Disclosures for Adjustable-Rate Mortgage Loans

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 560

[No. 98-70]

RIN 1550-AB12

Disclosures for Adjustable-Rate Mortgage Loans

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Final rule.

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SUMMARY: The Office of Thrift Supervision (OTS) is issuing a final rule

revising adjustable-rate mortgage loan (ARM) disclosure requirements

for savings associations. In the interim final rule, the OTS conformed

its ARM disclosure rule text to recent changes to related disclosure

provisions in Regulation Z, which was issued by the Federal Reserve

Board (FRB) under the Truth in Lending Act (TILA). In today's final

rule, the OTS replaces its existing rule with a simple cross-reference

to the Regulation Z disclosure provisions. The rule also makes minor

technical changes. This substitution does not affect the rule's

function of promoting safe and sound lending by savings associations

nor OTS's enforcement of its provisions.

EFFECTIVE DATE: Effective date: July 17, 1998. Compliance date:

Compliance is optional until October 1, 1998.

FOR FURTHER INFORMATION CONTACT: Susan Miles, Attorney, (202) 906-6798,

Regulations and Legislation Division, Chief Counsel's Office, Office of

Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

I. Background

To assist borrowers in making informed decisions on the cost of

credit, the OTS and FRB have issued regulations imposing disclosure

requirements on creditors issuing ARMs. The FRB disclosure rules at 12

CFR Part 226 implement TILA 1 and are commonly referred to

as Regulation Z. Regulation Z applies to all lenders subject to TILA,

including savings associations. Regulation Z, however, specifically

states that information provided in accordance with the variable rate

regulations of other federal agencies, such as the OTS, may be

substituted for the disclosures required by Regulation Z.2

To this extent, Regulation Z incorporates the OTS ARM disclosure rule

at 12 CFR 560.210, and the OTS rule serves as an implementing

regulation of TILA.

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\1\ 15 U.S.C. 1601 et seq.

\2\ 12 CFR 226.19(b) n. 45a and 226.20(c) n. 45c.

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Section 560.210 applies to ARMs with a term of more than one year

that are secured by property occupied by or to be occupied by the

borrower. This rule was first issued by the OTS's predecessor agency,

the Federal Home Loan Bank Board (FHLBB) under the agency's authority

under the Home Owners' Loan Act (HOLA) 3 to ensure that

savings associations operate in a safe and sound manner. The FHLBB

believed the regulation was necessary because ``[s]afe and sound

lending using ARMs requires that the borrower have a full understanding

of the type of obligation being incurred in order to make a reasonable

and meaningful decision concerning ability to repay.'' 4 The

OTS continues to consider promoting safe and sound lending an important

function of this regulation.

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\3\ 12 U.S.C. 1463(a) and 1464(a).

\4\ 50 FR 32005 (Aug. 8, 1985).

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Although the original FHLBB regulation was more detailed than

Regulation Z, the disclosures required under OTS regulations have been

identical to those required under Regulation Z since 1988. Under

Regulation Z, if a variable rate transaction exceeds a term of one year

and is secured by the consumer's principal dwelling, the creditor must

provide various initial disclosures for each variable rate program in

which the consumer is interested.5 Until recently amended,

Regulation Z required an institution to provide: (1) A fifteen-year

historical example, based on a $10,000 loan amount, illustrating how

payments and the loan balance would have been affected by interest rate

changes implemented according to the terms of the loan program; and (2)

The maximum interest rate and payment for a $10,000 loan, originated at

the most recent interest rate shown in the historical example assuming

the maximum periodic increases in rates and payments under the loan,

and the initial interest rate and payment for that loan.

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\5\ 12 CFR 226.19(b)(2) (1997).

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Section 2105 of the Economic Growth and Regulatory Paperwork

Reduction Act of 1996 (EGRPRA) 6 amended section 128(a) of

TILA to permit a creditor to elect to provide a statement that periodic

rates may substantially increase or decrease (together with the maximum

interest rate and payment amount based on a $10,000 loan amount), in

lieu of the historical example. On December 1, 1997, the FRB published

a final rule implementing section 2105 of EGRPRA.

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\6\ Pub. L. 104-208, 110 Stat. 3009 (September 30, 1996).

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On January 8, 1998, the OTS published an interim final rule making

identical amendments to Sec. 560.210.7 Under the OTS interim

final rule, a savings association may provide either the historical

example or the maximum interest rate and payment. If the savings

association chooses the maximum interest rate and payment option,

however, it must also provide the initial rate and payment amount and a

statement that the periodic rate may increase or decrease

substantially.

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\7\ 63 FR 1051.

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Consistent with the FRB final rule, the OTS interim rule also

modified how the interest rate is calculated under the maximum interest

rate and payment option. Before the interim final rule, a savings

association calculated the maximum interest rate using ``the most

recent interest rate shown in the historical example.'' Since a savings

association is not required to provide the historical example when it

elects the maximum interest rate and payment option, the interim final

rule provided for the disclosure of ``the initial interest rate (index

value plus margin, adjusted by the amount of any discount or premium)

in effect as of an identified month and year for the particular loan

program.''

Similarly, before the interim final rule, the OTS required a

savings association to explain how a customer could calculate payments

for the loan

[[Page 38462]]

amount based on the most recent payment shown in the historical

example. To allow customers to understand the relationship between

their transactions and the disclosures made under the maximum interest

rate and payment option, the interim final rule permits a savings

association to provide a customer with a similar explanation using the

initial interest rate. The FRB made a similar change to Regulation Z.

II. Discussion of Comments

The OTS received comments from three commenters: one state-

chartered savings institution, one federal savings bank, and one law

firm. All three commenters supported the substantive changes in the

interim final rule. Accordingly, today's final rule incorporates the

substantive changes to the ARM disclosure requirements.

The OTS specifically solicited comment on whether it should delete

the text of the disclosure requirements in Sec. 560.210 and rely on the

disclosure requirements in Regulation Z. All three commenters urged the

OTS to adopt this approach.

The OTS has deleted the text of the disclosure requirements from

the final rule and has substituted appropriate cross-references to

Regulation Z. This approach will permit OTS-regulated institutions to

immediately comply with all future changes to the Regulation Z

disclosures in this area without waiting for the OTS to conform its

rule through the rulemaking process.8 Thus, the rule will

ensure that all competing lenders are subject to similar regulatory

requirements for ARM loans. This approach is consistent with section

303 of the Community Development Regulatory Improvement Act of 1994

(CDRIA), which instructs each banking agency to review their

regulations and remove duplicate requirements and encourages common

interagency supervisory policies. Finally, this change more closely

conforms OTS rules to those issued by the Office of the Comptroller of

the Currency and Federal Deposit Insurance Corporation. These agencies'

rules do not prescribe any ARM disclosures and, instead, rely entirely

on Regulation Z.

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\8\ We note that the recent FRB final rule was effective on

November 21, 1997. The OTS's related interim final rule was

effective on January 8, 1998.

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Rather than delete all references to ARM disclosure requirements

from the regulations, the OTS has decided to retain appropriate cross-

references to the disclosure provisions in Regulation Z. This approach,

which two commenters supported, preserves the OTS's authority to

utilize the full panoply of enforcement actions available under the

HOLA and section 8 of the Federal Deposit Insurance Act (FDIA)

9 when an institution has improperly adjusted ARM interest

rates. As noted above, Sec. 560.210 implements both HOLA and TILA.

Although TILA authorizes the OTS to utilize the standard enforcement

remedies under section 8 of the FDIA, it limits when an agency may

require an institution to ``make dollar adjustments'' for errors. Under

TILA, the agency is authorized to direct an institution to make dollar

adjustments only where an annual percentage rate or finance charge was

inaccurately disclosed.10

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\9\ 12 U.S.C. 1818.

\10\ 15 U.S.C. 1607(b) & (e)(5).

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By contrast, the OTS may seek any remedy authorized under the HOLA

or section 8 of the FDIA for violations of regulations adopted pursuant

to its authority under the HOLA.11 As previously discussed,

a long-standing purpose of the disclosure requirements of Sec. 560.210

and its predecessor regulations has been promoting safe and sound

lending by savings associations through ensuring that borrowers have a

full understanding of their obligations and can therefore make

reasonable and meaningful decisions about their ability to repay their

loans. Thus, when enforcing Sec. 560.210 as a safety and soundness

regulation, the agency has a wider array of enforcement tools than

would be available if it were solely enforcing violations of TILA.

Section 8 of the FDIA, for example, permits the OTS to issue cease and

desist orders requiring affirmative corrective actions, which may

include account adjustments. FDIA also authorizes the OTS to require an

institution to make restitution if the institution was unjustly

enriched, or acted with reckless disregard.

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\11\ 12 U.S.C. 1464(d).

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Changing the format of the regulation to incorporate some

provisions of Regulation Z by cross-referencing does not affect this

authority. As with other OTS regulations that incorporate regulations

of other agencies by cross referencing (e.g., 12 CFR 560.93, 563.43),

OTS has the responsibility of enforcing the incorporated regulations as

they apply to savings associations. The OTS will continue to enforce

violations of Sec. 560.210 using the enforcement remedies provided

under the HOLA and FDIA.12

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\12\ One commenter noted that borrowers have additional

enforcement remedies under state law and under RESPA's mortgage loan

servicing provisions. See 12 U.S.C. 2605(e)(1)(B). The OTS does not

wish to rely on the efforts of the individual plaintiffs to ensure

that thrift institutions use safe and sound banking practices and

comply with applicable laws and regulation. Rather, the OTS has

retained and will exercise the broadest possible enforcement

authority permitted under the existing statutes.

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In the preamble to the interim rule, the OTS observed that

Sec. 560.210, on its face, applies to loans secured by a borrower's

principal dwelling or by a second home. By contrast, the applicable

Regulation Z disclosure requirements at 12 CFR 226.19(b) and 226.20(c)

apply only when the secured property serves as the borrower's primary

dwelling.13 Two commenters urged the OTS to eliminate

coverage for loans secured by second homes.

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\13\ See e.g., 12 CFR Part 226, Supp. I. Official Staff

Interpretation, Section 226.19, Paragraph 19(b), Comment 1.

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In recent years, the OTS has revised the scope of its ARM

disclosure rule to more closely conform to Regulation Z requirements.

For example, in the recent Lending and Investment rulemaking, OTS

eliminated coverage of ARM loans that are primarily for a business,

commercial, or agricultural purpose. The OTS made this revision to

minimize the differences between its ARM regulation and Regulation Z

and to ensure parity in coverage for all lenders.14 To

ensure that the scope of the OTS rule is, and continues to be,

coextensive with Regulation Z, the cross-reference in the final rule

refers to variable rate transactions as described under 12 CFR

226.19(b) and 226.20(c). These transactions are limited to those

involving principal residences.

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\14\ 61 FR 50951, 50962-63 (Sept. 30, 1996). Moreover, we note

that the FHLBB's initial ARM disclosure regulation originally

specifically excluded the coverage of second homes. 50 FR 32010

(August 8, 1985). In 1987, however, the relevant language was

deleted without any discussion. 52 FR 3668 (February 5, 1987).

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In addition to the changes discussed above, the OTS has made minor

technical changes to current Sec. 560.210. For example, the new cross-

references to variable rate mortgage transactions under Regulation Z,

permit the deletion of the existing definitions of ``adjustable-rate

mortgage loan,'' ``applicant,'' and ``home.''

The OTS has also deleted current Sec. 560.210(e). This paragraph

states that a savings association making a closed- or open-end ARM loan

must comply with Regulation Z (12 CFR 226.30) by specifying in their

credit contracts the maximum interest rate that may be imposed during

the term of the obligation. This section simply reiterates already

applicable requirements under Regulation Z, and may be deleted as

unnecessary.

[[Page 38463]]

III. Effective Date

The OTS has determined that there is good cause to dispense with a

30-day delayed effective date under 5 U.S.C. 553(d)(3). The revised

disclosure requirements reduce regulatory confusion by conforming the

OTS disclosure rules under the HOLA more closely to those of the FRB

under TILA. The changes do not have an adverse impact on savings

associations because they reduce regulatory burden. Moreover, the

substantive changes to disclosure requirements were immediately

effective upon publication of the interim rule in January, 1998 and

many institutions have already adopted the changes. Accordingly, OTS-

regulated institutions will not require additional time to adjust their

policies or practices to comply with the rule.

The OTS has also determined, for the reasons stated in the

preceding paragraph, that good cause exists to adopt an effective date

that is before date that would otherwise be required by section 302 of

CDRIA (i.e., the first day of the calendar quarter after the date of

publication).

Accordingly, the final rule is effective immediately. However, like

the FRB rule, compliance with the OTS rule is optional until October 1,

1998.

IV. Paperwork Reduction Act of 1995

The collections of information contained in this final rule were

submitted to and approved by the Office of Management and Budget in

accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d))

under OMB Control Number 1550-0078.

Comments on all aspects of this information collection above should

be sent to the Office of Management and Budget, Paperwork Reduction

Project (1550-0078), Washington, DC 20503, with copies to the Office of

Thrift Supervision, 1700 G Street, NW, Washington, DC 20552.

Under the Paperwork Reduction Act of 1995, no persons are required

to respond to a collection of information unless it displays a valid

OMB control number. The valid OMB control number assigned to the

collection of information in this final rule is displayed at 12 CFR

506.1(b).

The collection of information requirements in this final rule are

found at 12 CFR 560.210. The OTS needs the disclosures requirements to

ensure that savings associations comply with a statutory TILA

requirement and to otherwise supervise safe and sound lending by

savings associations. The likely respondents/recordkeepers are OTS-

regulated savings associations.

V. Executive Order 12866

The Director of the OTS has determined that this final rule does

not constitute a ``significant regulatory action'' for the purposes of

Executive Order 12866.

VI. Regulatory Flexibility Act Analysis

Pursuant to section 605(b) of the Regulatory Flexibility Act, the

OTS certifies that this final rule will not have a significant economic

impact on a substantial number of small entities. The final rule will

not impose any additional burdens or requirements. Rather, it reduces

the disclosures required for ARMs and eases the compliance burden on

all savings associations, including small savings associations.

Accordingly, a regulatory flexibility analysis is not required.

VII. Unfunded Mandates Act of 1995

The OTS has determined that the requirements of this final rule

will not result in expenditures by State, local, and tribal

governments, or by the private sector, of more than $100 million in any

one year. Accordingly, a budgetary impact statement is not required

under section 202 of the Unfunded Mandates Act of 1995, as codified at

2 U.S.C. 1571(a).

List of Subjects in 12 CFR Part 560

Consumer protection, Investments, Manufactured homes, Mortgages,

Reporting and recordkeeping requirements, Savings associations.

Accordingly, the Office of Thrift Supervision amends title 12,

chapter V, of the Code of Federal Regulations as set forth below:

PART 560--LENDING AND INVESTMENT

1. The authority citation for part 560 continues to read as

follows:

Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1701j-3,

1828, 3803, 3806; 42 U.S.C. 4106.

2. Section 560.210 is revised to read as follows:

Sec. 560.210 Disclosures for variable rate transactions.

A savings association must provide the initial disclosures

described at 12 CFR 226.19(b) and the adjustment notices described at

12 CFR 226.20(c) for variable rate transactions, as described in those

regulations. The OTS administers and enforces those provisions for

savings associations.

Dated: July 14, 1998.

By the Office of Thrift Supervision.

Ellen Seidman,

Director.

[FR Doc. 98-19143 Filed 7-16-98; 8:45 am]

BILLING CODE 6720-01-P