATION, this
interim rule implements those MDIA
requirements by requiring disclosure of

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the interest rate and payment summary
and the no guarantee to refinance
statement.
B. Summary of Issues Raised by
Comments in Response to the Initial
Regulatory Flexibility Analysis
The initial regulatory flexibility
analysis published in the 2009 ClosedEnd Proposal (IRFA) related to the
disclosure requirements being
implemented by this interim rule, as
well as a significant number of
additional proposed requirements for
mortgage transactions. Those additional
requirements include the rest of the
proposed changes to the TILA
disclosure’s content, timing, and format;
proposed new requirements and
changes to the format and content of
disclosures given at application;
proposed changes to the timing, content,
and types of notices provided after
consummation; and proposed new
protections related to limits on loan
originator compensation. Consequently,
most comments to the 2009 Closed-End
Proposal relating specifically to the
IRFA addressed the overall proposal.
Comments relating to specific burdens
focused mainly on aspects of the
proposal other than the interest rate and
payment summary and the noguarantee-to-refinance statement.
A few commenters opposed certain
aspects of the interest rate and payment
summary, such as its tabular format
requirement, on the grounds that they
would be technologically challenging.
The Board believes, however, that
software likely is readily available that
is capable of tabular formatting,
especially in light of the increasing use
of tabular disclosures under various
state and federal laws. More
importantly, the formatting
requirements are essential to the interim
rule’s purposes based on consumer
testing, as discussed above. Some small
depository institutions, mortgage
brokers, and their trade associations also
suggested exempting small creditors or
delaying the implementation of the
overall proposal by substantial time
periods to allow time for other
regulatory developments to take effect.
TILA exempts from coverage persons
that do not ‘‘regularly extend’’ consumer
credit. See TILA Section 103(f), 15
U.S.C. 1604(f) (definition of ‘‘creditor’’).
Regulation Z implements this provision
in § 226.2(a)(17). Thus, lenders with
limited activity (in the case of mortgage
lending, five or fewer loans in a year)
already are exempt from all TILA
disclosure requirements. Limited
lending activity likely correlates to a
significant extent with being a small
entity. The Board believes, however,

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that an exemption from certain TILA
disclosure requirements for small
creditors that otherwise are subject to
TILA and Regulation Z generally would
undermine the purposes of TILA by
limiting the instances where consumers
would receive the benefit of the
disclosures. This would be especially
true if the exemption were limited to the
interest rate and payment summary
implemented by this interim rule.
Consumers also could be confused by
receiving disclosures that differ in that
one respect, solely based on which
creditor they applied to for a mortgage
loan. Accordingly, the Board is not
exempting small entities from the
requirements of this interim rule.
The Board intends to establish the
implementation period for the new
disclosures and other new TILA
requirements when it publishes a final
rule under the 2009 and 2010 ClosedEnd Proposals. At that time, the Board
will take into consideration the impact
on small businesses and the time
needed for them to implement the new
requirements. With respect to this
interim rule, the Board is affording
creditors the maximum possible time to
implement the interest rate and
payment summary and no-guarantee-torefinance notice requirements, by
making compliance optional until the
statutory effective date of January 30,
2011.
The U.S. Small Business
Administration Office of Advocacy
(Advocacy) commented on the IRFA
generally. Advocacy asserted that the
Board’s IRFA failed to satisfy the
requirements of the RFA in two ways.
First, Advocacy stated that the IRFA
lacked adequate information about the
economic impact of the proposal.
Second, Advocacy stated that the Board
failed to give full consideration to less
burdensome alternatives to the
proposal.
The Board acknowledged that the
overall proposal would have a
significant economic impact on a
substantial number of small entities but
also noted that the precise costs to small
entities of updating their systems and
disclosures are difficult to identify. The
Board noted that the impact would
depend on a number of unknown
factors, including the specifications of
the current systems used by such
entities to prepare and provide
disclosures and to administer and
maintain accounts, the complexity of
the terms of credit products that they
offer, and the range of such product
offerings. See 74 FR 43232, 43320, Aug.
26, 2009. The Board also recognizes that
the impact also includes the cost of legal
counsel to implement new disclosure

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58481

requirements, but that cost also is
difficult to quantify. Nevertheless, as
Advocacy recognized in its comment
letter, in preparing an IRFA an agency
may provide general, descriptive
statements of the effects of a proposed
rule if quantification is not practicable
or reliable. 5 U.S.C. 607. Because
quantification of the impact was
impracticable, the Board believes the
descriptive discussion, referenced
above, satisfied this standard.
Most alternatives raised by
commenters specifically to reduce
burdens related to the loan originator
compensation proposal, which is not a
part of this interim rule. The Board
considered alternatives to the various
disclosure proposals, and discussed
them throughout the SUPPLEMENTARY
INFORMATION to the 2009 Closed-End
Proposal. Despite these discussions,
Advocacy asserted that the Board did
not consider alternatives that are
specifically meant to reduce the
economic impact on small entities. The
Board stated, however, that a principal
goal of the Regulation Z review is to
produce revised and improved mortgage
disclosures that consumers will be more
likely to understand and use in their
decisions, while at the same time not
creating undue burdens for creditors.
See 74 FR 43232, 43234, Aug. 26, 2009.
In considering alternatives to the 2009
Closed-End Proposal, the Board sought
to further both of these objectives, thus
all alternatives were specifically
considered at least in part as to how
they might reduce the economic impact
on small entities.
In proposing the specific parts of the
proposal being implemented by this
interim rule, the Board did not identify
any alternatives that might reduce the
economic impact on small entities while
still achieving the purposes of the
disclosure. As noted above, recent
amendments to TILA require these
disclosures, and extensive consumer
testing led to the specifics of the
requirements. The Board has concluded
that the required content and format are
necessary to meet the purposes of TILA
as amended by MDIA, and it has not
identified any less burdensome
alternatives that would achieve the
same purposes. Accordingly, the Board
did not discuss any alternatives to the
interest rate and payment summary or
the no-guarantee-to-refinance statement
requirements. As also noted above, the
Board cannot quantify precisely the
costs of complying with the
requirements of this interim rule. The
Board sought comment, however, on
any costs, compliance requirements, or
changes in operating procedures arising
from the application of the overall

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proposal, including the requirements
implemented by this interim rule, to
small businesses. See 74 FR 43232,
43320, Aug. 26, 2009. As noted above,
some commenters objected to the
interest rate and payment summary as
burdensome, but they gave no specific
cost information.

srobinson on DSKHWCL6B1PROD with PROPOSALS2

C. Description and Estimate of Small
Entities to Which the Interim Rule Will
Apply
The interim rule will apply to all
institutions and entities that engage in
closed-end lending secured by real
property or a dwelling. TILA and
Regulation Z have broad applicability to
individuals and businesses that
originate even small numbers of homesecured loans. See § 226.1(c)(1). As
discussed in the IRFA, through data
from Reports of Condition and Income
(Call Reports) of depository institutions
and certain subsidiaries of banks and
bank holding companies, as well as data
reported under the Home Mortgage
Disclosure Act (HMDA), the Board can
estimate the approximate number of
small depository institutions and nondepository institutions that would be
subject to the rules. For the majority of
HMDA respondents that are not
depository institutions, exact revenue
information is not available.
Based on the best information
available, the Board makes the following
estimate of small entities that will be
affected by this interim rule: According
to March 2010 Call Report data,
approximately 8,848 small depository
institutions would be subject to the rule.
Approximately 15,899 depository
institutions in the United States filed
Call Report data, approximately 11,218
of which had total domestic assets of
$175 million or less and thus were
considered small entities for purposes of
the RFA. Of the 3,898 banks, 523 thrifts,
6,727 credit unions, and 70 branches of
foreign banks that filed Call Report data
and were considered small entities,
3,776 banks, 496 thrifts, 4,573 credit
unions, and 3 branches of foreign banks,
totaling 8,848 institutions, extended
mortgage credit. For purposes of this
Call Report analysis, thrifts include
savings banks, savings and loan entities,
co-operative banks and industrial banks.
Further, 1,507 non-depository
institutions (independent mortgage
companies, subsidiaries of a depository
institution, or affiliates of a bank
holding company) filed HMDA reports
in 2009 for 2008 lending activities.
Based on the small volume of lending
activity reported by these institutions,
most are likely to be small entities.

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D. Reporting, Recordkeeping, and Other
Compliance Requirements
The compliance requirements of the
interim rule are described in part V of
the SUPPLEMENTARY INFORMATION. To
comply with the revised rules, small
entities will be required to modify their
procedures for making credit
disclosures for mortgage loans. The
precise costs to small entities of
updating their systems and disclosures
are difficult to estimate. These costs will
depend on a number of unknown
factors, including, among other things,
the specifications of the current systems
used by such entities to prepare and
provide disclosures, the scope and
complexity of their mortgage products,
the extent to which they will require
outside legal counsel to develop
compliant disclosures, and their
internal costs of training personnel.
E. Steps Taken To Minimize the
Economic Impact on Small Entities
The Board generally prescribes model
forms and clauses to facilitate
compliance with its disclosure
requirements under Regulation Z. In
this interim rule, the Board is adopting
model clauses to illustrate the interest
rate and payment summary for fixedrate mortgages, adjustable- or step-rate
mortgages, mortgages with negative
amortization, and mortgages with
interest-only payments, as well as
model clauses to illustrate the
introductory rate disclosure, the balloon
payment disclosure, and the no
guarantee to refinance statement. In
addition, as noted above, the Board is
affording small creditors and other
creditors the maximum possible time to
implement this interim rule’s
requirements by making compliance
optional until the statutory effective
date. This regulatory flexibility analysis
does not discuss alternatives to the
interim rule because the Board is
revising Regulation Z for the narrow
purpose of carrying out its mandate to
implement statutory amendments to
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
For the reasons set forth in the
preamble, the Board amends Regulation
Z, 12 CFR Part 226, as set forth below:

■

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

■

Authority: 12 U.S.C. 3806; 15 U.S.C. 1604,
1637(c)(5), and 1639(l); Pub. L. 111–24 § 2,
123 Stat. 1734.

Subpart C—Closed-End Credit
2. Section 226.18 is amended by
revising paragraph (g) introductory text
and adding new paragraphs (s) and (t)
to read as follows:

■

§ 226.18

Content of disclosures.

*

*
*
*
*
(g) Payment schedule. Other than for
a transaction that is subject to paragraph
(s) of this section, the number, amounts,
and timing of payments scheduled to
repay the obligation.
*
*
*
*
*
(s) Interest rate and payment
summary for mortgage transactions. For
a closed-end transaction secured by real
property or a dwelling, other than a
transaction secured by a consumer’s
interest in a timeshare plan described in
11 U.S.C. 101(53D), the creditor shall
disclose the following information about
the interest rate and payments:
(1) Form of disclosures. The
information in paragraphs (s)(2)–(4) of
this section shall be in the form of a
table, with no more than five columns,
with headings and format substantially
similar to Model Clause H–4(E), H–4(F),
H–4(G), or H–4(H) in Appendix H to
this part. The table shall contain only
the information required in paragraphs
(s)(2)–(4) of this section, shall be placed
in a prominent location, and shall be in
a minimum 10-point font.
(2) Interest rates—(i) Amortizing
loans. (A) For a fixed-rate mortgage, the
interest rate at consummation.
(B) For an adjustable-rate or step-rate
mortgage—
(1) The interest rate at consummation
and the period of time until the first
interest rate adjustment may occur,
labeled as the ‘‘introductory rate and
monthly payment’’;
(2) The maximum interest rate that
may apply during the first five years
after consummation and the earliest
date on which that rate may apply,
labeled as ‘‘maximum during first five
years’’; and
(3) The maximum interest rate that
may apply during the life of the loan
and the earliest date on which that rate
may apply, labeled as ‘‘maximum ever.’’
(C) If the loan provides for payment
increases as described in paragraph
(s)(3)(i)(B) of this section, the interest
rate in effect at the time the first such

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Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations
payment increase is scheduled to occur
and the date on which the increase will
occur, labeled as ‘‘first adjustment’’ if the
loan is an adjustable-rate mortgage or,
otherwise, labeled as ‘‘first increase.’’
(ii) Negative amortization loans. For a
negative amortization loan—
(A) The interest rate at consummation
and, if it will adjust after
consummation, the length of time until
it will adjust, and the label
‘‘introductory’’ or ‘‘intro’’;
(B) The maximum interest rate that
could apply when the consumer must
begin making fully amortizing payments
under the terms of the legal obligation;
(C) If the minimum required payment
will increase before the consumer must
begin making fully amortizing
payments, the maximum interest rate
that could apply at the time of the first
payment increase and the date the
increase is scheduled to occur; and
(D) If a second increase in the
minimum required payment may occur
before the consumer must begin making
fully amortizing payments, the
maximum interest rate that could apply
at the time of the second payment
increase and the date the increase is
scheduled to occur.
(iii) Introductory rate disclosure for
amortizing adjustable-rate mortgages.
For an amortizing adjustable-rate
mortgage, if the interest rate at
consummation is less than the fullyindexed rate, placed in a box directly
beneath the table required by paragraph
(s)(1) of this section, in a format
substantially similar to Model Clause
H–4(I) in Appendix H to this part—
(A) The interest rate that applies at
consummation and the period of time
for which it applies;
(B) A statement that, even if market
rates do not change, the interest rate
will increase at the first adjustment and
a designation of the place in sequence
of the month or year, as applicable, of
such rate adjustment; and
(C) The fully-indexed rate.
(3) Payments for amortizing loans—(i)
Principal and interest payments. If all
periodic payments will be applied to
accrued interest and principal, for each
interest rate disclosed under paragraph
(s)(2)(i) of this section—
(A) The corresponding periodic
principal and interest payment, labeled
as ‘‘principal and interest;’’
(B) If the periodic payment may
increase without regard to an interest
rate adjustment, the payment that
corresponds to the first such increase
and the earliest date on which the
increase could occur;
(C) That an escrow account is
required, if applicable, and an estimate

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of the amount of taxes and insurance,
including any mortgage insurance; and
(D) The sum of the amounts disclosed
under paragraphs (s)(3)(i)(A) and (C) of
this section or (s)(3)(i)(B) and (C) of this
section, as applicable, labeled as ‘‘total
estimated monthly payment.’’
(ii) Interest-only payments. If the loan
is an interest-only loan, for each interest
rate disclosed under paragraph (s)(2)(i)
of this section, the corresponding
periodic payment and—
(A) If the payment will be applied to
only accrued interest, the amount
applied to interest, labeled as ‘‘interest
payment,’’ and a statement that none of
the payment is being applied to
principal;
(B) If the payment will be applied to
accrued interest and principal, the
earliest date that such payments will be
required and an itemization of the
amount applied to accrued interest and
the amount applied to principal, labeled
as ‘‘interest payment’’ and ‘‘principal
payment,’’ respectively;
(C) The escrow information described
in paragraph (s)(3)(i)(C) of this section;
and
(D) The sum of all amounts required
to be disclosed under paragraphs
(s)(3)(ii)(A) and (C) of this section or
(s)(3)(ii)(B) and (C) of this section, as
applicable, labeled as ‘‘total estimated
monthly payment.’’
(4) Payments for negative
amortization loans. For negative
amortization loans:
(i)(A) The minimum periodic
payment required until the first
payment increase or interest rate
increase, corresponding to the interest
rate disclosed under paragraph
(s)(2)(ii)(A) of this section;
(B) The minimum periodic payment
that would be due at the first payment
increase and the second, if any,
corresponding to the interest rates
described in paragraphs (s)(2)(ii)(C) and
(D) of this section; and
(C) A statement that the minimum
payment pays only some interest, does
not repay any principal, and will cause
the loan amount to increase;
(ii) The fully amortizing periodic
payment amount at the earliest time
when such a payment must be made,
corresponding to the interest rate
disclosed under paragraph (s)(2)(ii)(B) of
this section; and
(iii) If applicable, in addition to the
payments in paragraphs (s)(4)(i) and (ii)
of this section, for each interest rate
disclosed under paragraph (s)(2)(ii) of
this section, the amount of the fully
amortizing periodic payment, labeled as
the ‘‘full payment option,’’ and a
statement that these payments pay all
principal and all accrued interest.

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(5) Balloon payments. (i) Except as
provided in paragraph (s)(5)(ii) of this
section, if the transaction will require a
balloon payment, defined as a payment
that is more than two times a regular
periodic payment, the balloon payment
shall be disclosed separately from other
periodic payments disclosed in the table
under this paragraph (s), outside the
table and in a manner substantially
similar to Model Clause H–4(J) in
Appendix H to this part.
(ii) If the balloon payment is
scheduled to occur at the same time as
another payment required to be
disclosed in the table pursuant to
paragraph (s)(3) or (s)(4) of this section,
then the balloon payment must be
disclosed in the table.
(6) Special disclosures for loans with
negative amortization. For a negative
amortization loan, the following
information, in close proximity to the
table required in paragraph (s)(1) of this
section, with headings, content, and
format substantially similar to Model
Clause H–4(G) in Appendix H to this
part:
(i) The maximum interest rate, the
shortest period of time in which such
interest rate could be reached, the
amount of estimated taxes and
insurance included in each payment
disclosed, and a statement that the loan
offers payment options, two of which
are shown.
(ii) The dollar amount of the increase
in the loan’s principal balance if the
consumer makes only the minimum
required payments for the maximum
possible time and the earliest date on
which the consumer must begin making
fully amortizing payments, assuming
that the maximum interest rate is
reached at the earliest possible time.
(7) Definitions. For purposes of this
§ 226.18(s):
(i) The term ‘‘adjustable-rate
mortgage’’ means a transaction secured
by real property or a dwelling for which
the annual percentage rate may increase
after consummation.
(ii) The term ‘‘step-rate mortgage’’
means a transaction secured by real
property or a dwelling for which the
interest rate will change after
consummation, and the rates that will
apply and the periods for which they
will apply are known at consummation.
(iii) The term ‘‘fixed-rate mortgage’’
means a transaction secured by real
property or a dwelling that is not an
adjustable-rate mortgage or a step-rate
mortgage.
(iv) The term ‘‘interest-only’’ means
that, under the terms of the legal
obligation, one or more of the periodic
payments may be applied solely to
accrued interest and not to loan

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srobinson on DSKHWCL6B1PROD with PROPOSALS2

principal; an ‘‘interest-only loan’’ is a
loan that permits interest-only
payments.
(v) The term ‘‘amortizing loan’’ means
a loan in which payment of the periodic
payments does not result in an increase
in the principal balance under the terms
of the legal obligation; the term
‘‘negative amortization’’ means payment
of periodic payments that will result in
an increase in the principal balance
under the terms of the legal obligation;
the term ‘‘negative amortization loan’’
means a loan that permits payments
resulting in negative amortization, other
than a reverse mortgage subject to
§ 226.33.
(vi) The term ‘‘fully-indexed rate’’
means the interest rate calculated using
the index value and margin at the time
of consummation.
(t) ‘‘No-guarantee-to-refinance’’
statement. (1) Disclosure. For a closed-

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end transaction secured by real property
or a dwelling, other than a transaction
secured by a consumer’s interest in a
timeshare plan described in 11 U.S.C.
101(53D), the creditor shall disclose a
statement that there is no guarantee the
consumer can refinance the transaction
to lower the interest rate or periodic
payments.
(2) Format. The statement required by
paragraph (t)(1) of this section must be
in a form substantially similar to Model
Clause H–4(K) in Appendix H to this
part.
3. Appendix H to Part 226 is amended
by:
■ A. Adding entries for H–4(E) through
H–4(K) to the table of contents at the
beginning of the appendix; and
■ B. Adding new Model Clauses H–4(E)
through H–4(K) in numerical order.
■

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Appendix H to Part 226—Closed-End
Model Forms and Clauses
*

*

*

*

*

H–4(E)—Fixed-Rate Mortgage Interest Rate
and Payment Summary Model Clause
(§ 226.18(s))
H–4(F)—Adjustable-Rate Mortgage or StepRate Mortgage Interest Rate and Payment
Summary Model Clause (§ 226.18(s))
H–4(G)—Mortgage with Negative
Amortization Interest Rate and Payment
Summary Model Clause (§ 226.18(s))
H–4(H)—Fixed-Rate Mortgage with InterestOnly Interest Rate and Payment
Summary Model Clause (§ 226.18(s))
H–4(I)—Adjustable-Rate Mortgage
Introductory Rate Disclosure Model
Clause (§ 226.18(s)(2)(iii))
H–4(J)—Balloon Payment Disclosure Model
Clause (§ 226.18(s)(5))
H–4(K)—No Guarantee to Refinance
Statement Model Clause (§ 226.18(t))

*

*

*

*

*

BILLING CODE P

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58486

BILLING CODE C

H–4(I)—Introductory Rate Model Clause
[Introductory Rate Notice
You have a discounted introductory rate of
llll % that ends after (period).
In the (period in sequence), even if market
rates do not change, this rate will increase
to ll %.]
H–4(J)—Balloon Payment Model Clause
[Final Balloon Payment due (date):
$llll]
H–4(K)—‘‘No-Guarantee-to-Refinance’’
Statement Model Clause
There is no guarantee that you will be able
to refinance to lower your rate and payments.

*

*
*
*
*
4. In Supplement I to Part 226:
A. Under Section 226.17—General
Disclosure Requirements, 17(a) Form of
disclosures, Paragraph 17(a)(1),
paragraph 1 is revised.
■ B. Under Section 226.18—Content of
Disclosures, 18(g) Payment schedule,
paragraph 6 is added, and an entry for
18(s) Interest rate and payment
summary for mortgage transactions is
added.
■ C. Under Appendixes G and H—
Open-End and Closed-End Model Forms
and Clauses, paragraph 1 is revised.
■ D. Under Appendix H—Closed-End
Model Forms and Clauses, paragraph 7
is revised.
The additions and revisions read as
follows:
srobinson on DSKHWCL6B1PROD with PROPOSALS2

■
■

Supplement I to Part 226—Official Staff
Interpretations
*

*

*

*

*

Subpart C—Closed-End Credit

*

*

*

*

*

Section 226.17—General Disclosure
Requirements
17(a) Form of disclosures.
Paragraph 17(a)(1).

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1. Clear and conspicuous. This standard
requires that disclosures be in a reasonably
understandable form. For example, while the
regulation requires no mathematical
progression or format, the disclosures must
be presented in a way that does not obscure
the relationship of the terms to each other.
In addition, although no minimum type size
is mandated (except for the interest rate and
payment summary for mortgage transactions
required by § 228.18(s)), the disclosures must
be legible, whether typewritten, handwritten,
or printed by computer.

*

*

*

*

*

Section 226.18—Content of Disclosures

*

*
18(g)

*

*

*

*

*

Payment schedule.

*

*

*

6. Mortgage transactions. Section 226.18(g)
applies only to closed-end transactions other
than transactions that are subject to
§ 226.18(s). Section 226.18(s) applies to
closed-end transactions secured by real
property or a dwelling. Thus, if a closed-end
consumer credit transaction is secured by
real property or a dwelling, the creditor
discloses an interest rate and payment
summary table in accordance with § 226.18(s)
and does not observe the requirements of
§ 226.18(g). On the other hand, if a closedend consumer credit transaction is not
secured by real property or a dwelling, the
creditor discloses a payment schedule in
accordance with § 226.18(g) and does not
observe the requirements of § 226.18(s).

*

*

*

*

*

18(s) Interest rate and payment summary
for mortgage transactions.
1. In general. Section 226.18(s) prescribes
format and content for disclosure of interest
rates and monthly (or other periodic)
payments for mortgage loans. The
information in § 226.18(s)(2)–(4) is required
to be in the form of a table, except as
otherwise provided, with headings and
format substantially similar to Model Clause
H–4(E), H–4(F), H–4(G), or H–4(H) in
Appendix H to this part. A disclosure that
does not include the shading shown in a
model clause but otherwise follows the
model clause’s headings and format is

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substantially similar to that model clause. In
all cases, the table should have no more than
five vertical columns corresponding to
applicable interest rates at various times
during the loan’s term; corresponding
payments would be shown in horizontal
rows. Certain loan types and terms are
defined for purposes of § 226.18(s) in
§ 226.18(s)(7).
2. Amortizing loans. Loans described as
amortizing in §§ 226.18(s)(2)(i) and
226.18(s)(3) include interest-only loans if
they do not also permit negative
amortization. (For rules relating to loans with
balloon payments, see § 226.18(s)(5)). If an
amortizing loan is an adjustable-rate
mortgage with an introductory rate (less than
the fully-indexed rate), creditors must
provide a special explanation of introductory
rates. See § 226.18(s)(2)(iii).
3. Negative amortization. For negative
amortization loans, creditors must follow the
rules in §§ 226.18(s)(2)(ii) and 226.18(s)(4) in
disclosing interest rates and monthly
payments. Loans with negative amortization
also require special explanatory disclosures
about rates and payments. See § 226.18(s)(6).
Loans with negative amortization include
‘‘payment option’’ loans, in which the
consumer is permitted to make minimum
payments that will cover only some of the
interest accruing each month. See also
comment 17(c)(1)–12, regarding graduatedpayment adjustable-rate mortgages.
18(s)(2) Interest rates.
18(s)(2)(i) Amortizing loans.
Paragraph 18(s)(2)(i)(A).
1. Fixed rate loans—payment increases.
Although the interest rate will not change
after consummation for a fixed-rate loan,
some fixed-rate loans may have periodic
payments that increase after consummation.
For example, the terms of the legal obligation
may permit the consumer to make interestonly payments for a specified period such as
the first five years after consummation. In
such cases, the creditor must include the
increased payment under § 226.18(s)(3)(ii)(B)
in the payment row, and must show the
interest rate in the column for that payment,
even though the rate has not changed since
consummation. See also comment 17(c)(1)–
13, regarding growth equity mortgages.

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Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations
Paragraph 18(s)(2)(i)(B).
1. Adjustable-rate mortgages and step-rate
mortgages. Creditors must disclose more than
one interest rate for adjustable-rate mortgages
and step-rate mortgages, in accordance with
§ 226.18(s)(2)(i)(B). Creditors must assume
that an adjustable-rate mortgage’s interest
rate will increase after consummation as
rapidly as possible, taking into account the
terms of the legal obligation.
2. Maximum interest rate during first five
years—adjustable-rate mortgages and steprate mortgages. The creditor must disclose
the maximum rate that could apply during
the first five years after consummation. If
there are no interest rate caps other than the
maximum rate required under § 226.30, then
the creditor should disclose only the rate at
consummation and the maximum rate. Such
a table would have only two columns.
i. For an adjustable-rate mortgage, the
creditor must take into account any interest
rate caps when disclosing the maximum
interest rate during the first five years. The
creditor must also disclose the earliest date
on which that adjustment may occur.
ii. If the transaction is a step-rate mortgage,
the creditor should disclose the rate that will
apply after consummation. For example, the
legal obligation may provide that the rate is
6 percent for the first two years following
consummation, and then increases to 7
percent for at least the next three years. The
creditor should disclose the maximum rate
during the first five years as 7 percent and
the date on which the rate is scheduled to
increase to 7 percent.
3. Maximum interest rate at any time. The
creditor must disclose the maximum rate that
could apply at any time during the term of
the loan and the earliest date on which the
maximum rate could apply.
i. For an adjustable-rate mortgage, the
creditor must take into account any interest
rate caps in disclosing the maximum interest
rate. For example, if the legal obligation
provides that at each annual adjustment the
rate may increase by no more than 2
percentage points, the creditor must take this
limit into account in determining the earliest
date on which the maximum possible rate
may be reached.
ii. For a step-rate mortgage, the creditor
should disclose the highest rate that could
apply under the terms of the legal obligation
and the date on which that rate will first
apply.
Paragraph 18(s)(2)(i)(C).
1. Payment increases. For some loans, the
payment may increase following
consummation for reasons unrelated to an
interest rate adjustment. For example, an
adjustable-rate mortgage may have an
introductory fixed-rate for the first five years
following consummation and permit the
borrower to make interest-only payments for
the first three years. Under
§ 226.18(s)(3)(ii)(B), the creditor must
disclose the first payment that will be
applied to both principal and interest. In
such a case, § 226.18(s)(2)(i)(C) requires that
the creditor also disclose the interest rate that
corresponds to the first payment of principal
and interest, even though the interest rate
will not adjust at that time. The table would
show, from left to right: The interest rate and

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payment at consummation with the payment
itemized to show that the payment is being
applied to interest only; the interest rate and
payment when the interest-only option ends;
the maximum interest rate and payment
during the first five years; and the maximum
possible interest rate and payment.
18(s)(2)(ii) Negative amortization loans.
1. Rate at consummation. In all cases the
interest rate in effect at consummation must
be disclosed, even if it will apply only for a
short period such as one month.
2. Rates for adjustable-rate mortgages. The
creditor must assume that interest rates rise
as quickly as possible after consummation, in
accordance with any interest rate caps under
the legal obligation. For adjustable-rate
mortgages with no rate caps except a life-time
maximum, creditors must assume that the
interest rate reaches the maximum at the first
adjustment. For example, assume that the
legal obligation provides for an interest rate
at consummation of 1.5 percent. One month
after consummation, the interest rate adjusts
and will adjust monthly thereafter, according
to changes in the index. The consumer may
make payments that cover only part of the
interest accrued each month, until the date
the principal balance reaches 115 percent of
its original balance, or until the end of the
fifth year after consummation, whichever
comes first. The maximum possible rate is
10.5 percent. No other limits on interest rates
apply. The minimum required payment
adjusts each year, and may increase by no
more than 7.5 percent over the previous
year’s payment. The creditor should disclose
the following rates and the dates when they
are scheduled to occur: A rate of 1.5 percent
for the first month following consummation
and the minimum payment; a rate of 10.5
percent, and the corresponding minimum
payment taking into account the 7.5 percent
limit on payment increases, at the beginning
of the second year; and a rate of 10.5 percent
and the corresponding minimum payment
taking into account the 7.5 percent payment
increase limit, at the beginning of the third
year. The creditor also must disclose the rate
of 10.5 percent, the fully amortizing
payment, and the date on which the
consumer must first make such a payment
under the terms of the legal obligation.
18(s)(2)(iii) Introductory rate disclosure
for amortizing adjustable-rate mortgage.
1. Introductory rate. In some adjustablerate mortgages, creditors may set an initial
interest rate that is lower than the fullyindexed rate at consummation. For
amortizing loans with an introductory rate,
creditors must disclose the information
required in § 226.18(s)(2)(iii) directly below
the table.
Paragraph 18(s)(2)(iii)(B).
1. Place in sequence. ‘‘Designation of the
place in sequence’’ refers to identifying the
month or year, as applicable, of the change
in the rate resulting from the expiration of an
introductory rate by its place in the sequence
of months or years, as applicable, of the
transaction’s term. For example, if a
transaction has a discounted rate for the first
three years, § 226.18(s)(2)(iii)(B) requires a
statement such as, ‘‘In the fourth year, even
if market rates do not change, this rate will
increase to __%.’’

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Paragraph 18(s)(2)(iii)(C).
1. Fully-indexed rate. The fully-indexed
rate is defined in § 226.18(s)(7) as the index
plus the margin at consummation. For
purposes of § 226.18(s)(2)(iii)(C), ‘‘at
consummation’’ refers to disclosures
delivered at consummation, or three business
days before consummation pursuant to
§ 226.19(a)(2)(ii); for early disclosures
delivered within three business days after
receipt of a consumer’s application pursuant
to § 226.19(a)(1), the fully-indexed rate
disclosed under § 226.18(s)(2)(iii)(C) may be
based on the index in effect at the time the
disclosures are provided. The index in effect
at consummation (or at the time of early
disclosures) need not be used if a contract
provides for a delay in the implementation of
changes in an index value. For example, if
the contract specifies that rate changes are
based on the index value in effect 45 days
before the change date, creditors may use any
index value in effect during the 45 days
before consummation (or any earlier date of
disclosure) in calculating the fully-indexed
rate to be disclosed.
18(s)(3) Payments for amortizing loans.
1. Payments corresponding to interest
rates. Creditors must disclose the periodic
payment that corresponds to each interest
rate disclosed under § 226.18(s)(2)(i)(A)–(C).
The corresponding periodic payment is the
regular payment for each such interest rate,
without regard to any final payment that
differs from others because of the rounding
of periodic payments to account for payment
amounts including fractions of cents. Balloon
payments, however, must be disclosed as
provided in § 226.18(s)(5).
2. Principal and interest payment amounts;
examples.
i. For fixed-rate interest-only transactions,
§ 226.18(s)(3)(ii)(B) requires scheduled
increases in the regular periodic payment
amounts to be disclosed along with the date
of the increase. For example, in a fixed-rate
interest-only loan, a scheduled increase in
the payment amount from an interest-only
payment to a fully amortizing payment must
be disclosed. Similarly, in a fixed-rate
balloon loan, the balloon payment must be
disclosed in accordance with § 226.18(s)(5).
ii. For adjustable-rate mortgage
transactions, § 226.18(s)(3)(i)(A) requires that
for each interest rate required to be disclosed
under § 226.18(s)(2)(i) (the interest rate at
consummation, the maximum rate during the
first five years, and the maximum possible
rate) a corresponding payment amount must
be disclosed.
iii. The format of the payment disclosure
varies depending on whether all regular
periodic payment amounts will include
principal and interest, and whether there will
be an escrow account for taxes and
insurance.
Paragraph 18(s)(3)(i)(C).
1. Taxes and insurance. An estimated
payment amount for taxes and insurance
must be disclosed if the creditor will
establish an escrow account for such
amounts. The payment amount must include
estimated amounts for property taxes and
premiums for mortgage-related insurance
required by the creditor, such as insurance
against loss of or damage to property, or

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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. Premiums for
credit insurance, debt suspension and debt
cancellation agreements, however, should
not be included. Except for periodic mortgage
insurance premiums included in the escrow
payment under § 226.18(s)(3)(i)(C), amounts
included in the escrow payment disclosure
such as property taxes and homeowner’s
insurance generally are not finance charges
under § 226.4 and, therefore, do not affect
other disclosures, including the finance
charge and annual percentage rate.
2. Mortgage insurance. Payment amounts
under § 226.18(s)(3)(i) should reflect the
consumer’s mortgage insurance payments
until the date on which the creditor must
automatically terminate coverage under
applicable law, even though the consumer
may have a right to request that the insurance
be cancelled earlier. The payment amount
must reflect the terms of the legal obligation,
as determined by applicable state or other
law. For example, assume that under
applicable law, mortgage insurance must
terminate after the 130th scheduled monthly
payment, and the creditor collects at closing
and places in escrow two months of
premiums. If, under the legal obligation, the
creditor will include mortgage insurance
premiums in 130 payments and refund the
escrowed payments when the insurance is
terminated, payment amounts disclosed
through the 130th payment should reflect
premium payments. If, under the legal
obligation, the creditor will apply the amount
escrowed to the two final insurance
payments, payments disclosed through the
128th payment should reflect premium
payments. The escrow amount reflected on
the disclosure should include mortgage
insurance premiums even if they are not
escrowed and even if there is no escrow
account established for the transaction.
Paragraph 18(s)(3)(i)(D).
1. Total monthly payment. For amortizing
loans, each column should add up to a total
estimated payment. The total estimated
payment amount should be labeled. If
periodic payments are not due monthly, the
creditor should use the appropriate term
such as ‘‘quarterly’’ or ‘‘annually.’’
18(s)(3)(ii) Interest-only payments.
1. Interest-only loans that are also negative
amortization loans. The rules in
§ 226.18(s)(3)(ii) for disclosing payments on
interest-only loans apply only if the loan is
not also a negative amortization loan. If the
loan is a negative amortization loan, even if
it also has an interest-only feature, payments
are disclosed under the rules in
§ 226.18(s)(4).
Paragraph 18(s)(3)(ii)(C).
1. Escrows. See the commentary under
§ 226.18(s)(3)(i)(C) for guidance on escrows
for purposes of § 226.18(s)(3)(ii)(C).
18(s)(4) Payments for negative
amortization loans.
1. Table. Section 226.18(s)(1) provides that
tables shall include only the information
required in § 226.18(s)(2)–(4). Thus, a table
for a negative amortization loan must contain
no more than two horizontal rows of
payments and no more than five vertical
columns of interest rates.

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2. Payment amounts. The payment
amounts disclosed under § 226.18(s)(4) are
the minimum or fully amortizing periodic
payments, as applicable, corresponding to
the interest rates disclosed under
§ 226.18(s)(2)(ii). The corresponding periodic
payment is the regular payment for each such
interest rate, without regard to any final
payment that differs from the rest because of
the rounding of periodic payments to account
for payment amounts including fractions of
cents.
Paragraph 18(s)(4)(i).
1. Minimum required payments. In one row
of the table, the creditor must disclose the
minimum required payment in each column
of the table, corresponding to each interest
rate or adjustment required in
§ 226.18(s)(2)(ii). The payments in this row
must be calculated based on an assumption
that the consumer makes the minimum
required payment for as long as possible
under the terms of the legal obligation. This
row should be identified as the minimum
payment option, and the statement required
by § 226.18(s)(4)(i)(C) should be included in
the heading for the row.
Paragraph 18(s)(4)(iii).
1. Fully amortizing payments. In one row
of the table, the creditor must disclose the
fully amortizing payment in each column of
the table, corresponding to each interest rate
required in § 226.18(s)(2)(ii). The creditor
must assume, for purposes of calculating the
amounts in this row that the consumer makes
only fully amortizing payments starting with
the first scheduled payment.
18(s)(5) Balloon payments.
1. General. A balloon payment is one that
is more than two times the regular periodic
payment. In a reverse mortgage transaction,
the single payment is not considered a
balloon payment. A balloon payment must be
disclosed outside and below the table, unless
the balloon payment coincides with an
interest rate adjustment or a scheduled
payment increase. In those cases, the balloon
payment must be disclosed in the table.
18(s)(6) Special disclosures for loans with
negative amortization.
1. Escrows. See the commentary under
§ 226.18(s)(3)(i)(C) for guidance on escrows
for purposes of § 226.18(s)(6). Under that
guidance, because mortgage insurance
payments decline over a loan’s term, the
payment amounts shown in the table should
reflect the mortgage insurance payment that
will be applicable at the time each disclosed
periodic payment will be in effect.
Accordingly, the disclosed mortgage
insurance payment will be zero if it
corresponds to a periodic payment that will
occur after the creditor will be legally
required to terminate mortgage insurance. On
the other hand, because only one escrow
amount is disclosed under § 226.18(s)(6) for
negative amortization loans and escrows are
not itemized in the payment amounts, the
single escrow amount disclosed should
reflect the mortgage insurance amount that
will be collected at the outset of the loan’s
term, even though that amount will decline
in the future and ultimately will be
discontinued pursuant to the terms of the
mortgage insurance policy.

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Appendixes G and H—Open-End and
Closed-End Model Forms and Clauses
1. Permissible changes. Although use of the
model forms and clauses is not required,
creditors using them properly will be deemed
to be in compliance with the regulation with
regard to those disclosures. Creditors may
make certain changes in the format or content
of the forms and clauses and may delete any
disclosures that are inapplicable to a
transaction or a plan without losing the act’s
protection from liability, except formatting
changes may not be made to model forms and
samples in H–18, H–19, H–20, H–21, H–22,
H–23, G–2(A), G–3(A), G–4(A), G–10(A)–(E),
G–17(A)–(D), G–18(A) (except as permitted
pursuant to § 226.7(b)(2)), G–18(B)–(C), G–19,
G–20, and G–21, or to the model clauses in
H–4(E), H–4(F), H–4(G), and H–4(H). The
rearrangement of the model forms and
clauses may not be so extensive as to affect
the substance, clarity, or meaningful
sequence of the forms and clauses. Creditors
making revisions with that effect will lose
their protection from civil liability. Except as
otherwise specifically required, acceptable
changes include, for example:
i. Using the first person, instead of the
second person, in referring to the borrower.
ii. Using ‘‘borrower’’ and ‘‘creditor’’ instead
of pronouns.
iii. Rearranging the sequences of the
disclosures.
iv. Not using bold type for headings.
v. Incorporating certain state ‘‘plain
English’’ requirements.
vi. Deleting inapplicable disclosures by
whiting out, blocking out, filling in ‘‘N/A’’
(not applicable) or ‘‘0,’’ crossing out, leaving
blanks, checking a box for applicable items,
or circling applicable items. (This should
permit use of multipurpose standard forms.)
vii. Using a vertical, rather than a
horizontal, format for the boxes in the closedend disclosures.

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Appendix H—Closed-End Model Forms
and Clauses
*

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7. Models H–4(D) through H–4(J). These
model clauses illustrate certain notices,
statements, and other disclosures required as
follows:
i. Model H–4(D) illustrates the adjustment
notice required under § 226.20(c), and
provides examples of payment change
notices and annual notices of interest rate
changes.
ii. Model H–4(E) illustrates the interest rate
and payment summary table required under
§ 226.18(s) for a fixed-rate mortgage
transaction.
iii. Model H–4(F) illustrates the interest
rate and payment summary table required
under § 226.18(s) for an adjustable-rate or a
step-rate mortgage transaction.
iv. Model H–4(G) illustrates the interest
rate and payment summary table required
under § 226.18(s) for a mortgage transaction
with negative amortization.
v. Model H–4(H) illustrates the interest rate
and payment summary table required under
§ 226.18(s) for a fixed-rate, interest-only
mortgage transaction.

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vi. Model H–4(I) illustrates the
introductory rate disclosure required by
§ 226.18(s)(2)(iii) for an adjustable-rate
mortgage transaction with an introductory
rate.
vii. Model H–4(J) illustrates the balloon
payment disclosure required by § 226.18(s)(5)
for a mortgage transaction with a balloon
payment term.
viii. Model H–4(K) illustrates the noguarantee-to-refinance statement required by
§ 226.18(t) for a mortgage transaction.

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By order of the Board of Governors of the
Federal Reserve System, August 13, 2010.
Robert deV. Frierson,
Deputy Secretary of the Board.
[FR Doc. 2010–20663 Filed 9–23–10; 8:45 am]
BILLING CODE P

FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Docket No. R–1378]

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

The Board is publishing final
rules amending Regulation Z (Truth in
Lending). The final rule implements
Section 131(g) of the Truth in Lending
Act (TILA), which was enacted on May
20, 2009, as Section 404(a) of the
Helping Families Save Their Homes
Act. TILA Section 131(g) became
effective immediately upon enactment
and established a new requirement for
notifying consumers of the sale or
transfer of their mortgage loans.
Consistent with the statute, the final
rule requires a purchaser or assignee
that acquires a loan to provide the
disclosures in writing no later than 30
days after the date on which the loan
was sold, transferred or assigned.
Certain exceptions may apply if the
covered person transfers or assigns the
loan to another party on or before the
30th day.
DATES: Effective Date. This final rule is
effective on January 1, 2011.
Mandatory Compliance Date. The
mandatory compliance date is January
1, 2011. Covered persons may
immediately comply with this
amendment or continue to comply with
12 CFR 226.39 until the mandatory
compliance date.
FOR FURTHER INFORMATION CONTACT:
Jelena McWilliams, Attorney, or Paul
Mondor, Senior Attorney; Division of
Consumer and Community Affairs,
Board of Governors of the Federal

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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. Background
The Truth in Lending Act (TILA), 15
U.S.C. 1601 et seq., seeks to promote the
informed use of consumer credit by
requiring disclosures about its costs and
terms. TILA requires additional
disclosures for loans secured by
consumers’ homes and permits
consumers to rescind certain
transactions that involve their principal
dwelling. TILA directs the Board to
prescribe regulations to carry out its
purposes. TILA specifically authorizes
the Board, among other things, to issue
regulations that contain such
classifications, differentiations, or other
provisions, or that provide for such
adjustments and exceptions for any
class of transactions, that in the Board’s
judgment are necessary or proper to
effectuate the purposes of TILA,
facilitate compliance with TILA, or
prevent circumvention or evasion of
TILA. 15 U.S.C. 1604(a). TILA is
implemented by the Board’s Regulation
Z. 12 CFR part 226. An Official Staff
Commentary interprets the requirements
of the regulation and provides guidance
to creditors in applying the rules to
specific transactions. See 12 CFR part
226, Supp. I.
On May 20, 2009, the Helping
Families Save Their Homes Act of 2009
(the ‘‘2009 Act’’) was signed into law.
Public Law 111–22, 123 Stat. 1632.
Section 404(a) of the 2009 Act amended
TILA to establish a new requirement for
notifying consumers of the sale or
transfer of their mortgage loans. The
purchaser or assignee that acquires the
loan must provide the required
disclosures no later than 30 days after
the date on which it acquired the loan.
This provision is contained in TILA
Section 131(g), 15 U.S.C. 1641(g), which
applies to any consumer credit
transaction secured by the principal
dwelling of a consumer. Consequently,
the disclosure requirements in Section
131(g) apply to both closed-end
mortgage loans and open-end home
equity lines of credit.
Section 131(g) became effective
immediately upon enactment on May
20, 2009, and did not require the
issuance of implementing regulations.
Mortgage loans sold, or otherwise
transferred on or after that date became
subject to the requirements of Section
131(g), and failure to comply can result
in civil liability under TILA Section
130(a). See 15 U.S.C. 1640(a). In

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November 2009, the Board issued an
interim rule that was effective
immediately upon publication, so that
parties subject to the rule would have
guidance on how to interpret and
comply with the statutory requirements.
74 FR 60143, Nov. 20, 2009.
Under the Real Estate Settlement
Procedures Act (RESPA), consumers
must be notified when the servicer of
their mortgage loan has changed.1 The
2009 Act’s legislative history reflects
that, in addition to the information
provided under RESPA, the Congress
intended to provide consumers with
information about the identity of the
owner of their mortgage loan. In some
cases, consumers that have an extended
right to rescind the loan under TILA
Section 125, 15 U.S.C. 1635, can assert
that right against the purchaser or
assignee. See TILA Section 131(c), 15
U.S.C. 1641(c). Among other things, the
2009 Act seeks to ensure that consumers
attempting to exercise this right know
the identity of the assignee and how to
contact the assignee or its agent for that
purpose. See 155 Cong. Rec. S5098–99
(daily ed. May 5, 2009); 155 Cong. Rec.
S5173–74 (daily ed. May 6, 2009). The
legislative history indicates, however,
that TILA Section 131(g) was not
intended to require notice when a
transaction ‘‘does not involve a change
in the ownership of the physical note,’’
such as when the note holder issues
mortgage-backed securities but does not
transfer legal title to the loan. 155 Cong.
Rec. S5099.
II. Summary of the Final Rule
The final rule requires an acquiring
party to provide the disclosures in
writing no later than 30 days after the
date on which the loan was sold,
transferred or assigned. Under the final
rule, the disclosures must state (1) The
name, address, and telephone number of
the new owner; (2) the transfer date; (3)
the name, address, and telephone
number of an agent or other party
authorized to receive the consumer’s
rescission notice and resolves issues
concerning the consumer’s payments on
the loan (if other than owner); and (4)
where the transfer of ownership is
recorded.
Consistent with the statute and
legislative intent, the final rule
implements Section 404(a) of the 2009
Act by applying the new disclosure
requirements to any person or entity
that acquires ownership of an existing
consumer mortgage loan, whether the
acquisition occurs as a result of a
1 RESPA is implemented by Regulation X, 24 CFR
part 3500, which is issued by the Department of
Housing and Urban Development (HUD).

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