Truth in Lending, 43232-43425 [E9-18119]

Agencies

• FEDERAL RESERVE SYSTEM

[Federal Register Volume 74, Number 164 (Wednesday, August 26, 2009)]
[Proposed Rules]
[Pages 43232-43425]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-18119]



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Part II





Federal Reserve System





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12 CFR Part 226



Truth in Lending; Proposed Rule

Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / 
Proposed Rules

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FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Regulation Z; Docket No. R-1366]


Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule; request for public comment.

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SUMMARY: The Board proposes to amend Regulation Z, which implements the 
Truth in Lending Act (TILA), and the staff commentary to the 
regulation, as part of a comprehensive review of TILA's rules for 
closed-end credit. This proposal would revise the rules for disclosures 
of closed-end credit secured by real property or a consumer's dwelling, 
except for rules regarding rescission and reverse mortgages, which the 
Board anticipates will be reviewed at a later date. Published elsewhere 
in today's Federal Register is the Board's proposal regarding rules for 
disclosures of open-end credit secured by a consumer's dwelling.
    Disclosures provided at application would include a Board-published 
one-page ``Key Questions to Ask About Your Mortgage'' document that 
explains potentially risky loan features, and a Board-published one-
page ``Fixed vs. Adjustable Rate Mortgages'' document. Transaction-
specific disclosures required within three business days of application 
would summarize key loan terms. The calculation of the annual 
percentage rate and the finance charge would be revised to be more 
comprehensive, and their disclosures improved. Consumers would receive 
a ``final'' TILA disclosure at least three business days before 
consummation. Certain new post-consummation disclosures would be 
required. In addition, the proposed revisions would prohibit certain 
payments to mortgage brokers and loan officers that are based on the 
loan's terms or conditions, and prohibit steering consumers to 
transactions that are not in their interest to increase compensation 
received.
    Rules regarding eligibility restrictions and disclosures for credit 
insurance and debt cancellation or debt suspension coverage would apply 
to all closed-end and open-end credit transactions.

DATES: Comments must be received on or before December 24, 2009.

ADDRESSES: You may submit comments, identified by Docket No. R-1366, by 
any of the following methods:
     Agency Web Site: https://www.federalreserve.gov. Follow the 
instructions for submitting comments at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: https://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.
    All public comments are available from the Board's Web site at 
https://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 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: Jamie Z. Goodson, Jelena McWilliams, 
Nikita M. Pastor, or Maureen C. Yap, Attorneys; Paul Mondor, Senior 
Attorney; or Kathleen C. Ryan, Senior Counsel. Division of Consumer and 
Community Affairs, Board of Governors of the Federal Reserve System, at 
(202) 452-3667 or 452-2412; for users of Telecommunications Device for 
the Deaf (TDD) only, contact (202) 263-4869.

SUPPLEMENTARY INFORMATION: 

I. Background on 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, or administrative 
sanction.

II. Summary of Major Proposed Changes

    The goal of the proposed amendments to Regulation Z is to improve 
the effectiveness of disclosures that creditors provide to consumers in 
connection with an application and throughout the life of a mortgage. 
The proposed changes are the result of the Board's review of the 
provisions that apply to closed-end mortgage transactions. The proposal 
would apply to all closed-end credit transactions secured by real 
property or a dwelling, and would not be limited to credit secured by 
the consumer's principal dwelling. The Board is proposing changes to 
the format, timing, and content of disclosures for the four main types 
of closed-end credit information governed by Regulation Z: (1) 
disclosures at application; (2) disclosures within three days after 
application; (3) disclosures three days before consummation; and (4) 
disclosures after consummation. In addition, the Board is proposing 
additional protections related to limits on loan originator 
compensation.
    Disclosures at Application. The proposal contains new requirements 
and changes to the format and content of disclosures given at 
application, to make them more meaningful and easier for consumers to 
use. The proposed changes include:
     Providing a new one-page Board publication, entitled ``Key 
Questions to Ask About Your Mortgage,'' which would explain the 
potentially risky features of a loan.
     Providing a new one-page Board publication, entitled 
``Fixed vs. Adjustable Rate Mortgages,'' which would explain the basic 
differences between such loans and would replace the lengthy Consumer 
Handbook on Adjustable-Rate Mortgages (CHARM booklet) currently 
required under Regulation Z.
     Revising the format and content of the current adjustable-
rate mortgage (ARM) loan program disclosure, including: a requirement 
that the disclosure be in a tabular question and answer format, a 
streamlined plain-language disclosure of interest rate and payment 
information, and a new disclosure of potentially risky features, such 
as prepayment penalties.
    Disclosures within Three Days after Application. The proposal also 
contains revisions to the TILA disclosures provided within three days 
after

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application (the ``early TILA disclosure'') to make the information 
clearer and more conspicuous. The proposed changes include:
     Revising the calculation of the finance charge and annual 
percentage rate (APR) so that they capture most fees and costs paid by 
consumers in connection with the credit transaction.
     Providing a graph that would show consumers how their APR 
compares to the APRs for borrowers with excellent credit and for 
borrowers with impaired credit.
     Summarizing key loan features, such as the loan term, 
amount, and type, and disclosing total settlement charges, as is 
currently required for the good faith estimate of settlement costs 
(GFE) under the Real Estate Settlement Procedures Act (RESPA) and 
Regulation X.
     Requiring disclosure of potential changes to the interest 
rate and monthly payment.
     Adopting new format requirements, including rules 
regarding: type size and use of boldface for certain terms, placement 
of information, and highlighting certain information in a tabular 
format.
    Disclosures Three Days before Consummation. The proposal would 
require creditors to provide a ``final'' TILA disclosure that the 
consumer must receive at least three business days before consummation. 
In addition, two proposed alternatives regarding redisclosure of the 
``final'' TILA disclosure include:
     Alternative 1: If any terms change after the ``final'' 
TILA disclosures are provided, then another final TILA disclosure would 
need to be provided so that the consumer receives it at least three 
business days before consummation.
     Alternative 2: If the APR exceeds a certain tolerance or 
an adjustable-rate feature is added after the ``final'' TILA 
disclosures are provided, then another final TILA disclosure would need 
to be provided so that the consumer receives it at least three business 
days before consummation. All other changes could be disclosed at 
consummation.
    Disclosures after Consummation. The proposal would change the 
timing, content and types of notices provided after consummation. The 
proposed changes include:
     For ARMs, increasing advance notice of a payment change 
from 25 to 60 days, and revising the format and content of the ARM 
adjustment notice.
     For payment option loans with negative amortization, 
requiring a monthly statement to provide information about payment 
options that include the costs and effects of negatively-amortizing 
payments.
     For creditor-placed property insurance, requiring notice 
of the cost and coverage at least 45 days before imposing a charge for 
such insurance.
    Loan Originator Compensation. The proposal contains new limits on 
originator compensation for all closed-end mortgages. The proposed 
changes include:
     Prohibiting certain payments to a mortgage broker or a 
loan officer that are based on the loan's terms and conditions.
     Prohibiting a mortgage broker or loan officer from 
``steering'' consumers to transactions that are not in their interest 
in order to increase the mortgage broker's or loan officer's 
compensation.

III. The Board's Review of Closed-End Credit Rules

    The Board has amended Regulation Z numerous times since TILA 
simplification in 1980. In 1987, the Board revised Regulation Z to 
require special disclosures for closed-end ARMs secured by the 
borrower's principal dwelling. 52 FR 48665; Dec. 24, 1987. In 1995, the 
Board revised Regulation Z to implement changes to TILA by the Home 
Ownership and Equity Protection Act (HOEPA). 60 FR 15463; Mar. 24, 
1995. HOEPA requires special disclosures and substantive protections 
for home-equity loans and refinancings with APRs or points and fees 
above certain statutory thresholds. Numerous other amendments have been 
made over the years to address new mortgage products and other matters, 
such as abusive lending practices in the mortgage and home-equity 
markets.
    The Board's current review of Regulation Z was initiated in 
December 2004 with an advance notice of proposed rulemaking.\1\ 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.
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    \1\ The review was initiated pursuant to requirements of section 
303 of the Riegle Community Development and Regulatory Improvement 
Act of 1994, section 610(c) of the Regulatory Flexibility Act of 
1980, and section 2222 of the Economic Growth and Regulatory 
Paperwork Reduction Act of 1996. An advance notice of proposed 
rulemaking is published to obtain preliminary information prior to 
issuing a proposed rule or, in some cases, deciding whether to issue 
a proposed rule.
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    Beginning in 2007, the Board proposed revisions to the rules for 
closed-end credit in several phases:
     HOEPA. In 2007, the Board proposed rules under HOEPA for 
higher-priced mortgage loans (2007 HOEPA Proposed Rule). The final 
rules, approved in July 2008 (2008 HOEPA Final Rule), prohibited 
certain unfair or deceptive lending and servicing practices in 
connection with closed-end mortgages. The Board also approved revisions 
to advertising rules for both closed-end and open-end home-secured 
loans to ensure that advertisements contain accurate and balanced 
information and do not contain misleading or deceptive representations. 
The final rules also required creditors to provide consumers with 
transaction-specific disclosures early enough to use while shopping for 
a mortgage. 73 FR 44522; July 30, 2008.
     Timing of Disclosures for Closed-End Mortgages. On May 7, 
2009, the Board approved final rules implementing the Mortgage 
Disclosure Improvement Act of 2008 (the MDIA).\2\ The MDIA adds to the 
requirements of the 2008 HOEPA Final Rule regarding transaction-
specific disclosures. Among other things, the MDIA and the final rules 
require early, transaction-specific disclosures for mortgage loans 
secured by dwellings even when the dwelling is not the consumer's 
principal dwelling, and requires waiting periods between the time when 
disclosures are given and consummation of the transaction. 74 FR 23289; 
May 19, 2009.
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    \2\ 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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    This proposal would revise the rules for disclosures for closed-end 
credit secured by real property or a consumer's dwelling. The Board 
anticipates reviewing the rules for rescission and reverse mortgages in 
the next phase of the Regulation Z review.

A. Coordination With Disclosures Required Under the Real Estate 
Settlement Procedures Act

    The Board anticipates working with the Department of Housing and 
Urban Development (HUD) to ensure that TILA and Real Estate Settlement 
Procedures Act of 1974 (RESPA) disclosures are compatible and 
complementary, including potentially developing a single disclosure 
form that creditors could use to combine the initial disclosures 
required under TILA and

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RESPA. The two statutes have different purposes but have considerable 
overlap. Harmonizing the two disclosure schemes would ensure that 
consumers receive consistent information under both laws. It may also 
help reduce information overload by eliminating some duplicative 
disclosures. Consumer testing would be used to ensure consumers could 
understand and use the combined disclosures. In the meantime, the Board 
is proposing a revised model TILA form so that commenters can see how 
the Board's proposed revisions to Regulation Z might be applied in 
practice.
    RESPA, which is implemented by HUD's Regulation X, seeks to ensure 
that consumers are provided with timely information about the nature 
and costs of the settlement process and are protected from 
unnecessarily high real estate settlement charges. To this end, RESPA 
mandates that consumers receive information about the costs associated 
with a mortgage loan transaction, and prohibits certain business 
practices. Under RESPA, creditors must provide a GFE within three 
business days after a consumer submits a written application for a 
mortgage loan, which is the same time creditors must provide the early 
TILA disclosure. RESPA also requires a statement of the actual costs 
imposed at loan settlement (HUD-1 settlement statement). In November 
2008, HUD published revised RESPA rules, including new GFE and HUD-1 
settlement statement forms, which lenders, mortgage brokers, and 
settlement agents must use beginning on January 1, 2010. 73 FR 68204; 
Nov. 17, 2008. In addition to revised disclosures of settlement costs, 
the revised GFE now includes loan terms, some of which would also 
appear on the TILA disclosure, such as whether there is a prepayment 
penalty and the borrower's interest rate and monthly payment. The 
revised GFE form was developed through HUD's consumer testing.
    TILA, which is implemented by the Board's Regulation Z, governs the 
disclosure of the APR and certain loan terms. This proposal contains a 
revised model TILA form that was developed through consumer testing. In 
addition to a revised disclosure of the APR and loan terms, the revised 
TILA disclosure would include the total settlement charges that appear 
on the GFE required under RESPA. Total settlement charges would be 
added to the TILA form because consumer testing conducted by the Board 
found that consumers wanted to have settlement charges disclosed on the 
TILA form.
    The proposed revised TILA form and HUD's revised GFE would 
represent significant improvements, but overlap between the two forms 
could be eliminated to reduce information overload and consistency 
issues. There have been previous efforts to develop a combined TILA and 
RESPA disclosure form, which were fueled by the amount, complexity, and 
overlap of information in the disclosures. Under a 1996 congressional 
directive, the Board and HUD studied ways to simplify and improve the 
disclosures. In July 1998, the Board and HUD submitted a joint report 
to Congress that provided a broad outline intended to be a starting 
point for consideration of legislative reform of the mortgage 
disclosure requirements (the 1998 Joint Report).\3\ The 1998 Joint 
Report included a recommendation for combining and simplifying the 
RESPA and TILA disclosure forms to satisfy the requirements of both 
laws. In addition, The 1998 Joint Report recommended that the timing of 
the TILA and RESPA disclosures be coordinated. Recent regulatory 
changes addressed the timing issues so that initial disclosures 
required under TILA and RESPA would be delivered at the same time.
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    \3\ Bd. of Governors of the Fed. Reserve Sys. and U.S. Dep't of 
Hous. and Urban Dev., Joint Report to the Congress Concerning Reform 
to the Truth in Lending Act and the Real Estate Settlement 
Procedures Act (1998), available at https://www.federalreserve.gov/boarddocs/rptcongress/tila.pdf.
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B. The Bankruptcy Act's Amendment to TILA

    The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 
(Bankruptcy Act) primarily amended the federal bankruptcy code, but 
also contained several provisions amending TILA. With respect to open-
end and closed-end dwelling-secured credit, the Bankruptcy Act requires 
that the credit application disclosure contain a statement warning 
consumers that if the loan exceeds the fair market value of the 
dwelling, then the interest on that portion of the loan is not tax 
deductible, and the consumer should consult a tax advisor for further 
information on tax deductibility. This proposal would implement this 
Bankruptcy Act provision.

C. The MDIA's Amendments to TILA

    On July 30, 2008, Congress enacted the MDIA.\4\ The MDIA codified 
some of the requirements of the Board's 2008 HOEPA Final Rule, which 
required transaction-specific disclosures to be provided within three 
business days after an application is received and before the consumer 
has paid a fee, other than a fee for obtaining the consumer's credit 
history.\5\ 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. In addition, the MDIA required 
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 Board implemented these MDIA 
requirements in final rules published May 19, 2009, and effective July 
30, 2009. 74 FR 23289; May 19, 2009.
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    \4\ As noted, Congress subsequently amended the MDIA with the 
Emergency Economic Stabilization Act of 2008.
    \5\ To ease discussion, the description of the closed-end 
mortgage disclosure scheme includes MDIA's recent amendments to TILA 
and the disclosure timing requirements of the 2008 HOEPA Final Rule 
that will be effective July 30, 2009.
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    The MDIA also requires payment examples if the interest rate or 
payments can change. Such disclosures are to be formatted in accordance 
with the results of consumer testing conducted by the Board. Those 
provisions of the MDIA will not become effective until January 30, 
2011, or any earlier compliance date established by the Board. This 
proposal would implement those MDIA provisions.

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. Currently, Regulation Z requires 
creditors to provide at application an ARM loan program disclosure and 
the CHARM booklet. An early TILA disclosure is required within three 
business days of application and at least seven business days before 
consummation for closed-end mortgages.
    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

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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 behaviors, 
including first-time mortgage shoppers, prime and subprime borrowers, 
and consumers who had obtained one or more closed-end 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 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.
    Specifically, the Board worked with ICF Macro to develop and test 
several types of closed-end disclosures, including:
     Two Board publications to be provided at application, 
entitled ``Key Questions To Ask About Your Mortgage'' and ``Fixed vs. 
Adjustable Rate Mortgages'';
     An ARM loan program disclosure to be provided at 
application;
     An early TILA disclosure to be provided within three 
business days of application, and again so that the consumer receives 
it at least three business days before consummation;
     An ARM adjustment notice to be provided after 
consummation; and
     A payment option monthly statement to be provided after 
consummation.
    Exploratory focus groups. In February and March 2008 the Board 
worked with ICF Macro to conduct four focus groups with consumers who 
had obtained a mortgage in the previous two years. Two of the groups 
consisted of subprime borrowers and two consisted of prime borrowers, 
with creditworthiness determined by their answers to questions about 
prior financial hardship, difficulties encountered in shopping for 
credit, and the rate on their current mortgage. Each focus group 
consisted of between seven and nine people that discussed issues 
identified by the Board and raised by a moderator from ICF Macro. 
Through these focus groups, the Board gathered information on how 
consumers shop for mortgages, what information consumers currently use 
in making decisions about mortgages, and what perceptions consumers had 
of TILA disclosures currently provided in the shopping and application 
process.
    Cognitive interviews on existing disclosures. In 2008, the Board 
worked with ICF Macro to conduct five rounds of cognitive interviews 
with mortgage customers (seven to eleven participants per round). These 
cognitive interviews consisted of one-on-one discussions with 
consumers, during which consumers described their recent mortgage 
shopping experience and reviewed existing sample mortgage disclosures. 
In addition to learning about shopping behavior, the goals of these 
interviews were: (1) To learn more about what information consumers 
read when they receive current mortgage disclosures; (2) to research 
how easily consumers can find various pieces of information in these 
disclosures; and (3) to test consumers' understanding of certain 
mortgage related words and phrases.
    1. Initial design of disclosures for testing. In the fall of 2008, 
the Board worked with ICF Macro to develop sample mortgage disclosures 
to be used in later rounds of testing, taking into account information 
learned through the focus groups and the cognitive interviews.
    2. Additional cognitive interviews and revisions to disclosures. In 
late 2008 and early 2009, the Board worked with ICF Macro to conduct 
six additional rounds of cognitive interviews (nine or ten participants 
per round), where consumers were asked to view new sample mortgage 
disclosures developed by the Board and ICF Macro. The rounds of 
interviews were conducted sequentially to allow for revisions to the 
testing materials based on what was learned from the testing during 
each previous round.
    Results of testing. Several of the model forms were developed 
through the testing. A report summarizing the results of the testing is 
available on the Board's public Web site: https://www.federalreserve.gov.
    Many consumer testing participants reported that they did not shop 
for a lender or a mortgage. Several stated that they were referred to a 
lender by a realtor, family member or friend, and that they relied on 
that lender to get them a loan. Participants who reported shopping for 
a mortgage relied on originators' oral quotes for interest rates, 
monthly payments, and closing costs. Most participants stated that once 
they had applied for a particular loan and received a TILA disclosure 
they ceased shopping. Some cited the time involved, and the amount of 
documentation required, as factors for limiting their shopping. These 
findings suggest that consumers need information early in the process 
and that information should not be limited to information about ARMs. 
Therefore, the proposal would require creditors to provide key 
information about evaluating loan terms at the time an application form 
is provided, as discussed below.
    1. Disclosures provided to consumers before application. Currently, 
creditors must provide the CHARM booklet before a consumer applies or 
pays a nonrefundable fee, whichever is earlier. The booklet explains 
how ARMs generally work. Testing showed that participants found the 
CHARM booklet too lengthy to be useful, although some liked specific 
elements such as the glossary. In addition, creditors must provide an 
ARM loan program disclosure for each ARM loan program in which the 
consumer expresses an interest, before the consumer applies or has paid 
a nonrefundable fee. The ARM loan program disclosure currently must 
include either a 15-year historical example of rates and payments for a 
$10,000 loan, or the maximum interest rate and payment for a $10,000 
loan originated at the interest rate in effect for the disclosure's 
identified month and year. Many testing participants found the 
narrative form of the current ARM loan program disclosure difficult to 
read and understand. Some participants mistook the historical examples 
to be their actual loan rate and payments. Participants also found the 
content of the disclosure too general to be useful to them when 
comparing between lenders or products, and noted the absence of key 
loan information, such as the interest rate.
    Thus, the proposal would require creditors to provide, for all 
closed-end mortgages, a one-page document that explains the basic 
differences between fixed-rate mortgages and ARMs, and a one-page 
document that would explain potentially risky features of a mortgage in 
a plain-English question and answer format. In addition, the proposal 
would streamline the content of the ARM loan program disclosure to 
highlight in a table form information that participants found most 
useful, such as interest rate and payment adjustments, and to provide 
information about program-specific loan features that could pose 
greater risk, such as prepayment penalties. Consumer testing suggested 
that highlighting such information in a table form improved 
participants' ability to identify and understand the information 
provided about key loan features.
    2. Disclosures provided to consumers after application. Currently, 
creditors

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must provide an early TILA disclosure within three business days after 
application and at least seven business days before consummation, and 
before the consumer has paid a fee other than a fee for obtaining the 
consumer's credit history. If the APR on the early TILA disclosure 
exceeds a certain tolerance before consummation, the creditor must 
provide corrected disclosures that the consumer must receive at least 
three days before consummation. If any term other than the APR becomes 
inaccurate, the creditor must give the corrected disclosure no later 
than at consummation.
    The early TILA disclosure--and any corrected disclosure--must 
provide certain information, such as the loan's annual percentage rate 
(APR), finance charge, amount financed, and total of payments. 
Participants in consumer testing indicated that much of the information 
in the current TILA disclosure was of secondary importance to them when 
considering a loan. Participants consistently looked for the contract 
rate of interest, monthly payment, and in some cases, closing costs. 
Most participants assumed that the APR was the contract rate of 
interest, and that the finance charge was the total of all interest 
they would pay if they kept the loan to maturity. Most identified the 
amount financed as the loan amount. When asked to compare two loan 
offers using redesigned model forms that contained these disclosures, 
few participants used the APR and finance charge to compare the loans. 
In addition, some participants had difficulty determining whether the 
loan tested had a variable or fixed rate and understanding the payment 
schedule's relationship to the changing interest rate. Many did not 
understand what circumstances would trigger a prepayment penalty.
    Thus, the proposal contains a number of revisions to the format and 
content of TILA disclosures to make them clearer and more conspicuous. 
To enhance the effectiveness of the finance charge as a disclosure of 
the true cost of credit, the proposal would require a simpler, more 
inclusive approach. The disclosure of the APR would be enhanced to 
improve consumers' comprehension of the cost of credit. In addition, to 
help consumers determine whether the loan offered is affordable for 
them, creditors would be required to summarize key loan terms and 
highlight interest rate and payment information in a table. Consumer 
testing showed that using special formatting requirements, consistent 
terminology and a minimum 10-point font, would ensure that consumers 
are better able to identify and review key loan terms.
    3. Disclosures required after consummation. Currently, creditors 
must provide advance notice to a consumer before the interest rate and 
monthly payment adjust on an ARM. The ARM adjustment notice must 
provide certain information, including current and prior interest 
rates, the index values upon which the current and prior interest rates 
are based, and the payment that would be required to amortize the loan 
fully at the new interest rate. The Board worked with ICF Macro to 
develop a revised ARM adjustment notice that would enhance consumers' 
ability to identify and understand changes being made to their loan 
terms. Consumer testing of the revised ARM adjustment notice indicated 
that consumers understood the content and were able correctly to 
identify the amount and due date of the new payment. Thus, under the 
proposal, creditors would be required to provide the ARM adjustment 
notice in a revised format that would highlight changes being made to 
the interest rate and the monthly payment, and provide other important 
information, such as the due date of the new payment and the loan 
balance.
    Currently, creditors are not required to provide disclosures after 
consummation for negatively-amortizing loans. The Board worked with ICF 
Macro to develop a monthly statement that compares the amount and the 
impact on the loan balance of a fully-amortizing payment, interest-only 
payment, and minimum payment. Consumer testing of the proposed monthly 
statement indicated that consumers understood the content, easily 
recognized the payment options highlighted in the table, and understood 
that by making only the minimum payment they would be borrowing more 
money and increasing their loan balance. Thus, to improve consumer 
understanding of the risks associated with payment option loans, the 
Board proposes to require, not later than 15 days before a periodic 
payment is due, a monthly statement of payment options that explains 
the impact of payment choice on the loan balance.
    Additional testing during and after the comment period. During the 
comment period, the Board will work with ICF Macro to conduct 
additional testing of model disclosures. After receiving comments from 
the public on the proposal and the proposed disclosure forms, the Board 
will work with ICF Macro to further revise model disclosures based on 
comments received, and to conduct additional rounds of cognitive 
interviews to test the revised disclosures. After the cognitive 
interviews, quantitative testing will be conducted. The goal of the 
quantitative testing is to measure consumers' comprehension of the 
newly-developed disclosures with a larger and more statistically 
representative group of consumers.

E. Other Outreach and Research

    The Board also solicited input from members of the Board's Consumer 
Advisory Council on various issues presented by the review of 
Regulation Z. During 2009, for example, the Council discussed ways to 
improve disclosures for home-secured credit. In addition, Board staff 
met or conducted conference calls with various industry and consumer 
group representatives throughout the review process leading to this 
proposal. Board staff also reviewed disclosures currently provided by 
creditors, the Federal Trade Commission's (FTC) report on consumer 
testing of mortgage disclosures,\6\ HUD's report on consumer testing of 
the GFE,\7\ and other information.
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    \6\ James M. Lacko and Janis K. Pappalardo, Fed. Trade Comm'n, 
Improving Consumer Mortgage Disclosures: An Empirical Assessment of 
Current and Protoype Disclosure Forms (2007), (``Improving Consumer 
Mortgage Disclosures'') available at https://www2.ftc.gov/os/2007/06/P025505MortgageDisclosureReport.pdf.
    \7\ U.S. Dep't. of Hous. and Urban Dev., Summary Report: 
Consumer Testing of the Good Faith Estimate Form (GFE) (2008), 
available at https://www.huduser.org/publications/pdf/Summary_Report_GFE.pdf.
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F. Reviewing Regulation Z in Stages

    The Board is proceeding with a review of Regulation Z in stages. 
This proposal largely contains revisions to rules affecting closed-end 
credit transactions secured by real property or a dwelling. Published 
elsewhere in today's Federal Register is the Board's proposal regarding 
disclosures for open-end credit secured by a consumer's dwelling. 
Closed-end mortgages are distinct from other TILA-covered products, and 
conducting a review in stages allows for a manageable process. To 
minimize compliance burden for creditors offering other closed-end 
credit, as well as home-secured credit, the proposed rules that would 
apply only to closed-end home-secured credit are organized in sections 
separate from the general disclosure requirements for closed-end rules. 
Although this reorganization would increase the size of the regulation 
and commentary, the Board believes a clear delineation of rules for 
closed-end, home-secured loans pending the review of the remaining 
closed-end rules provides a clear compliance benefit to creditors.

[[Page 43237]]

G. Implementation Period

    The Board contemplates providing creditors sufficient time to 
implement any revisions that may be adopted. The Board seeks comment on 
an appropriate implementation period.

IV. The Board's Rulemaking Authority

    TILA Section 105. TILA mandates that the Board prescribe 
regulations to carry out the purposes of the act. TILA also 
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 the act, or prevent circumvention or 
evasion. 15 U.S.C. 1604(a).
     Exempt from all or part of TILA any class of transactions 
if the Board determines that TILA coverage does not provide a 
meaningful benefit to consumers in the form of useful information or 
protection. The Board must consider factors identified in the act and 
publish its rationale at the time it proposes an exemption for comment. 
15 U.S.C. 1604(f).
    In the course of developing the proposal, the Board has considered 
the views of interested parties, its experience in implementing and 
enforcing Regulation Z, and the results obtained from testing various 
disclosure options in controlled consumer tests. For the reasons 
discussed in this notice, the Board believes this proposal is 
appropriate pursuant to the authority under TILA Section 105(a).
    Also, as explained in this notice, the Board believes that the 
specific exemptions proposed are appropriate because the existing 
requirements do not provide a meaningful benefit to consumers in the 
form of useful information or protection. In reaching this conclusion 
with each proposed exemption, the Board considered (1) the amount of 
the loan and whether the disclosure provides a benefit to consumers who 
are parties to the transaction involving a loan of such amount; (2) the 
extent to which the requirement complicates, hinders, or makes more 
expensive the credit process; (3) the status of the borrower, including 
any related financial arrangements of the borrower, the financial 
sophistication of the borrower relative to the type of transaction, and 
the importance to the borrower of the credit, related supporting 
property, and coverage under TILA; (4) whether the loan is secured by 
the principal residence of the borrower; and (5) whether the exemption 
would undermine the goal of consumer protection. The rationales for 
these proposed exemptions are explained in part VI below.
    TILA Section 129(l)(2). TILA also authorizes the Board to prohibit 
acts or practices in connection with:
     Mortgage loans that the board finds to be unfair, 
deceptive, or designed to evade the provisions of HOEPA; and
     Refinancing of mortgage loans that the Board finds to be 
associated with abusive lending practices or that are otherwise not in 
the interest of the borrower.
    The authority granted to the Board under TILA Section 129(l)(2), 15 
U.S.C. 1639(l)(2), is broad. It reaches mortgage loans with rates and 
fees that do not meet HOEPA's rate or fee trigger in TILA Section 
103(aa), 15 U.S.C. 1602(aa), as well as mortgage loans not covered 
under that section, such as home purchase loans. Moreover, while 
HOEPA's statutory restrictions apply only to creditors and only to loan 
terms or lending practices, Section 129(l)(2) is not limited to acts or 
practices by creditors, nor is it limited to loan terms or lending 
practices. See 15 U.S.C. 1639(l)(2). It authorizes protections against 
unfair or deceptive practices ``in connection with mortgage loans,'' 
and it authorizes protections against abusive practices ``in connection 
with refinancing of mortgage loans.'' Thus, the Board's authority is 
not limited to regulating specific contractual terms of mortgage loan 
agreements; it extends to regulating loan-related practices generally, 
within the standards set forth in the statute.
    HOEPA does not set forth a standard for what is unfair or 
deceptive, but the Conference Report for HOEPA indicates that, in 
determining whether a practice in connection with mortgage loans is 
unfair or deceptive, the Board should look to the standards employed 
for interpreting State unfair and deceptive trade practices statutes 
and the Federal Trade Commission Act (FTC Act), Section 5(a), 15 U.S.C. 
45(a).\8\
---------------------------------------------------------------------------

    \8\ H.R. Rep. 103-652, at 162 (1994) (Conf. Rep.).
---------------------------------------------------------------------------

    Congress has codified standards developed by the Federal Trade 
Commission (FTC) for determining whether acts or practices are unfair 
under Section 5(a), 15 U.S.C. 45(a).\9\ Under the FTC Act, an act or 
practice is unfair when it causes or is likely to cause substantial 
injury to consumers which is not reasonably avoidable by consumers 
themselves and not outweighed by countervailing benefits to consumers 
or to competition. In addition, in determining whether an act or 
practice is unfair, the FTC is permitted to consider established public 
policies, but public policy considerations may not serve as the primary 
basis for an unfairness determination.\10\
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    \9\ See 15 U.S.C. 45(n); Letter from Commissioners of the FTC to 
the Hon. Wendell H. Ford, Chairman, and the Hon. John C. Danforth, 
Ranking Minority Member, Consumer Subcomm. of the H. Comm. on 
Commerce, Science, and Transp. (Dec. 17, 1980).
    \10\ 15 U.S.C. 45(n).
---------------------------------------------------------------------------

    The FTC has interpreted these standards to mean that consumer 
injury is the central focus of any inquiry regarding unfairness.\11\ 
Consumer injury may be substantial if it imposes a small harm on a 
large number of consumers, or if it raises a significant risk of 
concrete harm.\12\ The FTC looks to whether an act or practice is 
injurious in its net effects.\13\ The FTC has also observed that an 
unfair act or practice will almost always reflect a market failure or 
market imperfection that prevents the forces of supply and demand from 
maximizing benefits and minimizing costs.\14\ In evaluating unfairness, 
the FTC looks to whether consumers' free market decisions are 
unjustifiably hindered.\15\
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    \11\ Statement of Basis and Purpose and Regulatory Analysis, 
Credit Practices Rule, 42 FR 7740, 7743; Mar. 1, 1984 (Credit 
Practices Rule).
    \12\ Letter from Commissioners of the FTC to the Hon. Wendell H. 
Ford, Chairman, and the Hon. John C. Danforth, Ranking Minority 
Member, Consumer Subcomm. of the H. Comm. on Commerce, Science, and 
Transp., n.12 (Dec. 17, 1980).
    \13\ Credit Practices Rule, 42 FR at 7744.
    \14\ Id.
    \15\ Id.
---------------------------------------------------------------------------

    The FTC has also adopted standards for determining whether an act 
or practice is deceptive (though these standards, unlike unfairness 
standards, have not been incorporated into the FTC Act).\16\ First, 
there must be a representation, omission or practice that is likely to 
mislead the consumer. Second, the act or practice is examined from the 
perspective of a consumer acting reasonably in the circumstances. 
Third, the representation, omission, or practice must be material. That 
is, it must be likely to affect the consumer's conduct or decision with 
regard to a product or service.\17\
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    \16\ Letter from James C. Miller III, Chairman, FTC to the Hon. 
John D. Dingell, Chairman, H. Comm. on Energy and Commerce (Oct. 14, 
1983) (Dingell Letter).
    \17\ Dingell Letter at 1-2.
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    Many States also have adopted statutes prohibiting unfair or 
deceptive acts or practices, and these statutes employ a variety of 
standards, many of them different from the standards

[[Page 43238]]

currently applied to the FTC Act. A number of States follow an 
unfairness standard formerly used by the FTC. Under this standard, an 
act or practice is unfair where it offends public policy; or is 
immoral, unethical, oppressive, or unscrupulous; and causes substantial 
injury to consumers.\18\
---------------------------------------------------------------------------

    \18\ See, e.g., Kenai Chrysler Ctr., Inc. v. Denison, 167 P.3d 
1240, 1255 (Alaska 2007) (quoting FTC v. Sperry & Hutchinson Co., 
405 U.S. 233, 244-45 n.5 (1972)); State v. Moran, 151 N.H. 450, 452, 
861 A.2d 763, 755-56 (N.H. 2004) (concurrently applying the FTC's 
former test and a test under which an act or practice is unfair or 
deceptive if ``the objectionable conduct * * * attain[s] a level of 
rascality that would raise an eyebrow of someone inured to the rough 
and tumble of the world of commerce.'') (citation omitted); Robinson 
v. Toyota Motor Credit Corp., 201 Ill. 2d 403, 417-418, 775 N.E.2d 
951, 961-62 (2002) (quoting 405 U.S. at 244-45 n.5).
---------------------------------------------------------------------------

    In developing proposed rules under TILA Section 129(l)(2)(A), 15 
U.S.C. 1639(l)(2)(A), the Board has considered the standards currently 
applied to the FTC Act's prohibition against unfair or deceptive acts 
or practices, as well as the standards applied to similar State 
statutes.

V. Discussion of Major Proposed Revisions

    The goal of the proposed revisions is to improve the effectiveness 
of the Regulation Z disclosures that must be provided to consumers for 
closed-end credit transactions secured by real property or a dwelling. 
To shop for and understand the cost of home-secured credit, consumers 
must be able to identify and comprehend the key terms of mortgages. But 
the terms and conditions for mortgage transactions can be very complex. 
The proposed revisions to Regulation Z are intended to provide the most 
essential information to consumers when the information would be most 
useful to them, with content and formats that are clear and 
conspicuous. The proposed revisions are expected to improve consumers' 
ability to make informed credit decisions and enhance competition among 
creditors. Many of the changes are based on the consumer testing that 
was conducted in connection with the review of Regulation Z.
    In considering the proposed revisions, the Board sought to ensure 
that the proposal would not reduce access to credit, and sought to 
balance the potential benefits for consumers with the compliance 
burdens imposed on creditors. For example, the proposed revisions seek 
to provide greater certainty to creditors in identifying what costs 
must be disclosed for mortgages, and how those costs must be disclosed. 
More effective disclosures may also reduce confusion and 
misunderstanding, which may also ease creditors' costs relating to 
consumer complaints and inquiries.

A. Disclosures at Application

    Currently, Regulation Z requires pre-application disclosures only 
for variable-rate transactions. For these transactions, creditors are 
required to provide the CHARM booklet and a loan program disclosure 
that provides twelve items of information at the time an application 
form is provided or before the consumer pays a nonrefundable fee, 
whichever is earlier.
    ``Key Questions to Ask about Your Mortgage'' publication. Since 
1987, the number of loan products and product features has grown, 
providing consumers with more choices. However, the growth in loan 
features and products has also made the decision-making process more 
complex for consumers. The proposal would require creditors to provide 
to consumers a one-page Board publication entitled, ``Key Questions to 
Ask about Your Mortgage.'' Creditors would be required to provide this 
document for all closed-end loans secured by real property or a 
dwelling, not just variable-rate loans, before the consumer applies for 
a loan or pays a nonrefundable fee, whichever is earlier. The 
publication would inform consumers in a plain-English question and 
answer format about potentially risky features, such as interest-only, 
negative amortization, and prepayment penalties. To enable consumers to 
track the presence or absence of potentially risky features throughout 
the mortgage transaction process, the key questions and answers 
provided in this one-page document would also be included in the ARM 
loan program disclosure and the early and final TILA disclosures.
    ``Fixed vs. Adjustable Rate Mortgages'' publication. Instead of the 
CHARM booklet, the proposal would require creditors to provide a one-
page Board publication entitled, ``Fixed vs. Adjustable Rate 
Mortgages'' for all closed-end loans secured by real property or a 
dwelling, not just variable-rate loans. The publication would contain 
an explanation of the basic differences between fixed-rate mortgages 
and ARMs. Although the requirement to provide a CHARM booklet would be 
eliminated, the Board would continue to publish the CHARM booklet as a 
consumer-education publication.
    ARM loan program disclosure. Currently, for each variable-rate loan 
program in which a consumer expresses an interest, creditors must 
provide certain information, including the index and margin to be used 
to calculate interest rates and payments, and either a 15-year 
historical example of rates and payments for a $10,000 loan, or the 
maximum interest rate and payment for a $10,000 loan originated at the 
interest rate in effect for the disclosure's identified month and year. 
Based on consumer testing, the proposal would simplify the ARM loan 
program disclosure to focus on the interest rate and payment and the 
potential risks associated with ARMs. Information on how to calculate 
payments, and the effect of rising interest rates on monthly payments 
would be moved to the early TILA disclosure provided after application. 
Placing the information there will allow the creditor to customize the 
information to the consumer's potential loan, making the information 
more useful to consumers. The proposed ARM loan program disclosure 
would be provided in a tabular question and answer format to enable 
consumers to easily locate the most important information.

B. Disclosures Within Three Days After Application

    TILA and Regulation Z currently require creditors to provide an 
early TILA disclosure within three business days after application and 
at least seven business days before consummation, and before the 
consumer has paid a fee other than a fee for obtaining the consumer's 
credit history. If the APR on the early TILA disclosure exceeds a 
certain tolerance before consummation, the creditor must provide 
corrected disclosures that the consumer must receive at least three 
days before consummation. If any term other than the APR becomes 
inaccurate, the creditor must give the corrected disclosure no later 
than at consummation.
    The early TILA disclosure, and any corrected disclosure, must 
include certain loan information, including the amount financed, the 
finance charge, the APR, the total of payments, and the amount and 
timing of payments. The finance charge is the sum of all credit-related 
charges, but excludes a variety of fees and charges. TILA requires that 
the finance charge and the APR be disclosed more conspicuously than 
other information. The APR is calculated based on the finance charge 
and is meant to be a single, unified number to help consumers 
understand the total cost of credit.
    Calculation of the finance charge. The proposal contains a number 
of revisions to the calculation of the finance charge and the 
disclosure of the finance charge and the APR to improve consumers'

[[Page 43239]]

understanding of the cost of credit. Currently, TILA and Regulation Z 
permit creditors to exclude several fees or charges from the finance 
charge, including certain fees or charges imposed by third party 
closing agents; certain premiums for credit or property insurance or 
fees for debt cancellation or debt suspension coverage, if the creditor 
meets certain conditions; security interest charges; and real-estate 
related fees, such as title examination or document preparation fees.
    Consumer groups, creditors, and government agencies have long been 
dissatisfied with the ``some fees in, some fees out'' approach to the 
finance charge. Consumer groups and others believe that the current 
approach obscures the true cost of credit. They contend that this 
approach creates incentives for creditors to shift the cost of credit 
from the interest rate to ancillary fees excluded from the finance 
charge. They further contend that this approach undermines the purpose 
of the APR, which is to express in a single figure the total cost of 
credit. Creditors maintain that consumers are confused by the APR and 
that the current approach creates significant regulatory burdens. They 
contend that determining which fees are or are not included in the 
finance charge is overly complex and creates litigation risk.
    The Board proposes to use its exception and exemption authority to 
revise the finance charge calculation for closed-end mortgages, 
including HOEPA loans. The proposal would maintain TILA's definition of 
a ``finance charge'' as a fee or charge payable directly or indirectly 
by the consumer and imposed directly or indirectly by the creditor as 
an incident to the extension of credit. However, the proposal would 
require the finance charge to include charges by third parties if the 
creditor requires the use of a third party as a condition of or 
incident to the extension of credit (even if the consumer chooses the 
third party), or if the creditor retains a portion of the third-party 
charge (to the extent of the portion retained). Charges that would be 
incurred in a comparable cash transaction, such as transfer taxes, 
would continue to be excluded from the finance charge. Under this 
approach, consumers would benefit from having a finance charge and APR 
disclosure that better represent the cost of credit, undiluted by 
myriad exclusions for various fees and charges. This approach would 
cause more loans to be subject to the special protections of the 
Board's 2008 HOEPA Final Rule, special disclosures and restrictions for 
HOEPA loans, and certain State anti-predatory lending laws. However, 
the proposal could also reduce compliance burdens, regulatory 
uncertainty, and litigation risks for creditors.
    Disclosure of the finance charge and the APR. Currently, creditors 
are required to disclose the loan's ``finance charge'' and ``annual 
percentage rate,'' using those terms, more conspicuously than the other 
required disclosures. Consumer testing indicated that consumers do not 
understand the term ``finance charge.'' Most consumers believe the term 
refers to the total of all interest they would pay if they keep the 
loan to maturity, but do not realize that it includes the fees and 
costs associated with the loan. For these reasons, the proposal 
replaces the term ``finance charge'' with ``interest and settlement 
charges'' to make clear it is more than interest, and the disclosure 
would no longer be more conspicuous than the other required 
disclosures.
    In addition, the disclosure of the APR would be enhanced to improve 
consumers' comprehension of the cost of credit. Under the proposal, 
creditors would be required to disclose the APR in 16-point font in 
close proximity to a graph that compares the consumer's APR to the 
HOEPA average prime offer rate for borrowers with excellent credit and 
the HOEPA threshold for higher-priced loans. This disclosure would put 
the APR in context and help consumers understand whether they are being 
offered a loan that comports with their creditworthiness.
    Interest rate and payment summary. Currently, creditors are 
required to disclose the number, amount, and timing of payments 
scheduled to repay the loan. Under the MDIA's amendments to TILA, 
creditors will be required to provide examples of adjustments to the 
regularly required payment based on the change in interest rates 
specified in the contract. Consumer testing consistently indicated that 
consumers shop for and evaluate a mortgage based on the contract 
interest rate and the monthly payment, but consumers have difficulty 
understanding such terms using the current TILA disclosure. Under the 
proposal, creditors would be required to disclose in a tabular format 
the contract interest rate together with the corresponding monthly 
payment, including escrows for taxes and property and/or mortgage 
insurance. Special disclosure requirements would be imposed for 
adjustable-rate or step-rate loans to show the interest rate and 
payment at consummation, the maximum interest rate and payment at first 
adjustment, and the highest possible maximum interest rate and payment. 
Additional special disclosures would be required for loans with 
negatively-amortizing payment options, introductory interest rates, 
interest-only payments, and balloon payments.
    Disclosure of other terms. In addition to the interest rate and 
monthly payment, consumer testing indicated that consumers benefit from 
the disclosure of other key terms in a clear format. Thus, the proposal 
would require creditors to provide in a tabular format information 
about the loan amount, the loan term, the loan type (such as fixed-
rate), the total settlement charges, and the maximum amount of any 
prepayment penalty. In addition, creditors would be required to 
disclose in a tabular question and answer format the ``Key Questions 
about Risk,'' which would include information about potentially risky 
loan features such as prepayment penalties, interest-only payments, and 
negative amortization.

C. Disclosures Three Days Before Consummation

    As noted above, the creditor is required to provide the early TILA 
disclosure to the consumer within three business days after receiving 
the consumer's written application and at least seven business days 
before consummation, and before the consumer has paid a fee other than 
a fee for obtaining the consumer's credit history. If the APR on the 
early TILA disclosure exceeds a certain tolerance before consummation, 
the creditor must provide corrected disclosures that the consumer must 
receive at least three days before consummation. If any term other than 
the APR becomes inaccurate, the creditor must give the corrected 
disclosure no later than at consummation. The consumer may waive the 
seven- and three-day waiting periods for a bona fide personal financial 
emergency.
    There are, however, long-standing concerns about consumers facing 
different loan terms or increased settlement costs at closing. Members 
of the Board's Consumer Advisory Council, participants in public 
hearings, and commenters on prior Board rulemakings have expressed 
concern about consumers not learning of changes to credit terms or 
settlement charges until consummation. In addition, consumer testing 
indicated that consumers are often surprised at closing by changes in 
important loan terms, such as the addition of an adjustable-rate 
feature. Despite these changes, consumers report that they have 
proceeded with closing because they lacked alternatives (especially in 
the case of a home purchase loan), or

[[Page 43240]]

were told that they could easily refinance with better terms in the 
near future.
    For these reasons, the proposal would require the creditor to 
provide a final TILA disclosure that the consumer must receive at least 
three business days before consummation, even if no terms have changed 
since the early TILA disclosure was provided. In addition, the Board is 
proposing two alternative approaches to address changes to loan terms 
and settlement charges during the three-business-day waiting period. 
Under the first approach, if any terms change during the three-
business-day waiting period, the creditor would be required to provide 
another final TILA disclosure and wait an additional three business 
days before consummation could occur. Under the second approach, 
creditors would be required to provide another final TILA disclosure, 
but would have to wait an additional three business days before 
consummation only if the APR exceeds a designated tolerance or the 
creditor adds an adjustable-rate feature. Otherwise, the creditor would 
be permitted to provide the new final TILA disclosure at consummation.

D. Disclosures After Consummation

    Regulation Z requires certain notices to be provided after 
consummation. Currently, for variable-rate transactions, creditors are 
required to provide advance notice of an interest rate adjustment. 
There are no disclosure requirements for other post-consummation 
events.
    ARM adjustment notice. Currently, for variable-rate transactions, 
creditors are required to provide a notice of interest rate adjustment 
at least 25, but no more than 120, calendar days before a payment at a 
new level is due. In addition, creditors must provide an adjustment 
notice at least once each year during which an interest rate adjustment 
is implemented without an accompanying payment change. These 
disclosures must include certain information, including the current and 
prior interest rates and the index values upon which the current and 
prior interest rates are based.
    Under the proposal, creditors would be required to provide the ARM 
adjustment notice at least 60 days before payment at a new level is 
due. This proposal