Federal Register: September 24, 2010 (Volume 75, Number 185)
DOCID: fr24se10-28 FR Doc 2010-20667
FEDERAL RESERVE SYSTEM
U.S. Customs and Border Protection
CFR Citation: 12 CFR Part 226
Docket ID: [Docket No. R-1390]
NOTICE: Part II
DOCUMENT ACTION: Proposed rule; request for public comment.
Regulation Z; Truth in Lending
DATES: Comments must be received on or before December 23, 2010.
The Board proposes to amend Regulation Z, which implements the Truth in Lending Act (TILA), and the staff commentary to the regulation, as part of a comprehensive review of TILA's rules for home secured credit. This proposal would revise the rules for the consumer's right to rescind certain openend and closedend loan secured by the consumer's principal dwelling. In addition, the proposal contains revisions to the rules for determining when a modification of an existing closedend mortgage loan secured by real property or a dwelling is a new transaction requiring new disclosures. The proposal would amend the rules for determining whether a closedend loan secured by the consumer's principal dwelling is a ``higherpriced'' mortgage loan subject to the special protections in Sec. 226.35. The proposal would provide consumers with a right to a refund of fees imposed during the three business days following the consumer's receipt of early disclosures for closedend loans secured by real property or a dwelling.
The proposal also would amend the disclosure rules for open and closedend reverse mortgages. In addition, the proposal would prohibit certain unfair acts or practices for reverse mortgages. A creditor would be prohibited from conditioning a reverse mortgage on the consumer's purchase of another financial or insurance product such as an annuity, and a creditor could not extend a reverse mortgage unless the consumer has obtained counseling. The proposal also would amend the rules for reverse mortgage advertising.
Federal Reserve System
I. Background on TILA and Regulation Z
Congress enacted the Truth in Lending Act (TILA) based on findings that economic stability would be enhanced and competition among consumer credit providers would be strengthened by the informed use of credit resulting from consumers' awareness of the cost of credit. One of the purposes of TILA is to provide meaningful disclosure of credit terms to enable consumers to compare credit terms available in the marketplace more readily and avoid the uninformed use of credit.
TILA's disclosures differ depending on whether credit is an open end (revolving) plan or a closedend (installment) loan. TILA also contains procedural and substantive protections for consumers. TILA is implemented by the Board's Regulation Z. An Official Staff Commentary interprets the requirements of Regulation Z. By statute, creditors that follow in good faith Board or official staff interpretations are insulated from civil liability, criminal penalties, or administrative sanction.
II. Summary of Major Proposed Changes
The goal of the proposed amendments to Regulation Z is to update and make clarifying changes to the rules regarding the consumer's right to rescind certain open and closedend loans secured by the consumer's principal dwelling. The amendments would also ensure that consumers receive TILA disclosures for modifications to key loan terms, by revising the rules regarding when a modification to an existing closed end mortgage loan results in a new transaction. The amendments would ensure that prime loans are not incorrectly classified as ``higher priced mortgage loans'' subject to special protections for subprime loans in the Board's 2008 HOEPA Final Rule in Sec. 226.35, or as HOEPA loans under Sec. 226.32. The proposal would provide consumers a right to a refund of fees for three business days after the consumer receives early disclosures for closedend mortgages, ensuring that consumers do not feel financially committed to a transaction before they have had a chance to review the disclosures and consider other options.
The amendments also would improve the clarity and usefulness of disclosures for open and closedend reverse mortgages. They would protect consumers from unfair practices in connection with reverse mortgages, including conditioning a reverse mortgage on the consumer's purchase of a financial or insurance product such as an annuity, and originating a reverse mortgage before the consumer has received independent counseling. A consumer could not be required to pay a nonrefundable fee until three business days after the consumer has received counseling. Finally, the amendments would ensure that advertisements for reverse mortgages contain balanced information and are not misleading. Many of the proposed changes to disclosures are based on consumer testing, which is discussed in more detail below.
The Consumer's Right to Rescind. The proposed revisions to Regulation Z would:
Loan Modifications That Require New TILA Disclosure. The proposal
would provide that new TILA disclosures are required when the parties
to an existing closedend loan secured by real property or a dwelling
agree to modify key loan terms, without reference to State contract law.
Coverage Test for 2008 HOEPA Final Rule and HOEPA. The Board
proposes to revise how a creditor determines whether a closedend loan
secured by a consumer's principal dwelling is a ``higherpriced
mortgage loan'' subject to the Board's 2008 HOEPA Final Rule in Sec.
226.35, and how points and fees are calculated for coverage under the HOEPA rules in Sec. Sec. 226.32 and 226.34.
Consumer's Right to a Refund of Fees. For closedend loans secured
by real property or a dwelling, the proposal would require a creditor to:
Reverse Mortgage Disclosures. The proposal would require a creditor
to provide a consumer with new and revised reverse mortgage disclosures.
[cir] Loan cost information specific to reverse mortgages that is integrated with information required to be disclosed for all home equity lines of credit (HELOCs) or closedend mortgages, as applicable; and
[cir] A table expressing total costs as dollar amounts, in place of the table of reverse mortgage ``total annual loan cost rates.''
Required Counseling for Reverse Mortgages. The proposal would prohibit a creditor or other person from:
Prohibition on CrossSelling for Reverse Mortgages. The proposal would:
Reverse mortgage advertising. The proposal would amend Regulation Z to revise the advertising rules for reverse mortgages so that consumers receive accurate and balanced information. For example, the proposal would require advertisements that state that a reverse mortgage ``requires no payments'' to clearly disclose the fact that borrowers must pay taxes and required insurance.
Other Proposed Revisions. The proposal would contain several
changes to the rules for HELOCs and closedend mortgage loans. These changes include:
III. The Board's Review of HomeSecured Credit Rules
The Board has amended Regulation Z numerous times since TILA simplification in 1980. In 1987, the Board revised Regulation Z to require special disclosures for closedend ARMs secured by the borrower's principal dwelling. 52 FR 48665, Dec. 24, 1987. In 1995, the Board revised Regulation Z to implement changes to TILA by the Home Ownership and Equity Protection Act (HOEPA). 60 FR 15463, Mar. 24, 1995. HOEPA requires special disclosures and substantive protections for homeequity loans and refinancings with APRs or points and fees above certain statutory thresholds. Numerous other amendments have been made over the years to address new mortgage products and other matters, such as abusive lending practices in the mortgage and homeequity markets.
The Board's current review of Regulation Z was initiated in
December 2004 with an advance notice of proposed rulemaking.\1\ 69 FR
70925, Dec. 8, 2004. At that time, the Board announced its intent to conduct its
review of Regulation Z in stages, focusing first on the rules for open end (revolving) credit accounts that are not homesecured, chiefly generalpurpose credit cards and retailer credit card plans. In January 2008, the Board issued final rules for openend credit that is not homesecured. 74 FR 5244, Jan. 29, 2009. In May 2009, Congress enacted the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit Card Act), which amended TILA's provisions for openend credit. The Board approved final rules implementing the Credit Card Act in January and June 2010 (February 2010 Credit Card Rule). 75 FR 7658, Feb. 22, 2010; 75 FR 37526, June 29, 2010.
\1\ The review was initiated pursuant to requirements of section 303 of the Riegle Community Development and Regulatory Improvement Act of 1994, section 610(c) of the Regulatory Flexibility Act of 1980, and section 2222 of the Economic Growth and Regulatory Paperwork Reduction Act of 1996. An advance notice of proposed rulemaking is published to obtain preliminary information prior to issuing a proposed rule or, in some cases, deciding whether to issue a proposed rule.
Beginning in 2007, the Board proposed revisions to the rules for homesecured credit in several phases.
\2\ The MDIA is contained in Sections 2501 through 2503 of the Housing and Economic Recovery Act of 2008, Public Law 110289, enacted on July 30, 2008. The MDIA was later amended by the Emergency Economic Stabilization Act of 2008, Public Law 110343, enacted on October 3, 2008.
This proposal would add or revise several rules, including rules that apply to rescission; modifications of existing closedend loans; the method for determining whether a closedend loan is a ``higher priced mortgage'' loan; the fee restriction for early disclosures for closedend mortgage loans; reverse mortgage disclosures; restrictions on certain acts and practices in connection with reverse mortgages; and advertising practices for reverse mortgages and HELOCs.
B. Consumer Testing for This Proposal
A principal goal for the Regulation Z review is to produce revised and improved disclosures that consumers will be more likely to understand and use in their decisions, while not creating undue burdens for creditors. Currently, Regulation Z requires creditors to provide a notice to inform the consumer about the right to rescind and how to exercise that right.
Regulation Z also provides that a consumer who applies for a
reverse mortgage must receive the ``standard'' TILA disclosure for a
HELOC or closedend mortgage, as applicable, and a special disclosure
tailored to reverse mortgages. In addition, the Board has recently
proposed some new disclosures that were tested as part of this proposal:
The Board retained ICF Macro, a research and consulting firm that specializes in designing and testing documents, to conduct consumer testing to help the Board's review of Regulation Z's disclosures.
ICF Macro worked closely with the Board to test model rescission notices, model HELOC periodic statements and other HELOC notices, model notices for credit protection products, and model forms for reverse mortgages. Each round of testing involved testing several model disclosure forms. Interview participants were asked to review model forms and provide their reactions, and were then asked a series of questions designed to test their understanding of the content. Data were collected on which elements and features of each form were most successful in providing information clearly and effectively. The findings from each round of interviews were incorporated in revisions to the model forms for the following round of testing.
Some of the key methods and findings of the consumer testing are
summarized below. ICF Macro prepared reports of the results of the
testing, which are available on the Board's public Web site [[Page 58542]]
along with this proposal at: http://www.federalreserve.gov.
Rescission and Credit Protection Testing. This consumer testing consisted of four rounds of oneonone cognitive interviews. The goals of these interviews were to learn more about what information consumers read and understand when they receive disclosures, to research how easily consumers can find various pieces of information in these disclosures, and to test consumers' understanding of certain words and phrases. To address specific issues that surfaced during testing, the Board proposes to revise significantly the content of the model form for the right to rescind by setting forth new format requirements, and new mandatory and optional disclosures for the notice. The Board proposes new model and sample forms for the costs and features of credit protection products. The Board believes that the proposed new format rules and model forms would improve consumers' ability to identify disclosed information more readily; emphasize information that is most important to consumers; and simplify the organization and structure of required disclosures to reduce complexity and information overload.
1. Rescission Testing and Findings. The Board's goal was to develop clear and conspicuous model forms for the notice of the right to rescind that would enable borrowers to understand that they have a right to rescind the transaction within a certain period of time, and how to exercise that right. Beginning in the fall of 2009, four rounds of oneonone cognitive interviews with a total of 39 participants were conducted in different cities throughout the United States. The consumer testing groups were comprised of participants representing a range of ethnicities, ages, educational levels, and levels of experience with homesecured credit.
Participants in three rounds of testing were shown HELOC model forms for the notice of the right to rescind, and the participants in the last round were shown closedend model forms for the notice of the right to rescind. In the first two rounds of testing, approximately one half of the participants had some knowledge about the right to rescind prior to testing. However, in the last two rounds of testing only a few participants had some knowledge about the right to rescind.
Tabular format for rescission form. In the first round of rescission testing, the Board tested two forms, one that provided required information in a mostly narrative format based on the current model form, and another form that provided required information in a tabular form. Almost all participants in the first round commented that the information was easier to understand in a tabular form and had more success answering comprehension questions with a tabular form. This finding is consistent with previous findings in the Board's consumer testing of the HELOC disclosures, closedend mortgage disclosures, and credit card disclosures. 74 FR 43428, Aug. 26, 2009; 74 FR 43232, Aug. 26, 2009; 75 FR 7658, Feb. 22, 2010. As a result, the remaining three rounds of testing focused on developing, testing and refining the tabular form. The forms tested in subsequent rounds differed mainly in how they described the deadline to rescind.
Tearoff portion of rescission form. Currently, consumers must be given two copies of the notice of right to rescindone to use to exercise the right and one to retain for the consumer's records. See Sec. Sec. 226.15(b) and 226.23(b). The current model forms contain an instruction to the consumer to keep one copy of the two notices that they receive because it contains important information regarding their right to rescind. See Model Forms G5 through G9 of Appendix G and Model Forms H8 and H9 of Appendix H. The Board tested a model form that would allow the consumer to detach the bottom part of the form and use it to notify the creditor that the consumer wishes to rescind the transaction. Most participants said that they would use the bottom part of the form to cancel the transaction. A few participants said that they would prepare and send a separate statement in addition to the form. When asked what they would do if they lost the notice and wanted to rescind, most participants said that they would call the creditor or visit their creditor's Web site to obtain another copy of the notice. Almost all participants said that they would make and keep a copy of the form if they decided to exercise the right.
Accordingly, the Board is proposing to eliminate the requirement that creditors provide two copies of the notice of the right to rescind to each consumer entitled to rescind. See proposed Sec. Sec. 226.15(b)(1) and 226.23(b)(1), below. Instead, the Board is proposing to require creditors to provide a form at the bottom of the notice that the consumer may detach and use to exercise the right to rescind, enabling them to retain the portion explaining their rights. See proposed Sec. 226.15(b)(2)(i) and (3)(viii), Sec. 226.23(b)(2)(i) and (3)(vii).
Deadline for rescission. Consumer testing also revealed that consumers are generally unable to calculate the deadline for rescission based on the information currently required in the notice. The current model forms provide a blank space for the creditor to insert a date followed by the language ``(or midnight of the third business day following the latest of the three events listed above)'' as the deadline by which the consumer must exercise the right. The three events referenced are the following: (1) The date of the transaction or occurrence giving rise to right of rescission; (2) the date the consumer received the Truth in Lending disclosures; and (3) the date the consumer received the notice of the right to rescind.
Most participants had difficulty using the three events to calculate the deadline for rescission. The primary causes of errors were not counting Saturdays as a business day, counting Federal holidays as a business day, and counting the day the last event took place as the first day of the threeday period. Alternative text was tested to assist participants in calculating the deadline based on the three events; however, the text added length and complexity to the form without a significant improvement in comprehension. Participants in all rounds strongly preferred forms that provided a specific date over those that required them to calculate the deadline themselves. Thus, the Board is proposing to require a creditor to provide the calendar date on which it reasonably and in good faith expects the three business day period for rescission to expire. See proposed Sec. Sec. 226.15(b)(3)(vii) and 226.23(b)(3)(vi).
Extended right to rescind. Consumer testing also indicated that
consumers do not understand how an extended right to rescind could
arise. Consumers were confused when presented with a single disclosure
that provided information about the threebusinessday right to rescind
and an extended right to rescind. In two rounds of testing,
participants were presented with a model form that contained a
statement explaining when a consumer might have an extended right to
rescind. However, consumer testing revealed that these explanations
added length and complexity but did not increase consumer comprehension
of the extended right to rescind. Nonetheless, the Board believes that
some disclosure regarding the extended right to rescind is necessary
for full disclosure of the consumer's rights. Thus, the Board is
proposing to include a statement in the model forms that the right to cancel the
transaction or occurrence giving rise to the right of rescission may extend beyond the date disclosed in the notice.
How to exercise the right of rescission. Consumer testing revealed that consumers are particularly concerned about proving that they exercised the right to rescind before the threeday period expires. Participants offered varied responses about a preferred delivery method to submit the notice of the right to rescind to the creditor: some preferred to send it by email and facsimile to receive instant electronic confirmation; others preferred to send it by mail with return receipt and tracking requested. Most participants said they would not handdeliver the notice to a bank employee unless they could be certain that the employee was authorized to receive the notice on the creditor's behalf and could provide them with a receipt.
The proposed rule would require a creditor, at minimum, to disclose
the name and address to which the consumer may mail the notice of rescission. See proposed Sec. Sec. 226.15(b)(3)(vi) and
226.23(b)(3)(v). The proposed rule would also permit a creditor to describe other methods, if any, that the consumer may use to send or deliver written notification of exercise of the right, such as overnight courier, fax, email, or in person. The proposed sample forms include information for the consumer to submit the notice of rescission by mail or fax. See proposed Samples G5(B) and G5(C) of Appendix G and Sample H8(B) of Appendix H.
2. Credit Protection Products Testing and Findings. The Board and ICF Macro also developed and tested model and sample forms for credit protection products in the last two rounds of 18 interviewsone round with 10 participants for HELOCs, and one round with 8 participants for closedend mortgages. These forms were based on model clauses proposed in the August 2009 ClosedEnd Proposal. The sample form was based on samples for credit life insurance disclosures proposed in the August 2009 ClosedEnd Proposal.
Consumer testing revealed that consumers have limited understanding of credit protection products, and that some of the current disclosures do not adequately inform consumers of the costs and risks of these products. For example, the current regulation allows creditors to disclose the cost of the product on a unitcost basis in certain situations. However, even when provided with a calculator, only three of 10 participants in the first round of testing could correctly calculate the cost of the product using the unit cost. When the cost was disclosed as a dollar figure tailored to the loan amount in the second round of testing, all participants understood the cost of the product. Accordingly, the proposal would require creditors to disclose the maximum premium or charge per period.
In addition, most credit protection products place limits on the maximum benefit, but the current regulation does not require disclosure of these limits. To address this problem, the Board tested a disclosure of the maximum benefit amount for a sample credit life insurance policy. In the first round of testing, only five of the 10 participants understood the disclosure of the maximum benefit when disclosed at the bottom of the form by the signature line. In the second round of testing, this information was presented in a tabular questionand answer format and all eight participants understood the disclosure. Accordingly, the proposal would require creditors to disclose the maximum benefit amount. In addition, based on consumer testing, the proposal would require other improved disclosures, such as the disclosure of eligibility requirements.
Prior to consumer testing, the Board reviewed several disclosures for credit protection disclosures, which revealed that many disclosures were in small font, not grouped together, and in dense blocks of text. Based on the Board's experience with consumer disclosures, the Board was concerned that consumers would find these disclosures difficult to comprehend. To address these problems, the Board tested a sample credit life insurance disclosure that used 12point font, tabular question andanswer format, and bold, underlined text. Participants understood the content of the disclosures when presented in this format. Accordingly, the proposal would require creditors to provide the disclosures clearly and conspicuously in a minimum 10point font, and group them together with substantially similar headings, content, and format to the proposed model forms. See proposed Model Forms G16(A) and H17(A).
3. Reverse Mortgage Disclosures Testing and Findings.
The reverse mortgage testing consisted of four focus groups and three rounds of oneonone cognitive interviews. The goals of these focus groups and interviews were to learn about consumers' understanding of reverse mortgages, how consumers shop for reverse mortgages and what information consumers read when they receive reverse mortgage disclosures, and to assess their understanding of such disclosures. The consumer testing groups contained participants with a range of ethnicities, ages, and educational levels, and included consumers who had obtained a reverse mortgage as well as those who were eligible for one based on their age and the amount of equity in their home.
Exploratory focus groups. In January 2010 the Board worked with ICF Macro to conduct four focus groups with consumers who had obtained a reverse mortgage or were eligible for one based on their age and the amount of equity in their home. Each focus group consisted of ten people that discussed issues identified by the Board and raised by a moderator from ICF Macro. Through these focus groups, the Board gathered information on consumers' understanding of reverse mortgages, as well as the process through which consumers decide to apply for a reverse mortgage. Focus group participants also provided feedback on a sample reverse mortgage disclosure that was representative of those currently in use. Following the focus groups, ICF Macro's design team used what they learned to develop improved versions of the disclosures for further testing.
Cognitive interviews on existing disclosures. In 2010, the Board worked with ICF Macro to conduct three rounds of cognitive interviews with a total of 31 participants. These cognitive interviews consisted of oneonone discussions with reverse mortgage consumers, during which consumers were asked to explain what they understood about reverse mortgages, their experiences and perceptions of shopping for the product, and to review samples of existing and revised reverse mortgage disclosures. In addition to learning about the information that consumers thought was important to know about reverse mortgages, the goals of these interviews were: (1) To test consumers' comprehension of the existing reverse mortgage disclosure form; (2) to research how easily consumers can find various pieces of information in the existing and revised disclosures; and (3) to test consumers' understanding of certain reverse mortgage related words and phrases.
Findings of reverse mortgage testing. Many consumer testing
participants did not understand reverse mortgages or had misconceptions
about them. Most participants understood that reverse mortgages are
different from traditional mortgages in that traditional mortgages have
to be paid back during the borrower's lifetime, while reverse mortgage
borrowers receive payments from the lender based on the equity in the consumer's home. However,
important misconceptions about reverse mortgages were shared by a significant number of participants. For example, some participants believed that by getting a reverse mortgage, a borrower is giving the lender ownership of his or her home. Rather than seeing a reverse mortgage as a loan that needs to be repaid, these participants believed it represented the exchange of a home for a stream of funds. Some participants also believed that if the amount owed on a reverse mortgage exceeds the value of the home, the borrower is responsible for paying the difference and that if at any point a borrower ``outlives'' their reverse mortgagethat is, if the equity in their home decreases to zerothey will no longer receive any payments from the lender.
Therefore, the proposal would require creditors to provide key information about reverse mortgages at the time an application form is provided to the consumer, as discussed below.
Reverse mortgage disclosures provided to consumers before application. Currently, for reverse mortgages, creditors must provide the home equity line of credit (HELOC) or closedend mortgage application disclosures required by TILA, depending on whether the reverse mortgage is openend or closedend credit. These documents are not tailored to reverse mortgages.
For openend reverse mortgages this includes a Boardpublished HELOC brochure or a suitable substitute at the time an application for an openend reverse mortgage is provided to the consumer. For an adjustablerate closedend reverse mortgage, consumers would receive the lengthy CHARM booklet that explains how ARMs generally work. However, closedend reverse mortgages are almost always fixed rate transactions, so consumers generally do not receive any TILA disclosures at application.
Since consumers have a number of misconceptions about reverse mortgages that are not addressed by the current disclosures, the proposal would require creditors to provide, for all reverse mortgages, a twopage document that explains how reverse mortgages work and about terms and risks that are important to consider when selecting a reverse mortgage, rather than the current documents.
Reverse mortgage disclosures provided to consumers after application. Depending on whether a reverse mortgage is openend or closedend credit, the current cost disclosure requirements under TILA and Regulation Z differ. All reverse mortgage creditors must provide the total annual loan cost (``TALC'') disclosure at least three business days before accountopening for an openend reverse mortgage, or consummation for a closedend reverse mortgage. For closedend reverse mortgages, TILA and Regulation Z require creditors to provide an early TILA disclosure within three business days after application and at least seven business days before consummation, and before the consumer has paid a fee other than a fee for obtaining a credit history. For openend reverse mortgages, creditors must provide disclosures on or with an application that contain information about the creditor's openend reverse mortgage plans. These disclosures do not include information dependent on a specific borrower's creditworthiness or the value of the dwelling, such as the APRs offered to the consumer, because the application disclosures are provided before underwriting takes place. Creditors are required to disclose transactionspecific costs and terms at the time that an openend reverse mortgage plan is opened.
In addition, reverse mortgage creditors currently must disclose a table of TALC rates. The table of TALC rates is designed to show consumers how the cost of the reverse mortgage varies over time and with house price appreciation. Generally, the longer the consumer keeps a reverse mortgage the lower the relative cost will be because the upfront costs of the reverse mortgage will be amortized over a longer period of time. Thus, the TALC rates usually will decline over time even though the total dollar cost of the reverse mortgage is rising due to interest and fees being charged on an increasing loan balance.
Very few participants understood the table of TALC rates. Although participants seemed to understand the paragraphs explaining the TALC table, the vast majority could not explain how the description related to the percentages shown in the TALC table. Participants could not explain why the TALC rates were declining over time even though the reverse mortgage's loan balance was rising. Most participants thought the TALC rates shown were interest rates, and interpreted the table as showing that their interest rate would decrease if they held their reverse mortgage for a longer period of time. Participants, including those who currently have a reverse mortgage (and thus presumably received the TALC disclosure), consistently stated that they would not use the disclosure to decide whether or not to obtain a reverse mortgage. Instead, participants consistently expressed a preference for a disclosure providing total costs as a dollar amount.
Thus, the proposal would require a table that demonstrates how the reverse mortgage balance grows over time. The table expresses this information as dollar amounts rather than as annualized loan cost rates. The table would show (1) How much money would be advanced to the consumer; (2) the total of all costs and charges owed by the consumer; and (3) the total amount the consumer would be required to repay. This information would be provided for each of three assumed loan periods of 1 year, 5 years, and 10 years. Consumer testing has shown that consumers would have a much easier time understanding this table and would be much more likely to use it in evaluating a reverse mortgage than they would the TALC rates.
In addition, the proposed reverse mortgage disclosures would combine reversemortgagespecific information with much of the information that the Board proposed for HELOCs and closedend mortgages in 2009. For example, the proposed disclosure would include information about APRs, variable interest rates and fees. However, because not all of the information currently required for HELOCs and closedend mortgages is relevant or applicable to reverse mortgage borrowers, the disclosures would not contain information that would not be meaningful to reverse mortgage consumers. By consolidating the reverse mortgage disclosures, the proposal would ensure that consumers receive meaningful information in an understandable format that is largely similar for openend and closedend reverse mortgages, and has been designed and consumer tested for reverse mortgage consumers.
Additional testing during and after comment period. During the comment period, the Board may work with ICF Macro to conduct additional testing of model disclosures proposed in this notice.
IV. The Board's Rulemaking Authority
TILA Section 105. TILA mandates that the Board prescribe
regulations to carry out the purposes of the act. TILA also specifically authorizes the Board, among other things, to:
In the course of developing the proposal, the Board has considered the views of interested parties, its experience in implementing and enforcing Regulation Z, and the results obtained from testing various disclosure options in controlled consumer tests. For the reasons discussed in this notice, the Board believes this proposal is appropriate pursuant to the authority under TILA Section 105(a).
Also, as explained in this notice, the Board believes that the specific exemptions proposed are appropriate because the existing requirements do not provide a meaningful benefit to consumers in the form of useful information or protection. In reaching this conclusion with each proposed exemption, the Board considered (1) The amount of the loan and whether the disclosure provides a benefit to consumers who are parties to the transaction involving a loan of such amount; (2) the extent to which the requirement complicates, hinders, or makes more expensive the credit process; (3) the status of the borrower, including any related financial arrangements of the borrower, the financial sophistication of the borrower relative to the type of transaction, and the importance to the borrower of the credit, related supporting property, and coverage under TILA; (4) whether the loan is secured by the principal residence of the borrower; and (5) whether the exemption would undermine the goal of consumer protection. The rationales for these proposed exemptions are explained in part VI below.
TILA Section 129(l)(2). TILA also authorizes the Board to prohibit acts or practices in connection with:
The authority granted to the Board under TILA Section 129(l)(2), 15 U.S.C. 1639(l)(2), is broad. It reaches mortgage loans with rates and fees that do not meet HOEPA's rate or fee trigger in TILA section 103(aa), 15 U.S.C. 1602(aa), as well as mortgage loans not covered under that section, such as home purchase loans. Moreover, while HOEPA's statutory restrictions apply only to creditors and only to loan terms or lending practices, Section 129(l)(2) is not limited to acts or practices by creditors, nor is it limited to loan terms or lending practices. See 15 U.S.C. 1639(l)(2). It authorizes protections against unfair or deceptive practices ``in connection with mortgage loans,'' and it authorizes protections against abusive practices ``in connection with refinancing of mortgage loans.'' Thus, the Board's authority is not limited to regulating specific contractual terms of mortgage loan agreements; it extends to regulating loanrelated practices generally, within the standards set forth in the statute.
HOEPA does not set forth a standard for what is unfair or deceptive, but the Conference Report for HOEPA indicates that, in determining whether a practice in connection with mortgage loans is unfair or deceptive, the Board should look to the standards employed for interpreting state unfair and deceptive trade practices statutes and the Federal Trade Commission Act (FTC Act), Section 5(a), 15 U.S.C. 45(a).\3\
\3\ H.R. Rep. 103652, at 162 (1994) (Conf. Rep.).
Congress has codified standards developed by the Federal Trade
Commission (FTC) for determining whether acts or practices are unfair
under Section 5(a), 15 U.S.C. 45(a).\4\ Under the FTC Act, an act or
practice is unfair when it causes or is likely to cause substantial
injury to consumers which is not reasonably avoidable by consumers
themselves and not outweighed by countervailing benefits to consumers
or to competition. In addition, in determining whether an act or
practice is unfair, the FTC is permitted to consider established public
policies, but public policy considerations may not serve as the primary basis for an unfairness determination.\5\
\4\ See 15 U.S.C. 45(n); Letter from Commissioners of the FTC to the Hon. Wendell H. Ford, Chairman, and the Hon. John C. Danforth, Ranking Minority Member, Consumer Subcomm. of the H. Comm. on Commerce, Science, and Transp. (Dec. 17, 1980).
\5\ 15 U.S.C. 45(n).
The FTC has interpreted these standards to mean that consumer
injury is the central focus of any inquiry regarding unfairness.\6\
Consumer injury may be substantial if it imposes a small harm on a
large number of consumers, or if it raises a significant risk of
concrete harm.\7\ The FTC looks to whether an act or practice is
injurious in its net effects.\8\ The FTC has also observed that an
unfair act or practice will almost always reflect a market failure or
market imperfection that prevents the forces of supply and demand from
maximizing benefits and minimizing costs. \9\ In evaluating unfairness,
the FTC looks to whether consumers' free market decisions are unjustifiably hindered. \10\
\6\ Statement of Basis and Purpose and Regulatory Analysis, Credit Practices Rule, 42 FR 7740, 7743, Mar. 1, 1984 (Credit Practices Rule).
\7\ Letter from Commissioners of the FTC to the Hon. Wendell H. Ford, Chairman, and the Hon. John C. Danforth, Ranking Minority Member, Consumer Subcomm. of the H. Comm. on Commerce, Science, and Transp., n.12 (Dec. 17, 1980).
\8\ Credit Practices Rule, 42 FR at 7744.
The FTC has also adopted standards for determining whether an act
or practice is deceptive (though these standards, unlike unfairness
standards, have not been incorporated into the FTC Act).\11\ First,
there must be a representation, omission or practice that is likely to
mislead the consumer. Second, the act or practice is examined from the
perspective of a consumer acting reasonably in the circumstances.
Third, the representation, omission, or practice must be material. That
is, it must be likely to affect the consumer's conduct or decision with regard to a product or service.\12\
\11\ Letter from James C. Miller III, Chairman, FTC to the Hon. John D. Dingell, Chairman, H. Comm. on Energy and Commerce (Oct. 14, 1983) (Dingell Letter).
\12\ Dingell Letter at 12.
Many states also have adopted statutes prohibiting unfair or
deceptive acts or practices, and these statutes employ a variety of
standards, many of them different from the standards currently applied
to the FTC Act. A number of states follow an unfairness standard
formerly used by the FTC. Under this standard, an act or practice is
unfair where it offends public policy; or is immoral, unethical,
oppressive, or unscrupulous; and causes substantial injury to consumers.\13\
\13\ See, e.g., Kenai Chrysler Ctr., Inc. v. Denison, 167 P.3d 1240, 1255 (Alaska 2007) (quoting FTC v. Sperry & Hutchinson Co., 405 U.S. 233, 24445 n.5 (1972)); State v. Moran, 151 N.H. 450, 452, 861 A.2d 763, 75556 (N.H. 2004) (concurrently applying the FTC's former test and a test under which an act or practice is unfair or deceptive if ``the objectionable conduct [hellip] attain[s] a level of rascality that would raise an eyebrow of someone inured to the rough and tumble of the world of commerce.'') (citation omitted); Robinson v. Toyota Motor Credit Corp., 201 Ill. 2d 403, 417418, 775 N.E.2d 951, 96162 (2002) (quoting 405 U.S. at 24445 n.5).
In developing proposed rules under TILA Section 129(l)(2)(A), 15
U.S.C. 1639(l)(2)(A), the Board has considered the standards currently applied to the
FTC Act's prohibition against unfair or deceptive acts or practices, as well as the standards applied to similar State statutes.
V. Discussion of Major Proposed Revisions
The objectives of the proposed revisions are to update and clarify the rules for homesecured credit that provide important protections to consumers, and to reduce undue compliance burden and litigation risk for creditors. The proposal would improve the clarity and usefulness of disclosures for the consumer's right to rescind. Disclosures for reverse mortgages would be improved, providing greater clarity about transactions that are complex and unfamiliar to many consumers. The proposal would also ensure that consumers receive disclosures when the creditor modifies key terms of an existing loan. Consumers would be assured the opportunity to review early disclosures for closedend loans, before a fee is imposed that may make the consumer feel financially committed to the loan offered. Proposed changes to disclosures are based on consumer testing, to ensure that the disclosures are understandable and useful to consumers.
In considering the revisions, the Board sought to ensure that the proposal would not reduce access to credit, and sought to balance the potential benefits for consumers with the compliance burdens imposed on creditors. For example, the proposal revises the material disclosures that can trigger an extended right to rescind, to include disclosures that consumer testing has shown consumers find important in their decision making, and exclude disclosures that consumers do not find useful. The proposal also includes tolerances for certain material disclosures, to ensure that inconsequential errors do not result in an extended right to rescind.
A. The Consumer's Right to Rescind
TILA and Regulation Z provide that a consumer generally has three business days after closing to rescind certain loans secured by the consumer's principal dwelling. The consumer may have up to three years after closing to rescind, however, if the creditor fails to provide the consumer with certain ``material'' disclosures or the notice of the right to rescind (the ``extended right to rescind'').
The Notice of Rescission. Regulation Z requires creditors to provide two copies of the notice of the right to rescind to each consumer entitled to rescind the transaction, to ensure that consumers can use one copy to rescind the loan and retain the other copy with information about the right to rescind. The regulation sets forth the contents for the notice and provides model forms that creditors may use to satisfy these disclosure requirements. Creditors are required to provide the date of the transaction, the date the right expires, and an explanation of how to calculate the deadline on the form.
Consumer testing shows that consumers may have difficulty understanding the explanation of the right of rescission in the current model forms. Consumers struggled with determining when the deadline to rescind expires, based on the later of consummation, delivery of the material disclosures, or delivery of the notice of the right to rescind. Consumer testing also shows that when rescission information was presented in a certain format, participants found information easier to locate and their comprehension of the disclosures improved. In addition, creditors have raised concerns about the twocopy rule, indicting this rule can impose litigation risks when a consumer alleges an extended right to rescind based on the creditor's failure to deliver two copies of the notice.
Based on the results of consumer testing and outreach, the Board
proposes to revise the content and format requirements for the notice
of the right to rescind and issue revised model forms. The revised notice would include:
In addition, the information required in the rescission notice must be disclosed:
Twocopy rule. The proposal also requires creditors to provide just one notice of the right to rescind to each consumer entitled to rescind (as opposed to two copies required under the current regulation). The proposed model rescission notice contains a ``tear off'' form at the bottom, so that the consumer could separate that portion to deliver to the creditor while retaining the top portion with the description of rights. The Board believes that consumers who rescind should be able to keep a written explanation of their rights, but is concerned about the litigation costs imposed by the twocopy rule. Moreover, the need for the twocopy rule seems to have diminished. Today, consumers generally have access to copy machines and scanners that would allow them to make and keep a copy of the notice if they decide to exercise the right.
Material Disclosures. A consumer's right to rescind generally does not expire until the notice of the right to rescind and the material disclosures are properly delivered. If the notice or material disclosures are never delivered, the right to rescind expires on the earlier of three years from the date of consummation or upon the sale or transfer of all of the consumer's interest in the property. Delivery of the material disclosures and notice ensures that consumers are notified of their right to rescind, and that they have the information they need to decide whether to exercise the right. Because different disclosures are given for open and closedend loans, TILA and Regulation Z specify certain ``material disclosures'' that must be given for HELOCs and other ``material disclosures'' that must be given for closedend homesecured loans.
Congress added the statutory definition of ``material disclosures''
in 1980. Changes in the HELOC and closedend mortgage marketplace since
then have made this statutory definition outdated. Certain disclosures
that are the most important to consumers in deciding whether to take
out a loan (based on consumer testing) currently are not considered
``material disclosures.'' In contrast, other disclosures that are not
likely to impact a consumer's decision to enter into a loan currently
are ``material disclosures'' under the statutory definition. The Board
believes that revising the definition of ``material disclosures'' to
reflect the disclosures that are most critical to the consumer's
evaluation of credit terms would better ensure that the compliance
costs related to rescission are aligned with disclosure requirements
that provide meaningful benefits for consumers. Thus, the Board
proposes to use its adjustment and exception authority to add certain
disclosures and remove other disclosures from the definition of ``material disclosures'' for both HELOCs
and closedend mortgage loans. The Board also proposes to add tolerances for accuracy for certain disclosures to ensure
inconsequential disclosure errors do not result in extended rescission rights.
Material Disclosures for HELOCs. In the August 2009 HELOC Proposal, the Board proposed comprehensive revisions to the accountopening disclosures for HELOCs that would reflect changes in the HELOC market. The proposed accountopening disclosures and revised model forms were developed after extensive consumer testing to determine which credit terms consumers find the most useful in evaluating HELOC plans. Consistent with the August 2009 HELOC Proposal, the staff recommends proposed revisions to the definition of material disclosures to include the information that is critical to consumers in evaluating HELOC offers, and to remove information that consumers do not find to be important. For example, the proposal revises the definition of ``material disclosures'' to include the credit limit applicable to the HELOC plan, which consumer testing shows is one of the most important pieces of information that consumers wanted to know in deciding whether to open a HELOC plan. The proposal also adds to the definition of ``material disclosures'' a disclosure of the total onetime costs imposed to open a HELOC plan (i.e., total closing costs), but removes from the definition an itemization of these costs. Consumer testing shows that it is the total closing costs (rather than the itemized costs) that is more important to consumers in deciding whether to open a HELOC plan. Also, based on the results of consumer testing, the proposal would add and remove other disclosures from the definition of ``material disclosures.'' The proposal contains tolerances for accuracy of the credit limit and the total onetime costs imposed to open a HELOC plan, to ensure inconsequential errors in these disclosures do not result in extended rescission rights.
Material Disclosures for ClosedEnd Mortgage Loans. In the August 2009 ClosedEnd Proposal, the Board proposed comprehensive revisions to the disclosures for closedend mortgages that would reflect the changes in the mortgage market. The Board developed the proposed disclosures and revised model forms based on extensive consumer testing to determine which credit terms consumers find the most useful in evaluating closedend mortgage loans. Consistent with the August 2009 ClosedEnd Proposal, this proposal revises the definition of material disclosures to include the information that is critical to consumers in evaluating closedend mortgage offers, and to remove information that consumers do not find to be important. For example, the proposal adds to the definition of ``material disclosures'' information about the interest rate, the total settlement charges, and whether a loan has negative amortization or permits interestonly payments. Consumer testing shows these disclosures are critical to consumers in evaluating closedend mortgage loans. In addition, the proposal adds disclosures of the loan amount and the loan term (e.g., 30 year loan) to the definition of ``material disclosures.'' These disclosures would replace disclosures of the amount financed, and the total and number of payments. Also, based on the results of consumer testing, other disclosures would be added to the definition of ``material disclosures,'' such as disclosure of any prepayment penalty. The proposal retains the current rule's existing tolerances for certain material disclosures, and provides tolerances for certain of the proposed material disclosures, such as the total settlement charges, the loan amount and the prepayment penalty, to ensure inconsequential errors in these disclosures do not result in extended rescission rights.
Parties' Obligations When a Consumer Rescinds. TILA and Regulation
Z set out the process for rescission. The regulation specifies that when a consumer rescinds:
TILA and Regulation Z allow a court to modify the process for rescission.
The rescission process during the initial threebusinessday period after closing normally is straightforward, because loan funds typically have not been disbursed yet. In those cases, when a consumer provides a notice of rescission, the creditor's security interest is automatically void. Within 20 calendar days of receipt of the consumer's notice, the creditor must return any money paid by the consumer and take whatever steps are necessary to terminate its security interest.
If the consumer provides a notice of rescission after the initial threebusinessday period, however, the process is problematic. In this case, the creditor has typically disbursed money or delivered property to the consumer and perfected its security interest. In addition, it may be unclear whether the consumer's right to rescind has expired. Therefore, a creditor may be reluctant to terminate the security interest until the consumer establishes that the right to rescind has not expired and the consumer can tender the loan balance. Given these circumstances, questions have been raised about: (1) Whether the creditor must respond to a notice of rescission, (2) how the parties may resolve a claim outside of a court proceeding, and (3) whether the release of the security interest may be conditioned on the consumer's tender. Both consumer advocates and creditors have urged the Board to clarify the operation of the rescission process in the extended right context. To address the concerns discussed above, the Board proposes a revised process for rescission in the extended right context.
Rescission process outside a court proceeding. The proposal provides that if a creditor receives a consumer's notice of rescission outside of a court proceeding, the creditor must send a written acknowledgement to the consumer within 20 calendars days of receipt of the notice. The acknowledgement must indicate whether the creditor will agree to cancel the transaction. If the creditor agrees to cancel the transaction, the creditor must release its security interest upon the consumer's tender of the amount provided in the creditor's written statement. Under this proposed process, consumers would be promptly and clearly informed about the status of their notice of rescission, and better prepared to take appropriate action. The proposal would ensure that if a consumer tenders the amount requested, the creditor must terminate its security interest in the consumer's home.
Rescission process in a court proceeding. The Board proposes to use
its adjustment authority to ensure a clearer and more equitable process
for resolving rescission claims raised in court proceedings. The
sequence of rescission procedures set forth in TILA and the current
regulation would seem to require the creditor to release its security
interest whether or not the consumer can tender the loan balance. The
Board does not believe that Congress intended for the creditor to lose
its status as a secured creditor if the consumer does not return the
loan balance. Therefore, the proposal provides that when the parties
are in a court proceeding, the creditor is not required to release its
security interest until the consumer tenders the principal balance less
interest and fees, and any damages and costs, as determined by the [[Page 58548]]
court. The Board believes this adjustment would facilitate compliance with TILA. The majority of courts that have considered this issue condition the creditor's release of the security interest on the consumer's proof of tender.
Other Revisions Related to Rescission. The Board proposes several
changes to Regulation Z that are designed to preserve the right to
rescind while reducing undue litigation costs and compliance burden for creditors. These amendments would provide that:
FOR FURTHER INFORMATION CONTACT
For home-equity lines of credit: Jennifer S. Benson or Jelena McWilliams, Attorneys; Krista P. Ayoub or John C. Wood, Counsels. For closedend mortgages: Jamie Z. Goodson, Catherine Henderson, Nikita M. Pastor, Samantha J. Pelosi, or Maureen C. Yap, Attorneys; Paul Mondor, Senior Attorney. For reverse mortgages, Brent Lattin or Lorna M. Neill, Senior Attorneys. Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System, at (202) 4523667 or 4522412; for users of Telecommunications Device for the Deaf (TDD) only, contact (202) 2634869.