Truth in Lending, 11598-11629 [2011-4385]

Agencies

• FEDERAL RESERVE SYSTEM

[Federal Register Volume 76, Number 41 (Wednesday, March 2, 2011)]
[Proposed Rules]
[Pages 11598-11629]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-4385]



[[Page 11597]]

Vol. 76

Wednesday,

No. 41

March 2, 2011

Part III





Federal Reserve System





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12 CFR Part 226



Truth in Lending; Proposed Rule

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

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FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Regulation Z; Docket No. R-1406]
RIN No. 7100-AD 65


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 is publishing for public comment a proposed rule 
that would amend Regulation Z (Truth in Lending) to implement certain 
amendments to the Truth in Lending Act made by the Dodd-Frank Wall 
Street Reform and Consumer Protection Act. Regulation Z currently 
requires creditors to establish escrow accounts for higher-priced 
mortgage loans secured by a first lien on a dwelling. The proposal 
would implement statutory changes made by the Dodd-Frank Act that 
lengthen the time for which a mandatory escrow account established for 
a higher-priced mortgage loan must be maintained. In addition, the 
proposal would implement the Act's disclosure requirements regarding 
escrow accounts. The proposal also would exempt certain loans from the 
statute's escrow requirement. The primary exemption would apply to 
mortgage loans extended by creditors that operate predominantly in 
rural or underserved areas, originate a limited number of mortgage 
loans, and do not maintain escrow accounts for any mortgage loans they 
service.

DATES: Comments must be received on or before May 2, 2011.

ADDRESSES: You may submit comments, identified by Docket No. R-1406 and 
RIN No. 7100-AD 65, by any of the following methods:
     Agency Web Site: https://www.federalreserve.gov. Follow the 
instructions for submitting comments at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: regs.comments@federalreserve.gov. Include the 
docket number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Address to Jennifer J. Johnson, Secretary, Board of 
Governors of the Federal Reserve System, 20th Street and Constitution 
Avenue, NW., Washington, DC 20551.
    All public comments will be made available on the Board's Web site 
at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, comments 
will not be edited to remove any identifying or contact information. 
Public comments may also be viewed electronically or in paper in Room 
MP-500 of the Board's Martin Building (20th and C Streets, NW.,) 
between 9 a.m. and 5 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Samantha Pelosi, 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

    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.
    On July 30, 2008, the Board published a final rule amending 
Regulation Z to establish new regulatory protections for consumers in 
the residential mortgage market. 73 FR 44522; July 30, 2008 (the HOEPA 
Final Rule). Among other things, the HOEPA Final Rule defined a class 
of higher-priced mortgage loans that are subject to additional 
protections. A higher-priced mortgage loan is a transaction secured by 
a consumer's principal dwelling with an annual percentage rate that 
exceeds the average prime offer rate for a comparable transaction by 
1.5 or more percentage points for loans secured by a first lien, or by 
3.5 or more percentage points for loans secured by a subordinate lien. 
The HOEPA Final Rule included a requirement that creditors establish 
escrow accounts for taxes and insurance on higher-priced mortgage loans 
secured by a first lien on a principal dwelling. The escrow requirement 
was effective on April 1, 2010, for loans secured by site-built homes, 
and on October 1, 2010, for loans secured by manufactured housing.
    On August 26, 2009, the Board published a proposed rule to amend 
Regulation Z. 74 FR 43232; Aug. 26, 2009 (the 2009 Closed-End 
Proposal). Among other things, the 2009 Closed-End Proposal proposed 
new staff commentary to address questions that some creditors had 
raised concerning the determination of the average prime offer rate 
that is used to determine whether a transaction is a higher-priced 
mortgage loan covered by the HOEPA Final Rule. No final action has been 
taken on this proposal.
    On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act) was signed into law. Among other 
provisions, Title XIV of the Dodd-Frank Act amends TILA to establish 
certain requirements for escrow accounts for consumer credit 
transactions secured by a first lien on a consumer's principal 
dwelling. The escrow provisions of the Dodd-Frank Act are similar, but 
not identical, to the provisions adopted by the Board in the HOEPA 
Final Rule. Sections 1461 and 1462 of the Dodd-Frank Act create new 
TILA Section 129D, which substantially codifies the Board's escrow 
requirement for higher-priced mortgage loans but also adds disclosure 
requirements, lengthens the period for which escrow accounts are 
required, and adjusts the rate threshold for determining whether escrow 
accounts are required for ``jumbo loans,'' whose principal amounts 
exceed the maximum eligible for purchase by Freddie Mac. The new 
section also authorizes the Board to create an exemption from the 
escrow requirement for transactions originated by creditors meeting 
certain prescribed criteria.
    On September 24, 2010, the Board published two other proposed rules 
that would affect the escrow requirement for higher-priced mortgage 
loans. First, the Board proposed, among other amendments, to replace 
the APR as the metric a creditor compares to the average prime offer 
rate to determine whether a transaction is a higher-priced mortgage 
loan. Creditors instead would use a ``transaction coverage rate'' that 
would be closely comparable to the average prime offer rate and would 
not

[[Page 11599]]

be disclosed to consumers. 75 FR 58539; Sept. 24, 2010 (the 2010 
Mortgage Proposal). No final action has been taken on this proposal. 
Second, the Board proposed to implement one of the amendments to the 
TILA made by the Dodd-Frank Act. That amendment establishes a separate 
threshold above the average prime offer rate for determining coverage 
of the escrow requirement for ``jumbo'' loans, as discussed above. 75 
FR 58505; Sept. 24, 2010 (the ``Jumbo'' Threshold Proposal). 
Simultaneous with this proposal, the Board is publishing a final rule 
to adopt the provisions in the ``Jumbo'' Threshold Proposal (the 
``Jumbo'' Final Rule).

II. Summary of the Proposed Rule

    The Board is proposing amendments to Regulation Z's escrow 
requirement, in accordance with the Dodd-Frank Act. First, the proposed 
rule would expand the minimum period for mandatory escrow accounts from 
one to five years, and under certain circumstances longer. Second, the 
proposed rule would extend the partial exemption for certain loans 
secured by a condominium unit to planned unit developments and other, 
similar property types that have governing associations that maintain a 
master insurance policy. Third, the proposed rule would create an 
exemption from the escrow requirement for any loan extended by a 
creditor that makes most of its first-lien higher-priced mortgage loans 
in counties designated by the Board as ``rural or underserved,'' has 
annual originations of 100 or fewer first-lien mortgage loans, and does 
not escrow for any mortgage transaction it services.
    The Board also is proposing to establish two new disclosure 
requirements relating to escrow accounts. One disclosure would be 
required three business days before consummation of a mortgage 
transaction for which an escrow account will be established. The Dodd-
Frank Act requires such disclosures for higher-priced mortgage loans, 
for which such an escrow account is required; the Board is proposing to 
require the same disclosure for all mortgage loans for which an escrow 
account is established. The disclosure would explain what an escrow 
account is and how it works. It would state the risk of not having an 
escrow account. The disclosure would state the estimated amount of the 
first year's disbursements, the amount to be paid at consummation to 
fund the escrow account initially, and the amount of the consumer's 
regular mortgage payments to be paid into the escrow account. Finally, 
the disclosure would state that the amount of the regular escrow 
payment may change in the future.
    Also, pursuant to the Dodd-Frank Act, the Board is proposing a 
second disclosure that would be given when a mortgage transaction is 
entered into without an escrow account or when an escrow account on an 
existing mortgage loan will be cancelled. The disclosure would be 
required to be delivered at least three business days before 
consummation or cancellation of the existing escrow account, as 
applicable. This disclosure would explain what an escrow account is, 
how it works, and the risk of not having an escrow account. It also 
would state the potential consequences of failing to pay home-related 
costs such as taxes and insurance in the absence of an escrow account. 
In addition, it would state why there will be no escrow account or why 
it is being cancelled, as applicable, the amount of any fee imposed for 
not having an escrow account, and how the consumer can request that an 
escrow account be established or left in place, along with any deadline 
for such requests.

III. Consumer Testing for This Proposal

    As noted above, the Dodd-Frank Act amended TILA to require new 
disclosures regarding escrow accounts. Consistent with its practice 
concerning disclosures required by Regulation Z, the Board conducted 
consumer testing to develop the disclosures in this proposal. The Board 
retained ICF Macro, a research and consulting firm that specializes in 
designing and testing documents, to design and test model disclosure 
forms for this proposal.
    ICF Macro worked closely with the Board to conduct one round of 
testing (eight interviews) on the Board's proposed disclosures 
regarding escrow accounts. Interview participants were asked to review 
model forms and provide their reactions, and they then were 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 were incorporated in revised model forms, 
which are included in this proposal.
    Key findings of the Board's consumer testing are discussed where 
relevant in the section-by-section analysis below. ICF Macro prepared a 
report of the results of the testing, which is available on the Board's 
public Web site along at: https://www.federalreserve.gov.

IV. Section-by-Section Analysis

Section 226.2 Definitions and Rules of Construction

2(a) Definitions
2(a)(6) Business Day
    The Board is proposing revisions to Sec.  226.2(a)(6) to define 
``business day'' for purposes of the timing of the new disclosures for 
escrow account. Currently, Sec.  226.2(a)(6) contains two definitions 
of business day. Under the general definition, a business day is a day 
on which the creditor's offices are open to the public for carrying on 
substantially all of its business functions. See comment 2(a)(6)-1. For 
some purposes, however, a more precise definition of business day 
applies: All calendar days except Sundays and specified Federal legal 
holidays.
    TILA Section 129D(h) requires creditors to disclose certain 
information regarding a mandatory escrow account at least three 
business days before consummation of the transaction giving rise to 
such account or in accordance with timeframes established by 
regulation. The Board is proposing to revise Sec.  226.2(a)(6) and 
comment 2(a)(6)-2 to apply the more precise definition of business day 
for this purpose. This proposed application of the more precise 
definition of business day is being made so that the same definition of 
business day would be used for the three-business-day waiting period 
proposed in Sec.  226.19(f)(4) as in the seven-business day waiting 
period for the early disclosures and three-business-day waiting period 
for the corrected disclosures in Sec.  226.19(a)(2), which should 
simplify compliance. This proposal would also apply the more precise 
definition of business day to the requirement in proposed Sec.  
229.20(d)(4) that servicers provide disclosures regarding the 
cancellation of an escrow account at least three business days before 
closure of the escrow account.

Section 226.19 Certain Transactions Secured by Real Property or a 
Dwelling 19(f) Escrow Accounts

Requirements of TILA Section 129D
    The Board is proposing a new Sec.  226.19(f) to implement the 
escrow account disclosure requirements of TILA Section 129D, as enacted 
by Sections 1461 and 1462 of the Dodd-Frank Act. TILA Section 129D(a) 
contains the statutory requirement that an escrow account be 
established in connection with the consummation of any consumer credit 
transaction secured by a first lien on a consumer's principal dwelling 
(other than an open-end credit

[[Page 11600]]

plan or a reverse mortgage). Section 129D(b), however, limits that 
requirement to four specified circumstances: (1) Where an escrow 
account is required by federal or state law; (2) where the loan is 
made, guaranteed, or insured by a state or federal agency; (3) where 
the transaction's annual percentage rate exceeds the average prime 
offer rate by prescribed margins; and (4) where an escrow account is 
``required pursuant to regulation.'' TILA Section 129D(h) requires 
certain disclosures when an escrow account mandated by TILA Section 
129D(b) is established. TILA Section 129D(j) requires certain other 
disclosures when an escrow account for a transaction secured by real 
property is not established or is cancelled.
The Board's Proposal
    For a closed-end transaction secured by a first-lien on real 
property or a dwelling, proposed Sec.  226.19(f) would require the 
creditor to disclose the information about escrow accounts specified in 
Sec.  226.19(f)(2)(i) when an escrow account is established and 
specified in Sec.  226.19(f)(2)(ii) when an escrow account is not 
established in connection with the consummation. Proposed Sec.  
226.19(f) would require the creditor to disclose this information in 
accordance with the format requirements of Sec.  226.19(f)(1) and the 
timing requirements of Sec.  226.19(f)(4). In addition, the proposal 
would provide that for purposes of Sec.  226.19(f), the term ``escrow 
account'' has the same meaning as under Regulation X (24 CFR 
3500.17(b)), which implements the Real Estate Settlement Procedures Act 
(RESPA), and is subject to any interpretations by the Department of 
Housing and Urban Development (HUD). This proposed definition would 
parallel existing Sec.  226.35(b)(3)(iv). Proposed comment 19(f)-1 
would clarify that the term ``real property'' includes vacant and 
unimproved land. It also would clarify that the term ``dwelling'' 
includes vacation and second homes and mobile homes, boats, and 
trailers used as residences and refer to additional guidance regarding 
the term provided by Sec.  226.2(a)(19) and the related commentary.
    Secured by a first-lien transaction. Proposed Sec.  226.19(f) would 
require disclosures for the establishment or non-establishment of an 
escrow account in connection with consummation of a transaction secured 
by a first lien, but not a subordinate lien. TILA Sections 129D(a) and 
(b) require the establishment of an escrow account in connection with 
only first-lien mortgage loans. TILA Sections 129D(h) and (j) require 
disclosures when such an escrow account is established or is not 
established in connection with consummation. Proposed Sec.  226.19(f) 
would not require disclosures for subordinate-lien mortgages because 
TILA does not require the establishment of escrow accounts for 
subordinate-lien mortgages and the Board understands that creditors 
rarely offer or establish escrow accounts for such mortgages. 
Nevertheless, the Board seeks comment on whether this approach is 
appropriate.
    Disclosures for establishment of voluntary escrow accounts. 
Proposed Sec.  226.19(f) would implement the TILA Section 129D(h) 
disclosure requirements for the establishment of escrow accounts 
mandated by TILA Section 129D(b) and also would impose disclosure 
requirements for the establishment of escrow accounts that are not 
mandated by TILA. Under the proposal, creditors would have to make the 
same disclosures for any escrow account that will be established in 
connection with the consummation of a loan secured by a first lien. The 
proposed disclosure requirement would inform all consumers obtaining an 
escrow account, whether mandatory or voluntary, about the function and 
purpose of escrow accounts generally and the funding of their escrow 
account specifically.
    The proposed Sec.  226.19(f) requirement that disclosures be 
provided for the establishment of both mandatory and voluntary escrow 
accounts would parallel the TILA Section 129D(j) requirement that 
disclosures be provided for the non-establishment or cancellation of 
any type of escrow account. Conforming the types of escrow accounts 
that trigger the establishment disclosures to those that trigger the 
non-establishment and cancellation disclosures avoids the anomalous 
result of a consumer receiving information about escrow accounts when 
an escrow account is not established or is cancelled, but not when it 
is established in the first place.
    The Board proposes that the TILA Section 129D(h) disclosures be 
provided for voluntary as well as mandatory escrow accounts pursuant to 
its authority under TILA Section 105(a). It authorizes the Board to 
prescribe regulations that contain classifications, differentiations, 
or other provisions, and may provide for adjustments and exceptions for 
any class of transactions, to effectuate the purposes of TILA and 
Regulation Z, to prevent circumvention or evasion, or to facilitate 
compliance. 15 U.S.C. 1604(a). One purpose of the statute is to assure 
meaningful disclosure of credit terms so that the consumer will be able 
to compare more readily the various credit terms available and avoid 
the uninformed use of credit. 15 U.S.C. 1601(a). The Board believes 
that providing disclosures to consumers that will have a voluntary 
escrow account established would enable those consumers to compare the 
costs of different mortgage loans available to them more easily and to 
avoid the uninformed use of credit. The information provided would 
allow consumers to compare the cost and fees of mortgage loans that 
have and do not have an escrow account, to identify the premium that 
different creditors may be charging for a mortgage loan with an escrow 
account, and to understand the total obligation of the mortgage loan 
that they ultimately may choose.
    Real property or a dwelling. With Sec.  226.19(f), the Board covers 
real property and principal dwellings as well as dwellings that are not 
used as a principal residence. TILA Section 129D(h) requires certain 
disclosures when an escrow account mandated by TILA Section 129D(b) is 
established in connection with the consummation of a closed-end 
transaction secured by a consumer's principal dwelling. TILA Section 
129D(j) requires certain other disclosures when an escrow account for a 
transaction secured by real property is not established or is 
cancelled. Proposed Sec.  226.19(f)(2) implements TILA Section 129D(h) 
regarding disclosures when an escrow account is established in 
connection with consummation of a transaction secured by a consumer's 
principal dwelling, but also covers other dwellings and real property 
without a dwelling. In addition, proposed Sec.  226.19(f)(2) implements 
TILA Section 129D(j) regarding disclosures when an escrow account is 
not established in connection with consummation of a transaction 
secured by real property, but also covers dwellings that would be 
considered personal property under state law. The Board believes that 
coverage of the same types of property under the disclosure 
requirements for the establishment as well as the non-establishment of 
an escrow account would promote the informed use of credit by consumers 
and compliance by creditors. The disclosures for the establishment of 
an escrow account likely would be just as useful to a consumer entering 
into a transaction secured by a second or vacation home or vacant or 
unimproved land as it would to a consumer entering into a transaction 
secured by a principal dwelling. Similarly, the disclosures for the 
non-establishment of an escrow

[[Page 11601]]

account should cover all dwellings, whether or not they are deemed to 
be real or personal property under state law. Furthermore, the coverage 
of all dwellings would eliminate the analysis that creditors would have 
to undertake to determine whether and which disclosures would be 
triggered when a transaction will be secured by any one of various 
types of dwellings.
    The Board proposes the Sec.  229.19(f) coverage of real property 
and dwellings pursuant to its authority under TILA Section 105(a). 15 
U.S.C. 1604(a). TILA Section 105(a) authorizes the Board to prescribe 
regulations that contain classifications, differentiations, or other 
provisions, and may provide for adjustments and exceptions for any 
class of transactions, to effectuate the purposes of TILA and 
Regulation Z, to prevent circumvention or evasion, or to facilitate 
compliance. 15 U.S.C. 1604(a). One purpose of the statute is to assure 
meaningful disclosure of credit terms so that the consumer will be able 
to compare more readily the various credit terms available and avoid 
the uninformed use of credit. 15 U.S.C. 1601(a). The class of 
transactions that would be affected is transactions secured by real 
property or a dwelling. As mentioned above, providing disclosures 
regarding an escrow account to consumers entering into a transaction 
secured by real estate or a dwelling would both educate consumers and 
ease compliance burdens for creditors.
19(f)(1) Format Requirements
    Proposed Sec.  226.19(f)(1) contains format requirements for the 
disclosures required by Sec.  226.19(f)(2). Proposed Sec.  
226.19(f)(1)(i) requires that creditors provide the Sec.  226.19(f)(2) 
disclosures in a minimum 10-point font, grouped together on the front 
side of a one-page document, separate from all other material, with the 
headings, content, order, and format substantially similar to Model 
Form H-24 (when an escrow account is established) or Model Form H-25 
(when an escrow account is not established) in Appendix H. Consumer 
testing has shown that the location and order in which information was 
presented affected consumers' ability to locate and comprehend the 
information disclosed. Proposed comment 19(f)(1)(i)-1 clarifies that 
the disclosures required by Sec.  226.19(f)(2) and any optional 
information permitted by Sec.  226.19(f)(3) must be grouped together on 
the front side of a separate one-page document that contains no other 
material. The proposed comment also clarifies that the Sec.  
226.19(f)(2)(i) disclosures may not appear in the same document as the 
escrow disclosures required under Sec.  226.18 or under RESPA or 
Regulation X. Proposed comment 19(f)(1)(i)-2 clarifies that the notice 
containing the disclosures required by Sec.  226.19(f)(2) and any 
optional information permitted by Sec.  226.19(f)(3) must be in writing 
in a form that the consumer may keep.
    Proposed Sec.  226.19(f)(1)(ii) would require that the heading 
``Information About Your Mortgage Escrow Account'' required by Sec.  
226.19(f)(2)(i) or the heading ``Required Direct Payment of Property 
Taxes and Insurance'' required by Sec.  226.19 (f)(2)(ii) be more 
conspicuous than and precede the other disclosures. The heading would 
be required to be outside the table that is required by proposed Sec.  
226.19(f)(1)(iii).
    Proposed Sec.  226.19(f)(1)(iii) would require the creditor to 
provide the disclosures regarding the establishment of an escrow 
account under Sec.  226.19(f)(2)(i) in the form of a table containing 
four rows or the non-establishment of an escrow account under Sec.  
226.19(f)(2)(ii) in the form of a table containing no more than seven 
rows. The disclosures regarding the non-establishment of an escrow 
account under Sec.  226.19(f)(2)(ii) would be in the form of a table 
containing five rows when the creditor does not offer the option of 
having an escrow account. In such a case, the creditor would be 
required by to omit the Sec. Sec.  226.19(f)(2)(ii)(D) and (G) 
disclosures from the table because they would be inapplicable. Only the 
information required or permitted by Sec.  226.19(f)(2)(i) or (ii) 
would be allowed to appear in the table. Proposed Sec.  
226.19(f)(1)(iv) would require the creditor to present the disclosures 
in the format of a question and answer in a manner substantially 
similar to Model Form H-24 or H-25 in Appendix H. Consumer testing has 
shown that using a tabular, question and answer format improved 
participants' ability to identify and understand key information. 
Proposed Sec.  226.19(f)(1)(iv) also would require the creditor to 
present the disclosures appearing in the table in the order listed in 
Sec.  226.19(f)(2)(i)(A)-(D) or (ii)(A)-(G), as applicable. This order 
would ensure that consumers receive the disclosed information in a 
logical progression.
    Proposed Sec.  226.19(f)(1)(v) would require the creditor to 
highlight certain disclosures because consumer testing has shown that 
such emphasis allows consumers to locate and identify important 
information more quickly. The Board proposes that all dollar amounts be 
presented in bold font. It also proposes implementation of the 
requirement in TILA Section 129D(j)(2)(B) that the notice regarding the 
non-establishment of an escrow account contain a ``prominent'' 
statement of the consumer's responsibility for covering home-related 
costs through potentially large semi-annual or annual payments by 
requiring presentation of that information in bold format.
19(f)(2) Content Requirements
19(f)(2)(i) Establishment of Escrow Account
    Proposed Sec.  226.19(f)(2)(i) would implement TILA Section 129D(h) 
by setting forth the required content for the disclosure notice 
regarding the establishment of an escrow account before the end of the 
45-day period following consummation of a transaction subject to Sec.  
226.19(f). The proposed 45-day period reflects the requirement in Sec.  
3500.17(g)(1) of Regulation X, which implements RESPA, that the 
servicer submit an initial escrow account statement to the borrow at 
settlement or within 45 calendar days of settlement for escrow accounts 
that are established as a condition of the loan. The Board solicits 
comment on whether the 45-day period is appropriate for deeming an 
account to be established in connection with consummation of a mortgage 
transaction. Proposed comment 19(f)(2)(i)-2 would clarify that neither 
creditors nor servicers are required to provide the Sec.  
226.19(f)(2)(i) disclosures when an escrow account is established 
solely in connection with the consumer's delinquency or default on the 
underlying debt obligation.
    Proposed Sec.  226.19(f)(2)(i) also would require the disclosures 
to be made clearly and conspicuously. Proposed comment 19(f)(2)(i)-1 
would clarify that, to meet the clear and conspicuous standard, 
disclosures must be made in a reasonably understandable form and 
readily noticeable to the consumer. Proposed Sec.  226.19(f)(2)(i) also 
would require the disclosure notice to bear the heading ``Information 
About Your Mortgage Escrow Account.''
19(f)(2)(i)(A) Purpose of Notice
    Proposed Sec.  226.19(f)(2)(i)(A) would require a statement that 
the purpose of the notice is to inform the consumer that the consumer's 
mortgage with the creditor will have an escrow account. This proposed 
provision would implement the requirement of TILA Section 129D(h)(1) 
that the creditor disclose the fact that an escrow account will be 
established.

[[Page 11602]]

19(f)(2)(i)(B) Explanation of Escrow Account
    Proposed Sec.  226.19(f)(2)(i)(B) would require the creditor to 
provide a statement that an escrow account is an account used to pay 
home-related costs such as property taxes and insurance together with a 
statement that an escrow account is sometimes called an ``impound'' or 
``trust'' account. This information would be followed by a statement 
that the consumer will pay into the escrow account over time and that 
the creditor will take money from the account to pay costs as needed. 
The Board is proposing these statements explaining an escrow account, 
the other names sometimes used for an escrow account, and how an escrow 
account works pursuant to its authority under TILA Section 129D(h)(6) 
to prescribe regulations requiring the creditor to disclose such other 
information as the Board determines necessary for the protection of the 
consumer. The Board believes that informing consumers of the other 
names for an escrow account would prevent consumers in Western regions 
of the country from confusing an escrow account for the payment of 
home-related costs such as property taxes and insurance premiums with 
the escrow that is commonly used for the closing and settlement of a 
credit transaction. The Board also believes that the basic information 
explaining what an escrow account is and how it works provides needed 
context for the other disclosures in the notice.
    Proposed Sec.  226.19(f)(2)(i)(B) also would require a statement of 
the estimated dollar amount that the consumer's home-related costs will 
total for the first year of the mortgage. TILA Section 129D(h)(3) 
requires creditors establishing an escrow account in connection with a 
transaction to disclose the amount, in the initial year after 
consummation, of the estimated taxes and hazard insurance. The 
statement regarding the total dollar amount of the estimated home-
related costs would implement the TILA Section 129D(h)(3) requirement. 
Proposed comment 19(f)(2)(i)-1 states that the creditor may comply with 
the numerical content requirement of Sec.  226.19(f)(2)(i)(B) by using 
the amount derived from the escrow account analysis conducted pursuant 
to Regulation X.
19(f)(2)(i)(C) Risk of Not Having Escrow Account
    Proposed Sec.  226.19(f)(2)(i)(C) would require a statement that, 
if the consumer did not have an escrow account, the consumer would be 
responsible for directly paying home-related costs through potentially 
large semi-annual or annual payments. This is consistent with the 
requirements of TILA Section 129D(h)(5). The Board is proposing the 
statement regarding the consumer's direct responsibility, in the 
absence of an escrow account, for paying home-related costs through 
potentially large payments to implement TILA Section 129D(h)(5) and to 
conform the disclosure with the similar disclosure required by TILA 
Section 129D(j)(2)(B) regarding the non-establishment of an escrow 
account.
19(f)(2)(i)(D) Funding of Escrow Account
    Proposed Sec.  226.19(f)(2)(i)(D) would implement TILA Section 
129D(h)(2) by requiring a statement of the dollar amount that the 
consumer will be required to deposit at closing to initially fund the 
escrow account. Proposed Sec.  226.19(f)(2)(i)(D) also would implement 
TILA Section 129D(h)(4) by requiring a statement of the dollar amount 
that the consumer's periodic mortgage payments will include for deposit 
into the escrow account. In addition, proposed Sec.  226.19(f)(2)(i)(D) 
would require a third statement that the amount of this escrow payment 
may change in the future. The Board is proposing to require this last 
statement pursuant to its authority under TILA Section 129D(h)(6) to 
prescribe regulations requiring the creditor to disclose such other 
information as the Board determines necessary for the protection of the 
consumer. This information notifies a consumer that his or her periodic 
mortgage payment could change with an increase or decrease in property 
tax or hazard insurance costs. Proposed comment 19(f)(2)(i)-1 states 
that the creditor may comply with the numerical content requirement of 
Sec.  226.19(f)(2)(i)(D) by using the amount derived from the escrow 
account analysis conducted pursuant to Regulation X.
19(f)(2)(ii) Non-Establishment of Escrow Account
    Proposed Sec.  226.19(f)(2)(ii) would implement TILA Section 
129D(j)(2) by setting forth the required content for the disclosure 
notice regarding escrow accounts when an escrow account will not be 
established before the end of the 45-day period following consummation 
of a transaction subject to Sec.  226.19(f).
    Proposed Sec.  226.19(f)(2)(ii) would require that the disclosures 
be made clearly and conspicuously. Proposed comment 19(f)(2)(ii)-1 
refers to comment 19(f)(2)(i)-1, which clarifies that, to meet the 
clear and conspicuous standard, disclosures must be made in a 
reasonably understandable form and readily noticeable to the consumer. 
Proposed Sec.  226.19(f)(2)(ii) also would require the disclosure 
notice to bear the heading ``Required Direct Payment of Property Taxes 
and Insurance.''
19(f)(2)(ii)(A) Purpose of Notice
    Proposed Sec.  226.19(f)(2)(ii)(A) would require a statement that 
the purpose of the notice is to inform the consumer that the consumer's 
mortgage with the creditor will not have an escrow account and to 
explain the risk of not having an escrow account. The Board is 
proposing these disclosures pursuant to the Board's authority under 
TILA Section 129D(j)(2)(D) to include in the notice such other 
information as the Board determines necessary for the protection of the 
consumer. The Board believes that these disclosures are necessary to 
draw the consumer's attention to the fact that his or her mortgage will 
not have an escrow account and the implications of such absence.
19(f)(2)(ii)(B) Explanation of Escrow Account
    Proposed Sec.  226.19(f)(2)(ii)(B) would require the creditor to 
provide a statement that an escrow account is an account that is used 
to pay home-related costs such as property taxes and insurance together 
with a statement that an escrow account is sometimes called an 
``impound'' or ``trust'' account. This information would be followed by 
a statement that the borrower pays into the escrow account over time 
and that the creditor takes money from the account to pay costs as 
needed. The Board is proposing these statements explaining an escrow 
account, the other names sometimes used for an escrow account, and how 
an escrow account works pursuant to its authority under TILA Section 
129D(h)(6) to prescribe regulations requiring the creditor to disclose 
such other information as the Board determines necessary for the 
protection of the consumer. The Board believes that informing consumers 
of the other names for an escrow account would prevent consumers in 
Western regions of the country from confusing an escrow account for the 
payment of home-related costs such as property taxes and insurance 
premiums with the escrow that is commonly used for the closing and 
settlement of a credit transaction. The Board also believes that the 
basic information explaining what an escrow account is and how it works 
provides needed context for the other disclosures in the notice.

[[Page 11603]]

19(f)(2)(ii)(C) Reason Why Mortgage Will Not Have an Escrow Account
    Proposed Sec.  226.19(f)(2)(ii)(C) would require a statement that 
the consumer was given the option of having an escrow account but that 
the consumer waived it or a statement that the creditor does not offer 
the option of having an escrow account, as applicable. The Board is 
proposing this disclosure pursuant to the Board's authority under TILA 
Section 129D(j)(2)(D) to include in the notice such other information 
as the Board determines necessary for the protection of the consumer. 
This disclosure would provide the consumer with the background 
information necessary to understand the disclosure required by Sec.  
226.19(f)(2)(ii)(G) at the end of the notice as to whether the consumer 
has an option to request the establishment of an escrow account.
19(f)(2)(ii)(D) Fee for Choosing Not To Have Escrow Account
    Proposed Sec.  226.19(f)(2)(ii)(D) would implement TILA Section 
129D(j)(2)(A) by requiring disclosure of any fee charged for not 
establishing an escrow account. Proposed Sec.  226.19(f)(2)(ii)(D) 
would require, if the consumer waives establishment of an escrow 
account, a statement of the dollar amount of any fee that the consumer 
will be charged for choosing not to have an escrow account, or a 
statement that the consumer will not be charged a fee. If the creditor 
is not establishing an escrow account because it does not offer escrow 
accounts to consumers, proposed Sec.  226.19(f)(2)(ii)(D) would require 
the creditor to omit this disclosure from the table.
    The Board understands that creditors only charge a fee for the non-
establishment of an escrow account when the creditor usually offers and 
establishes escrow accounts for all first-lien transactions, but a 
particular consumer requests that an escrow account not be established 
for his or her transaction. A creditor that offers and establishes 
escrow accounts for all first-lien transactions typically benefits from 
this practice because the funds in the escrow accounts provide interest 
income to the creditor and additional capital reserves. The Board 
believes that a creditor that is asked by a consumer not to engage in 
its usual practice of establishing an escrow account for his or her 
particular transaction may charge that consumer a fee for foregoing 
such financial benefits with respect the transaction. Creditors that do 
not regularly offer or establish escrow accounts do not charge 
consumers for the non-establishment of an escrow account, because those 
creditors are not foregoing a financial benefit. The proposal would 
require creditors that do not offer escrow accounts to omit the 
disclosure regarding a fee because the Board understands that those 
creditors do not charge these fees and that the disclosure, therefore, 
would be inapplicable. Nevertheless, the Board seeks comment on this 
approach.
19(f)(2)(ii)(E) Risk of Not Having Escrow Account
    Proposed Sec.  226.19(f)(2)(ii)(E) would require a statement that 
the consumer will be responsible for directly paying home-related costs 
through potentially large semi-annual or annual payments. TILA Section 
129D(j)(2)(B) requires a clear and prominent statement that the 
consumer is responsible for personally and directly paying the non-
escrowed items, in addition to paying the mortgage loan payment, in the 
absence of an escrow account, and that the costs for taxes and 
insurance can be substantial. Proposed Sec.  226.19(f)(2)(ii)(E) would 
implement these TILA Section 129D(j)(2)(B) requirements.
19(f)(2)(ii)(F) Consequences of Failure To Pay Home-Related Costs
    Proposed Sec.  226.19(f)(2)(ii)(F) would require a statement that, 
if the consumer does not pay the applicable home-related costs, the 
creditor could require an escrow account on the mortgage or add the 
costs to the loan balance. This information would be followed by a 
statement that the creditor could also require the consumer to pay for 
insurance that the creditor buys on the consumer's behalf and a 
statement that this insurance would likely be more expensive and 
provide fewer benefits than traditional homeowner's insurance. TILA 
Section 129D(j)(2)(C) requires an explanation of the consequences of 
any failure to pay non-escrowed items, including the possible 
requirement for the forced placement of insurance and the potentially 
higher cost or reduced coverage for the consumer for such insurance. 
Proposed Sec.  226.19(f)(2)(ii)(F) would implement TILA Section 
129D(j)(2)(C) by providing examples of the possible consequences of a 
failure to pay home-related costs, such as a decision by the creditor 
to require an escrow account, to add the home-related costs to the loan 
balance, or to purchase ``forced-placed'' insurance. Proposed Sec.  
226.19(f)(2)(ii)(F) would require a description of ``forced-placed'' 
insurance, rather than use of that term, because consumer testing 
showed that consumers were unfamiliar with the term and that the term 
itself distracted consumers from recognizing the other possible 
consequences of a failure to pay home-related costs.
19(f)(2)(ii)(G) Option To Establish Escrow Account
    Proposed Sec.  226.19(f)(2)(ii)(G) would require disclosure of the 
telephone number that the consumer can use to request an escrow account 
and the latest date by which the consumer can make the request. The 
Board is proposing this disclosure pursuant to its authority under TILA 
Section 129D(j)(2)(D) to include in the notice such other information 
as it determines necessary for the protection of the consumer. The 
Board believes that, after considering the risks of not having an 
escrow account as disclosed in the notice, a consumer who originally 
waived the establishment of an escrow account may wish to set one up. 
The information to contact the creditor with a request to establish an 
escrow account should be readily available to such consumers in the 
notice. The proposed rule would not require a creditor to obtain a 
toll-free telephone number that consumers may use to request the 
establishment of an escrow account. The Board proposes that a creditor 
disclose the telephone number that it has obtained for consumers to 
contact it regarding a variety of issues and that also may be used to 
request establishment of an escrow account. If the creditor does not 
offer the option of having an escrow account, proposed Sec.  
226.19(f)(2)(ii)(G) would require the creditor to omit this disclosure 
from the table.
    The proposal does not require a creditor to disclose whether a fee 
will be charged when a consumer changes his or her decision and asks 
for an escrow account to be established. The Board understands that a 
creditor that usually offers and establishes escrow accounts for all 
first-lien transactions would not charge a consumer for changing his or 
her decision. The Board seeks comment on this approach.
19(f)(3) Optional Information
    Proposed Sec.  226.19(f)(3) would permit the creditor, at its 
option, include the creditor's name or logo, or the consumer's name, 
property address, or loan number on the disclosure notice, outside of 
the table. Proposed comment 19(f)(3)-1 clarifies that Sec.  
226.19(f)(3) lists the information that the creditor may, at its 
option, include on the disclosure notice, outside of the table 
described in Sec.  226.19(f)(1)(iii) that contains the required content 
of Sec.  226.19(f)(2).

[[Page 11604]]

19(f)(4) Waiting Period for Disclosures
    Proposed Sec.  226.19(f)(4) would require the creditor to provide 
the disclosures regarding the establishment or the non-establishment of 
an escrow account, as applicable, so that the consumer receives them no 
later than three business days prior to consummation. This proposed 
provision would implement the requirement of TILA Section 129D(h) for 
disclosures regarding the establishment of an escrow account three 
business days before consummation and the requirement of TILA Section 
129D(j)(1)(A) for disclosures regarding the non-establishment of an 
escrow account in a ``timely'' manner. Proposed Sec.  226.19(f)(4) 
would conform the timing requirement of TILA Section 129D(j)(1)(A) to 
that of TILA Section 129D(h) so that a consumer that will not have an 
escrow account would have sufficient time to consider the attendant 
responsibilities and risks before consummating the transaction.
    Proposed comment 19(f)(4)-1 would clarify that, for purposes of 
Sec.  226.19(f)(4), ``business day'' means all calendar days except for 
Sundays and specified legal public holidays. The Board believes that 
the definition of business day that excludes Sundays and public 
holidays is more appropriate than the more general definition because 
consumers should not be presumed to have received disclosures in the 
mail on a day on which there is no mail delivery. Proposed comment 
19(f)(4)-2 would provide guidance regarding the timing requirement with 
an example that states if consummation is to occur on Thursday, June 
11, the consumer must receive the disclosures on or before Monday, June 
8, assuming there are no legal public holidays.
19(f)(5) Timing of Receipt
    Proposed Sec.  226.19(f)(5) states that, if the disclosures are 
mailed to the consumer or delivered by a means other than in person, 
the consumer is considered to have received the disclosures three 
business days after they are mailed or delivered. Proposed comment 
19(f)(5)-1 states that, if the creditor provides the disclosures to the 
consumer in person, consummation may occur any time on the third 
business day following delivery. If the creditor provides the 
disclosures by mail, receipt is presumed three business days after they 
are placed in the mail, for purposes of determining when the three-
business-day waiting period required under Sec.  226.19(f)(4) begins. 
The proposed comment also permits creditors that use electronic mail or 
courier to follow this approach. Whatever method is used to provide 
disclosures, creditors may rely on documentation of receipt in 
determining when the waiting period begins.
19(f)(6) Consumer's Waiver of Waiting Period Before Consummation
    Proposed Sec.  226.19(f)(6) would permit consumers to modify or 
waive the three-business-day waiting period following receipt of the 
escrow account disclosures required by Sec.  226.19(f)(2) for bona fide 
personal financial emergencies. Proposed Sec.  226.19(f)(6) would 
require the consumer waiving the waiting period to give the creditor a 
dated, written statement that describes the emergency, specifically 
modifies or waives the waiting period, and bears the signature of all 
the consumers primarily liable on the legal obligation. Proposed Sec.  
226.19(f)(6) would prohibit the use of printed forms to effectuate a 
waiver.
    Proposed comment 19(f)(6)-1 would provide additional guidance 
regarding the waiver procedure. For example, the proposed comment would 
clarify that a consumer may modify or waive the waiting period only 
after receiving the required disclosures. It also would clarify that a 
waiver is effective only if each consumer primarily liable on the legal 
obligation signs a waiver statement. Where there are multiple 
consumers, they may sign the same waiver statement. Proposed comment 
19(f)(6)-1 would allow the consumer to include the waiver statement 
that specifically waives or modifies the three-business-day waiting 
period required by Sec.  226.19(f)(4) in the same document that 
contains a waiver statement that specifically waives or modifies the 
seven-business-day waiting period for early disclosures or the three-
business-day waiting period for corrected disclosures required by Sec.  
226.19(a)(2).
    Proposed comment 19(f)(5)-2 would clarify that, to qualify as a 
bona fide personal financial emergency, the situation must require 
disbursement of loan proceeds before the end of the waiting period. 
Proposed comment 19(f)(5)-2 would further clarify that a bona fide 
personal financial emergency typically, but not always, will involve 
imminent loss of or harm to a dwelling or harm to the health and safety 
of a natural person. It also would provide that a waiver is not 
effective if the consumer's statement is inconsistent with facts known 
to the creditor.
    The Board proposes this waiver provision pursuant to the Board's 
authority under TILA Section 105(f). 15 U.S.C. 1604(f). TILA Section 
105(f) generally authorizes the Board to exempt all or any class of 
transactions from coverage under TILA and Regulation Z if the Board 
determines that coverage under that part does not provide a meaningful 
benefit to consumers in the form of useful information or protection. 
15 U.S.C. 1604(f)(1). The Board is proposing to exempt closed-end 
transactions secured by a first lien on real property or a dwelling 
from the three-business-day waiting period required by TILA Section 
129D(h) and Sec.  226.19(f)(4) when the consumer determines that the 
loan proceeds are needed before the waiting period ends to meet a bona 
fide personal financial emergency. TILA Section 105(f) directs the 
Board to make the determination of whether coverage of such 
transactions under TILA Section 129D(h) and Sec.  226.19(f)(4) provides 
a meaningful benefit to consumers in light of specific factors. 15 
U.S.C. 1604(f)(2). These factors are (1) the amount of the loan and 
whether the provision provides a benefit to consumers who are parties 
to such transactions; (2) the extent to which the requirement 
complicates, hinders, or makes more expensive the credit process for 
the class of transactions; (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 and Regulation Z; (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 Board has considered each of these factors carefully and, based 
on that review, believes that the proposed exemption is appropriate. 
Generally, a first-lien mortgage is the largest loan that a consumer 
will obtain. The waiting period would harm consumers experiencing a 
bona fide personal financial emergency because those consumers would 
need access to the proceeds of their loans during that period. The 
waiting period would hinder the credit process for consumers 
experiencing a bona fide personal financial emergency by forcing them 
to wait three business days before consummating the loan. For consumers 
experiencing a bona fide personal financial emergency, the proceeds of 
the mortgage loan will be extremely important in meeting other 
financial obligations. Most first-lien mortgage loans are secured by 
the consumer's principal dwelling. The exemption

[[Page 11605]]

would not undermine the goal of consumer protection because the 
disclosure required by Sec.  226.19(f)(2) must be provided to the 
consumer before the consumer may modify or waive the waiting period. 
Delivery of the disclosure itself promotes the informed use of credit. 
In addition, Sec.  226.19(f)(5) would require a consumer wishing to 
modify or waive the waiting period to provide the creditor with a 
dated, written statement that describes the emergency, specifically 
modifies or waives the waiting period, and bears the consumer's 
signature. The use of a printed form as the written statement would be 
prohibited.
    The Board's exemption authority under Section 105(f) does not apply 
in the case of a mortgage referred to in Section 103(aa), which are 
high-cost mortgages generally referred to as ``HOEPA loans.'' The Board 
does not believe that this limitation restricts its ability to apply 
the proposed waiver provision to all closed-end transactions secured by 
a first lien on real property or a dwelling when the consumer is 
experiencing a bona fide personal financial emergency, including HOEPA 
loans. This limitation on the Board's general exemption authority is a 
necessary corollary to the decision of the Congress, as reflected in 
TILA Section 129(l)(1), to grant the Board more limited authority to 
exempt HOEPA loans from the prohibitions applicable only to HOEPA loans 
in Section 129(c) through (i) of TILA. See 15 U.S.C. 1639(l)(1). In 
this case, the Board is not proposing any exemptions from the HOEPA 
prohibitions. This limitation does raise a question as to whether the 
Board could use its exemption authority under Section 105(f) to exempt 
HOEPA loans, but not other types of mortgage loans, from other, 
generally applicable TILA provisions. That question, however, is not 
implicated by this proposal.
    The Board proposes to apply its general exemption authority for all 
first lien loans secured by real property or a dwelling where a 
consumer is experiencing a bona fide personal financial emergency, 
including both HOEPA and non-HOEPA loans, to permit the modification or 
waiver of the pre-consummation waiting period because the waiting 
period does not benefit consumers in such circumstances. It would not 
be consistent with the statute or with Congressional intent to 
interpret the Board's authority under Sections 105(f) in such a way 
that the proposed waiver provision could apply only to mortgage loans 
that are not subject to HOEPA. Reading the statute in a way that would 
require HOEPA borrowers who are experiencing a bona fide personal 
financial emergency to wait three business days before consummating the 
transaction that will provide the needed proceeds is not a reasonable 
construction of the statute.
    The Board solicits comment on all aspects of this proposal, 
including the cost, burden, and benefits to consumers and to industry 
regarding the proposed disclosures regarding escrow accounts. The Board 
also requests comment on any alternatives to the proposal that would 
further the purposes of TILA and provide consumers with more useful 
disclosures.

Section 226.20 Subsequent Disclosure Requirements

20(d) Cancellation of Escrow Account
Requirements of TILA Section 129D(j)
    The Board is proposing a new Sec.  226.20(d) to implement the 
disclosure requirements of TILA Sections 129D(j)(1)(B) and 129D(j)(2), 
as enacted by Section 1462 of the Dodd-Frank Act. TILA Section 
129D(j)(1)(B) requires a creditor or servicer to provide the 
disclosures set forth in TILA Section 129D(j)(2) when a consumer 
requests closure of an escrow account that was established in 
connection with a transaction secured by real property.
The Board's Proposal
    For a closed-end transaction secured by a first lien on real 
property or a dwelling for which an escrow account was established and 
will be cancelled, proposed Sec.  226.20(d) would require the creditor 
or servicer to disclose the information about escrow accounts specified 
in Sec.  226.20(d)(2). Proposed Sec.  226.20(d) would require the 
creditor to disclose this information in accordance with the format 
requirements of Sec.  226.20(d)(1) and the timing requirements of Sec.  
226.20(d)(4). In addition, the proposal would provide that for purposes 
of Sec.  226.20(d), the term ``escrow account'' and the term 
``servicer'' have the same respective meanings as under Sec. Sec.  
3500.17(b) and 3500.2(b) of Regulation X, which implements RESPA, and 
is subject to any interpretations by HUD. These proposed definitions 
would parallel existing Sec.  226.35(b)(3)(iv) and Sec.  226.36(c)(3), 
respectively. Proposed comment 20(d)-1 would clarify that the term 
``real property'' includes vacant and unimproved land. It also would 
clarify that the term ``dwelling'' includes vacation and second homes 
and mobile homes, boats, and trailers used as residences and refer to 
additional guidance regarding the term provided by Sec.  226.2(a)(19) 
and the related commentary.
    Secured by a first-lien transaction. Proposed Sec.  226.20(d) would 
require disclosures for the cancellation of an escrow account that was 
established in connection with consummation of a transaction secured by 
a first lien, but not a subordinate lien. TILA Sections 129D(a) and (b) 
require the establishment of an escrow account in connection with only 
first-lien mortgage loans. TILA Section 129D(j) requires disclosures 
when such an escrow account is established and later cancelled. 
Proposed Sec.  226.20(d) would not require disclosures for cancellation 
of an escrow account that was established in connection with a 
subordinate-lien mortgages because TILA does not require the 
establishment of escrow accounts for such mortgages. In addition, the 
Board understands that, in practice, creditors rarely offer or 
establish escrow accounts for such mortgages and therefore, the 
cancellation disclosures seldom would be triggered. Nevertheless, the 
Board seeks comment on whether this approach is appropriate.
    Real property or a dwelling. With Sec.  226.20(d), the Board covers 
real property and dwellings. Proposed Sec.  226.20(d) implements TILA 
Section 129D(j), which requires disclosures when an escrow account that 
was established in connection with a transaction secured by real 
property will be cancelled. But, the proposal also covers cancellation 
of an escrow account that was established in connection with a 
transaction secured by a dwelling that is considered to be personal 
property under state law. The coverage of the proposal would parallel 
the coverage of proposed Sec.  226.19(f), which would require 
disclosures for the establishment or non-establishment of an escrow 
account. Board believes this coverage would promote informed use of 
credit by consumers and compliance by creditors. The information 
disclosed when an escrow account will be cancelled likely would be just 
as useful to a consumer who has a loan secured by a mobile home as it 
would to a consumer who has a mortgage loan secured by a single-family 
home. Similarly, the disclosures should cover all dwellings, whether or 
not they are deemed personal rather than real property under state law. 
Furthermore, the coverage of all dwellings would eliminate the analysis 
that creditors would have to undertake to determine whether the 
cancellation of the escrow account established for a loan secured by a 
particular type of dwelling would trigger the disclosures.

[[Page 11606]]

    The Board proposes the Sec.  229.19(f) coverage of real property 
and dwellings pursuant to its authority under TILA Section 105(a). 15 
U.S.C. 1604(a). TILA Section 105(a) authorizes the Board to prescribe 
regulations that contain classifications, differentiations, or other 
provisions, and may provide for adjustments and exceptions for any 
class of transactions, to effectuate the purposes of TILA and 
Regulation Z, to prevent circumvention or evasion, or to facilitate 
compliance. 15 U.S.C. 1604(a). One purpose of the statute is to assure 
meaningful disclosure of credit terms so that the consumer will be able 
to compare more readily the various credit terms available and avoid 
the uninformed use of credit. 15 U.S.C. 1601(a). The class of 
transactions that would be affected is transactions secured by real 
property or a dwelling. For the reasons set forth in the above 
discussion regarding proposed Sec.  226.19(f), the Board believes that 
coverage of transactions secured by a dwelling as well as real property 
would provide promote the informed use of credit by consumers.
    Creditor's or servicer's independent decision to cancel escrow 
account. TILA Section 129D(j)(1)(B) requires a creditor or servicer to 
provide the TILA Section 129D(j)(2) cancellation disclosures when the 
consumer chooses and provides written notice the choice to close his or 
her escrow account in accordance with any statute, regulation, or 
contractual agreement. Proposed Sec.  226.20(d) would implement TILA 
Section 129D(j)(1)(B), but also would require provision of the 
cancellation disclosures when the creditor or servicer decides 
independently to cancel an escrow account. The Board believes that a 
consumer whose escrow account will be closed should be informed of the 
risks attendant with not having an escrow account, even if the consumer 
is not requesting the cancellation of the account.
    The Board proposes this requirement pursuant to its authority under 
TILA Section 105(a). 15 U.S.C. 1604(a) and (f). TILA Section 105(a) 
authorizes the Board to prescribe regulations that contain 
classifications, differentiations, or other provisions, and may provide 
for adjustments and exceptions for any class of transactions, to 
effectuate the purposes of TILA and Regulation Z, to prevent 
circumvention or evasion, or to facilitate compliance. 15 U.S.C. 
1604(a). One purpose of the statute is to assure meaningful disclosure 
of credit terms so that the consumer will be able to compare more 
readily the various credit terms available and avoid the uninformed use 
of credit. 15 U.S.C. 1601(a). The Board believes provision of the 
cancellation disclosures when creditors and servicers independently 
make decisions to close escrow accounts will help consumers to avoid 
the uninformed use of credit. The cancellation disclosures would 
consumers of their responsibility to personally and directly pay 
property taxes and insurance premiums and of the consequences for 
failure to do so. Indirectly, the disclosure would inform consumers 
that they would need to budget or save to meet these potentially large 
obligations when due, but that the total amount of their regular 
periodic mortgage payments would decrease.
20(d)(1) Format Requirements
    Proposed Sec.  226.20(d)(1) contains format requirements for the 
disclosures required by Sec.  226.20(d)(2). Proposed Sec.  
226.20(d)(1)(i) would require that the creditor or servicer provide the 
Sec.  226.20(d)(2) disclosures in a minimum 10-point font, grouped 
together on the front side of a one-page document, separate from all 
other material, with the headings, content, order, and format 
substantially similar to Model Form H-26 in Appendix H. Consumer 
testing has shown that the location and order in which information was 
presented affected consumers' ability to locate and comprehend the 
information disclosed. Proposed comment 20(d)(1)(i)-1 clarifies that 
the disclosures required by Sec.  226.20(d)(2) and any optional 
information permitted by Sec.  226.20(d)(3) must be grouped together on 
the front side of a separate one-page document that contains no other 
material. Proposed comment 20(d)(1)(i)-2 clarifies that the notice 
containing the disclosures required by Sec.  226.20(d)(2) and any 
optional information permitted by Sec.  226.20(d)(3) must be in writing 
in a form that the consumer may keep.
    Proposed Sec.  226.20(d)(1)(ii) would require that the heading 
``Required Direct Payment of Property Taxes and Insurance'' required by 
Sec.  226.20(d)(2) be more conspicuous than and precede the other 
disclosures. The heading would be required to be outside of the table 
that is required by proposed Sec.  226.20(d)(1)(iii).
    Proposed Sec.  226.20(d)(1)(iii) would require the creditor or 
se