Regulation Z; Truth in Lending, 58470-58489 [2010-20663]

Agencies

• FEDERAL RESERVE SYSTEM

[Federal Register Volume 75, Number 185 (Friday, September 24, 2010)]
[Rules and Regulations]
[Pages 58470-58489]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-20663]



[[Page 58469]]

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Part II





Federal Reserve System





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12 CFR Part 226



Regulation Z; Truth in Lending; Proposed Rules, Interim Rule, Final 
Rules

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

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FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Docket No. R-1366]


Regulation Z; Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Interim rule; request for public comment.

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SUMMARY: The Board is publishing for comment an interim rule amending 
Regulation Z, which implements the Truth in Lending Act (TILA). The 
interim rule implements certain requirements of the Mortgage Disclosure 
Improvement Act of 2008, which amended TILA. The amendments and this 
interim rule require creditors extending consumer credit secured by 
real property or a dwelling to disclose certain summary information 
about interest rates and payment changes, in a tabular format, as well 
as a statement that consumers are not guaranteed to be able to 
refinance their transactions in the future. The interest rate and 
payment summary tables replace the payment schedule previously required 
as part of the TILA disclosure for mortgage transactions. Disclosures 
for non-mortgage, closed-end consumer credit will continue to include 
the current payment schedule.

DATES: This interim rule is effective October 25, 2010. Compliance with 
its requirements is optional, however, until January 30, 2011; its 
requirements are mandatory for transactions for which an application 
for credit is received by the creditor on or after that date. Comments 
on this interim rule must be received on or before November 23, 2010.

ADDRESSES: You may submit comments, identified by Docket No. R-1366, by 
any of the following methods:
     Agency Web site: 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: Address to Jennifer J. Johnson, Secretary, Board of 
Governors of the Federal Reserve System, 20th Street and Constitution 
Avenue, NW., Washington, DC 20551.
    All public comments will be made available on the Board's Web site 
at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, comments 
will not be edited to remove any identifying or contact information. 
Public comments may also be viewed electronically or in paper in Room 
MP-500 of the Board's Martin Building (20th and C Streets, NW.,) 
between 9 a.m. and 5 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Paul Mondor, Senior Attorney, or 
Kathleen C. Ryan, Senior Counsel, Division of Consumer and Community 
Affairs, Board of Governors of the Federal Reserve System, Washington, 
DC 20551, at (202) 452-2412 or (202) 452-3667. For users of 
Telecommunications Device for the Deaf (TDD) only, contact (202) 263-
4869.

SUPPLEMENTARY INFORMATION:

I. Background

A. TILA and Regulation Z

    Congress enacted the Truth in Lending Act (TILA) based on findings 
that economic stability would be enhanced and competition among 
consumer credit providers would be strengthened by the informed use of 
credit resulting from consumers' awareness of the cost of credit. One 
of the purposes of TILA is to provide meaningful disclosure of credit 
terms to enable consumers to compare credit terms available in the 
marketplace more readily and avoid the uninformed use of credit.
    TILA's disclosures differ depending on whether credit is an open-
end (revolving) plan or a closed-end (installment) loan. TILA also 
contains procedural and substantive protections for consumers. TILA is 
implemented by the Board's Regulation Z. An Official Staff Commentary 
interprets the requirements of Regulation Z. By statute, creditors that 
follow in good faith Board or official staff interpretations are 
insulated from civil liability, criminal penalties, and administrative 
sanction.

B. MDIA Amendments to TILA and Regulation Z

    On July 30, 2008, Congress enacted the Mortgage Disclosure 
Improvement Act of 2008 (the MDIA).\1\ The MDIA requires transaction-
specific TILA disclosures to be provided within three business days 
after an application is received and before the consumer has paid a 
fee, other than a fee for obtaining the consumer's credit history.\2\ 
In addition, the MDIA requires creditors to mail or deliver early TILA 
disclosures at least seven business days before consummation and 
provide corrected disclosures if the disclosed APR changes in excess of 
a specified tolerance. The consumer must receive the corrected 
disclosures no later than three business days before consummation. The 
MDIA also expanded coverage of the early disclosure requirement to 
include loans secured by a dwelling even when it is not the consumer's 
principal dwelling. The Board implemented these MDIA requirements in 
final rules published May 19, 2009, and effective July 30, 2009. 74 FR 
23289, May 19, 2009 (MDIA Final Rule).
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    \1\ The MDIA is contained in Sections 2501 through 2503 of the 
Housing and Economic Recovery Act of 2008, Public Law 110-289, 
enacted on July 30, 2008. The MDIA was later amended by the 
Emergency Economic Stabilization Act of 2008, Public Law 110-343, 
enacted on October 3, 2008.
    \2\ To ease discussion, the description of the closed-end 
mortgage disclosure scheme includes MDIA's amendments to TILA and 
the disclosure timing requirements implemented by the Board in 2008 
through a final rule that preceded MDIA's enactment. 73 FR 44522, 
July 30, 2008 (2008 HOEPA Final Rule). The MDIA codified some of the 
2008 HOEPA Final Rule and expanded its coverage and its 
requirements. The MDIA also made these requirements effective July 
30, 2009.
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    The MDIA also requires disclosure of payment examples if the loan's 
interest rate or payments can change. Such disclosures are to be 
formatted in accordance with the results of consumer testing conducted 
by the Board. And the MDIA requires disclosure of a statement that 
there is no guarantee the consumer will be able to refinance the 
transaction in the future. Those provisions of the MDIA become 
effective on January 30, 2011, or any earlier compliance date 
established by the Board. This interim rule implements those MDIA 
provisions.

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

    The Board's current review of Regulation Z was initiated in 
December 2004 with an advance notice of proposed rulemaking. 69 FR 
70925, Dec. 8, 2004. At that time, the Board announced its intent to 
conduct its review of Regulation Z in stages, focusing first on the 
rules for open-end (revolving) credit accounts that are not home-
secured, chiefly general-purpose credit cards and retailer credit card 
plans. In December 2008, the Board approved final rules for open-end 
credit that is not home-secured. 74 FR 5244, Jan. 29, 2009. In May 
2009, Congress enacted the Credit Card Accountability Responsibility 
and Disclosure Act of 2009 (Credit Card Act), which amended TILA's 
provisions for open-end credit. The Board approved final rules

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implementing the Credit Card Act in January and June 2010. 75 FR 7658, 
Feb. 22, 2010; 75 FR 37526, June 29, 2010.
    Beginning in 2007, the Board proposed revisions to the rules for 
home-secured credit in several phases. In 2007, the Board proposed 
rules for closed-end higher-priced mortgage loans secured by the 
consumer's principal dwelling, leading to the HOEPA Final Rule. On May 
7, 2009, the Board adopted the MDIA Final Rule for closed-end loans 
secured by a dwelling. On July 23, 2009, the Board issued a proposed 
rule to revise the rules for disclosures for closed-end credit secured 
by real property or a consumer's dwelling. 74 FR 43232, Aug. 26, 2009 
(2009 Closed-End Proposal). The Board also issued a proposed rule to 
revise the rules for disclosures for open-end lines of credit secured 
by a dwelling. 74 FR 43428, Aug. 26, 2009. Concurrently with this 
interim rule, the Board is publishing another proposed rule that would 
add and revise rules for rescission, reverse mortgages, and 
modifications to existing closed-end mortgage loans (2010 Closed-End 
Proposal).

D. Consumer Testing

    A principal goal for the Regulation Z review is to produce revised 
and improved mortgage disclosures that consumers will be more likely to 
understand and use in their decisions, while at the same time not 
creating undue burdens for creditors. In 2007, the Board retained a 
research and consulting firm (ICF Macro) that specializes in designing 
and testing documents to conduct consumer testing to help the Board's 
review of mortgage rules under Regulation Z. Working closely with the 
Board, ICF Macro conducted several tests in different cities throughout 
the United States. The testing consisted of four focus groups and 
eleven rounds of one-on-one cognitive interviews. The goals of these 
focus groups and interviews were to learn how consumers shop for 
mortgages and what information consumers read when they receive 
mortgage disclosures, and to assess their understanding of such 
disclosures.
    The consumer testing groups contained participants with a range of 
ethnicities, ages, educational levels, and mortgage-shopping behaviors, 
including first-time mortgage shoppers, prime and subprime borrowers, 
and consumers who had obtained one or more 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. Several of the 
model forms included in the 2009 Closed-End Proposal were developed 
through the testing. A report summarizing the results of the testing is 
available on the Board's public Web site: https://www.federalreserve.gov/boarddocs/meetings/2009/20090723/Full%20Macro%20CE%20Report.pdf.

II. Summary of the Interim Rule

    MDIA requires creditors to disclose examples of rates and payments, 
including the maximum rate and payment, for loans with variable rates 
or payments. MDIA also requires creditors to disclose a statement that 
consumers should not assume they can refinance their loans. The 2009 
Closed-End Proposal included provisions that would implement these MDIA 
requirements, including provisions interpreting the statute's 
requirement that creditors disclose ``examples'' of payment adjustments 
other than the maximum during the life of the loan and the ``no-
guarantee-to-refinance'' statement. Those provisions, proposed 
Sec. Sec.  226.38(c) and 226.38(f)(3), respectively, would require the 
TILA disclosure to contain certain interest rate and payment summary 
tables and the ``no-guarantee-to-refinance'' statement. See 74 FR 
43232, 43334-35 and 43337, Aug. 26, 2009. The Board does not expect to 
finalize that proposal, however, before the January 30, 2011 statutory 
effective date of the MDIA requirement to disclose examples of payment 
adjustments. Accordingly, this interim rule implements the MDIA 
requirements now, so that mortgage creditors will have the guidance 
necessary to comply with them by January 30, 2011. This interim rule 
adopts the provisions of the 2009 Closed-End Proposal requiring 
disclosure of interest rate and payment summary tables as proposed, 
except as discussed below and with minor modifications for clarity.
    Under this interim rule, creditors will be required to disclose in 
a tabular format the contract interest rate together with the 
corresponding monthly payment, including any escrows for taxes and 
property and/or mortgage insurance. Special disclosure requirements are 
imposed for adjustable-rate or step-rate loans to show the interest 
rate and payment at consummation, the maximum interest rate and payment 
at any time during the first five years after consummation, and the 
maximum interest rate and payment possible during the life of the loan. 
Additional special disclosures are required for loans with negatively-
amortizing payment options, introductory interest rates, interest-only 
payments, and balloon payments. Finally, the interim rule requires the 
disclosure of a statement that there is no guarantee the consumer will 
be able to refinance the loan with a new transaction in the future.

III. Legal Authority

A. Rulemaking Authority

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

B. Authority To Issue Interim Rule

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

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C. Authority for October 25, 2010 Effective Date

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

IV. Overview of Comments Received on the Interest Rate and Payment 
Summary Tables

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

V. Section-by-Section Analysis

Section 226.17 General Disclosure Requirements

17(a) Form of Disclosures
17(a)(1)
    Comment 17(a)(1)-1 provides guidance on the general requirement 
that the TILA disclosures be clear and conspicuous. The comment 
currently states that no minimum type size is mandated for the 
disclosures. This interim rule amends the comment by adding a 
parenthetical exception to that general rule, to conform to the fact 
that new Sec.  226.18(s), discussed below, requires a minimum 10-point 
type size.

Section 226.18 Content of Disclosures

18(g) Payment Schedule
    The interim rule makes a conforming amendment to Sec.  226.18(g). 
That section imposes the current payment schedule disclosure for 
closed-end consumer credit. As discussed below, Sec.  226.18(s) 
replaces the payment schedule with the new interest rate and payment 
summary table for a transaction secured by real property or a dwelling, 
other than a transaction secured by a consumer's interest in a 
timeshare plan. Thus, Sec.  226.18(g) is amended to exclude such 
transactions from its coverage.
18(s) Interest Rate and Payment Summary for Mortgage Transactions
    This interim rule adopts a new Sec.  226.18(s), which provides 
requirements for disclosure of the contract interest rate and the 
periodic payment for most transactions secured by real property or a 
dwelling. The information required by Sec.  226.18(s)(2)-(4) must be in 
the form of a table, as provided in Sec.  226.18(s)(1), substantially 
similar to Model Clause H-4(E), H-4(F), H-4(G), or H-4(H) in Appendix 
H. As noted above, some industry commenters on the 2009 Closed-End 
Proposal questioned the use of shading in the proposed model forms. The 
Board recognizes these commenters' concern that shading can undermine 
the forms' legibility when they are photocopied or faxed. By requiring 
that disclosures be ``substantially similar'' to the models, however, 
the Board does not intend that disclosures must include any shading 
that the models contain. Comment 18(s)-1 therefore clarifies that a 
disclosure that does not include the shading shown in a model clause 
but otherwise follows the model clause's headings and format is 
substantially similar to that model clause.
    The rules for disclosing the interest rate and periodic payments 
for an amortizing loan are provided in

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Sec. Sec.  226.18(s)(2)(i) and 226.18(s)(3). Rules for disclosing the 
interest rate and periodic payments for a loan with negative 
amortization are in Sec. Sec.  226.18(s)(2)(ii) and 226.18(s)(4). 
Special rules for disclosing balloon payments are found in Sec.  
226.18(s)(5). Additional explanations of introductory rates and 
negative amortization are required by Sec. Sec.  226.18(s)(2)(iii) and 
226.18(s)(6), respectively. Finally, Sec.  226.18(s)(7) provides 
definitions for certain terms used in Sec.  226.18(s).
Existing Requirements for Periodic Payments
    TILA Section 128(a)(6) requires the creditor to disclose the 
number, amount, and due dates or period of payments scheduled to repay 
the total of payments, for closed-end credit. 15 U.S.C. 1638(a)(6). 
Currently, Sec.  226.18(g) implements TILA Section 128(a)(6). Under 
Sec.  226.18(g), creditors must show the number, amounts, and timing of 
payments scheduled to repay the obligation, except as provided in Sec.  
226.18(g)(2) for certain loans with varying payments.\3\
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    \3\ For a mortgage transaction with rates or fees that exceed 
certain thresholds, TILA Section 129 requires special disclosures 
regarding payments three business days before consummation of the 
transaction. See Sec.  226.32(c)(3), (4). The Board is not revising 
those disclosures in this interim rule.
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    Comment 18(g)-1 provides that the payment schedule should include 
all components of the finance charge, not just interest. Thus, if 
mortgage insurance is required, the payment schedule must reflect the 
consumer's mortgage insurance payments until the date on which the 
creditor must automatically terminate coverage under applicable law. 
See comment 18(g)-5. Commentary to Sec.  226.17(c) provides that, for 
an adjustable-rate loan, creditors should disclose the payments and 
other disclosures based only on the initial rate and should not assume 
that the rate will increase. The disclosures must reflect a discounted 
or premium initial interest rate, however, for as long as it is 
charged. The commentary permits, but does not require, creditors to 
include in the payments amounts that are not finance charges or part of 
the amount financed. Thus, creditors may, but need not, include 
insurance premiums excluded from the finance charge under Sec.  
226.4(d), and ``real estate escrow amounts such as taxes added to the 
payment in mortgage transactions.''
    Effect of MDIA amendments. TILA Section 128(b)(2)(C), as added by 
the MDIA, requires additional disclosures for loans secured by a 
dwelling in which the interest rate or payments may vary. 15 U.S.C. 
1638(b)(2)(C). Specifically, creditors must provide ``examples of 
adjustments to the regular required payment on the extension of credit 
based on the change in the interest rates specified by the contract for 
such extension of credit. Among the examples required * * * is an 
example that reflects the maximum payment amount of the regular 
required payments on the extension of credit, based on the maximum 
interest rate allowed under the contract. * * *'' 15 U.S.C. 
1638(b)(2)(C).
    TILA Section 128(b)(2)(C) provides that these examples must be in 
conspicuous type size and format and that the payment schedule be 
labeled ``Payment Schedule: Payments Will Vary Based on Interest Rate 
Changes.'' TILA Section 128(b)(2)(C) requires the Board to conduct 
consumer testing to determine the appropriate format for providing the 
disclosures to consumers so that the disclosures can be easily 
understood, including the fact that the initial regular payments are 
for a specific time period that will end on a certain date, that 
payments will adjust afterwards potentially to a higher amount, and 
that there is no guarantee that the borrower will be able to refinance 
to a lower amount. 15 U.S.C. 1638(b)(2)(C). As discussed above, the 
Board conducted the required testing and, based on the results and 
other analysis, developed the mortgage disclosures contained in the 
2009 Closed-End Proposal, including those aspects now being adopted in 
this interim rule.
The Interim Rule
    The Board is adding new Sec.  226.18(s) to implement TILA Section 
128(a)(6) and Section 128(b)(2)(C) for most closed-end transactions 
secured by real property or a dwelling.\4\ For all other closed-end 
credit transactions, Sec.  226.18(g) continues to provide the rules for 
disclosing payments. Section 226.18(s) requires creditors to disclose 
the contract interest rate, regular periodic payment, and balloon 
payment if applicable. For adjustable-rate or step-rate amortizing 
loans, up to three interest rates and corresponding periodic payments 
are required, including the maximum possible interest rate and payment. 
If payments are scheduled to increase independent of an interest-rate 
adjustment, the increased payment must be disclosed. Payments for 
amortizing loans must separately itemize an estimate of the amount for 
taxes and insurance if the creditor will establish an escrow account. 
If a borrower may make one or more payments of interest only, all 
payment amounts disclosed must be itemized to show the amount that will 
be applied to interest and the amount that will be applied to 
principal. Special rate and payment disclosures are required for loans 
with negative amortization. Creditors must provide the information 
about interest rates and payments in the form of a table, and creditors 
are not permitted to include other, unrelated information in the table.
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    \4\ TILA Section 128(b)(2)(C) also provides that the Board's 
testing should ensure that consumers can understand that there is no 
guarantee that they will be able to refinance. New Sec.  226.18(t), 
discussed below, implements this aspect of Section 128(b)(2)(C).
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    Scope of Sec.  226.18(s). TILA Section 128(b)(2)(C) applies to all 
transactions secured by a dwelling, other than transactions secured by 
timeshare plans (discussed below). The Board proposed to expand the 
requirement in Section 128(b)(2)(C) to include loans secured by real 
property that do not include a dwelling and is now adopting that 
proposal. Thus, transactions secured by real property with no dwelling 
or other structure built thereon would be subject to the enhanced 
disclosures, assuming such transactions are consumer credit. Some 
creditors commented on the proposed expansion of the scope of the MDIA 
requirements, questioning its necessity. As discussed in the 2009 
Closed-End Proposal, however, unimproved real property is likely to be 
a significant asset for most consumers, and consumers should receive 
the disclosures required in Section 128(b)(2)(C) before they become 
obligated on a loan secured by such an asset. The disclosures will 
alert consumers to the potential for interest rate and payment 
increases and help them to determine whether these risks are 
appropriate to their circumstances. The Board also believes that 
consistent disclosure requirements for all mortgage-secured, closed-
end, consumer credit transactions, whether they include a dwelling or 
not, should ease compliance burdens for mortgage creditors.
    The Board is adopting this adjustment to TILA Section 128(b)(2)(C) 
pursuant to its authority under TILA Section 105(a). 15 U.S.C. 1604(a). 
Section 105(a) authorizes the Board to make exceptions and adjustments 
to TILA for any class of transactions to effectuate the statute's 
purposes, which include facilitating consumers' ability to compare 
credit terms and helping consumers avoid the uninformed use of credit. 
15 U.S.C. 1601(a), 1604(a). The class of transactions that would be 
affected is transactions secured by real property or a dwelling. As 
discussed, providing

[[Page 58474]]

examples of increased interest rates and payments will help consumers 
understand the risks involved in certain loans. The Board believes that 
this adjustment is proper to ensure that consumers receive meaningful 
disclosures that facilitate their informed use of credit.
    Timeshare plans. TILA Section 128(b)(2)(G), as added by MDIA, 
excludes from the coverage of Section 128(b)(2)(C) an extension of 
credit secured by a timeshare plan. 15 U.S.C. 1638(b)(2)(G). Thus, the 
interim rule excludes these transactions from coverage of Sec.  
226.18(s).\5\ This exclusion does not affect the determination of 
whether such transactions are subject to Regulation Z and Sec.  226.18; 
if they are subject to that section, they must include the payment 
schedule under Sec.  226.18(g).
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    \5\ Credit secured by a timeshare plan is also excluded from 
MDIA's other requirements. Accordingly, the MDIA Final Rule excluded 
from the new timing, corrected disclosure, and related requirements 
a transaction ``that is secured by a consumer's interest in a 
timeshare plan described in 11 U.S.C. 101(53D).'' See Sec.  
226.19(a)(5).
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    Reverse mortgages. Section 226.18 currently applies to reverse 
mortgages. Reverse mortgages have unique features that make the 
disclosures in Sec.  226.18, including the current payment schedule 
under Sec.  226.18(g), difficult to apply and potentially confusing to 
consumers. The same is true of the new interest rate and payment 
summary tables required by this interim rule under Sec.  226.18(s). 
Simultaneously with this interim rule, the Board is proposing improved 
comprehensive disclosure requirements tailored to closed- and open-end 
reverse mortgages. When those disclosures are adopted in final form, 
the Board anticipates that it also will exclude reverse mortgages from 
the coverage of the closed-end mortgage disclosure requirements. In the 
meantime, the Board is excluding reverse mortgages from the definition 
of ``negative amortization mortgage'' under Sec.  226.18(s)(7) because 
the special interest rate and payment summary requirements for negative 
amortization mortgages, discussed below, would be especially unworkable 
for reverse mortgages and also especially likely to cause consumer 
confusion. Virtually all reverse mortgages being made in the market 
currently are, to the Board's knowledge, fixed-rate loans. 
Consequently, under the requirements discussed below, reverse mortgages 
would be disclosed under the relatively straightforward fixed-rate 
summary table requirements of Sec. Sec.  226.18(s)(2)(i) and 
226.18(s)(3).
    Fixed-rate, fixed-payment loans. TILA Section 128(b)(2)(C) applies 
by its terms only to mortgages where the rate, payment, or both may 
change after consummation. Accordingly, the Board could apply the new 
interest rate and payment summary requirements to only such mortgages 
and leave fixed-rate, fixed-payment mortgages subject to Sec.  
226.18(g). The Board believes, however, that applying Sec.  226.18(s) 
to all mortgages will simplify compliance for creditors and make 
comparing different loan products more straightforward for consumers. 
Accordingly, the interest rate and payment summary table is required 
for all transactions secured by real property or a dwelling, including 
fixed-rate, fixed-payment mortgages. The Board is adopting this 
requirement pursuant to its authority under TILA Section 105(a) to 
effectuate the purposes of TILA. 15 U.S.C. 1604(a).
    Payment schedule label. The Board proposed in the 2009 Closed-End 
Proposal to revise the label for the interest rate and payment 
information from the text set out in the statute. The Board proposed to 
replace the statutory language, ``Payment Schedule: Payments Will Vary 
Based on Interest Rate Changes,'' with ``Interest Rate and Payment 
Summary'' based on plain language principles, to make the disclosure 
more readily understandable. The Board is now adopting that proposal. 
The Board is making this adjustment pursuant to the same TILA Section 
105(a) authority, and for the same class of transactions, as discussed 
above with respect to transactions subject to Sec.  226.18(s).
    Disclosure of the interest rate. Currently, TILA does not require 
disclosure of the contract interest rate for closed-end credit. In the 
consumer testing conducted for the Board, when consumers were asked 
what factors they considered when looking for a mortgage, the most 
common answers consumers provided were that they wanted to obtain the 
lowest interest rate possible and that they wanted the loan with the 
lowest possible monthly payment. Nevertheless, as they described their 
thought process, most consumers were primarily focused on the initial 
rate and payment, rather than how those terms might vary over time.
    In addition, testing indicated that the current TILA payment 
schedule, which does not show the relationship between the interest 
rate and payments, is ineffective at communicating to consumers what 
could happen to their payments over time with an adjustable-rate 
mortgage. Most participants said they liked the current presentation of 
the payments because it was specific and detailed. When shown a payment 
schedule for an adjustable-rate mortgage with an introductory rate, 
however, many incorrectly assumed that payments shown were in fact 
their future payments, rather than payments based on the fully-indexed 
rate at consummation.
    Under the Board's interim rule, the interest rate and payment are 
shown together in a table. The Board believes that highlighting the 
relationship between the interest rate and payment will enhance 
consumers' understanding of loan terms. If the interest rate is 
adjustable, the table indicates changes in the interest rate over time. 
In addition, payment changes that are not based on adjustments to the 
interest rate are indicated in the table. Highlighting potential 
changes to the interest rate and payment based on maximum interest rate 
increases, rather than showing a set payment schedule based on the 
assumption that the index used to calculate an adjustable interest rate 
will not change, will clarify to consumers not only that their interest 
rate and payments may change, but also how the interest rate and 
payment may change over time. Consumers will be better able to 
determine if an adjustable-rate loan will be affordable and appropriate 
for their individual circumstances.
    Definitions for Sec.  226.18(s). Section 226.18(s) uses several 
terms that are defined in Sec.  226.18(s)(7). Under Sec.  226.18(s)(7), 
the term ``adjustable-rate mortgage'' means a loan in which the annual 
percentage rate may increase after consummation. The term ``step-rate 
mortgage'' means a loan in which the interest rate will change after 
consummation, and the rates and periods in which they will apply are 
known. The term ``fixed-rate mortgage'' means a loan that is not 
adjustable-rate or step-rate. The term ``interest-only'' means that one 
or more periodic payments may be applied solely to interest and not to 
loan principal; an ``interest-only loan'' is a loan that permits 
interest-only payments. An ``amortizing loan'' is defined as a loan in 
which the regular periodic payments cannot cause the principal balance 
to increase; the term ``negative amortization'' means the regular 
periodic payments may cause the principal balance to increase; the term 
``negative amortization loan'' means a loan with a negative 
amortization feature but explicitly excludes a reverse mortgage, as 
discussed above. Finally, the term ``fully-indexed rate'' means the 
interest rate calculated using the index value and margin.

[[Page 58475]]

18(s)(1)
    Section 226.18(s)(1) requires the interest rate and payment 
information to be disclosed in the form of a table. This will ensure 
that payment examples required by the MDIA are in conspicuous format as 
required by TILA Section 128(b)(2)(C). The MDIA also requires 
conspicuous type size for the examples. Under Sec.  226.18(s)(1), the 
table must be in a minimum 10-point font to ensure that it is clear and 
conspicuous.
    The interim rule prescribes the number of interest rates and 
payments that may be shown in the table. The number of columns and rows 
for the table required by Sec.  226.18(s) will vary depending on 
whether the loan is an amortizing loan and whether it has an adjustable 
rate. In all cases, Sec.  226.18(s)(1) provides that the tables must 
have no more than five columns across, to avoid information overload 
for consumers. Creditors may not include information in the table that 
is not required under 226.18(s), to avoid information overload. Model 
clauses are provided in Appendix H.
18(s)(2) Interest Rates
18(s)(2)(i) Amortizing Loans
    Section 226.18(s)(2)(i) requires disclosure of interest rates for 
amortizing loans. For a fixed-rate mortgage with no scheduled payment 
increases or balloon payments, the creditor discloses only one interest 
rate. Fixed-rate loans with payment increases require the creditor to 
disclose the interest rate along with each payment increase, even if 
the interest rate does not change. For adjustable-rate mortgages and 
step-rate mortgages, more than one interest rate must be shown, as 
discussed below.
Interest Rates for Fixed-Rate Mortgages
    For fixed-rate mortgages, Sec.  226.18(s)(2)(i)(A) requires 
creditors to disclose the interest rate applicable at consummation. If 
the transaction does not provide for any payment increases, only one 
interest rate is disclosed. Some fixed rate mortgages, however, have 
scheduled payment increases. In those cases the creditor must show the 
interest rate associated with such payments, even though the rate has 
not changed, as discussed under Sec.  226.18(s)(2)(i)(C) below.
Interest Rates for Adjustable-Rate Mortgages and Step-Rate Mortgages
    As discussed above, TILA Section 128(b)(2)(C) requires creditors to 
disclose examples of payment increases, including the maximum possible 
payment, for adjustable-rate mortgages and other mortgages where 
payments may vary. Under Sec.  226.18(s)(2)(i), creditors must disclose 
more than one interest rate for adjustable-rate mortgages and step-rate 
mortgages because the payments can vary.
    Interest rates at consummation. Under Sec.  226.18(s)(2)(i)(B)(1), 
the creditor must provide the interest rate at consummation and the 
period of time until the first adjustment, labeled as ``introductory 
rate and monthly payment.'' Additional explanation of discounted 
introductory rates is required by Sec.  226.18(s)(2)(iii), discussed 
below.
    Maximum during first five years. The Board proposed in the 2009 
Closed-End Proposal to require disclosure of the maximum rate and 
payment at first adjustment, as one of the examples required by TILA 
Section 128(b)(2)(C). The proposal would have required the creditor to 
provide the maximum interest rate applicable at the first interest rate 
adjustment and the calendar month and year in which the first scheduled 
adjustment occurs.
    The Board is modifying this aspect of the proposed rule. Instead of 
the maximum rate at the first scheduled adjustment, Sec.  
226.18(s)(2)(i)(B)(2) requires disclosure of the maximum possible rate 
at any time during the first five years after consummation, even if 
that is not the first adjustment, and the earliest date that rate may 
apply. The Board believes that requiring the example to reflect the 
first adjustment poses a risk that consumers would not be adequately 
warned of significant interest rate changes on a transaction where the 
first adjustment will be fairly modest under the transaction's terms. 
The limited first rate increase could be followed quickly by a much 
greater increase, which would not be disclosed under the rule as 
proposed. The Board solicits comment on whether five years is the 
appropriate period to address this concern. Consistent with the 2009 
Closed-End Proposal, the creditor must take into account any 
limitations on interest rate increases when determining the interest-
rate to be disclosed under Sec.  226.18(s)(2)(i)(B)(2). If the interest 
rate may reach the maximum possible during the loan's term within the 
first five years, the creditor should disclose the rate as the maximum 
possible interest rate, discussed below.
    Maximum possible interest rate. Section 226.18(s)(2)(i)(B)(3) 
requires creditors to disclose the maximum interest rate that could 
apply at any time, and the earliest date on which that rate could 
apply, as required by TILA Section 128(b)(2)(C). The Board is requiring 
this disclosure for step-rate mortgages as well, because the rate and 
payment may increase in such loans. As noted above, consumer advocates 
strongly supported this requirement in their comments. Consumer testing 
conducted for the Board also suggests that consumers find this 
information about the maximum rate and payment particularly important 
in evaluating a loan offer for an adjustable-rate mortgage. 
Participants indicated that this information is most useful to them in 
determining whether such a loan was affordable. If an amortizing 
adjustable-rate mortgage has intermediate limitations on interest rate 
increases, then the table required by proposed Sec.  226.18(s) will 
have at least three columns; if the transaction has no intermediate 
limitations on interest rates, then the table will have two columns, 
one showing the rate at consummation and the other showing the maximum 
possible under the loan's terms.
    Interest rate applicable at scheduled payment increase. Some 
mortgages provide for a payment increase that is not attributable to an 
interest rate adjustment or increase. For example, a loan may permit 
the borrower to make payments that cover only accrued interest for some 
specified period, such as the first five years following consummation; 
at the end of the interest-only period, the borrower must begin making 
larger payments to cover both interest accrued and principal. Section 
226.18(s)(2)(i)(C) provides that, where such a payment increase will 
not coincide with an interest rate adjustment, the creditor must 
include a column that discloses the interest rate that would apply at 
the time the adjustment is scheduled to occur, and the date on which 
the increase would occur. Thus, for a fixed-rate mortgage, the creditor 
shows the same interest rate twice (and the corresponding payments as 
discussed below). The Board believes this will help the consumer 
understand that the increase in payment is due to the requirement to 
begin repaying loan principal and not to an interest-rate adjustment.
    The same is true for adjustable-rate mortgages and step-rate 
mortgages. For example, some adjustable-rate mortgages permit the 
borrower to make interest-only payments for a specified period, such as 
the first five years following consummation. A scheduled payment 
increase may or may not coincide with a scheduled interest rate 
adjustment. Under Sec.  226.18(s)(2)(i)(C), if a scheduled payment 
increase does not coincide with an interest rate adjustment (or rate 
increase for a step-rate mortgage), creditors must include a

[[Page 58476]]

column that discloses the interest rate that will apply at the time of 
the increase, the date the increase is scheduled to occur, and an 
appropriate description such as ``first increase'' or ``first 
adjustment,'' as appropriate. Comment 18(s)(2)(i)(C)-1 provides 
clarifying examples.
18(s)(2)(ii) Negative Amortization Loans
    For negative amortization loans, for which any scheduled payment 
may cause the principal balance to increase, Sec.  226.18(s)(2)(ii) 
requires disclosure of the interest rate applicable at consummation. 
Some ARM loans do not provide any limitations on interest rate 
increases (``interest rate caps''); the only cap is the maximum 
possible interest rate required by Sec.  226.30(a). For these payment 
option loans, the creditor must disclose the interest rate in effect at 
consummation and assume that the interest rate reaches the maximum at 
the next adjustment--often the second month after consummation. The 
creditor must disclose that rate for the first and second scheduled 
payment increases, explained under the discussion of Sec.  226.18(s)(4) 
below. And the creditor must disclose that rate a third time, in the 
last column, when the loan has recast, i.e., converted to fully 
amortizing payments over the remainder of the loan's term. This 
approach to interest rates for negative amortization loans is 
consistent with the MDIA, which requires disclosure of the payment at 
the maximum possible rate, and other examples of payment increases. 
Additional rules for disclosing the interest rate on a loan with 
negative amortization are found in Sec.  226.18(s)(6), discussed below.
18(s)(2)(iii) Introductory Rate Disclosure for Amortizing Adjustable-
Rate Mortgages
    Many adjustable-rate mortgages have an introductory or ``teaser'' 
rate, set below the sum of the index and margin used for later 
adjustments. Section 226.18(s)(2)(iii) requires a special disclosure of 
any introductory rate. In consumer testing conducted for the Board, 
many participants did not understand the ramifications of an 
introductory interest rate. Participants understood that if market 
interest rates increased, the interest rate and payment on their loan 
would increase. In contrast, participants did not understand that, if 
they had an introductory rate, their interest rate and payment would 
increase when the introductory rate expired, even if market interest 
rates did not increase.
    Several different disclosures designed to show the impact of an 
introductory rate were tested in tabular form, with mixed results. 
Therefore, the Board is requiring an explanation of the introductory 
rate below the table itself. Section 226.18(s)(2)(iii) requires 
disclosure of the introductory rate, how long it will last, and that 
the interest rate will increase at the first scheduled adjustment even 
if market rates do not increase. Creditors also must disclose the fully 
indexed rate that otherwise would apply at consummation. This 
disclosure must be placed in a box beneath the table, in a format 
substantially similar to Model Clause H-4(I).
    Creditors commenting on the 2009 Closed-End Proposal expressed 
concern over the requirement to disclose the fully-indexed rate at 
consummation because the value of the index at consummation may be 
unknown when disclosures are required to be delivered within three 
business days after receipt of an application under Sec.  226.19(a)(1). 
Comment 18(s)(2)(iii)(C)-1 would clarify that, for early disclosures, 
the fully-indexed rate disclosed under Sec.  226.18(s)(2)(iii)(C) may 
be based on the index in effect at the time the disclosure is provided. 
``At consummation,'' as used in Sec.  226.18(s)(2)(iii)(C), refers to 
disclosures delivered at consummation, or three business days before 
consummation pursuant to Sec.  226.19(a)(2)(ii). The comment also 
adopts guidance for cases where the contract provides for a delay in 
the implementation of changes in an index value. In such cases, the 
disclosure may reflect an index value in effect anytime during the 
contractual delay period prior to the time of the disclosure. For 
example, if the contract specifies that rate changes are based on the 
index value in effect 45 days before the change date, creditors may use 
any index value in effect during the 45 days before consummation (or 
any earlier date of disclosure) in calculating the fully-indexed rate 
to be disclosed. This guidance is similar to existing comment 17(c)(1)-
10.
18(s)(3) Payments for Amortizing Loans
18(s)(3)(i) Principal and Interest Payments
    Section 226.18(s)(3)(i) requires disclosure of the principal and 
interest payment that corresponds to each interest rate disclosed under 
Sec.  226.18(s)(2)(i). Under Sec.  226.18(s)(3)(i), if all regular 
periodic payments include principal and interest, each disclosed 
payment amount must be listed in a single row in the table with a 
description such as ``principal and interest.'' Separate rules apply to 
amortizing loans with interest-only payments under Sec.  
226.18(s)(3)(ii), discussed below.
    Regular periodic payments. Under Sec.  226.18(s)(3)(i)(A), for 
transactions where the regular periodic payment fully amortizes the 
loan, the payment amount including both principal and interest must be 
disclosed. Section 226.18(s)(3)(i)(B) requires disclosure of the 
payment amount at any scheduled payment increase that does not coincide 
with an interest rate adjustment, and the date on which the increase is 
scheduled to occur. For example, a fixed-rate loan might have terms 
under which part of the scheduled payment is applied to principal for 
an initial period, thus it is not an interest-only loan disclosed under 
Sec.  226.18(s)(3)(ii). The amount of principal covered by such 
payments, however, may be insufficient to amortize the loan fully over 
its life. In such cases, a scheduled increase in the payment amount 
from such a partially amortizing payment to a fully amortizing payment 
would be required to be disclosed.
    Escrows; mortgage insurance premiums. Section 226.18(s)(3)(i)(C) 
provides that, if an escrow account will be established, the creditor 
must disclose the estimated payment amount for taxes and insurance, 
including any mortgage insurance. For transactions secured by real 
property or a dwelling, creditors no longer have the flexibility 
provided in existing Sec.  226.18(g) to exclude escrow amounts. 
Consumer testing conducted for the Board shows that many consumers 
compare loans based on the monthly payment amount. The Board believes 
that, for consumers to understand the monthly amount they actually will 
be required to pay for a particular loan, information about payments 
for taxes and insurance is necessary. Escrow information is included in 
the table to make it easier for consumers to identify whether there is 
an escrow account and how much of their payment applies to the escrow.
    As noted above, both consumer advocates and some industry 
commenters argued that taxes and insurance estimates should be included 
even when no escrow account is established. The Board believes there 
may be valid reasons for such an approach. For purposes of this interim 
rule, however, the Board is adopting the requirement as proposed. The 
Board is concerned that disclosures of taxes and insurance in all cases 
may leave consumers confused as to whether an escrow account is 
included with the loan or not, in the absence of a clear and effective 
notice indicating which is the

[[Page 58477]]

case. After additional testing can be conducted to determine whether 
such a notice is feasible and helpful to consumers, the Board will 
consider such an approach when it adopts the 2009 Closed-End Proposal 
as a final rule.
    Comment 18(s)(3)(i)(C)-1 clarifies the types of taxes and insurance 
that are required to be included in the estimate. The comment also 
clarifies that the estimated escrow amounts disclosed under Sec.  
226.18(s)(3)(i)(C), other than mortgage insurance premiums, do not 
affect any other disclosures, including the finance charge and annual 
percentage rate.
    Comment 18(s)(3)(i)(C)-2 provides guidance on how to determine the 
length of time for which mortgage insurance payments must be included 
in the estimate. Under the comment, the payment amount should reflect 
the consumer's mortgage insurance payments until the date on which the 
creditor must automatically terminate coverage under applicable law, 
even though the consumer may have a right to request that the insurance 
be canceled earlier. This guidance mirrors existing comment 18(g)-5. 
Comment 18(s)(3)(i)(C)-2 also states that periodic mortgage insurance 
payments should be included in the escrow line of the summary table 
even if they are not escrowed and even if there is no escrow account 
established for the transaction.
    Credit insurance. The Board solicited comment on whether premiums 
or other amounts for credit life insurance, debt suspension and debt 
cancellation agreements, and other similar products (``credit 
protection products'') should be included or excluded from the 
disclosure of escrows for taxes and insurance. The Board expressed 
concerns that inclusion of such amounts may cause some consumers to 
believe these products are required. Most commenters that addressed 
this question agreed with the Board's concern and favored excluding 
such amounts from the escrow amount disclosed. The Board is adopting 
the escrow disclosure requirement as proposed and is adding language to 
comment 18(s)(3)(i)(C)-1 to clarify that premiums or payments for 
credit protection products should not be included in the disclosed 
escrow amounts.
    Total periodic payments. Section 226.18(s)(3)(i)(D) requires 
disclosure of the total estimated monthly payment. The total estimated 
monthly payment is the sum of the principal and interest payments 
required under Sec.  226.18(s)(3)(i)(A) or (B), as applicable, and the 
estimated taxes and insurance payments required to be disclosed in 
Sec.  226.18(s)(3)(i)(C).
18(s)(3)(ii) Interest-Only Payments
    Like Sec.  226.18(s)(3)(i), Sec.  226.18(s)(3)(ii) requires the 
disclosure of regular periodic payments corresponding to the amortizing 
loan interest rates disclosed under Sec.  226.18(s)(2)(i). In addition, 
under Sec.  226.18(s)(3)(ii), special itemization of the payment is 
required if the loan permits the consumer to make any interest-only 
payments. Comment 18(s)(3)(ii)-1 clarifies, however, that these rules 
apply only if the loan is not also a negative amortization loan; if the 
loan is a negative amortization loan, even if it also has an interest-
only feature, payments are disclosed under the rules in Sec.  
226.18(s)(4), discussed below.
    Principal and interest payment itemization. Under Sec.  
226.18(s)(3)(ii), if any regular periodic payment amounts will include 
interest but not principal, all payments for the loan must be itemized 
into principal and interest. For a payment that includes no principal, 
Sec.  226.18(s)(3)(ii)(A) requires the creditor to indicate that none 
of the payment amount will be applied to principal. The creditor must 
label the dollar amount to be applied to interest ``interest payment.'' 
The Board requires this itemization and labeling to highlight for 
consumers the impact of making interest-only payments. Without this 
emphasis, many participants in the Board's consumer testing did not 
clearly understand that an ``interest-only'' loan was different from a 
loan in which all payments are applied to principal and interest. Thus, 
even for later payments that will be applied to both principal and 
interest, Sec.  226.18(s)(3)(ii)(B) requires the creditor to itemize 
the payment between the two.
    Escrows and total periodic payments. Section 226.18(s)(3)(ii)(C) 
requires disclosure of an estimate of the amount of taxes and 
insurance, including mortgage insurance. Section 226.18(s)(3)(ii)(D) 
requires disclosure of the estimated total payment including principal, 
interest, and taxes and insurance. These requirements parallel the 
escrow and total payment disclosures under Sec.  226.18(s)(3)(i)(C) and 
(D). Accordingly, comment 18(s)(3)(ii)(C)-1 refers to the commentary 
under Sec.  226.18(s)(3)(i)(C), discussed above, for guidance on 
escrows.
18(s)(4) Payments for Negative Amortization Loans
    Under Sec.  226.18(s)(4), for each interest rate disclosed under 
Sec.  226.18(s)(2)(ii) for a loan with negative amortization, the 
creditor must disclose payments in two separate rows. One row of the 
table shows the fully amortizing payment for each interest rate; for 
purposes of calculating these payments the creditor would assume the 
interest rate reaches the maximum at the earliest possible date and 
that the consumer makes only fully amortizing payments. The other row 
of the table shows the minimum required payment for each rate, until 
the recast point. At the recast point, the minimum payment row shows 
the fully amortizing payment. For purposes of the minimum payment row, 
creditors must assume the interest rate reaches the maximum at the 
earliest possible date and that the consumer makes only the minimum 
required payment for as long as permitted under the terms of the legal 
obligation.
    The interest rate and payment summary would display only two 
payment options, even if the terms of the legal obligation provide for 
others, such as an option to make interest-only payments. The table 
would show only the option to make minimum payments that would result 
in negative amortization, and the option to make fully amortizing 
payments. The Board believes that displaying all of the options in the 
table could cause confusion and information overload for consumers. 
Creditors would be free to provide information on options not displayed 
in the table, outside the segregated information required under this 
subsection.
    Consumer advocates commented that the Board's proposed sample 
disclosure for payment option adjustable-rate mortgages (``payment 
option ARMs''), proposed sample H-19(I), would not show the maximum 
possible payment for a typical payment option ARM because the sample 
assumed the transaction's lifetime maximum interest rate of 10.5% would 
be reached at the second payment, which caused the loan to recast to 
fully amortizing payments at the earliest possible time. The commenters 
noted that a payment option ARM reaches the maximum possible payment 
when it applies an intervening rate for a period, so that the onset of 
fully amortizing payments is delayed as long as possible thus 
maximizing the principal balance to which the lifetime maximum rate is 
applied after the loan recasts. The proposed sample was intended to 
illustrate the maximum payment possible under certain assumed 
transaction terms, which did not include any rate adjustment caps other 
than the lifetime cap. Thus, while it did not show the maximum possible 
payment under any payment option

[[Page 58478]]

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