Truth in Lending, 81836-81843 [2010-32534]

Agencies

• FEDERAL RESERVE SYSTEM

[Federal Register Volume 75, Number 249 (Wednesday, December 29, 2010)]
[Rules and Regulations]
[Pages 81836-81843]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-32534]


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FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Regulation Z; Docket No. R-1366]


Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: 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). This 
interim rule revises the Board's interim rule published on September 
24, 2010, which implemented certain requirements of the Mortgage 
Disclosure Improvement Act of 2008. The September 2010 interim rule 
requires creditors who extend consumer credit secured by real property 
or a dwelling to disclose summary information about interest rates and 
payment changes in a tabular format. The Board is issuing this interim 
rule to clarify certain provisions of the September 2010 interim rule. 
Specifically, this rule clarifies the requirements for adjustable-rate 
transactions that are ``5/1 ARM'' loans. It corrects the requirements 
for interest-only loans to clarify that the disclosures should reflect 
the date of the interest rate change rather than the date the first 
payment is due under the new rate. This interim rule also revises the 
definition of ``negative amortization loans'' to clarify which 
transactions are covered by the special disclosure requirements for 
such loans.

DATES: This interim rule is effective January 30, 2011. Compliance with 
its provisions is optional, however, for transactions for which an 
application for credit is received by the creditor before October 1, 
2011. This interim rule does not change the January 30, 2011 mandatory 
compliance date of the September 2010 interim rule. Comments on this 
interim rule must be received on or before February 28, 2011.

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/

[[Page 81837]]

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: Jamie Z. Goodson, Attorney, or Paul 
Mondor, Senior Attorney, Division of Consumer and Community Affairs, 
Board of Governors of the Federal Reserve System, Washington, DC 20551, 
at (202) 452-2412 or (202) 452-3667. For users of Telecommunications 
Device for the Deaf (TDD) only, contact (202) 263-4869.

SUPPLEMENTARY INFORMATION: 

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 amended TILA and 
requires transaction-specific TILA disclosures to be provided within 
three business days after an application for a closed-end mortgage loan 
is received and before the consumer has paid any fee (other than a fee 
for obtaining the consumer's credit history).\2\ Creditors also must 
mail or deliver these 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 Regulation 
Z's 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, which became effective July 30, 2009 as required by the statute. 
See 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\ The MDIA codified some requirements adopted by the Board in 
a July 2008 final rule prior to the MDIA's enactment. 73 FR 44522, 
July 30, 2008 (2008 HOEPA Final Rule). To ease discussion, the 
description of the MDIA's disclosure requirements includes the 
requirements of the 2008 HOEPA Final Rule.
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    The MDIA also requires disclosure of payment examples if the loan's 
interest rate or payments can change, along with a statement that there 
is no guarantee the consumer will be able to refinance the transaction 
in the future. Under the statute, these provisions of the MDIA will 
become effective on January 30, 2011. On September 24, 2010, the Board 
published an interim rule to implement these requirements. See 75 FR 
58470; Sept. 24, 2010 (September 2010 Interim Rule). The Board is 
issuing this interim rule to make certain clarifying changes to 
provisions in the September 2010 Interim Rule.

II. Summary of the Interim Rule

    The MDIA amended TILA to require creditors to disclose examples of 
rates and payments, including the maximum rate and payment, for loans 
with variable rates or payments. The act also requires creditors to 
disclose a statement that consumers should not assume they can 
refinance their loans. On July 23, 2009, the Board published a proposed 
rule to revise the disclosure rules for closed-end credit secured by 
real property or a consumer's dwelling. See 74 FR 43232; Aug. 26, 2009 
(2009 Closed-End Proposal). Among other things, the 2009 Closed-End 
Proposal included provisions to implement MDIA's new interest rate and 
payment disclosure requirements. Because the 2009 Closed-End Proposal 
is not expected to be finalized before the January 30, 2011 effective 
date of the MDIA disclosure requirements, the Board issued the 
September 2010 Interim Rule to provide creditors with the guidance 
necessary to comply by the statutory deadline. The September 2010 
Interim Rule is substantially similar to the provisions of the 2009 
Closed-End Proposal that implemented the interest rate and payment 
disclosure requirements of the MDIA.
    Under the September 2010 Interim Rule, creditors will be required 
to disclose in a tabular format the contract interest rate together 
with the corresponding monthly payment, including an estimated amount 
for 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, consistent with the statute, the September 2010 
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.
    This interim rule clarifies the requirement in the September 2010 
Interim Rule that, for adjustable-rate and step-rate loans, creditors 
disclose the maximum interest rate and payment during the first five 
years. As modified by this rule, creditors must base their disclosures 
on the first five years after the first regular periodic payment due 
date, rather than the first five years after consummation. The 
clarification is intended to ensure the disclosures are consistent with 
the manner in which payments are typically structured for adjustable-
rate transactions that are ``5/1 ARM'' loans.
    In addition, this interim rule clarifies the requirements for 
disclosing the payments on an ``interest-only loan.'' Under the 
September 2010 Interim Rule, for each interest rate disclosed, the 
creditor must disclose the earliest date that rate may apply and the 
corresponding periodic payment. For an interest-only loan, if the 
corresponding payment will be applied to both accrued interest and 
principal, the September 2010 Interim Rule further requires the 
creditor to disclose the earliest date that such payments will be 
required. This interim rule would eliminate the potential conflict from 
disclosing two

[[Page 81838]]

different dates in the same column, by clarifying that creditors should 
disclose the earliest date that the interest rate becomes effective 
rather than the date that the first payment is due under the new rate.
    Also under this interim rule, the definition of ``negative 
amortization loan'' is being revised to clarify which transactions are 
covered by the special disclosure requirements for such loans. Those 
disclosures were designed to show consumers how their periodic payments 
could increase over time and to enable comparisons between the 
consequences for consumers of making ``minimum'' and ``full'' payments. 
The revision would clarify that these disclosures apply only to loans 
where consumers are allowed to make minimum payments that result in 
negative amortization. Thus, the revised definition of ``negative 
amortization loan'' excludes loan products that do not have a minimum 
required payment that results in negative amortization. For example, 
some loans that are designed for borrowers with seasonal employment 
require level, amortizing payments, but do not require payments in 
certain months; during months when no payment is made the accrued 
interest increases the loan balance. As clarified, the special 
disclosure requirements for negative amortization loans do not apply to 
the excluded loans, even though some negative amortization can occur 
because of the capitalization of accrued interest from time to time. 
Such loans will be disclosed under the rules for amortizing loans.
    Finally, this interim rule clarifies how the provisions in the 
September 2010 Interim Rule apply to home construction loans. A new 
staff comment accompanying Appendix D clarifies that, when a 
construction loan secured by real property or a dwelling that may be 
permanently financed by the same creditor is disclosed as more than one 
transaction, the construction financing must be disclosed under the new 
rules for interest rate and payment summary tables. On the other hand, 
if the creditor discloses the construction and permanent financing as a 
single transaction, the summary table should reflect only the permanent 
financing, while the construction financing should be disclosed only 
with a statement outside the table that interest payments must be made 
and the timing of such payments.

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.

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 that would implement the MDIA. The September 2010 
Interim Rule adopted only those provisions of the 2009 Closed-End 
Proposal that implement the MDIA requirements that will become 
effective on January 30, 2011. Accordingly, the Board believed that the 
September 2010 Interim Rule complied with the APA's public notice and 
opportunity to comment requirement. The Board adopted the provisions 
concerning interest rates and payments as an interim rule, rather than 
as a final rule, because the Board intended to conduct additional 
testing of these and other disclosure requirements, including 
quantitative testing, and may revise the interim provisions further in 
light of further testing results. The Board sought to permit further 
public comment while also giving the provisions effect so that 
creditors would have the guidance they need and the time to implement 
it by January 30, 2011, as discussed above.
    For the same reasons, the Board is now implementing these 
clarifications by interim rule to ensure timely publication and 
effectiveness of the additional guidance it provides before the 
statutory requirements become effective. The additional guidance is 
needed to prevent compliance burdens that otherwise would result from 
certain conflicts and uncertainties in the existing provisions as 
implemented by the September 2010 Interim Rule.
    Comments on the September 2010 Interim Rule raised additional 
issues that are not being addressed at this time. The Board believes 
that issuing a permanent final rule imposing further changes in 
creditors' disclosure so soon before the mandatory January 30, 2011 
compliance date would impose undue burden on creditors. Accordingly, 
this interim rule is being published only to clarify certain issues 
that created uncertainty for creditors on how to comply with the 
September 2010 Interim Rule before the statutory effective date. Other 
comments received on the September 2010 Interim Rule, as well as this 
interim rule, can be taken into consideration before publication of a 
permanent final rule.

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

    The September 2010 Interim Rule provided an overview of comments on 
the 2009 Closed-End Proposal. See 75 FR 58470, 58472; Sept. 24, 2010. 
In response to the September 2010 Interim Rule, the Board received 36 
comments. Most of those were from creditors and their trade 
associations and form-software vendors that provide creditors with 
systems to generate disclosures. They raised various practical concerns 
with the new requirements. The concerns addressed in this interim rule 
are described below.
    Several commenters expressed concern about the requirement that the 
summary table for adjustable-rate and step-rate loans include the 
maximum rate applicable during the first five years after consummation. 
They noted that ``5/1 ARM'' loans typically provide for 60 regular 
periodic payments at the initial rate and that the rate typically does 
not adjust until at least the 61st full month after consummation. As a 
result, the payment summary table as prescribed in the September 2010 
Interim Rule would not show the rate increase at the first adjustment 
of a typical ``5/1 ARM'' loan if the table is based on interest rate 
changes occurring during the first five years after consummation.
    For interest-only loans, some commenters questioned the requirement 
that creditors disclose the earliest date on which the new interest 
rate can apply as well as the earliest date on which the corresponding 
payment would be due at the new rate. Because interest is paid in 
arrears on most mortgage transactions, those two dates are generally 
one month apart. Commenters noted that the structure of the table 
allows for only one date in each column.
    Commenters also asked the Board to clarify whether certain types of 
loan products should be disclosed as ``negative amortization loans.'' 
They noted that some loan products have features that may result in the 
principal balance increasing even though the consumer does not have the 
right on each due date to choose between making a minimum payment that 
causes

[[Page 81839]]

negative amortization and making a larger payment. For example, some 
loans provide for regular, amortizing payments, but have irregular 
payment schedules and periods when no payment is due, during which 
accrued interest is added to the principal balance. Commenters also 
noted that some loans have rates that adjust without a corresponding 
adjustment in the periodic payment in order to maintain the consumer's 
payment at a level amount; if the interest rate increases during the 
loan term, the principal balance may increase. These commenters stated 
that such products cannot be disclosed as negative amortization loans 
under the September 2010 Interim Rule, which calls for parallel 
disclosures of the consumer's minimum payment and full payment options.
    Many of the commenters asked how the requirements for the new rate 
and payment summary table in Sec.  226.18(s) affect the guidance in 
Appendix D for disclosing multiple-advance construction loans. Most 
home construction loans are covered by Sec.  226.18(s) because they are 
secured by real property or a dwelling. Specifically, commenters sought 
clarification on whether the guidance in Appendix D for disclosing the 
``repayment schedule'' for a construction loan remains applicable or, 
alternatively, whether the requirements of Sec.  226.18(s) override the 
existing guidance in Appendix D.
    The Board is adopting this interim rule to address the foregoing 
four issues. The Board is also adopting minor, technical revisions to 
address other uncertainties raised by the commenters, as discussed 
below.

V. Section-by-Section Analysis

Section 226.18 Content of Disclosures

18(h) Total of Payments
    The Board is revising staff comment 18(h)-2 to clarify how to 
calculate the total of payments under Sec.  226.18(h) for transactions 
secured by real property or a dwelling. Existing comment 18(h)-2 states 
that the total of payments is the sum of the payments disclosed under 
Sec.  226.18(g). For transactions subject to Sec.  226.18(s), however, 
no payment schedule will be disclosed under Sec.  226.18(g). 
Accordingly, the Board is revising comment 18(h)-2 to provide that 
creditors should continue to follow the rules in Sec.  226.18(g) and 
associated commentary, and comments 17(c)(1)-8 and -10 for adjustable-
rate transactions, to calculate the total of payments for transactions 
secured by real property or a dwelling.
18(s) Interest Rate and Payment Summary for Mortgage Transactions
    The Board is adopting new commentary language to clarify that 
references to ``monthly'' payments in the disclosures may be modified 
to reflect other periods when applicable, such as when payments are due 
quarterly instead of monthly. Section 226.18(s)(2)(i)(B)(1) provides 
that the interest rate at consummation must be disclosed and labeled 
``introductory rate and monthly payment.'' Under Sec. Sec.  
226.18(s)(3)(i)(D) and 226.18(s)(3)(ii)(D), for each interest rate 
disclosed under Sec.  226.18(s)(2), the creditor must also disclose the 
sum of the corresponding periodic payment and any estimated escrow 
payment, which must be labeled ``total estimated monthly payment.'' The 
Board has also published model clauses that use the word ``monthly'' in 
describing the disclosed payments.
    Existing comment 18(s)(3)(i)(D)-1 provides that, if periodic 
payments are not due monthly, the creditor should use the appropriate 
term such as ``quarterly'' or ``annually.'' There is no similar 
guidance, however under the other provisions. The Board is revising 
comment 18(s)-1 to clarify that the same guidance applies to Sec. Sec.  
226.18(s)(2)(i)(B)(1) and 226.18(s)(3)(ii)(D), as well as the model 
clauses.
18(s)(2) Interest Rates
18(s)(2)(i) Amortizing Loans
    Maximum interest rate during first five years. The Board is 
revising Sec.  226.18(s)(2)(i)(B)(2) to clarify the rule's application 
to adjustable-rate transactions that are ``5/1 ARM'' loans. As adopted 
in the September 2010 Interim Rule, 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 and the earliest date that rate may 
apply. As noted above, some commenters questioned whether the Board 
intended creditors to disclose the first adjustment for ``5/1 ARMs'' 
under this provision. Commenters stated the intent of the rule is 
unclear because the first rate adjustment generally occurs more than 
five years after consummation. For example, assuming a ``5/1 ARM'' loan 
is consummated on August 16, 2011, the first payment due date typically 
is October 1, 2011. The first rate adjustment then occurs on the due 
date of the 60th regular payment, September 1, 2016, which is more than 
five years after consummation. The Board intended that creditors 
disclose the first rate adjustment for a ``5/1 ARM.'' To ensure that 
the first rate adjustment will be disclosed for ``5/1 ARMs,'' the Board 
is revising Sec.  226.18(s)(2)(i)(B)(2) to clarify that creditors 
should disclosure the maximum possible rate that will apply at any time 
during the first five years after the date on which the first regular 
periodic payment will be due, rather than after consummation.
    Payment increases without regard to an interest rate adjustment. 
The Board is revising comment 18(s)(2)(i)(C)-1 to clarify that, for 
interest-only loans, creditors must disclose the change in the periodic 
payment when the consumer begins making payments that include principal 
as well as interest. Under Sec.  226.18(s)(2)(i)(C), if an amortizing 
loan provides for a payment increase without regard to an interest rate 
adjustment (as described in Sec.  226.18(s)(3)(i)(B)), the creditor 
must disclose an additional column showing the rate in effect at the 
time of such a payment increase and the date on which the payment 
increase will occur. Some commenters suggested that this additional 
column would not be required for an interest-only loan to show the 
change in the periodic payment when the consumer begins making payments 
that include principal. These commenters believe that, under the 
September 2010 Interim Rule, Sec.  226.18(s)(3)(i)(B) does not apply to 
interest-only loans. In fact, the disclosure requirement of Sec.  
226.18(s)(2)(i)(C) applies to all amortizing loans, including interest-
only loans, if the consumer's payment can increase in the manner 
described in Sec.  226.18(s)(3)(i)(B), even if it is not the type of 
loan covered by Sec.  226.18(s)(3)(i). In such a case, if the 
transaction is an interest-only loan, the creditor also must disclose 
the corresponding periodic payment pursuant to Sec.  226.18(s)(3)(ii). 
The Board is revising comment 18(s)(2)(i)(C)-1 to clarify this point. 
The Board is also revising this comment to clarify that payment 
increases without regard to an interest rate increase do not include 
minor payment variations resulting solely from the fact that months 
have different numbers of days.
18(s)(3) Payments for Amortizing Loans
18(s)(3)(i) Principal and Interest Payments
    Escrows. The Board is revising Sec.  226.18(s)(3)(i)(C) to clarify 
when creditors must disclose estimated payments for taxes and 
insurance. Under Sec.  226.18(s)(3)(i)(C) and accompanying comment 
18(s)(3)(i)(C)-1, an estimated payment amount for taxes and insurance 
must be disclosed if the creditor will establish an escrow

[[Page 81840]]

account for such amounts, even if the escrow account is not required by 
the creditor. The regulation also states that the creditor must 
disclose that the escrow account is required if that is the case. Under 
the 2009 Closed-End Proposal, the statement that an escrow account is 
required would have been implemented in a separate part of the revised 
disclosure, outside of the interest rate and payment summary table. The 
inclusion of this requirement in the September 2010 Interim Rule, which 
implemented only the summary table, was an error. This requirement is 
being removed. Some commenters stated that the text of the regulation 
as implemented by the September 2010 Interim Rule could be read to 
suggest that the amounts for taxes and insurance should be disclosed 
only if the escrow account was required by the creditor. The Board's 
intent under the September 2010 Interim Rule, however, was to require 
disclosure of the estimated escrow payment if an escrow account will be 
established, whether the escrow account is required or not, as comment 
18(s)(3)(i)(C)-1 indicates. Accordingly, the Board is revising the text 
of Sec.  226.18(s)(3)(i)(C) to clarify the scope of the disclosure 
requirement.
    The Board also is revising comment 18(s)(3)(i)(C)-1 to clarify how 
creditors should estimate the amounts for future taxes and insurance 
when such amounts must be disclosed in connection with changes in the 
periodic payment after consummation. Some commenters noted that 
estimating future taxes and insurance would be highly speculative. The 
September 2010 Interim Rule generally does not require creditors to 
make projections about future tax rates and insurance premiums. 
Creditors might be aware, however, of changes in mortgage insurance 
premiums that are based on the outstanding loan balance. Accordingly, 
the Board is revising comment 18(s)(3)(i)(C)-1 to clarify that, when 
escrow payments must be disclosed in multiple columns of the table, 
each column should use the same estimate for taxes and insurance except 
that the estimate should reflect changes in the periodic mortgage 
insurance premiums that are known to the creditor at the time the 
disclosure is made. The comment further explains that the estimated 
mortgage insurance premiums should be based on the declining principal 
balance that will occur as a result of changes to the interest rate 
that are assumed for purposes of disclosing those rates under Sec.  
226.18(s)(2) and accompanying commentary.
18(s)(3)(ii) Interest-Only Payments
    Payment date. The Board is revising Sec.  226.18(s)(3)(ii)(B) to 
remove the requirement to disclose the earliest date on which the 
payment disclosed under that section will be required. Under the 
September 2010 Interim Rule, for each interest rate disclosed, the 
creditor must disclose the earliest date that rate may apply and the 
corresponding periodic payment. For an interest-only loan, if the 
corresponding payment will be applied to both accrued interest and 
principal, Sec.  226.18(s)(3)(ii)(B) further requires the creditor to 
disclose the earliest date that such payments will be required. 
Commenters questioned the requirement for disclosing two different 
dates in the same column and the potential for confusion. Because 
interest is paid in arrears on most mortgage transactions, those two 
dates are generally one month apart; commenters also noted that the 
structure of the table allows for only one date in each column.
    The date in each column is intended to be the earliest date the 
interest rate may apply, not the date that the corresponding payment 
will take effect. Accordingly, the Board is revising Sec.  
226.18(s)(3)(ii)(B) by removing the language that requires creditors to 
disclose ``the earliest date that such payments will be required.'' As 
revised, this interim rule clarifies that creditors should disclose the 
earliest date that the interest rate becomes effective rather than the 
date that the first payment is due under the new rate. Revised Sec.  
226.18(s)(3)(ii)(B) also clarifies that the itemized amounts disclosed 
as being applied to interest and principal when a consumer begins 
making principal and interest payments for an interest-only loan are 
those amounts for the first such payment.
18(s)(7) Definitions
    ``Negative amortization loans.'' The Board is revising Sec.  
226.18(s)(7)(v) to clarify what types of loans are subject to the 
special disclosure requirements for ``negative amortization loans.'' As 
adopted by the September 2010 Interim Rule, Sec.  226.18(s)(7)(v) 
defines ``negative amortization'' as the ``payment of periodic payments 
that will result in an increase in the principal balance under the 
terms of the legal obligation.'' The rule also defines a ``negative 
amortization loan'' as ``a loan that permits payments resulting in 
negative amortization, other than a reverse mortgage subject to Sec.  
226.33.'' Thus, some transactions that do not provide for multiple 
payment options, but that have repayment terms that may result in 
negative amortization, can be construed as negative amortization loans 
for purposes of the interest rate and payment summary table required by 
Sec.  226.18(s). The special disclosure requirements for negative 
amortization loans and the model clause for such loans are intended to 
show consumers the effects of making minimum payments that result in 
negative amortization in comparison to the effects of making fully 
amortizing payments; the Board did not intend to apply those 
requirements to loans that do not provide for such minimum payments.
    Accordingly, the Board is revising the definition of ``negative 
amortization loan'' in Sec.  226.18(s)(7) to clarify which transactions 
are subject to the disclosure requirements for such loans in Sec.  
226.18(s)(2)(ii). Specifically, under the revised definition the 
special disclosures for ``negative amortization loans'' would apply 
only to loan products that have minimum required payments that result 
in negative amortization. For example, certain loans that are designed 
for borrowers with seasonal income require periodic amortizing payments 
but do not require the borrower to make payments in certain months; 
during months when no payment is made the accrued interest increases 
the principal balance. Also, some adjustable-rate loans provide for 
fixed periodic payments that do not adjust when the interest rate 
adjusts; in cases where the interest rate increases during the loan 
term, the additional accrued interest increases the principal balance. 
As clarified, the special disclosure requirements for negative 
amortization loans will not apply to such loans, even though the 
principal balance might increase during the loan term when accrued 
interest is capitalized. New comment 18(s)(7)-1 has been added to note 
that such loans will be disclosed under the rules for amortizing loans.
    The revised definition will limit the meaning of ``negative 
amortization loan'' to loan products that can be disclosed meaningfully 
under the special rules for negative amortization loans. If a loan 
provides for a minimum periodic payment that causes negative 
amortization, creditors must disclose the corresponding fully 
amortizing payment in a parallel row of the table, as contemplated by 
Sec. Sec.  226.18(s)(2)(ii) and 226.18(s)(4) and Model Clause H-4(G).
Appendix D--Multiple-Advance Construction Loans
    The Board is adopting a new comment under Appendix D to clarify

[[Page 81841]]

the impact of Sec.  226.18(s) on the appendix's guidance for disclosing 
the ``repayment schedule'' when construction financing is secured by 
real property or a dwelling. A creditor that also might permanently 
finance the construction phase has the option of disclosing the 
construction and permanent phases as separate transactions or as a 
single transaction. See Sec.  226.17(c)(6)(ii). Part I of Appendix D 
provides guidance for disclosing the construction financing as a 
separate transaction, while Part II provides guidance on disclosing the 
construction and permanent financing as one transaction.
    For loans secured by real property or a dwelling, if a creditor 
elects to disclose the construction and permanent phases as separate 
transactions, the construction phase must be disclosed in accordance 
with Sec.  226.18(s), as adopted by the September 2010 Interim Rule and 
modified by this interim rule. Under Sec.  226.18(s), the creditor must 
disclose the applicable interest rates and corresponding periodic 
payments during the construction phase in an interest rate and payment 
summary table. The provision in Appendix D, Part I.A.3, which allows 
the creditor to omit the number and amounts of any interest payments 
``in disclosing the payment schedule under Sec.  226.18(g)'' does not 
apply because the transaction is governed by Sec.  226.18(s) rather 
than Sec.  226.18(g). Also, because the construction phase is being 
disclosed as a separate transaction and its terms do not repay all 
principal, the creditor must disclose a balloon payment, pursuant to 
Sec.  226.18(s)(5). This guidance is being added to the commentary as 
new comment App. D-6.
    On the other hand, if the creditor elects to disclose the 
construction and permanent phases as a single transaction, the 
construction phase must be disclosed pursuant to Appendix D, Part II.C, 
which provides that the creditor shall disclose the repayment schedule 
without reflecting the number or amounts of payments of interest only 
that are made during the construction phase. Appendix D also provides, 
however, that creditors must disclose (outside of the table) the fact 
that interest payments must be made and the timing of such payments. 
The rate and payment summary table disclosed under Sec.  226.18(s) must 
reflect only the permanent phase of the transaction. Therefore, in 
determining the rates and payments that must be disclosed in the 
columns of the table, creditors should apply the requirements of Sec.  
226.18(s) to the permanent phase only. For example, under Sec.  
226.18(s)(2)(i)(A) or Sec.  226.18(s)(2)(i)(B)(1), as applicable, the 
creditor should disclose the interest rate corresponding to the first 
installment due under the permanent phase and not any rate applicable 
during the construction phase. This guidance is also reflected in new 
comment App. D-6.
Appendices G and H--Open-End and Closed-End Model Forms and Clauses
    This interim rule amends comment App. G and H-1 to provide that 
creditors may revise the column heading in Model Clause H-4(H) to 
reflect the column heading required by Sec.  226.18(s)(2)(i)(C) of the 
regulation. Commenters noted a discrepancy between Sec.  
226.18(s)(2)(i)(C) and Model Clause H-4(H). Section 226.18(s)(2)(i)(C) 
states that the column heading must be labeled as ``first adjustment'' 
if the loan is an adjustable-rate mortgage or, otherwise, labeled as 
``first increase.'' Due to a technical error, the heading in Model 
Clause H-4(H) is incorrectly labeled ``maximum ever.'' TILA Section 
105(b) provides creditors with a safe harbor if they use any model form 
or clause published by the Board. Thus, use of Model Clause H-4(H) as 
published in the September 2010 Interim Rule is deemed to be in 
compliance with Sec.  226.18(s)(2)(i)(C). Comment App. G and H-1 is 
being amended, however, to clarify that the same safe harbor is 
available to creditors that use the model clause but alter the column 
heading to read ``first adjustment'' or ``first increase,'' as 
applicable, in compliance with the literal requirement of Sec.  
226.18(s)(2)(i)(C).

VI. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 
U.S.C. 3506; 5 CFR Part 1320 Appendix A.1), the Board reviewed this 
interim rule under the authority delegated to the Board by the Office 
of Management and Budget (OMB). The Board also conducted such a review 
for the September 2010 Interim Rule. See 75 FR 58470, 58479-80; Sept. 
24, 2010. The Board believes that the technical revisions made by this 
interim rule do not alter the findings in the Board's previous PRA 
review. The revisions do not add to the disclosure requirements adopted 
in the September 2010 Interim Rule but, rather, only resolve 
uncertainties and clarify under certain circumstances which of those 
disclosure requirements apply to which types of mortgage loan products 
and how. Accordingly, for purposes of this interim rule, the Board 
refers to the findings of the PRA review set forth in the September 
2010 Interim Rule.
    The Board has a continuing interest in the public's opinion of the 
collection of information. Comments on the collection of information 
should be sent to Cynthia Ayouch, Acting Federal Reserve Board 
Clearance Officer, Division of Research and Statistics, Mail Stop 95-A, 
Board of Governors of the Federal Reserve System, Washington, DC 20551, 
with copies of such comments sent to the Office of Management and 
Budget, Paperwork Reduction Project (7100-0199), Washington, DC 20503.

VII. Regulatory Flexibility Analysis

    In accordance with Section 4 of the Regulatory Flexibility Act 
(RFA), 5 U.S.C. 604, the Board published a final regulatory flexibility 
analysis for the amendments to Regulation Z in the September 2010 
Interim Rule. See 75 FR 58470, 58480-82; Sept. 24, 2010. For the 
reasons discussed above regarding the PRA, the Board believes that this 
interim rule does not affect the Board's prior regulatory flexibility 
analysis and that it therefore continues to apply for purposes of this 
interim rule. The Board notes, in fact, that the revisions this interim 
rule makes to the provisions of Regulation Z adopted in the September 
2010 Interim Rule are for the purpose of resolving conflicts and 
uncertainties, thus facilitating compliance for creditors. 
Consequently, to the extent this interim rule has any effect on the 
Board's prior regulatory flexibility analysis, it is to reduce the 
overall impact of the September 2010 Interim Rule on all entities, 
including small entities.

List of Subjects in 12 CFR Part 226

    Advertising, Consumer protection, Federal Reserve System, 
Mortgages, Reporting and recordkeeping requirements, Truth in lending.

Authority and Issuance

0
For the reasons set forth in the preamble, the Board amends Regulation 
Z, 12 CFR part 226, as set forth below:

PART 226--TRUTH IN LENDING (REGULATION Z)

0
1. The authority citation for part 226 continues to read as follows:

    Authority:  12 U.S.C. 3806; 15 U.S.C. 1604, 1637(c)(5), and 
1639(l); Pub. L. 111-24 Sec.  2, 123 Stat. 1734.

Subpart C--Closed-End Credit

0
2. Section 226.18 is amended by revising paragraphs (s)(2)(i)(B)(2),

[[Page 81842]]

(s)(3)(i)(C), (s)(3)(ii)(B), and (s)(7)(v) to read as follows:


Sec.  226.18  Content of disclosures.

* * * * *
    (s) * * *
    (2) * * *
    (i) * * *
    (B) * * *
    (2) The maximum interest rate that may apply during the first five 
years after the date on which the first regular periodic payment will 
be due and the earliest date on which that rate may apply, labeled as 
``maximum during first five years''; and
* * * * *
    (3) * * *
    (i) * * *
    (C) If an escrow account will be established, an estimate of the 
amount of taxes and insurance, including any mortgage insurance, 
payable with each periodic payment; and
* * * * *
    (ii) * * *
    (B) If the payment will be applied to accrued interest and 
principal, an itemization of the amount of the first such payment 
applied to accrued interest and to principal, labeled as ``interest 
payment'' and ``principal payment,'' respectively;
* * * * *
    (7) * * *
    (v) The term ``amortizing loan'' means a loan in which payment of 
the periodic payments does not result in an increase in the principal 
balance under the terms of the legal obligation; the term ``negative 
amortization'' means payment of periodic payments that will result in 
an increase in the principal balance under the terms of the legal 
obligation; the term ``negative amortization loan'' means a loan, other 
than a reverse mortgage subject to Sec.  226.33, that provides for a 
minimum periodic payment that covers only a portion of the accrued 
interest, resulting in negative amortization.
* * * * *

0
3. In Supplement I to Part 226:
0
A. Under Section 226.18--Content of Disclosures, 18(h) Total of 
payments, Paragraph 2 is revised.
0
B. Under Section 226.18--Content of Disclosures, 18(s) Interest rate 
and payment summary for mortgage transactions, Paragraph 1 is revised.
0
C. Under Section 226.18--Content of Disclosures, 18(s) Interest rate 
and payment summary for mortgage transactions, 18(s)(2) Interest rates, 
18(s)(2)(i) Amortizing loans, Paragraph 18(s)(2)(i)(C), paragraph 1 is 
revised.
0
D. Under Section 226.18--Content of Disclosures, 18(s) Interest rate 
and payment summary for mortgage transactions, 18(s)(3) Payments for 
amortizing loans, Paragraph 18(s)(3)(i)(C), paragraph 1 is revised.
0
E. Under Section 226.18--Content of Disclosures, 18(s) Interest rate 
and payment summary for mortgage transactions, new 18(s)(7) Definitions 
and paragraph 1 are added.
0
F. Under Appendix D--Multiple Advance Construction Loans, new paragraph 
6 is added.
0
G. Under Appendices G and H--Open-End and Closed-End Model Forms and 
Clauses, paragraph 1 is revised.
    The additions and revisions read as follows:

Supplement I to Part 226--Official Staff Interpretations

* * * * *

Subpart C--Closed-End Credit

* * * * *
    Section 226.18--Content of Disclosures

    18(h) Total of payments.
* * * * *
    2. Calculation of total of payments. The total of payments is 
the sum of the payments disclosed under Sec.  226.18(g). For 
example, if the creditor disclosed a deferred portion of the 
downpayment as part of the payment schedule, that payment must be 
reflected in the total disclosed under this paragraph. To calculate 
the total of payments amount for transactions subject to Sec.  
226.18(s), creditors should use the rules in Sec.  226.18(g) and 
associated commentary and, for adjustable-rate transactions, 
comments 17(c)(1)-8 and -10.
* * * * *
    18(s) Interest rate and payment summary for mortgage 
transactions.
    1. In general. Section 226.18(s) prescribes format and content 
for disclosure of interest rates and monthly (or other periodic) 
payments for mortgage loans. The information in Sec.  226.18(s)(2)-
(4) is required to be in the form of a table, except as otherwise 
provided, with headings and format substantially similar to Model 
Clause H-4(E), H-4(F), H-4(G), or H-4(H) in Appendix H to this part. 
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. Where Sec.  
226.18(s)(2)-(4) or the applicable model clause requires that a 
column or row of the table be labeled using the word ``monthly'' but 
the periodic payments are not due monthly, the creditor should use 
the appropriate term, such as ``bi-weekly'' or ``quarterly.'' In all 
cases, the table should have no more than five vertical columns 
corresponding to applicable interest rates at various times during 
the loan's term; corresponding payments would be shown in horizontal 
rows. Certain loan types and terms are defined for purposes of Sec.  
226.18(s) in Sec.  226.18(s)(7).
* * * * *
    Paragraph 18(s)(2)(i)(C)
    1. Payment increases. For some loans, the payment may increase 
following consummation for reasons unrelated to an interest rate 
adjustment. For example, an adjustable-rate mortgage may have an 
introductory fixed-rate for the first five years following 
consummation and permit the borrower to make interest-only payments 
for the first three years. The disclosure requirement of Sec.  
226.18(s)(2)(i)(C) applies to all amortizing loans, including 
interest-only loans, if the consumer's payment can increase in the 
manner described in Sec.  226.18(s)(3)(i)(B), even if it is not the 
type of loan covered by Sec.  226.18(s)(3)(i). Thus, Sec.  
226.18(s)(2)(i)(C) requires that the creditor disclose the interest 
rate that corresponds to the first payment that includes principal 
as well as interest, even though the interest rate will not adjust 
at that time. In such cases, if the loan is an interest-only loan, 
the creditor also must disclose the corresponding periodic payment 
pursuant to Sec.  226.18(s)(3)(ii). The table would show, from left 
to right: The interest rate and payment at consummation with the 
payment itemized to show that the payment is being applied to 
interest only; the interest rate and payment when the interest-only 
option ends; the maximum interest rate and payment during the first 
five years; and the maximum possible interest rate and payment. The 
disclosure requirements of Sec.  226.18(s)(2)(i)(C) do not apply to 
minor payment variations resulting solely from the fact that months 
have different numbers of days.
* * * * *
    Paragraph 18(s)(3)(i)(C).
    1. Taxes and insurance. An estimated payment amount for taxes 
and insurance must be disclosed if the creditor will establish an 
escrow account for such amounts. If the escrow account will include 
amounts for items other than taxes and insurance, such as homeowners 
association dues, the creditor may but is not required to include 
such items in the estimate. When such estimated escrow payments must 
be disclosed in multiple columns of the table, such as for 
adjustable- and step-rate transactions, each column should use the 
same estimate for taxes and insurance except that the estimate 
should reflect changes in periodic mortgage insurance premiums that 
are known to the creditor at the time the disclosure is made. The 
estimated amounts of mortgage insurance premiums should be based on 
the declining principal balance that will occur as a result of 
changes to the interest rate that are assumed for purposes of 
disclosing those rates under Sec.  226.18(s)(2) and accompanying 
commentary. The payment amount must include estimated amounts for 
property taxes and premiums for mortgage-related insurance required 
by the creditor, such as insurance against loss of or damage to 
property, or against liability arising out of the ownership or use 
of the property, or insurance protecting the creditor against the 
consumer's default or other credit loss. Premiums for credit 
insurance, debt suspension and debt cancellation agreements, 
however, should not be included. Except for periodic mortgage 
insurance premiums included in the escrow payment under Sec.  
226.18(s)(3)(i)(C), amounts

[[Page 81843]]

included in the escrow payment disclosure such as property taxes and 
homeowner's insurance generally are not finance charges under Sec.  
226.4 and, therefore, do not affect other disclosures, including the 
finance charge and annual percentage rate.
* * * * *
    18(s)(7) Definitions.
    1. Negative amortization loans. Under Sec.  226.18(s)(7)(v), a 
negative amortization loan is one that requires only a minimum 
periodic payment that covers only a portion of the accrued interest, 
resulting in negative amortization. For such a loan, Sec.  
226.18(s)(4)(iii) requires creditors to disclose the fully 
amortizing periodic payment for each interest rate disclosed under 
Sec.  226.18(s)(2)(ii), in addition to the minimum periodic payment, 
regardless of whether the legal obligation explicitly recites that 
the consumer may make the fully amortizing payment. Some loan types 
that result in negative amortization do not meet the definition of 
negative amortization loan for purposes of Sec.  226.18(s). These 
include, for example, loans requiring level, amortizing payments but 
having a payment schedule containing gaps during which interest 
accrues and is added to the principal balance before regular, 
amortizing payments begin (or resume). For example, ``seasonal 
income'' loans may provide for amortizing payments during nine 
months of the year and no payments for the other three months; the 
required minimum payments (when made) are amortizing payments, thus 
such loans are not negative amortization loans under Sec.  
226.18(s)(7)(v). An adjustable-rate loan that has fixed periodic 
payments that do not adjust when the interest rate adjusts also 
would not be disclosed as a negative amortization loan under Sec.  
226.18(s). For example, assume the initial rate is 4%, for which the 
fully amortizing payment is $1500. Under the terms of the legal 
obligation, the consumer will make $1500 monthly payments even if 
the interest rate increases, and the additional interest is 
capitalized. The possibility (but not certainty) of negative 
amortization occurring after consummation does not make this 
transaction a negative amortization loan for purposes of Sec.  
226.18(s). Loans that do not meet the definition of negative 
amortization loan, even if they may have negative amortization, are 
amortizing loans and are disclosed under Sec. Sec.  226.18(s)(2)(i) 
and 226.18(s)(3).
* * * * *

Appendix D--Multiple Advance Construction Loans

* * * * *
    6. Relation to Sec.  226.18(s). A creditor must disclose an 
interest rate and payment summary table for transactions secured by 
real property or a dwelling, pursuant to Sec.  226.18(s), instead of 
the general payment schedule required by Sec.  226.18(g). 
Accordingly, home construction loans that are secured by real 
property or a dwelling are subject to Sec.  226.18(s) and not Sec.  
226.18(g). Under Sec.  226.176(c)(6)(ii), when a multiple-advance 
construction loan may be permanently financed by the same creditor, 
the construction phase and the permanent phase may be treated as 
either one transaction or more than one transaction.
    i. If a creditor uses Appendix D and elects pursuant to Sec.  
226.17(c)(6)(ii) to disclose the construction and permanent phases 
as separate transactions, the construction phase must be disclosed 
according to the rules in Sec.  226.18(s). Under Sec.  226.18(s), 
the creditor must disclose the applicable interest rates and 
corresponding periodic payments during the construction phase in an 
interest rate and payment summary table. The provision in Appendix 
D, Part I.A.3, which allows the creditor to omit the number and 
amounts of any interest payments ``in disclosing the payment 
schedule under Sec.  226.18(g)'' does not apply because the 
transaction is governed by Sec.  226.18(s) rather than Sec.  
226.18(g). Also, because the construction phase is being disclosed 
as a separate transaction and its terms do not repay all principal, 
the creditor must disclose a balloon payment, pursuant to Sec.  
226.18(s)(5).
    ii. On the other hand, if the creditor elects to disclose the 
construction and permanent phases as a single transaction, the 
construction phase must be disclosed pursuant to Appendix D, Part 
II.C, which provides that the creditor shall disclose the repayment 
schedule without reflecting the number or amounts of payments of 
interest only that are made during the construction phase. Appendix 
D also provides, however, that creditors must disclose (outside of 
the table) the fact that interest payments must be made and the 
timing of such payments. The rate and payment summary table 
disclosed under Sec.  226.18(s) must reflect only the permanent 
phase of the transaction. Therefore, in determining the rates and 
payments that must be disclosed in the columns of the table, 
creditors should apply the requirements of Sec.  226.18(s) to the 
permanent phase only. For example, under Sec.  226.18(s)(2)(i)(A) or 
Sec.  226.18(s)(2)(i)(B)(1), as applicable, the creditor should 
disclose the interest rate corresponding to the first installment 
due under the permanent phase and not any rate applicable during the 
construction phase.
* * * * *

Appendices G and H--Open-End and Closed-End Model Forms and Clauses

    1. Permissible changes. Although use of the model forms and 
clauses is not required, creditors using them properly will be 
deemed to be in compliance with the regulation with regard to those 
disclosures. Creditors may make certain changes in the format or 
content of the forms and clauses and may delete any disclosures that 
are inapplicable to a transaction or a plan without losing the act's 
protection from liability, except formatting changes may not be made 
to model forms and samples in H-18, H-19, H-20, H-21, H-22, H-23, G-
2(A), G-3(A), G-4(A), G-10(A)-(E), G-17(A)-(D), G-18(A) (except as 
permitted pursuant to Sec.  226.7(b)(2)), G-18(B)-(C), G-19, G-20, 
and G-21, or to the model clauses in H-4(E), H-4(F), H-4(G), and H-
4(H). Creditors may modify the heading of the second column shown in 
Model Clause H-4(H) to read ``first adjustment'' or ``first 
increase,'' as applicable, pursuant to Sec.  226.18(s)(2)(i)(C). The 
rearrangement of the model forms and clauses may not be so extensive 
as to affect the substance, clarity, or meaningful sequence of the 
forms and clauses. Creditors making revisions with that effect will 
lose their protection from civil liability. Except as otherwise 
specifically required, acceptable changes include, for example:
    i. Using the first person, instead of the second person, in 
referring to the borrower.
    ii. Using ``borrower'' and ``creditor'' instead of pronouns.
    iii. Rearranging the sequences of the disclosures.
    iv. Not using bold type for headings.
    v. Incorporating certain state ``plain English'' requirements.
    vi. Deleting inapplicable disclosures by whiting out, blocking 
out, filling in ``N/A'' (not applicable) or ``0,'' crossing out, 
leaving blanks, checking a box for applicable items, or circling 
applicable items. (This should permit use of multipurpose standard 
forms.)
    vii. Using a vertical, rather than a horizontal, format for the 
boxes in the closed-end disclosures.
* * * * *

    By order of the Board of Governors of the Federal Reserve 
System, December 21, 2010. Certain amendments to the Official Staff 
Commentary were approved by the Director of the Division of Consumer 
and Community Affairs, acting under authority delegated by the 
Board.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 2010-32534 Filed 12-28-10; 8:45 am]
BILLING CODE 6210-01-P