Regulation Z; Truth in Lending, 58539-58788 [2010-20667]

Agencies

• FEDERAL RESERVE SYSTEM

[Federal Register Volume 75, Number 185 (Friday, September 24, 2010)]
[Proposed Rules]
[Pages 58539-58788]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-20667]



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

[[Page 58539]]


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FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Docket No. R-1390]


Regulation Z; 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 home-
secured credit. This proposal would revise the rules for the consumer's 
right to rescind certain open-end and closed-end loan secured by the 
consumer's principal dwelling. In addition, the proposal contains 
revisions to the rules for determining when a modification of an 
existing closed-end mortgage loan secured by real property or a 
dwelling is a new transaction requiring new disclosures. The proposal 
would amend the rules for determining whether a closed-end loan secured 
by the consumer's principal dwelling is a ``higher-priced'' mortgage 
loan subject to the special protections in Sec.  226.35. The proposal 
would provide consumers with a right to a refund of fees imposed during 
the three business days following the consumer's receipt of early 
disclosures for closed-end loans secured by real property or a 
dwelling.
    The proposal also would amend the disclosure rules for open- and 
closed-end reverse mortgages. In addition, the proposal would prohibit 
certain unfair acts or practices for reverse mortgages. A creditor 
would be prohibited from conditioning a reverse mortgage on the 
consumer's purchase of another financial or insurance product such as 
an annuity, and a creditor could not extend a reverse mortgage unless 
the consumer has obtained counseling. The proposal also would amend the 
rules for reverse mortgage advertising.

DATES: Comments must be received on or before December 23, 2010.

ADDRESSES: You may submit comments, identified by Docket No. R-1390, 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: For home-equity lines of credit: 
Jennifer S. Benson or Jelena McWilliams, Attorneys; Krista P. Ayoub or 
John C. Wood, Counsels. For closed-end mortgages: Jamie Z. Goodson, 
Catherine Henderson, Nikita M. Pastor, Samantha J. Pelosi, or Maureen 
C. Yap, Attorneys; Paul Mondor, Senior Attorney. For reverse mortgages, 
Brent Lattin or Lorna M. Neill, Senior Attorneys. 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 update 
and make clarifying changes to the rules regarding the consumer's right 
to rescind certain open- and closed-end loans secured by the consumer's 
principal dwelling. The amendments would also ensure that consumers 
receive TILA disclosures for modifications to key loan terms, by 
revising the rules regarding when a modification to an existing closed-
end mortgage loan results in a new transaction. The amendments would 
ensure that prime loans are not incorrectly classified as ``higher-
priced mortgage loans'' subject to special protections for subprime 
loans in the Board's 2008 HOEPA Final Rule in Sec.  226.35, or as HOEPA 
loans under Sec.  226.32. The proposal would provide consumers a right 
to a refund of fees for three business days after the consumer receives 
early disclosures for closed-end mortgages, ensuring that consumers do 
not feel financially committed to a transaction before they have had a 
chance to review the disclosures and consider other options.
    The amendments also would improve the clarity and usefulness of 
disclosures for open- and closed-end reverse mortgages. They would 
protect consumers from unfair practices in connection with reverse 
mortgages, including conditioning a reverse mortgage on the consumer's 
purchase of a financial or insurance product such as an annuity, and 
originating a reverse mortgage before the consumer has received 
independent counseling. A consumer could not be required to pay a 
nonrefundable fee until three business days after the consumer has 
received counseling. Finally, the amendments would ensure that 
advertisements for reverse mortgages contain balanced information and 
are not misleading. Many of the proposed changes to disclosures are 
based on consumer testing, which is discussed in more detail below.
    The Consumer's Right to Rescind. The proposed revisions to 
Regulation Z would:
     Simplify and improve the notice of the right to rescind 
provided to consumers at closing;
     Revise the list of ``material disclosures'' that can 
trigger the extended right to rescind, to focus on disclosures that 
testing shows are most important to consumers; and

[[Page 58540]]

     Clarify the parties' obligations when the extended right 
to rescind is asserted, to reduce uncertainty and litigation costs.
    Loan Modifications That Require New TILA Disclosure. The proposal 
would provide that new TILA disclosures are required when the parties 
to an existing closed-end loan secured by real property or a dwelling 
agree to modify key loan terms, without reference to State contract 
law.
     New disclosures would be required when, for example, the 
parties agree to change the interest rate or monthly payment, advance 
new money, or add an adjustable rate or other risky feature such as a 
prepayment penalty.
     Consistent with current rules, no new disclosures would be 
required for modifications reached in a court proceeding, and 
modifications for borrowers in default or delinquency, unless the loan 
amount or interest rate is increased, or a fee is imposed on the 
consumer.
     Certain beneficial modifications, such as ``no cost'' rate 
and payment decreases, would also be exempt from the requirement for 
new TILA disclosures.
    Coverage Test for 2008 HOEPA Final Rule and HOEPA. The Board 
proposes to revise how a creditor determines whether a closed-end loan 
secured by a consumer's principal dwelling is a ``higher-priced 
mortgage loan'' subject to the Board's 2008 HOEPA Final Rule in Sec.  
226.35, and how points and fees are calculated for coverage under the 
HOEPA rules in Sec. Sec.  226.32 and 226.34.
     The proposal would replace the APR as the metric a 
creditor compares to the average prime offer rate to determine whether 
the transaction is a higher-priced mortgage loan.
     Creditors instead would use a ``coverage rate'' that would 
be closely comparable to the average prime offer rate, and would not be 
disclosed to consumers.
     The proposal would clarify that most third party fees 
would not be counted towards ``points and fees'' that trigger HOEPA 
coverage.
    Consumer's Right to a Refund of Fees. For closed-end loans secured 
by real property or a dwelling, the proposal would require a creditor 
to:
     Refund any appraisal or other fees paid by the consumer 
(other than a credit report fee), if the consumer decides not to 
proceed with a closed-end mortgage transaction within three business 
days of receiving the early disclosures (fees imposed after this three-
day period would not be refundable); and
     Disclose the right to a refund of fees to consumers before 
they apply for a closed-end mortgage loan.
    Reverse Mortgage Disclosures. The proposal would require a creditor 
to provide a consumer with new and revised reverse mortgage 
disclosures.
     Before the consumer applies for a mortgage, the creditor 
must provide a new two-page notice summarizing basic information and 
risks regarding reverse mortgages, entitled ``Key Questions To Ask 
about Reverse Mortgage Loans;''
     Within three business days of application, and again 
before the reverse mortgage loan is consummated (or the account is 
opened, for an open-end reverse mortgage):
    [cir] Loan cost information specific to reverse mortgages that is 
integrated with information required to be disclosed for all home-
equity lines of credit (HELOCs) or closed-end mortgages, as applicable; 
and
    [cir] A table expressing total costs as dollar amounts, in place of 
the table of reverse mortgage ``total annual loan cost rates.''
    Required Counseling for Reverse Mortgages. The proposal would 
prohibit a creditor or other person from:
     Originating a reverse mortgage before the consumer has 
obtained independent counseling from a counselor that meets the 
qualification standards established by HUD, or substantially similar 
standards;
     Imposing a nonrefundable fee on a consumer (except a fee 
for the counseling itself) until three business days after the consumer 
has received counseling from a qualified counselor; and
     Steering consumers to specific counselors or compensating 
counselors or counseling agencies.
    Prohibition on Cross-Selling for Reverse Mortgages. The proposal 
would:
     Prohibit a creditor or broker from requiring a consumer to 
purchase another financial or insurance product (such as an annuity) as 
a condition of obtaining a reverse mortgage; and
     Provide a ``safe harbor'' for compliance if, among other 
things, the reverse mortgage transaction is consummated (or the account 
is opened) at least ten calendar days before the consumer purchases 
another financial or insurance product.
    Reverse mortgage advertising. The proposal would amend Regulation Z 
to revise the advertising rules for reverse mortgages so that consumers 
receive accurate and balanced information. For example, the proposal 
would require advertisements that state that a reverse mortgage 
``requires no payments'' to clearly disclose the fact that borrowers 
must pay taxes and required insurance.
    Other Proposed Revisions. The proposal would contain several 
changes to the rules for HELOCs and closed-end mortgage loans. These 
changes include:
     Conforming advertising rules for HELOCs to rules for 
closed-end mortgage loans adopted as part of the Board's 2008 HOEPA 
Final Rule;
     Clarifying how creditors may comply with the 2008 HOEPA 
Final Rule's ability to repay requirement when making short-term 
balloon loans;
     Clarifying that certain practices regarding prepayment of 
FHA loans constitute prepayment penalties for purposes of TILA 
disclosures and the Board's 2008 HOEPA Final Rule;
     Requiring servicers to provide consumers with the name and 
address of the holder or master servicer of the consumer's loan 
obligation, upon the consumer's written request; and
     Revising the disclosure rules related to credit insurance 
and debt cancellation and suspension products.

III. The Board's Review of Home-Secured Credit Rules

A. Background

    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

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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 January 
2008, the Board issued 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 implementing the Credit Card Act 
in January and June 2010 (February 2010 Credit Card Rule). 75 FR 7658, 
Feb. 22, 2010; 75 FR 37526, June 29, 2010.
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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 
home-secured credit in several phases.
     HOEPA. In 2007, the Board proposed rules under HOEPA for 
higher-priced mortgage loans (2007 HOEPA Proposed Rules). The final 
rules, adopted 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 are 
not misleading or deceptive. 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. In May 
2009, the Board adopted 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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     Examples of Rate and Payment Increases for Variable Rate 
Mortgage Loans. The MDIA also requires payment examples if the interest 
rate or payments can change. Those provisions of the MDIA become 
effective January 30, 2011. As part of the August 2009 Closed-End 
Proposal, the Board proposed rules to implement the examples required 
by the MDIA. The Board has adopted an interim final rule published 
elsewhere in today's Federal Register that would include the examples 
and model clauses, to provide guidance to creditors until the August 
2009 Closed-End Proposal is finalized.
     Closed-End and HELOC Proposals. In August 2009, the Board 
issued two proposals. For closed-end mortgages, the proposal would 
revise the disclosure requirements and address other issues such as 
loan originators' compensation. 74 FR 43232, Aug. 26, 2009. For HELOCs, 
the proposal would revise the disclosure requirements and address other 
issues such as account terminations, suspensions and credit limit 
reductions, and reinstatement of accounts. 74 FR 43428, Aug. 26, 2009. 
Public comments for both proposals were due by December 24, 2009. The 
Board has adopted a final rule on mortgage originator compensation, 
published elsewhere in today's Federal Register. The Board is reviewing 
the comments on the other aspects of the Closed-End and HELOC 
Proposals.
     Final Rule on Mortgage Originator Compensation. The Board 
has adopted a final rule on mortgage originator compensation, published 
elsewhere in today's Federal Register. In the August 2009 Closed-End 
Proposal, the Board proposed to prohibit compensation to mortgage 
brokers and loan officers (collectively ``originators'') that is based 
on a loan's interest rate or other terms, and to prohibit originators 
from steering consumers to loans that are not in consumers' interests. 
The final rule is substantially similar to the proposal.
     Notice of Sale or Transfer of Mortgage Loans. On November 
20, 2009, the Board issued an interim final rule to implement 
amendments to TILA in the Helping Families Save Their Homes Act of 
2009. 74 FR 60143, Nov. 20, 2009. The statutory amendments took effect 
on May 20, 2009, and require notice to consumers when their mortgage 
loan is sold or transferred. The Board has adopted a final rule that is 
published elsewhere in today's Federal Register.
    This proposal would add or revise several rules, including rules 
that apply to rescission; modifications of existing closed-end loans; 
the method for determining whether a closed-end loan is a ``higher-
priced mortgage'' loan; the fee restriction for early disclosures for 
closed-end mortgage loans; reverse mortgage disclosures; restrictions 
on certain acts and practices in connection with reverse mortgages; and 
advertising practices for reverse mortgages and HELOCs.

B. Consumer Testing for This Proposal

    A principal goal for the Regulation Z review is to produce revised 
and improved disclosures that consumers will be more likely to 
understand and use in their decisions, while not creating undue burdens 
for creditors. Currently, Regulation Z requires creditors to provide a 
notice to inform the consumer about the right to rescind and how to 
exercise that right.
    Regulation Z also provides that a consumer who applies for a 
reverse mortgage must receive the ``standard'' TILA disclosure for a 
HELOC or closed-end mortgage, as applicable, and a special disclosure 
tailored to reverse mortgages. In addition, the Board has recently 
proposed some new disclosures that were tested as part of this 
proposal:
     In the Board's August 2009 HELOC Proposal, the Board 
proposed model clauses and forms for periodic statements, and notices 
that would be required when a creditor terminates, suspends, or reduces 
a HELOC, as well as when a creditor responds to a consumer's request to 
reinstate a suspended or reduced line.
     In the Board's August 2009 Closed-End Proposal, the Board 
proposed model clauses for credit insurance, debt suspension, and debt 
cancellation products (``credit protection products'') offered in 
connection with a HELOC or closed-end mortgage loan.
    The Board retained ICF Macro, a research and consulting firm that 
specializes in designing and testing documents, to conduct consumer 
testing to help the Board's review of Regulation Z's disclosures.
    ICF Macro worked closely with the Board to test model rescission 
notices, model HELOC periodic statements and other HELOC notices, model 
notices for credit protection products, and model forms for reverse 
mortgages. Each round of testing involved testing several model 
disclosure forms. 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.
    Some of the key methods and findings of the consumer testing are 
summarized below. ICF Macro prepared reports of the results of the 
testing, which are available on the Board's public Web site

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along with this proposal at: https://www.federalreserve.gov.
    Rescission and Credit Protection Testing. This consumer testing 
consisted of four rounds of one-on-one cognitive interviews. The goals 
of these interviews were to learn more about what information consumers 
read and understand when they receive disclosures, to research how 
easily consumers can find various pieces of information in these 
disclosures, and to test consumers' understanding of certain words and 
phrases. To address specific issues that surfaced during testing, the 
Board proposes to revise significantly the content of the model form 
for the right to rescind by setting forth new format requirements, and 
new mandatory and optional disclosures for the notice. The Board 
proposes new model and sample forms for the costs and features of 
credit protection products. The Board believes that the proposed new 
format rules and model forms would improve consumers' ability to 
identify disclosed information more readily; emphasize information that 
is most important to consumers; and simplify the organization and 
structure of required disclosures to reduce complexity and information 
overload.
    1. Rescission Testing and Findings. The Board's goal was to develop 
clear and conspicuous model forms for the notice of the right to 
rescind that would enable borrowers to understand that they have a 
right to rescind the transaction within a certain period of time, and 
how to exercise that right. Beginning in the fall of 2009, four rounds 
of one-on-one cognitive interviews with a total of 39 participants were 
conducted in different cities throughout the United States. The 
consumer testing groups were comprised of participants representing a 
range of ethnicities, ages, educational levels, and levels of 
experience with home-secured credit.
    Participants in three rounds of testing were shown HELOC model 
forms for the notice of the right to rescind, and the participants in 
the last round were shown closed-end model forms for the notice of the 
right to rescind. In the first two rounds of testing, approximately one 
half of the participants had some knowledge about the right to rescind 
prior to testing. However, in the last two rounds of testing only a few 
participants had some knowledge about the right to rescind.
    Tabular format for rescission form. In the first round of 
rescission testing, the Board tested two forms, one that provided 
required information in a mostly narrative format based on the current 
model form, and another form that provided required information in a 
tabular form. Almost all participants in the first round commented that 
the information was easier to understand in a tabular form and had more 
success answering comprehension questions with a tabular form. This 
finding is consistent with previous findings in the Board's consumer 
testing of the HELOC disclosures, closed-end mortgage disclosures, and 
credit card disclosures. 74 FR 43428, Aug. 26, 2009; 74 FR 43232, Aug. 
26, 2009; 75 FR 7658, Feb. 22, 2010. As a result, the remaining three 
rounds of testing focused on developing, testing and refining the 
tabular form. The forms tested in subsequent rounds differed mainly in 
how they described the deadline to rescind.
    Tear-off portion of rescission form. Currently, consumers must be 
given two copies of the notice of right to rescind--one to use to 
exercise the right and one to retain for the consumer's records. See 
Sec. Sec.  226.15(b) and 226.23(b). The current model forms contain an 
instruction to the consumer to keep one copy of the two notices that 
they receive because it contains important information regarding their 
right to rescind. See Model Forms G-5 through G-9 of Appendix G and 
Model Forms H-8 and H-9 of Appendix H. The Board tested a model form 
that would allow the consumer to detach the bottom part of the form and 
use it to notify the creditor that the consumer wishes to rescind the 
transaction. Most participants said that they would use the bottom part 
of the form to cancel the transaction. A few participants said that 
they would prepare and send a separate statement in addition to the 
form. When asked what they would do if they lost the notice and wanted 
to rescind, most participants said that they would call the creditor or 
visit their creditor's Web site to obtain another copy of the notice. 
Almost all participants said that they would make and keep a copy of 
the form if they decided to exercise the right.
    Accordingly, the Board is proposing to eliminate the requirement 
that creditors provide two copies of the notice of the right to rescind 
to each consumer entitled to rescind. See proposed Sec. Sec.  
226.15(b)(1) and 226.23(b)(1), below. Instead, the Board is proposing 
to require creditors to provide a form at the bottom of the notice that 
the consumer may detach and use to exercise the right to rescind, 
enabling them to retain the portion explaining their rights. See 
proposed Sec.  226.15(b)(2)(i) and (3)(viii), Sec.  226.23(b)(2)(i) and 
(3)(vii).
    Deadline for rescission. Consumer testing also revealed that 
consumers are generally unable to calculate the deadline for rescission 
based on the information currently required in the notice. The current 
model forms provide a blank space for the creditor to insert a date 
followed by the language ``(or midnight of the third business day 
following the latest of the three events listed above)'' as the 
deadline by which the consumer must exercise the right. The three 
events referenced are the following: (1) The date of the transaction or 
occurrence giving rise to right of rescission; (2) the date the 
consumer received the Truth in Lending disclosures; and (3) the date 
the consumer received the notice of the right to rescind.
    Most participants had difficulty using the three events to 
calculate the deadline for rescission. The primary causes of errors 
were not counting Saturdays as a business day, counting Federal 
holidays as a business day, and counting the day the last event took 
place as the first day of the three-day period. Alternative text was 
tested to assist participants in calculating the deadline based on the 
three events; however, the text added length and complexity to the form 
without a significant improvement in comprehension. Participants in all 
rounds strongly preferred forms that provided a specific date over 
those that required them to calculate the deadline themselves. Thus, 
the Board is proposing to require a creditor to provide the calendar 
date on which it reasonably and in good faith expects the three 
business day period for rescission to expire. See proposed Sec. Sec.  
226.15(b)(3)(vii) and 226.23(b)(3)(vi).
    Extended right to rescind. Consumer testing also indicated that 
consumers do not understand how an extended right to rescind could 
arise. Consumers were confused when presented with a single disclosure 
that provided information about the three-business-day right to rescind 
and an extended right to rescind. In two rounds of testing, 
participants were presented with a model form that contained a 
statement explaining when a consumer might have an extended right to 
rescind. However, consumer testing revealed that these explanations 
added length and complexity but did not increase consumer comprehension 
of the extended right to rescind. Nonetheless, the Board believes that 
some disclosure regarding the extended right to rescind is necessary 
for full disclosure of the consumer's rights. Thus, the Board is 
proposing to include a statement in the model forms that the right to 
cancel the

[[Page 58543]]

transaction or occurrence giving rise to the right of rescission may 
extend beyond the date disclosed in the notice.
    How to exercise the right of rescission. Consumer testing revealed 
that consumers are particularly concerned about proving that they 
exercised the right to rescind before the three-day period expires. 
Participants offered varied responses about a preferred delivery method 
to submit the notice of the right to rescind to the creditor: some 
preferred to send it by e-mail and facsimile to receive instant 
electronic confirmation; others preferred to send it by mail with 
return receipt and tracking requested. Most participants said they 
would not hand-deliver the notice to a bank employee unless they could 
be certain that the employee was authorized to receive the notice on 
the creditor's behalf and could provide them with a receipt.
    The proposed rule would require a creditor, at minimum, to disclose 
the name and address to which the consumer may mail the notice of 
rescission. See proposed Sec. Sec.  226.15(b)(3)(vi) and 
226.23(b)(3)(v). The proposed rule would also permit a creditor to 
describe other methods, if any, that the consumer may use to send or 
deliver written notification of exercise of the right, such as 
overnight courier, fax, e-mail, or in person. The proposed sample forms 
include information for the consumer to submit the notice of rescission 
by mail or fax. See proposed Samples G-5(B) and G-5(C) of Appendix G 
and Sample H-8(B) of Appendix H.
    2. Credit Protection Products Testing and Findings. The Board and 
ICF Macro also developed and tested model and sample forms for credit 
protection products in the last two rounds of 18 interviews--one round 
with 10 participants for HELOCs, and one round with 8 participants for 
closed-end mortgages. These forms were based on model clauses proposed 
in the August 2009 Closed-End Proposal. The sample form was based on 
samples for credit life insurance disclosures proposed in the August 
2009 Closed-End Proposal.
    Consumer testing revealed that consumers have limited understanding 
of credit protection products, and that some of the current disclosures 
do not adequately inform consumers of the costs and risks of these 
products. For example, the current regulation allows creditors to 
disclose the cost of the product on a unit-cost basis in certain 
situations. However, even when provided with a calculator, only three 
of 10 participants in the first round of testing could correctly 
calculate the cost of the product using the unit cost. When the cost 
was disclosed as a dollar figure tailored to the loan amount in the 
second round of testing, all participants understood the cost of the 
product. Accordingly, the proposal would require creditors to disclose 
the maximum premium or charge per period.
    In addition, most credit protection products place limits on the 
maximum benefit, but the current regulation does not require disclosure 
of these limits. To address this problem, the Board tested a disclosure 
of the maximum benefit amount for a sample credit life insurance 
policy. In the first round of testing, only five of the 10 participants 
understood the disclosure of the maximum benefit when disclosed at the 
bottom of the form by the signature line. In the second round of 
testing, this information was presented in a tabular question-and-
answer format and all eight participants understood the disclosure. 
Accordingly, the proposal would require creditors to disclose the 
maximum benefit amount. In addition, based on consumer testing, the 
proposal would require other improved disclosures, such as the 
disclosure of eligibility requirements.
    Prior to consumer testing, the Board reviewed several disclosures 
for credit protection disclosures, which revealed that many disclosures 
were in small font, not grouped together, and in dense blocks of text. 
Based on the Board's experience with consumer disclosures, the Board 
was concerned that consumers would find these disclosures difficult to 
comprehend. To address these problems, the Board tested a sample credit 
life insurance disclosure that used 12-point font, tabular question-
and-answer format, and bold, underlined text. Participants understood 
the content of the disclosures when presented in this format. 
Accordingly, the proposal would require creditors to provide the 
disclosures clearly and conspicuously in a minimum 10-point font, and 
group them together with substantially similar headings, content, and 
format to the proposed model forms. See proposed Model Forms G-16(A) 
and H-17(A).
    3. Reverse Mortgage Disclosures Testing and Findings.
    The reverse mortgage testing consisted of four focus groups and 
three rounds of one-on-one cognitive interviews. The goals of these 
focus groups and interviews were to learn about consumers' 
understanding of reverse mortgages, how consumers shop for reverse 
mortgages and what information consumers read when they receive reverse 
mortgage disclosures, and to assess their understanding of such 
disclosures. The consumer testing groups contained participants with a 
range of ethnicities, ages, and educational levels, and included 
consumers who had obtained a reverse mortgage as well as those who were 
eligible for one based on their age and the amount of equity in their 
home.
    Exploratory focus groups. In January 2010 the Board worked with ICF 
Macro to conduct four focus groups with consumers who had obtained a 
reverse mortgage or were eligible for one based on their age and the 
amount of equity in their home. Each focus group consisted of ten 
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 consumers' understanding of reverse mortgages, 
as well as the process through which consumers decide to apply for a 
reverse mortgage. Focus group participants also provided feedback on a 
sample reverse mortgage disclosure that was representative of those 
currently in use. Following the focus groups, ICF Macro's design team 
used what they learned to develop improved versions of the disclosures 
for further testing.
    Cognitive interviews on existing disclosures. In 2010, the Board 
worked with ICF Macro to conduct three rounds of cognitive interviews 
with a total of 31 participants. These cognitive interviews consisted 
of one-on-one discussions with reverse mortgage consumers, during which 
consumers were asked to explain what they understood about reverse 
mortgages, their experiences and perceptions of shopping for the 
product, and to review samples of existing and revised reverse mortgage 
disclosures. In addition to learning about the information that 
consumers thought was important to know about reverse mortgages, the 
goals of these interviews were: (1) To test consumers' comprehension of 
the existing reverse mortgage disclosure form; (2) to research how 
easily consumers can find various pieces of information in the existing 
and revised disclosures; and (3) to test consumers' understanding of 
certain reverse mortgage related words and phrases.
    Findings of reverse mortgage testing. Many consumer testing 
participants did not understand reverse mortgages or had misconceptions 
about them. Most participants understood that reverse mortgages are 
different from traditional mortgages in that traditional mortgages have 
to be paid back during the borrower's lifetime, while reverse mortgage 
borrowers receive payments from the lender based on the equity in the 
consumer's home. However,

[[Page 58544]]

important misconceptions about reverse mortgages were shared by a 
significant number of participants. For example, some participants 
believed that by getting a reverse mortgage, a borrower is giving the 
lender ownership of his or her home. Rather than seeing a reverse 
mortgage as a loan that needs to be repaid, these participants believed 
it represented the exchange of a home for a stream of funds. Some 
participants also believed that if the amount owed on a reverse 
mortgage exceeds the value of the home, the borrower is responsible for 
paying the difference and that if at any point a borrower ``outlives'' 
their reverse mortgage--that is, if the equity in their home decreases 
to zero--they will no longer receive any payments from the lender.
    Therefore, the proposal would require creditors to provide key 
information about reverse mortgages at the time an application form is 
provided to the consumer, as discussed below.
    Reverse mortgage disclosures provided to consumers before 
application. Currently, for reverse mortgages, creditors must provide 
the home equity line of credit (HELOC) or closed-end mortgage 
application disclosures required by TILA, depending on whether the 
reverse mortgage is open-end or closed-end credit. These documents are 
not tailored to reverse mortgages.
    For open-end reverse mortgages this includes a Board-published 
HELOC brochure or a suitable substitute at the time an application for 
an open-end reverse mortgage is provided to the consumer. For an 
adjustable-rate closed-end reverse mortgage, consumers would receive 
the lengthy CHARM booklet that explains how ARMs generally work. 
However, closed-end reverse mortgages are almost always fixed rate 
transactions, so consumers generally do not receive any TILA 
disclosures at application.
    Since consumers have a number of misconceptions about reverse 
mortgages that are not addressed by the current disclosures, the 
proposal would require creditors to provide, for all reverse mortgages, 
a two-page document that explains how reverse mortgages work and about 
terms and risks that are important to consider when selecting a reverse 
mortgage, rather than the current documents.
    Reverse mortgage disclosures provided to consumers after 
application. Depending on whether a reverse mortgage is open-end or 
closed-end credit, the current cost disclosure requirements under TILA 
and Regulation Z differ. All reverse mortgage creditors must provide 
the total annual loan cost (``TALC'') disclosure at least three 
business days before account-opening for an open-end reverse mortgage, 
or consummation for a closed-end reverse mortgage. For closed-end 
reverse mortgages, TILA and Regulation Z 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 a credit 
history. For open-end reverse mortgages, creditors must provide 
disclosures on or with an application that contain information about 
the creditor's open-end reverse mortgage plans. These disclosures do 
not include information dependent on a specific borrower's 
creditworthiness or the value of the dwelling, such as the APRs offered 
to the consumer, because the application disclosures are provided 
before underwriting takes place. Creditors are required to disclose 
transaction-specific costs and terms at the time that an open-end 
reverse mortgage plan is opened.
    In addition, reverse mortgage creditors currently must disclose a 
table of TALC rates. The table of TALC rates is designed to show 
consumers how the cost of the reverse mortgage varies over time and 
with house price appreciation. Generally, the longer the consumer keeps 
a reverse mortgage the lower the relative cost will be because the 
upfront costs of the reverse mortgage will be amortized over a longer 
period of time. Thus, the TALC rates usually will decline over time 
even though the total dollar cost of the reverse mortgage is rising due 
to interest and fees being charged on an increasing loan balance.
    Very few participants understood the table of TALC rates. Although 
participants seemed to understand the paragraphs explaining the TALC 
table, the vast majority could not explain how the description related 
to the percentages shown in the TALC table. Participants could not 
explain why the TALC rates were declining over time even though the 
reverse mortgage's loan balance was rising. Most participants thought 
the TALC rates shown were interest rates, and interpreted the table as 
showing that their interest rate would decrease if they held their 
reverse mortgage for a longer period of time. Participants, including 
those who currently have a reverse mortgage (and thus presumably 
received the TALC disclosure), consistently stated that they would not 
use the disclosure to decide whether or not to obtain a reverse 
mortgage. Instead, participants consistently expressed a preference for 
a disclosure providing total costs as a dollar amount.
    Thus, the proposal would require a table that demonstrates how the 
reverse mortgage balance grows over time. The table expresses this 
information as dollar amounts rather than as annualized loan cost 
rates. The table would show (1) How much money would be advanced to the 
consumer; (2) the total of all costs and charges owed by the consumer; 
and (3) the total amount the consumer would be required to repay. This 
information would be provided for each of three assumed loan periods of 
1 year, 5 years, and 10 years. Consumer testing has shown that 
consumers would have a much easier time understanding this table and 
would be much more likely to use it in evaluating a reverse mortgage 
than they would the TALC rates.
    In addition, the proposed reverse mortgage disclosures would 
combine reverse-mortgage-specific information with much of the 
information that the Board proposed for HELOCs and closed-end mortgages 
in 2009. For example, the proposed disclosure would include information 
about APRs, variable interest rates and fees. However, because not all 
of the information currently required for HELOCs and closed-end 
mortgages is relevant or applicable to reverse mortgage borrowers, the 
disclosures would not contain information that would not be meaningful 
to reverse mortgage consumers. By consolidating the reverse mortgage 
disclosures, the proposal would ensure that consumers receive 
meaningful information in an understandable format that is largely 
similar for open-end and closed-end reverse mortgages, and has been 
designed and consumer tested for reverse mortgage consumers.
    Additional testing during and after comment period. During the 
comment period, the Board may work with ICF Macro to conduct additional 
testing of model disclosures proposed in this notice.

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).

[[Page 58545]]

     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).\3\
---------------------------------------------------------------------------

    \3\ 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).\4\ 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.\5\
---------------------------------------------------------------------------

    \4\ 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).
    \5\ 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.\6\ 
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.\7\ The FTC looks to whether an act or practice is 
injurious in its net effects.\8\ 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. \9\ In evaluating unfairness, 
the FTC looks to whether consumers' free market decisions are 
unjustifiably hindered. \10\
---------------------------------------------------------------------------

    \6\ Statement of Basis and Purpose and Regulatory Analysis, 
Credit Practices Rule, 42 FR 7740, 7743, Mar. 1, 1984 (Credit 
Practices Rule).
    \7\ 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).
    \8\ Credit Practices Rule, 42 FR at 7744.
    \9\ Id.
    \10\ 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).\11\ 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.\12\
---------------------------------------------------------------------------

    \11\ 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).
    \12\ Dingell Letter at 1-2.
---------------------------------------------------------------------------

    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 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.\13\
---------------------------------------------------------------------------

    \13\ 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 [hellip] 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

[[Page 58546]]

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 objectives of the proposed revisions are to update and clarify 
the rules for home-secured credit that provide important protections to 
consumers, and to reduce undue compliance burden and litigation risk 
for creditors. The proposal would improve the clarity and usefulness of 
disclosures for the consumer's right to rescind. Disclosures for 
reverse mortgages would be improved, providing greater clarity about 
transactions that are complex and unfamiliar to many consumers. The 
proposal would also ensure that consumers receive disclosures when the 
creditor modifies key terms of an existing loan. Consumers would be 
assured the opportunity to review early disclosures for closed-end 
loans, before a fee is imposed that may make the consumer feel 
financially committed to the loan offered. Proposed changes to 
disclosures are based on consumer testing, to ensure that the 
disclosures are understandable and useful to consumers.
    In considering the 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 proposal revises the material disclosures 
that can trigger an extended right to rescind, to include disclosures 
that consumer testing has shown consumers find important in their 
decision making, and exclude disclosures that consumers do not find 
useful. The proposal also includes tolerances for certain material 
disclosures, to ensure that inconsequential errors do not result in an 
extended right to rescind.

A. The Consumer's Right to Rescind

    TILA and Regulation Z provide that a consumer generally has three 
business days after closing to rescind certain loans secured by the 
consumer's principal dwelling. The consumer may have up to three years 
after closing to rescind, however, if the creditor fails to provide the 
consumer with certain ``material'' disclosures or the notice of the 
right to rescind (the ``extended right to rescind'').
    The Notice of Rescission. Regulation Z requires creditors to 
provide two copies of the notice of the right to rescind to each 
consumer entitled to rescind the transaction, to ensure that consumers 
can use one copy to rescind the loan and retain the other copy with 
information about the right to rescind. The regulation sets forth the 
contents for the notice and provides model forms that creditors may use 
to satisfy these disclosure requirements. Creditors are required to 
provide the date of the transaction, the date the right expires, and an 
explanation of how to calculate the deadline on the form.
    Consumer testing shows that consumers may have difficulty 
understanding the explanation of the right of rescission in the current 
model forms. Consumers struggled with determining when the deadline to 
rescind expires, based on the later of consummation, delivery of the 
material disclosures, or delivery of the notice of the right to 
rescind. Consumer testing also shows that when rescission information 
was presented in a certain format, participants found information 
easier to locate and their comprehension of the disclosures improved. 
In addition, creditors have raised concerns about the two-copy rule, 
indicting this rule can impose litigation risks when a consumer alleges 
an extended right to rescind based on the creditor's failure to deliver 
two copies of the notice.
    Based on the results of consumer testing and outreach, the Board 
proposes to revise the content and format requirements for the notice 
of the right to rescind and issue revised model forms. The revised 
notice would include:
     The calendar date when the three-business-day rescission 
period expires, without the explanation of how to calculate the 
deadline.
     A statement that the consumer's right to cancel the loan 
may extend beyond the date stated in the notice and in that case, the 
consumer must send the notice to either the current owner of the loan 
or the servicer.
     A ``tear off'' form that a consumer may use to exercise 
his or her right to rescind.
    In addition, the information required in the rescission notice must 
be disclosed:
     In a tabular format, as opposed to a narrative format used 
in the current model rescission forms.
     On the front side of a one-page document, separate from 
all other unrelated material; and
     In a minimum 10-point font.
    Two-copy rule. The proposal also requires creditors to provide just 
one notice of the right to rescind to each consumer entitled to rescind 
(as opposed to two copies required under the current regulation). The 
proposed model rescission notice contains a ``tear off'' form at the 
bottom, so that the consumer could separate that portion to deliver to 
the creditor while retaining the top portion with the description of 
rights. The Board believes that consumers who rescind should be able to 
keep a written explanation of their rights, but is concerned about the 
litigation costs imposed by the two-copy rule. Moreover, the need for 
the two-copy rule seems to have diminished. Today, consumers generally 
have access to copy machines and scanners that would allow them to make 
and keep a copy of the notice if they decide to exercise the right.
    Material Disclosures. A consumer's right to rescind generally does 
not expire until the notice of the right to rescind and the material 
disclosures are properly delivered. If the notice or material 
disclosures are never delivered, the right to rescind expires on the 
earlier of three years from the date of consummation or upon the sale 
or transfer of all of the consumer's interest in the property. Delivery 
of the material disclosures and notice ensures that consumers are 
notified of their right to rescind, and that they have the information 
they need to decide whether to exercise the right. Because different 
disclosures are given for open- and closed-end loans, TILA and 
Regulation Z specify certain ``material disclosures'' that must be 
given for HELOCs and other ``material disclosures'' that must be given 
for closed-end home-secured loans.
    Congress added the statutory definition of ``material disclosures'' 
in 1980. Changes in the HELOC and closed-end mortgage marketplace since 
then have made this statutory definition outdated. Certain disclosures 
that are the most important to consumers in deciding whether to take 
out a loan (based on consumer testing) currently are not considered 
``material disclosures.'' In contrast, other disclosures that are not 
likely to impact a consumer's decision to enter into a loan currently 
are ``material disclosures'' under the statutory definition. The Board 
believes that revising the definition of ``material disclosures'' to 
reflect the disclosures that are most critical to the consumer's 
evaluation of credit terms would better ensure that the compliance 
costs related to rescission are aligned with disclosure requirements 
that provide meaningful benefits for consumers. Thus, the Board 
proposes to use its adjustment and exception authority to add certain 
disclosures and remove other disclosures from the definition of 
``material disclosures'' for both HELOCs

[[Page 58547]]

and closed-end mortgage loans. The Board also proposes to add 
tolerances for accuracy for certain disclosures to ensure 
inconsequential disclosure errors do not result in extended rescission 
rights.
    Material Disclosures for HELOCs. In the August 2009 HELOC Proposal, 
the Board proposed comprehensive revisions to the account-opening 
disclosures for HELOCs that would reflect changes in the HELOC market. 
The proposed account-opening disclosures and revised model forms were 
developed after extensive consumer testing to determine which credit 
terms consumers find the most useful in evaluating HELOC plans. 
Consistent with the August 2009 HELOC Proposal, the staff recommends 
proposed revisions to the definition of material disclosures to include 
the information that is critical to consumers in evaluating HELOC 
offers, and to remove information that consumers do not find to be 
important. For example, the proposal revises the definition of 
``material disclosures'' to include the credit limit applicable to the 
HELOC plan, which consumer testing shows is one of the most important 
pieces of information that consumers wanted to know in deciding whether 
to open a HELOC plan. The proposal also adds to the definition of 
``material disclosures'' a disclosure of the total one-time costs 
imposed to open a HELOC plan (i.e., total closing costs), but removes 
from the definition an itemization of these costs. Consumer testing 
shows that it is the total closing costs (rather than the itemized 
costs) that is more important to consumers in deciding whether to open 
a HELOC plan. Also, based on the results of consumer testing, the 
proposal would add and remove other disclosures from the definition of 
``material disclosures.'' The proposal contains tolerances for accuracy 
of the credit limit and the total one-time costs imposed to open a 
HELOC plan, to ensure inconsequential errors in these disclosures do 
not result in extended rescission rights.
    Material Disclosures for Closed-End Mortgage Loans. In the August 
2009 Closed-End Proposal, the Board proposed comprehensive revisions to 
the disclosures for closed-end mortgages that would reflect the changes 
in the mortgage market. The Board developed the proposed disclosures 
and revised model forms based on extensive consumer testing to 
determine which credit terms consumers find the most useful in 
evaluating closed-end mortgage loans. Consistent with the August 2009 
Closed-End Proposal, this proposal revises the definition of material 
disclosures to include the information that is criti