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11319

Rules and Regulations

Federal Register
Vol. 76, No. 41
Wednesday, March 2, 2011

This section of the FEDERAL REGISTER
contains regulatory documents having general
applicability and legal effect, most of which
are keyed to and codified in the Code of
Federal Regulations, which is published under
50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by
the Superintendent of Documents. Prices of
new books are listed in the first FEDERAL
REGISTER issue of each week.

FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Regulation Z; Docket No. R–1392]
RIN No. AD 7100–AD54

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

The Board is publishing a
final rule to amend Regulation Z, which
implements the Truth in Lending Act
(TILA). The final rule implements
Section 1461 of the recently enacted
Dodd-Frank Wall Street Reform and
Consumer Protection Act. Section 1461
amends TILA to provide a separate,
higher rate threshold for determining
when the Board’s escrow requirement
applies to higher-priced mortgage loans
that exceed the maximum principal
obligation eligible for purchase by
Freddie Mac.
DATES: The final rule is effective on
April 1, 2011, for covered loans for
which an application is received by a
creditor on or after that date.
FOR FURTHER INFORMATION CONTACT:
Jamie Z. Goodson, Attorney, or Paul
Mondor, Senior Attorney, 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:

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SUMMARY:

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

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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.
In 1994, Congress amended TILA by
enacting the Home Ownership and
Equity Protection Act (HOEPA). The
HOEPA amendments created special
substantive protections for consumers
obtaining mortgage loans with annual
percentage rates (APRs) or total points
and fees exceeding prescribed
thresholds. In addition, TILA Section
129(l)(2)(A), as added by HOEPA,
authorizes the Board to prohibit acts
and practices the Board finds to be
unfair and deceptive in connection with
mortgage loans. 15 U.S.C. 1639(l)(2)(A).
B. The 2008 HOEPA Final Rule
In July of 2008, the Board adopted
final rules pursuant to the Board’s
authority in Section 129(l)(2)(A). 73 FR
44522, July 30, 2008 (2008 HOEPA Final
Rule). The 2008 HOEPA Final Rule
defined a class of ‘‘higher-priced
mortgage loans’’ and prohibited certain
lending and servicing practices in
connection with such transactions.
Among other things, the Board
prohibited extending a higher-priced
mortgage loan secured by a first lien
unless an escrow account is established
before consummation for payment of
property taxes and premiums for
mortgage-related insurance required by
the creditor. See § 226.35(b)(3).
Under the 2008 HOEPA Final Rule, a
higher-priced mortgage loan is a
consumer credit transaction secured by
the consumer’s principal dwelling with
an APR that exceeds the average prime
offer rate for a comparable transaction,

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as of the date the transaction’s interest
rate is set, by 1.5 or more percentage
points for loans secured by a first lien,
or by 3.5 or more percentage points for
loans secured by a subordinate lien. See
§ 226.35(a)(1).
C. The Dodd-Frank Act
On July 21, 2010, the Dodd-Frank
Wall Street Reform and Consumer
Protection Act (the Dodd-Frank Act)
was signed into law.1 Section 1461 of
the Dodd-Frank Act creates TILA
Section 129D.2 TILA Section 129D
substantially codifies the requirement in
Regulation Z that escrow accounts for
taxes and insurance be established for
first-lien higher-priced mortgage loans,
adopted by the Board as part of the 2008
HOEPA Final Rule. As discussed above,
the 2008 HOEPA Final Rule imposed
the escrow requirement on first-lien
mortgage transactions having an APR
that exceeds the average prime offer rate
for a comparable transaction by 1.5 or
more percentage points. The DoddFrank Act incorporates this coverage
test in new TILA Section 129D for loans
that do not exceed the maximum
original principal obligation for a
mortgage to be eligible for purchase by
Freddie Mac. TILA Section
129D(b)(3)(A) (to be codified at 15
U.S.C. 1639d(b)(3)(A)).
For loans with an original principal
obligation that exceeds the applicable
Freddie Mac maximum principal
obligation, TILA Section 129D requires
escrow accounts only if the APR
exceeds the applicable average prime
offer rate by 2.5 or more percentage
points. TILA Section 129D(b)(3)(B) (to
be codified at 15 U.S.C. 1639d(b)(3)(B)).
The current maximum principal
obligation for a mortgage loan to be
eligible for purchase in 2011 by Freddie
Mac is $417,000 for a single-family
property that is not located in a
designated ‘‘high-cost’’ area.3 (Higher
limits apply for mortgage loans secured
by a property with two to four
residential units.) Thus, if the original
principal obligation for a mortgage loan
secured by a single-family property in
such an area is $415,000, the
determination of whether the loan is
1 Public

Law 111–203, 124 Stat. 1376.
Law 111–203, § 1461, 124 Stat. 1376,
2178 (to be codified at 15 U.S.C. 1639D).
3 See Freddie Mac, Bulletin No. 2010–28, 2011
Loan Limits, available at http://
www.freddiemac.com/sell/guide/bulletins/pdf/
bll1028.pdf.
2 Public

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Federal Register / Vol. 76, No. 41 / Wednesday, March 2, 2011 / Rules and Regulations

subject to the escrow requirement in
§ 226.35(b)(3) would be made using an
APR threshold of 1.5 percentage points
over the applicable average prime offer
rate; by contrast, if the original principal
obligation is $420,000, the
determination would be made using a
threshold of 2.5 percentage points over
the applicable average prime offer rate.
Loans that are not eligible for purchase
by Freddie Mac because their original
principal obligation is too large are
widely referred to in the mortgage
market as ‘‘jumbo’’ mortgages. The term
‘‘jumbo’’ also is used in this final rule to
refer to such loans.
II. The Board’s September 2010 Escrow
Proposal
A. Summary of the September 2010
Escrow Proposal
On September 24, 2010, the Board
published a proposed rule in the
Federal Register to implement TILA
Section 129D(b)(3)(B), as enacted by
Section 1461 of the Dodd-Frank Act. See
75 FR 58505 (September 2010 Escrow
Proposal). Accordingly, the Board
proposed to raise the rate threshold for
coverage by the escrow account
requirement for first-lien, higher-priced
‘‘jumbo’’ mortgage loans. Specifically,
the Board proposed to require escrows
for ‘‘jumbo’’ loans whose APR exceeds
the average prime offer rate for a
comparable transaction, as of the date
the transaction’s interest rate is set, by
2.5 or more percentage points. The
Board did not propose to implement
other provisions of the Dodd-Frank Act
related to escrow accounts under the
September 2010 Escrow Proposal. The
Board is proposing rules to implement
other escrow-related provisions of the
Dodd-Frank Act in a separate notice
published elsewhere in today’s Federal
Register.

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B. Overview of Comments Received
The comment period on the
September 2010 Escrow Proposal closed
on October 25, 2010. The Board
received 15 comment letters in response
to the proposed rule, from creditors,
loan originators, banking trade
associations, and state banking
regulators. No comments were received
from consumers or consumer advocates.
Commenters generally supported the
proposed increase in the coverage
threshold for the escrow requirement,
for ‘‘jumbo’’ loans.
Several commenters, however,
requested that the Board clarify that
only the dollar amount specified in the
sixth sentence of Section 305(a)(2) of the
Federal Home Loan Mortgage
Corporation Act (FHLMCA), 12 U.S.C.

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1454(a)(2), should be used in
determining whether or not a loan is a
‘‘jumbo’’ loan. (Currently, the amount
specified in that sentence as the
maximum principal obligation for a loan
secured by a single-family residence is
$417,000.) In particular, these
commenters stated that the higher
maximum principal obligation set for
‘‘high-cost’’ areas under Section
305(a)(2) should not be considered in
determining whether a loan is a ‘‘jumbo’’
loan. For example, if the maximum
principal obligation eligible for
purchase by Freddie Mac in a particular
‘‘high-cost’’ area were $500,000 for a
single-family residence, these
commenters believe that a loan with a
principal obligation between $417,000
and $500,000 secured by a single-family
residence in that area should be
classified as a ‘‘jumbo’’ loan subject to
the higher rate threshold for
classification as a higher-priced
mortgage loan, even though Freddie
Mac may purchase that loan.
Other commenters recommended
exemptions from the escrow
requirement for higher-priced mortgage
loans. Recommended exemptions
included for: (1) Loans a creditor holds
in portfolio; (2) loans made by
community banks; (3) loans made in
rural areas; and (4) small retail loans
that are first-lien loans because a
consumer has paid off his larger
mortgage. Such exceptions are outside
the scope of this rulemaking. The Board
is publishing elsewhere in today’s
Federal Register a proposed rule that
addresses several of those proposed
exceptions.
III. Summary of the Final Rule
This final rule revises § 226.35(b)(3),
as proposed, to provide a higher APR
threshold for determining whether
‘‘jumbo’’ mortgage loans secured by a
first lien on a consumer’s principal
dwelling are higher-priced mortgage
loans for which an escrow account must
be established. As revised, the threshold
for coverage of the escrow requirement
for ‘‘jumbo’’ loans is 2.5 percentage
points (rather than 1.5 percentage
points) in excess of the average prime
offer rate for a comparable transaction,
as of the date the transaction’s rate is
set. Raising the APR threshold
applicable to ‘‘jumbo’’ loans eliminates
the mandatory escrow requirement for
loans with an APR above the existing
threshold but below the new threshold.
Creditors may, at their option, elect to
continue to use the 1.5 percentage point
threshold for ‘‘jumbo’’ loans. Section
226.35 and this final rule do not apply
to open-end credit plans subject to
§ 226.5b or to loans to finance the initial

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construction of a dwelling, temporary or
‘‘bridge’’ loans with a term of 12 months
or less, or reverse mortgages. See
§ 226.35(a)(3). This final rule is effective
on April 1, 2011 for covered loans for
which an application is received on or
after that date, as discussed in detail
below in Part VI of this SUPPLEMENTARY
INFORMATION.
IV. Legal Authority
The Board amends § 226.35(b)(3)
pursuant to its authority under TILA
Section 105(a) to prescribe regulations
to carry out the purposes of TILA and
to provide for such requirements,
adjustments, and exceptions as
necessary or proper to effectuate the
purposes of, to prevent circumvention
of, and facilitate compliance with TILA,
as discussed in detail below. See 15
U.S.C. 1604(a) (as revised).
V. Section-by-Section Analysis
Section 226.1 Authority, Purpose,
Coverage, Organization, Enforcement
and Liability
1(d) Organization
Section 226.1(d) describes how
Regulation Z is organized. Section
226.1(d)(5) describes Subpart E of
Regulation Z, which this interim final
rule amends by revising § 226.35(a)(1)
and (b)(3)(v). Comment 1(d)(5)–1 is
revised to add a new subpart 1(d)(5)–
1.iii, stating that this final rule is
effective on April 1, 2011, for covered
transactions for which an application is
received on or after April 1, 2011.
Section 226.35 Prohibited Acts or
Practices in Connection With HigherPriced Mortgage Loans
35(a) Higher-Priced Mortgage Loans
35(a)(1)
As discussed below, the Board revises
§ 226.35(b)(3) to provide a higher
threshold for determining whether
escrow accounts must be established for
certain closed-end mortgage loans
secured by a first lien on the consumer’s
principal dwelling, pursuant to the
Dodd-Frank Act. As revised, the
threshold for coverage of the escrow
requirement for ‘‘jumbo’’ loans is 2.5
percentage points (rather than the 1.5
percentage points generally applicable
under § 226.35(a)(1)) in excess of the
average prime offer rate for a
comparable transaction, as of the date
the transaction’s rate is set. The Board
is making a conforming amendment to
§ 226.35(a)(1) to reflect this exception to
the general coverage test for higherpriced mortgage loans.

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Federal Register / Vol. 76, No. 41 / Wednesday, March 2, 2011 / Rules and Regulations
Economic Recovery Act of 2008 (HERA),
also provides that its principal
obligation limitations are subject to
35(b)(3) Escrows
other limitations in that paragraph.4 See
35(b)(3)(v) ‘‘Jumbo’’ Loans
12 U.S.C. 1454(a)(2). Other limitations
in that paragraph include annual
The Board adds a new
adjustments based on changes in the
§ 226.35(b)(3)(v) to implement TILA
housing price index maintained by
Section 129D(b)(3)(B), as enacted by
FHFA and adjustments to increase the
Section 1461 of the Dodd-Frank Act.
maximum principal obligation for loans
Section 226.35(b)(3)(v) provides a
secured by property in ‘‘high-cost’’ areas.
higher threshold for determining
See 12 U.S.C. 1454(a)(2). The plain
whether escrow accounts must be
language of the sixth sentence of
established for certain closed-end
mortgage loans secured by a first lien on FHLMCA Section 305(a)(2) incorporates
by reference limitations set by other
a consumer’s principal dwelling.
sentences in Section 305(a)(2). The
Currently, under § 226.35(a)(1), such a
Board believes, therefore, that
loan is considered a higher-priced
adjustments made pursuant to Section
mortgage loan and is subject to the
305(a)(2) should apply in determining
escrow requirement if its APR exceeds
whether a loan is a ‘‘jumbo’’ loan subject
the average prime offer rate for a
to the higher APR threshold for
comparable transaction, as of the date
classification as a higher-priced
the transaction’s rate is set, by 1.5 or
mortgage loan.
more percentage points. Pursuant to
The Board believes this is also
TILA Section 129D(b)(3)(B), for a
consistent with statutory intent, because
closed-end, first-lien mortgage loan
taking into account adjustments to the
whose original principal obligation
exceeds the current maximum principal maximum principal obligation will
obligation for loans eligible for purchase ensure similar treatment of all loans
eligible for purchase by Freddie Mac.
by Freddie Mac, the applicable rate
The higher threshold for ‘‘jumbo’’ loans
threshold is 2.5 percentage points or
reflects the higher price typically
more above the average prime offer rate
associated with loans that are not
for a comparable transaction, as of the
eligible for purchase by Freddie Mac (or
date the transaction’s rate is set.
by Fannie Mae, which is subject to the
Comment 35(b)(3)(v)–1 clarifies that
same limit on the maximum principal
adjustments to the maximum principal
obligation). Using the higher APR
obligation that are made by the Federal
threshold for loans that are eligible for
Housing Finance Agency (FHFA)
purchase by Freddie Mac after
pursuant to FHLMCA Section 305(a)(2)
adjustments to the maximum principal
or by other federal law will apply in
determining whether a mortgage loan is obligation pursuant to FHLMCA Section
a ‘‘jumbo’’ loan subject to the higher APR 305(a)(2) would not be consistent with
the statutory intent.
threshold under § 226.35(b)(3)(v).
Adjustments pursuant to other federal
Comment 35(b)(3)(v)–2 clarifies that the
law. Legislation enacted by Congress in
higher APR threshold applies solely in
2009 and 2010 provides for further
determining if a ‘‘jumbo’’ loan is subject
adjustments to the maximum principal
to the escrow requirement. The
obligation eligible for purchase by
determination of whether ‘‘jumbo’’ firstFreddie Mac. In light of declines in
lien loans are subject to the other
home values in certain areas, Congress
protections in § 226.35, such as the
provided in that legislation that the
ability to repay requirements under
maximum principal obligation eligible
§ 226.35(b)(1) and the restrictions on
for purchase by Freddie Mac shall be
prepayment penalties under
the greater of: (1) The maximum
§ 226.35(b)(2), would continue to be
principal obligation determined
based on the 1.5 percentage point
pursuant to FHLMCA Section 305(a)(2);
threshold.
and (2) the maximum principal
Adjustments pursuant to FHLMCA
obligation established for 2008 under
Section 305(a)(2). TILA Section
Section 201 of the Economic Stimulus
129D(b)(3)(B) provides that a separate,
Act of 2008.5 The Board believes such
higher APR threshold applies to a firstlien mortgage loan that exceeds the
4 Section 1124 of HERA revises Section 305(a)(2)
applicable maximum principal
of the FHLMCA. See Public Law 110–289, 122 Stat.
obligation eligible for purchase by
2654, 2692.
Freddie Mac, established pursuant to
5 See Public Law 111–242, § 146, 124 Stat. 2607,
2615 (2010) (providing for adjustments under a
the sixth sentence of FHLMCA Section
continuing resolution); Public Law 111–88, § 167,
305(a)(2) (the ‘‘general maximum
122 Stat. 2904, 2973 (2009) (same); see also Public
principal obligation’’). However, the
Law 110–185, § 201, 122 Stat. 613, 620 (Feb. 13,
sixth sentence of FHLMCA Section
2008) (providing for adjustments under the
305(a)(2), as revised by the Housing and Economic Stimulus Act).

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35(b) Rules for Higher-Priced Mortgage
Loans

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11321

adjustments also should apply in
determining if a loan is a ‘‘jumbo’’ loan
for purposes of § 226.35(b)(3)(v). The
Board believes such adjustments are
made pursuant to Section 305(a)(2),
because they incorporate FHLMCA
Section 305(a)(2) in the formula used to
determine the maximum principal
obligation eligible for purchase by
Freddie Mac.
Nevertheless, even if the adjustments
made pursuant to this legislation are not
deemed to be made pursuant to Section
305(a)(2), the Board believes it is
appropriate to use its authority under
TILA Section 105(a) to require
consideration of such adjustments. 15
U.S.C. 1604(a). TILA Section 105(a)
authorizes the Board to provide for such
requirements, adjustments, and
exceptions for all or any class of
transactions as in the Board’s judgment
are necessary or proper to effectuate the
purposes of, to prevent circumvention
or evasion of, or to facilitate compliance
with TILA. The Board believes it is
necessary and proper, to effectuate the
purposes of TILA Section 129D(b)(3)(B),
to make adjustments consistent with the
provisions of federal law other than
FHLMCA Section 305(a)(2) to ensure all
loans eligible for purchase by Freddie
Mac are treated similarly for purposes of
the escrow requirements. Further,
considering the additional adjustments
made by other federal laws is consistent
with the language in TILA Section
129D(b)(3)(B), which states that the
determination of whether or not a loan
is a ‘‘jumbo’’ loan subject to a higher
APR threshold shall be based on the
maximum principal obligation ‘‘in
effect’’ for Freddie Mac as of the date the
transaction’s rate is set. The maximum
principal obligation in effect is the
obligation FHFA establishes pursuant to
both FHLMCA Section 305(a)(2) and
other federal law.
The Board also believes those
adjustments are necessary and proper to
facilitate compliance with TILA Section
129D(b)(3)(B). Considering only
adjustments made under FHLMCA
Section 305(a)(2) would require
creditors that sell loans to Freddie Mac
to use one dollar limit to ascertain what
rate threshold to apply in determining
whether a loan is subject to the escrow
requirements and a different limit to
determine whether they may sell loans
to Freddie Mac. The same burden would
apply for creditors that sell loans to
Fannie Mae, which is subject to the
same maximum principal obligation
limits. Considering adjustments under
both FHLMCA Section 305(a)(2) and
other applicable federal law would
facilitate compliance by eliminating that
burden.

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For the reasons discussed above, and
pursuant to its authority under TILA
Section 105(a), the final rule provides
that FHFA’s adjustments to the general
maximum principal obligation stated in
FHLMCA Section 305(a)(2) which are
made pursuant to other applicable
federal law shall be considered in
determining whether a loan is a ‘‘jumbo’’
loan subject to § 226.35(b)(3)(v). See
comment 35(b)(3)(v)–1.
VI. Effective Date of Final Rule
The Board is changing the escrow
requirement’s coverage threshold to
implement the statutory amendment
made by the Dodd-Frank Act, as
discussed above. The amendment
relieves mortgage creditors of
compliance with the escrow
requirement for certain ‘‘jumbo’’ loans.
When relief is granted from Regulation
Z’s escrow requirement, the affected
loans could become subject to any state
or local laws that prohibit mandatory
escrow accounts. As a result, some
creditors might need time to make the
system changes necessary to comply
with state or local laws. Accordingly,
the Board sought comment on the
amount of time necessary for creditors
to implement the change in their
systems and procedures.
Almost all commenters that discussed
the implementation period stated that
the Board should allow creditors to
immediately use the higher APR
threshold for classification of a ‘‘jumbo
loan’’ as a higher-priced mortgage loan.
One banking trade association stated
that creditors easily can adjust their
systems to stop escrowing for such
loans. Most of the commenters that
addressed the effective date stated that
compliance with the higher threshold
should be optional until final rules are
issued to implement other escrowrelated requirements under the DoddFrank Act. Those commenters stated
that creditors would prefer to adjust
their training and systems to implement
all escrow-related statutory and
regulatory requirements at one time.
Some of those commenters stated that,
at a minimum, compliance should be
optional for a period of time; the
recommended periods ranged between
six months and one year. An industry
trade association and a bank stated that
the effective date for the final rule
should be delayed until other escrowrelated requirements are implemented.
The industry trade association
suggested, in the alternative, at least a
six-month delay. The industry trade
association also stated that creditors
should not have to adjust their systems
to comply with state or local laws
prohibiting mandatory escrow accounts

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and again subsequently to comply with
Board regulations.
The Dodd-Frank Act does not provide
an effective date specifically for rules
implementing TILA Section
129D(b)(3)(B). The Riegle Community
Development and Regulatory
Improvement Act of 1994 requires that
agency regulations that impose
additional reporting, disclosure, and
other requirements on insured
depository institutions take effect on the
first day of a calendar quarter following
publication in final form. 12 U.S.C.
4802(b). Consistent with the Riegle
Community Development Act, this final
rule is effective on April 1, 2011, for
covered loans for which an application
is received by a creditor on or after that
date. See comment 1(d)(5)–1.iii. The
Board believes that this time period will
afford creditors sufficient time to adjust
their systems to eliminate escrow
accounts for covered loans to comply
with any applicable state or local laws
that prohibit requiring an escrow
account or imposing other escrow
requirements.
Under this final rule, creditors can
choose to continue to escrow for
‘‘jumbo’’ loans with an APR below the
new threshold (subject to applicable
state or local laws). This final rule does
not require termination of any existing
escrow account.
VII. 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 final rule under
the authority delegated to the Board by
the Office of Management and Budget
(OMB). The rule contains no collections
of information under the PRA. See 44
U.S. C. 3502(3). Accordingly, there is no
paperwork burden associated with the
rule.
VIII. Final 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. The
RFA generally requires an agency to
assess the impact a rule is expected to
have on small entities. The RFA
requires an agency either to provide a
final regulatory flexibility analysis with
a final rule or certify that the final rule
will not have a significant economic
impact on a substantial number of small
entities. Under standards the Small
Business Administration (SBA) sets, the
threshold for an entity to be considered
‘‘small’’ is $175 million or less in assets
for banks and other depository

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institutions and $7 million or less in
revenues for non-bank mortgage
lenders.6
A. Statement of the Need for, and
Objectives of, the Final Rule
Congress enacted 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. Congress
enacted HOEPA in 1994 as an
amendment to TILA. TILA is
implemented by the Board’s Regulation
Z. HOEPA imposed additional
substantive protections on certain highcost mortgage transactions. HOEPA also
charged the Board with prohibiting acts
or practices in connection with
mortgage loans that are unfair,
deceptive, or designed to evade the
purposes of HOEPA, and acts or
practices in connection with refinancing
of mortgage loans that are associated
with abusive lending or are otherwise
not in the interest of borrowers. The
Board adopted the requirement to
establish an escrow account for higherpriced mortgage loans under 2008
HOEPA Final Rule pursuant to this
mandate.
The Dodd-Frank Act amended TILA
to increase the threshold for coverage of
the escrow requirement, for certain
loans ineligible for purchase by Freddie
Mac because their original principal
obligation is too high (‘‘jumbo’’ loans), as
discussed above in the SUPPLEMENTARY
INFORMATION. This final rule implements
that change by amending Regulation Z.
These amendments are made in
furtherance of the Board’s responsibility
to prescribe regulations to carry out the
purposes of TILA. The legal basis for the
final rule is in Section 105(a) of TILA.
15 U.S.C. 1604(a).
B. Summary of Significant Issues Raised
by Comments in Response to the Initial
Regulatory Flexibility Analysis
In accordance with Section 3(a) of the
RFA, 5 U.S.C. 603(a), the Board
prepared an initial regulatory flexibility
analysis (IRFA) in connection with the
proposed rule. The IRFA stated that the
Board believed the proposed rule would
not have a significant economic effect
on a substantial number of small
entities. The Board requested comment
on the IRFA and on any costs,
compliance requirements, or changes in
operating procedures arising from the
application of the proposed rule to
small businesses.
6 13

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No commenter specifically addressed
the Board’s IRFA, but several
commenters stated that compliance with
recent statutory and regulatory changes
to requirements for mortgage lending,
including amendments to TILA and
Regulation Z, is burdensome in the
aggregate. Most commenters that
discussed the effective date stated that
creditors should be able to use the
higher annual percentage rate threshold
immediately, to provide relief in
connection with ‘‘jumbo’’ loans that
would be subject to the higher threshold
for the escrow requirement. Those
commenters generally recommended,
however, that compliance with the final
rule be optional until the Board
implements other escrow-related
requirements under the Dodd-Frank
Act. An industry trade association and
a bank opposed an immediate effective
date for the final rule. Both commenters
that recommended allowing creditors to
use the higher threshold immediately
and commenters that recommended
delaying the effective date of the rule
suggested that, at a minimum, the Board
make compliance optional for a period
of time. Recommended periods ranged
from 6 months to one year.
As discussed above in Part VI of the
SUPPLEMENTARY INFORMATION, the Board
believes that the effective date of April
1, 2011, provides sufficient time for
creditors to adjust their training and
systems to apply the higher APR
threshold for ‘‘jumbo’’ loans. The rule is
effective on that date for loans where
the creditor receives an application on
or after April 1, 2011. Escrow accounts
typically are established when the loan
is consummated some time after the
application is processed and approved.
Further, creditors can choose to
continue to escrow for ‘‘jumbo’’ loans
with an APR below the new threshold,
subject to applicable state or local laws
prohibiting mandatory escrow or
imposing other escrow requirements. If
a creditor elects not to apply the higher
APR threshold to such loans, it is likely
that few or no training or systems
changes will be necessary.
C. Description and Estimate of Small
Entities to Which the Final Rule Applies
The final rule applies to all
institutions and entities that engage in
closed-end lending secured by a
consumer’s principal dwelling. TILA
and Regulation Z have broad
applicability to individuals and
businesses that originate even small
numbers of home-secured loans. See
§ 226.1(c)(1). Using data from Reports of
Condition and Income (Call Reports) of
depository institutions and certain
subsidiaries of banks and bank holding

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companies and data reported under the
Home Mortgage Disclosure Act (HMDA),
the Board can estimate the approximate
number of small entities that would be
subject to the rules. For the majority of
HMDA respondents that are not
depository institutions, however, exact
revenue information is not available.
Based on the best information
available, the Board makes the following
estimate of small entities that are
affected by this final rule: According to
September 2010 Call Report data,
approximately 8,669 small depository
institutions would be subject to the rule.
Approximately 15,627 depository
institutions in the United States filed
Call Report data, approximately 10,993
of which had total domestic assets of
$175 million or less and thus were
considered small entities for purposes of
the RFA. Of the 3,788 banks, 507 thrifts,
6,632 credit unions, and 66 branches of
foreign banks that filed Call Report data
and were considered small entities,
3,667 banks, 479 thrifts, 4,520 credit
unions, and 3 branches of foreign banks,
totaling 8,669 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, 1,303 non-depository
institutions (independent mortgage
companies, subsidiaries of a depository
institution, or affiliates of a bank
holding company) filed HMDA reports
in 2010 for 2009 lending activities.
Based on the small volume of lending
activity reported by these institutions,
most are likely to be small entities.
D. Reporting, Recordkeeping, and Other
Compliance Requirements
The changes to compliance
requirements that the final rule makes
are described in the SUPPLEMENTARY
INFORMATION. The effect of the revisions
to Regulation Z on small entities is
minimal because the revisions bring
about burden relief; certain mortgage
loans that otherwise would be subject to
the escrow account requirement in
§ 226.35(b)(3) are relieved of that
requirement. To take advantage of that
relief, some small entities will need to
modify their home-secured credit
origination processes once to implement
the revised coverage test. The precise
costs to small entities of updating their
systems are difficult to predict. 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
originate mortgage loans and test them
for ‘‘higher-priced mortgage loan’’
coverage.

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E. Steps Taken To Minimize the
Economic Impact on Small Entities
The final rule implements a specific
numerical adjustment to an annual
percentage rate (APR) threshold
mandated by Section 1461 the DoddFrank Act for ‘‘jumbo’’ loans, which
limits the Board’s flexibility to establish
alternative APR thresholds. The higher
APR threshold may be used in
connection with a ‘‘jumbo’’ loan, that is,
a loan with an original principal
obligation that exceeds the maximum
principal obligation for loans eligible for
purchase by Freddie Mac. As discussed
above in Part V of the SUPPLEMENTARY
INFORMATION, the Board believes that,
under the Dodd-Frank Act, loans are
‘‘jumbo’’ loans for purposes of TILA
Section 129D if they are ‘‘jumbo’’ loans
ineligible for purchase by Freddie Mac
because their original principal
obligation is too high. Some
commenters recommended that the
Board construe Section 1461 of the
Dodd-Frank Act narrowly to consider
only the general maximum principal
obligation for loans eligible for purchase
by Freddie Mac, despite the fact that the
maximum principal obligation is higher
in certain high-cost areas.
The Board is not adopting that
suggested alternative. As discussed in
greater detail in Part V of the
SUPPLEMENTARY INFORMATION, the Board
believes that the Dodd-Frank Act
requires consideration of adjustments to
the general maximum principal
obligation made by the Federal Housing
Finance Agency (FHFA) pursuant to
Section 305(a)(2) of the Federal Home
Loan Mortgage Corporation Act
(FHLMCA). Further, the Board believes
that it is necessary to consider
additional adjustments FHFA makes
pursuant to other applicable federal law
to effectuate the purposes of and
facilitate compliance with TILA, as
discussed above.
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:
PART 226—TRUTH IN LENDING
(REGULATION Z)
1. The authority citation for part 226
is revised 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,

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Federal Register / Vol. 76, No. 41 / Wednesday, March 2, 2011 / Rules and Regulations

123 Stat. 1734; Pub. L. 111–203, 124 Stat.
1376.

Subpart E—Special Rules for Certain
Home Mortgage Transactions
2. Section 226.35 is amended by
revising paragraph (a)(1) and adding
paragraph (b)(3)(v) to read as follows:

■

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

(a) Higher-priced mortgage loans—(1)
For purposes of this section, except as
provided in paragraph (b)(3)(v) of this
section, a higher-priced mortgage loan is
a consumer credit transaction secured
by the consumer’s principal dwelling
with an annual percentage rate that
exceeds the average prime offer rate for
a comparable transaction as of the date
the interest rate is set by 1.5 or more
percentage points for loans secured by
a first lien on a dwelling, or by 3.5 or
more percentage points for loans
secured by a subordinate lien on a
dwelling.
*
*
*
*
*
(b) * * *
(3) * * *
(v) ‘‘Jumbo’’ loans. For purposes of
this § 226.35(b)(3), for a transaction with
a principal obligation at consummation
that exceeds the limit in effect as of the
date the transaction’s interest rate is set
for the maximum principal obligation
eligible for purchase by Freddie Mac,
the coverage threshold set forth in
paragraph (a)(1) of this section for loans
secured by a first lien on a dwelling
shall be 2.5 or more percentage points
greater than the applicable average
prime offer rate.
*
*
*
*
*
■ 3. In Supplement I to Part 226:
■ A. Under Section 226.1—Authority,
Purpose, Coverage, Organization,
Enforcement and Liability, new
paragraph 1(d)(5)–1.iii is added.
■ B. Under Section 226.35—Prohibited
Acts or Practices in Connection With
Higher-Priced Mortgage Loans, 35(b)
Rules for higher-priced mortgage loans,
35(b)(3) Escrows, new heading
35(b)(3)(v) ‘‘Jumbo’’ loans and new
paragraphs 1 and 2 are added.

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Supplement I to Part 226—Official Staff
Interpretations
*

*

*

*

*

Section 226.1—Authority, Purpose, Coverage,
Organization, Enforcement and Liability
Paragraph 1(d)(5).
1. Effective dates.
i. * * *
ii. * * *

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DEPARTMENT OF TRANSPORTATION

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RIN 2120–AA64

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*

*

Subpart E—Special Rules for Certain
Home Mortgage Transactions
*

*

*

*

*

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

*

*

*

*

*

35(b) Rules for higher-priced mortgage
loans.

*

*

*

*

*

*

*

*

*

*

35(b)(3)(v) ‘‘Jumbo’’ loans.
1. Special threshold for ‘‘jumbo’’ loans. For
purposes of the escrow requirement in
§ 226.35(b)(3) only, the coverage threshold
stated in § 226.35(a)(1) for first-lien loans (1.5
or more percentage points greater than the
average prime offer rate) does not apply to a
loan with a principal obligation that exceeds
the limit in effect as of the date the loan’s rate
is set for the maximum principal obligation
eligible for purchase by Freddie Mac
(‘‘jumbo’’ loans). The Federal Housing
Finance Agency (FHFA) establishes and
adjusts the maximum principal obligation
pursuant to 12 U.S.C. 1454(a)(2) and other
provisions of federal law. Adjustments to the
maximum principal obligation made by
FHFA apply in determining whether a
mortgage loan is a ‘‘jumbo’’ loan to which the
separate coverage threshold in
§ 226.35(b)(3)(v) applies.
2. Escrow requirements only. Under
§ 226.35(b)(3)(v), for ‘‘jumbo’’ loans, the
annual percentage rate threshold is 2.5 or
more percentage points greater than the
average prime offer rate. This threshold
applies solely in determining whether a
‘‘jumbo’’ loan is subject to the escrow
requirement of § 226.35(b)(3). The
determination of whether ‘‘jumbo’’ first-lien
loans are subject to the other protections in
§ 226.35, such as the ability to repay
requirements under § 226.35(b)(1) and the
restrictions on prepayment penalties under
§ 226.35(b)(2), is based on the 1.5 percentage
point threshold stated in § 226.35(a)(1).

*

*

*

*

By order of the Board of Governors of the
Federal Reserve System, February 23, 2011.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 2011–4384 Filed 3–1–11; 8:45 am]
BILLING CODE 6210–01–P

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Federal Aviation Administration
14 CFR Part 39
[Docket No. FAA–2011–0149; Directorate
Identifier 2011–CE–001–AD; Amendment
39–16616; AD 2011–05–07]

Airworthiness Directives; Allied Ag Cat
Productions, Inc. Models G–164, G–
164A, G–164B, G–164B With 73″ Wing
Gap, G–164B–15T, G–164B–34T, G–
164B–20T, G–164C, G–164D, and G–
164D With 73″ Wing Gap Airplanes
Federal Aviation
Administration (FAA), DOT.
ACTION: Final rule; request for
comments.
AGENCY:

We are superseding an
existing airworthiness directive (AD) for
the products listed above. That AD
currently requires repetitively
inspecting the interior and the exterior
of the main tubular spar of the rudder
assembly for corrosion, taking necessary
corrective action if corrosion is found,
and applying corrosion protection. This
AD retains the requirements of the
previous AD and changes the
compliance time for certain products
listed above. This AD was prompted by
our determination that the compliance
time specified for Models G–164, G–
164A, and G–164B airplanes does not
adequately address the unsafe
condition. We are issuing this AD to
detect and correct corrosion in the
rudder main tubular spar, which could
result in failure of the rudder main spar
tube. This failure could lead to loss of
directional control.
DATES: This AD is effective March 17,
2011.
The Director of the Federal Register
approved the incorporation by reference
of certain publications listed in this AD
as of December 19, 2008 (73 FR 67372,
November 14, 2008).
We must receive any comments on
this AD by April 18, 2011.
ADDRESSES: You may send comments by
any of the following methods:
• Federal eRulemaking Portal: Go to
http://www.regulations.gov. Follow the
instructions for submitting comments.
• Fax: 202–493–2251.
• Mail: U.S. Department of
Transportation, Docket Operations,
M–30, West Building Ground Floor,
Room W12–140, 1200 New Jersey
Avenue, SE., Washington, DC 20590.
• Hand Delivery: U.S. Department of
Transportation, Docket Operations,
M–30, West Building Ground Floor,
SUMMARY:

35(b)(3) Escrows.

*

Subpart A—General

VerDate Mar<15>2010

iii. The final rule revising escrow
requirements under § 226.35(b)(3) published
on March 2, 2011 applies to certain closedend extensions of consumer credit secured by
the consumer’s principal dwelling. See
§ 226.35(a). Covered transactions for which
an application is received by a creditor on or
after April 1, 2011 are subject to
§ 226.35(b)(3), as revised.

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