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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
[Docket No. 06-12]
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
[Docket No. OP-1267]
FEDERAL DEPOSIT INSURANCE CORPORATION
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
[No. 2006-36]
NATIONAL CREDIT UNION ADMINISTRATION

Proposed Illustrations of Consumer Information for Nontraditional Mortgage
Products

AGENCIES: Office of the Comptroller of the Currency, Treasury (OCC); Board of
Governors of the Federal Reserve System (Board); Federal Deposit Insurance
Corporation (FDIC); Office of Thrift Supervision, Treasury (OTS); and National Credit
Union Administration (NCUA).
ACTION: Notice of proposed illustrations of consumer information with request for
comment.
SUMMARY: The OCC, Board, FDIC, OTS, and NCUA (the Agencies), request
comment on these Proposed Illustrations of Consumer Information for Nontraditional
Mortgage Products. The illustrations are intended to assist institutions in implementing
the consumer protection portion of the Interagency Guidance on Nontraditional Mortgage
Product Risks (Interagency Guidance), which is being published simultaneously with this
notice. The illustrations are not intended as model forms, and institutions will not be
required to use them. Rather, they are provided at the request of commenters to the
Interagency Guidance to illustrate the type of information that the Interagency Guidance
contemplates.
DATES: Comments must be submitted on or before [INSERT DATE 60 DAYS AFTER
PUBLICATION IN THE FEDERAL REGISTER].
ADDRESSES: The Agencies will jointly review all of the comments submitted.
Therefore, interested parties may send comments to any of the Agencies and need not

send comments (or copies) to all of the Agencies. Please consider submitting your
comments by e-mail or fax since paper mail in the Washington area and at the Agencies
is subject to delay. Interested parties are invited to submit comments to:
OCC: You should include “OCC” and Docket Number 06-12 in your comment. You
may submit your comment by any of the following methods:
• Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for
submitting comments.
• OCC Web Site: http://www.occ.treas.gov. Click on “Contact the OCC,” scroll down
and click on “Comments on Proposed Regulations.”
• E-Mail Address: regs.comments@occ.treas.gov.
• Fax: (202) 874-4448.
• Mail: Office of the Comptroller of the Currency, 250 E Street, SW., Mail Stop 1-5,
Washington, DC 20219.
• Hand Delivery/Courier: 250 E Street, SW., Attn: Public Information Room, Mail
Stop 1-5, Washington, DC 20219.
Instructions: All submissions received must include the agency name (OCC) and
docket number for this notice. In general, the OCC will enter all comments received
into the docket without change, including any business or personal information that
you provide.
You may review comments and other related materials by any of the following
methods:
• Viewing Comments Personally: You may personally inspect and photocopy
comments at the OCC’s Public Information Room, 250 E Street, SW., Washington,
DC. You can make an appointment to inspect comments by calling (202) 874-5043.
• Viewing Comments Electronically: You may request that we send you an electronic
copy of comments via e-mail or mail you a CD-ROM containing electronic copies by
contacting the OCC at regs.comments@occ.treas.gov.
• Docket Information: You may also request available background documents and
project summaries using the methods described above.
Board: You may submit comments, identified by Docket No. R-1267, 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: Jennifer J. Johnson, Secretary, Board of Governors of the Federal Reserve
System, 20th Street and Constitution Avenue, NW., Washington, DC 20551.

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All public comments are available from the Board’s Web site at
www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, unless
modified for technical reasons. Accordingly, your comments will not be edited to
remove any identifying or contact information. Public comments may also be viewed in
electronic or paper form 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.
FDIC: You may submit comments by any of the following methods:
• Agency Web Site: http://www.fdic.gov/regulations/laws/federal/propose.html.
Follow the instructions for submitting comments on the Agency Web site.
• E-Mail: Comments@FDIC.gov.
• Mail: Robert E. Feldman, Executive Secretary, Attention: Comments, Federal
Deposit Insurance Corporation, 550 17th Street, NW., Washington, DC 20429.
• Hand Delivery/Courier: Guard station at the rear of the 550 17th Street Building
(located on F Street) on business days between 7 a.m. and 5 p.m.
Instructions: All submissions received must include the agency name. All comments
received will be posted without change to
http://www.fdic.gov/regulations/laws/federal/propose.html including any personal
information provided.
OTS: You may submit comments, identified by docket number 2006-36, by any of the
following methods:
• Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for
submitting comments.
• E-mail address: regs.comments@ots.treas.gov. Please include docket number 200556 in the subject line of the message and include your name and telephone number in
the message.
• Fax: (202) 906-6518.
• Mail: Regulation Comments, Chief Counsel’s Office, Office of Thrift Supervision,
1700 G Street, NW., Washington, DC 20552, Attention: No. 2005-56.
• Hand Delivery/Courier: Guard’s Desk, East Lobby Entrance, 1700 G Street, NW.,
from 9 a.m. to 4 p.m. on business days. Address envelope as follows: Attention:
Regulation Comments, Chief Counsel’s Office, Attention: No. 2005-56.
Instructions: All submissions received must include the agency name and docket number
for this proposed Guidance. All comments received will be posted without change to the
OTS Internet Site at http://www.ots.treas.gov/pagehtml.cfm?catNumber=67&an=1,
including any personal information provided.
Docket: For access to the docket to read background documents or comments received,
go to http://www.ots.treas.gov/pagehtml.cfm?catNumber=67&an=1. In addition, you
may inspect comments at the OTS’s Public Reading Room, 1700 G Street, NW., by
appointment. To make an appointment for access, call (202) 906-5922, send an e-mail to
public.info@ots.treas.gov, or send a facsimile transmission to (202) 906-7755. (Prior
notice identifying the materials you will be requesting will assist us in serving you.) We
schedule appointments on business days between 10 a.m. and 4 p.m. In most cases,
appointments will be available the next business day following the date we receive a
request.

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NCUA: You may submit comments by any of the following methods:
• Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for
submitting comments.
• NCUA Web Site:
http://www.ncua.gov/RegulationsOpinionsLaws/proposed_regs/proposed_regs.html.
Follow the instructions for submitting comments.
• E-mail: Address to regcomments@ncua.gov. Include “[Your name] Comments on ”
in the e-mail subject line.
• Fax: (703) 518-6319. Use the subject line described above for e-mail.
• Mail: Address to Mary Rupp, Secretary of the Board, National Credit Union
Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428.
• Hand Delivery/Courier: Same as mail address.
FOR FURTHER INFORMATION CONTACT:
OCC: Michael S. Bylsma, Director, Stephen Van Meter, Assistant Director, or Kathryn
D. Ray, Special Counsel, Community and Consumer Law Division, (202) 874-5750.
Board: Kathleen C. Ryan, Counsel, Division of Consumer and Community Affairs, (202)
452-3667; or Andrew Miller, Counsel, Legal Division, (202) 452-3428. For users of
Telecommunications Device for the Deaf (“TDD”) only, contact (202) 263-4869.
FDIC: April Breslaw, Acting Associate Director, Compliance Policy & Exam Support
Branch, (202) 898-6609, Division of Supervision and Consumer Protection; or Richard
Foley, Counsel, (202) 898-3784, Legal Division.
OTS: Montrice G. Yakimov, Assistant Managing Director, Compliance and Consumer
Protection Division, (202) 906-6173; or Glenn Gimble, Senior Project Manager,
Compliance and Consumer Protection Division, (202) 906-7158.
NCUA: Cory Phariss, Program Officer, Examination and Insurance, (703) 518-6618.
SUPPLEMENTARY INFORMATION:
I.

Background
On December 29, 2005, the Agencies published for comment proposed
Interagency Guidance on Nontraditional Mortgage Products, 70 FR 77249 (Dec. 29,
2005). The consumer protection section of the proposed guidance set forth recommended
practices to ensure that consumers have clear and balanced information about
nontraditional mortgages prior to making a mortgage product choice, such as when
lenders provide promotional materials about nontraditional mortgages or during face-toface meetings when consumers are shopping for a mortgage. Additionally, the proposed
guidance recommended that monthly statements given with payment option mortgages
provide information that enables consumers to make informed payment choices. The
Agencies have revised the proposed guidance based on the comments received, and today
are publishing the final Interagency Guidance in a separate Federal Register notice.
The Interagency Guidance, including the consumer protection portion, is a set of
recommended practices to assist institutions in addressing particular risks raised by
nontraditional mortgage products. Several commenters to the proposal, including
industry trade associations, encouraged the Agencies to include model or sample
disclosures or other descriptive materials as part of the Interagency Guidance.

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In response to commenters, the Agencies believe that illustrations of consumer
information may be useful to institutions as they seek to implement the consumer
information recommendations of the Interagency Guidance. The Agencies also believe
that it would be desirable to seek public comment before issuing illustrations of the
recommended practices, to determine the types of illustrations that would be most useful
to consumers and institutions.
II. Proposed Illustrations
The Agencies appreciate that some institutions, including community banks, may
prefer not to incur the costs and other burdens of developing their own consumer
information documents to address the issues raised in the Interagency Guidance, and
could benefit from illustrations like those below.
Use of the proposed illustrations would be entirely voluntary. Accordingly, there
is no Agency requirement or expectation that institutions must use the illustrations in
their communications with consumers.
Institutions seeking to follow the recommendations set forth in the Interagency
Guidance could, at their option, elect to:
• use or not use the illustrations;
• provide information based on the illustrations, but expand, abbreviate, or
otherwise tailor any information in the illustrations as appropriate to reflect, for
example:
o the institution’s product offerings, such as by deleting information about
loan products and loan terms not offered by the institution and by revising
the illustrations to reflect specific terms currently offered by the
institution;
o the consumer’s particular loan requirements;
o current market conditions, such as by changing the loan amounts, interest
rates, and corresponding payment amounts to reflect current local market
circumstances; and
o other information, consistent with the Interagency Guidance, such as the
payment and loan balance information for monthly statements discussed in
connection with Illustration 3 or information about when a prepayment
penalty may be imposed; or
• provide the information described in the Interagency Guidance, as appropriate, in
an alternate format.
Whether or not an institution chooses to use the proposed illustrations, the
Interagency Guidance recommends that promotional materials and other product
descriptions provide consumers with information about the costs, terms, features, and
risks of nontraditional mortgage products that can assist consumers in their product
selection decisions. This includes information about potential payment shock and
negative amortization and, where applicable, information about prepayment penalties and
the costs of reduced documentation loans. The recommended information could be
presented in a brief narrative format as shown in Illustration 1 and/or in a chart with
examples as shown in Illustration 2.

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Set forth below are three illustrations that show how important information about
nontraditional mortgages could be provided to consumers in a concise and focused
manner and format. The Agencies request comment on all aspects of these illustrations.
We encourage specific comment on whether the illustrations, as proposed, would be
useful to institutions, including community banks, seeking to implement the
“Communications with Consumers” portion of the Interagency Guidance, or whether
changes should be made to them. We also encourage specific comment on whether the
illustrations, as proposed, would be useful in promoting consumer understanding of the
risks and material terms of nontraditional mortgage products, as described in the
Interagency Guidance, or whether changes should be made to them. Finally, we seek
comment on whether there are other illustrations relating to nontraditional mortgages that
would be useful to institutions and consumers.
The Agencies are aware that individual institutions and industry associations have
developed and are likely to continue developing documents that can be effective in
conveying critical information discussed in the “Communications with Consumers”
portion of the Interagency Guidance. These illustrations are not intended to dissuade
institutions and trade associations from developing their own means of delivering
important information about nontraditional mortgages to consumers. In this regard, the
Agencies note that they have not conducted any consumer testing to assess the
effectiveness of any existing documents currently used by institutions, or of the proposed
illustrations set forth below. Commenters are specifically invited to provide information
on any consumer testing they have conducted in connection with comparable disclosures.

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Illustration 1.
Key Facts About Interest-Only and Payment Option Mortgages
Whether you are buying a house or refinancing your mortgage, this information can help you decide if an
interest-only mortgage or a mortgage with the option to make a minimum payment (a payment-option
mortgage) is right for you.
Interest-Only Mortgages
An “interest-only” mortgage allows you to pay only the interest on the money you borrowed for the first few
years of the mortgage. This is known as the “interest-only period” (for example, the first 5 years of the
loan). If you only pay the amount of interest that’s due, once the interest-only period ends:
►You will still owe the original amount you borrowed.
►Your monthly payment will increase – even if interest rates stay the same – because you must pay back
the principal as well as interest.
►►Ask what the payments on your loan will be after the end of the interest-only period. If you are
considering an adjustable rate mortgage, ask about what your payments can be if interest rates increase.
Payment Option Mortgages
A payment option mortgage allows you to choose among several payment options each month, usually
during the first few years of the loan (the “option period”). The options typically include:
• A payment of principal and interest, which reduces the amount you owe on your mortgage. These
payments may be based on a 15-, 30-, or 40-year payment schedule.
• An interest-only payment, which does not reduce the amount you owe on your mortgage.
• A minimum payment, which may be less than the amount of interest due that month and does not
pay down the principal. If you choose this option, the amount of any interest you do not pay will
increase the amount you owe.
►The option period will end earlier than scheduled if the amount you owe grows beyond a set limit, for
instance 110% or 125% of your original mortgage amount. Suppose you made only the minimum payments
on a $180,000 mortgage and your payments did not cover all of the interest due. If your balance grew to
$225,000 because of the interest due that is not covered by the minimum payment, your loan would be
recalculated and it is likely that your payments would increase significantly.
►Your monthly payment could increase significantly, because:
• You will have to start paying back principal as well as interest.
• Unpaid interest has been added to your principal and the total amount you owe has increased.
• Interest rates may have increased (if your mortgage has an adjustable rate feature).
►►Ask:
• What the monthly payments on your loan could be when you must start paying back principal,
• How interest rate increases could affect your monthly payment (if your mortgage has an adjustable
rate feature),
• When the payment adjustments will be made, and
• The maximum amount you could owe on the loan if you make minimum payments.

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Additional Information
►Home Equity. Home equity is created when the value of your home increases and/or when you reduce
the amount you owe on your home through your loan payments. If your home does not increase in value
and you make interest-only payments, you are not building equity. And, if you make only the minimum
payments on a mortgage with a payment option feature, you may be increasing the amount you owe because
unpaid interest is added to the loan balance. This may make it harder to refinance your mortgage, or to
receive funds from the sale of your home. In fact, if the amount you owe on your home, along with the
costs associated with selling it (such as the real estate sales commissions and closing costs) exceeds the
sales price, you will not receive any cash when you sell, and will have to pay additional funds to your lender
or to other parties when you pay off your mortgage.
►Prepayment Penalties. Some mortgages have prepayment penalties. If you sell your home or refinance
your loan during the prepayment penalty period, you could owe additional fees or a penalty. Ask whether
your mortgage has a prepayment penalty and, if so, how much it can be. Most mortgages let you make
extra, additional principal payments with your monthly payment -- this is not “prepayment” of the entire
loan, and there usually is no penalty for these extra amounts.
►No Doc/Low Doc Loans. Lenders often charge more for “reduced documentation” loans. These loans
typically have higher interest rates or other costs compared to “full documentation” loans that require you to
verify your income and other assets. (By verifying your income, you help the lender to be sure that you can
afford the loan payments.) If you are considering a loan with a reduced documentation feature, ask if you’ll
be required to pay more (in interest and/or fees) for not submitting income and asset documentation.

8

Illustration 2.
Some of the information recommended by the guidance – in particular, some of the more detailed
information about payment shock and negative amortization – may be conveyed most effectively through
quantitative illustrations. The Interagency Guidance expressly contemplates hypothetical loan examples to
aid consumer understanding. This information also could be incorporated into a narrative format as shown in
Illustration 1. Illustration 2 shows another way in which this information could be presented. The chart and
the narrative explanation may also be combined into a two-page document that both explains and illustrates
the key facts about nontraditional mortgage products.

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Illustration 2.

COMPARISON OF SAMPLE MORTGAGE FEATURES
(For illustrative and educational purposes only – does not represent actual terms of loans available from any particular lender.)

A Typical Mortgage Transaction
Loan Amount $180,000 – 30-Year Term

Mortgage with a
Fixed Interest Rate
Interest
Only
Principal and
Interest

Mortgage with an
Adjustable Interest Rate (ARM)
Interest Only

Option Payment

5/1 ARM
Fixed Rate for First 5
Years; Adjustable Each
Year After First 5 Years
(Initial rate for years 1 to 5
is 6.5%; Maximum Rate is
11.5%)

Interest Only and
Fixed Rate for First
5 Years; Adjustable
Rate Each Year
After First 5 Years
(Initial rate for
years 1 to 5 is
6.6%; Maximum
Rate is 11.6%)

Adjustable Rate for
Entire Term of the
Mortgage
(Rate in month 1 is
1.25%; Rate in month 2
through year 5 is 6.4%;
Maximum Rate is
11.4%)

Fixed Rate
(6.7%)

Fixed Rate
(6.7%)
Interest
Only for
First 5
Years.

$1,162*

$1,005

$1,138

$990

Monthly Payment
Year 6 -- no change in
rates

$1,162

$1,238**

$1,138

$1,227

$1,324

Monthly Payment
Year 6 -- 2% rise in rates

$1,162

$1,238

$1,357

$1,462

$1,581

Maximum Monthly
Payment
Year 8 -- 5% rise in rates

$1,162

$1,238

$1,702

$1,832

1,985

Minimum Monthly
Payment
Years 1-5, except as noted

$600***
(1st year only)

How Much Will You Owe
after 5 Years?
Have You Reduced Your
Loan Balance after
5 Years of Payments?

$168,862
Yes
Your loan
balance was
reduced by
$11,118

$180,000
No
You did not
reduce
your loan
balance

$168,500

$180,000

Yes

No

Your loan balance was
reduced by $11,500

You did not
reduce your loan
balance

$197,945
No
Your loan balance
increased by $17,945

* This illustrates an interest rate and payments that are fixed for the life of the loan.
** This illustrates payments that are fixed after the first 5 years of the loan at a higher amount because they cover both principal and interest.
*** This illustrates minimum monthly payments that are based on an interest rate that is in effect during the first month only. The payments
required during the first year will not be sufficient to cover all of the interest that’s due when the rate increases in the second month of the loan.
Any unpaid interest amount will be added to the loan balance. Minimum payments for years 2-5 are based on the higher interest rate in effect at
the time, subject to any contract limits on payment increases. Minimum payments will be recast (recalculated) after 5 years, or when the loan
balance reaches a certain limit, to cover both principal and interest at the applicable rate.

IMPORTANT NOTE: Please use this chart to discuss possible loans with your lender.

11

Illustration 3.

The Interagency Guidance also recommends that if institutions provide monthly
statements to consumers on payment option mortgages, those statements should provide
information that enables consumers to make informed payment choices, including an
explanation of each payment option available and the impact of that choice on loan
balances. The following illustration shows one way in which this information could be
presented. It is important to note this illustration is not intended to set forth all of the
information that may be useful, and could be provided, to consumers on their monthly
statement, such as the current loan balance, an itemization of the payment amount
devoted to interest and to principal, and whether the loan balance has increased.

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Illustration 3.

Your Payment Options This Month

Amount

Principal and Interest Payment

$________

Interest-Only Payment

$________

Impact
•

You will reduce your loan balance.

•

You will not pay any principal on your loan.

•

You will not reduce your loan balance.

•

You [will] [may] not cover the interest on
your loan.

Minimum Payment

$________

•

You [will] [may] increase your loan
balance.

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III. Request for Comment

As noted above, the Agencies request comment on all aspects of the proposed
illustrations. Comments are specifically requested on the usefulness of the illustrations, as
proposed, for consumers and for institutions, or whether changes should be made;
whether the information is set forth in a clear manner and format; whether these
illustrations or a modified form should be adopted by the Agencies; and whether there are
other illustrations relating to nontraditional mortgages that would be useful to consumers
and institutions in addition to these.

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[THIS SIGNATURE PAGE PERTAINS TO THE NOTICE AND REQUEST FOR
COMMENT TITLED, “PROPOSED ILLUSTRATIONS OF CONSUMER
INFORMATION FOR NONTRADITIONAL MORTGAGE PRODUCTS.”]

Dated: September 25, 2006

John C. Dugan

(signed)

John C. Dugan,
Comptroller of the Currency.

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[THIS SIGNATURE PAGE PERTAINS TO THE NOTICE AND REQUEST FOR
COMMENT TITLED, “PROPOSED ILLUSTRATIONS OF CONSUMER
INFORMATION FOR NONTRADITIONAL MORTGAGE PRODUCTS.”]

By order of the Board of Governors of the Federal Reserve System, September 27, 2006.

Jennifer J. Johnson

(signed)

Jennifer J. Johnson,
Secretary of the Board.

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[THIS SIGNATURE PAGE PERTAINS TO THE NOTICE AND REQUEST FOR
COMMENT TITLED, “PROPOSED ILLUSTRATIONS OF CONSUMER
INFORMATION FOR NONTRADITIONAL MORTGAGE PRODUCTS.”]
Dated at Washington, D.C. this 27th day of September, 2006.

By order of the Federal Deposit Insurance Corporation.

Robert E. Feldman

(signed)

Robert E. Feldman,
Executive Secretary.

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[THIS SIGNATURE PAGE PERTAINS TO THE NOTICE AND REQUEST FOR
COMMENT TITLED, “PROPOSED ILLUSTRATIONS OF CONSUMER
INFORMATION FOR NONTRADITIONAL MORTGAGE PRODUCTS.”]
Dated: September 28, 2006

By the Office of Thrift Supervision.

John M. Reich

(signed)

John M. Reich,
Director.

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[THIS SIGNATURE PAGE PERTAINS TO THE NOTICE AND REQUEST FOR
COMMENT TITLED, “PROPOSED ILLUSTRATIONS OF CONSUMER
INFORMATION FOR NONTRADITIONAL MORTGAGE PRODUCTS.”]
By the National Credit Union Administration on September 28, 2006.

JoAnn M. Johnson

(signed)

JoAnn M. Johnson
Chairman

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