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FEDERAL RESERVE SYSTEM
12 CFR Part 226Regulation Z; Docket No. R-1305Truth in Lending
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Final rule; official staff commentary.
SUMMARY
: The Board is publishing final rules amending Regulation Z, whichimplements the Truth in Lending Act and Home Ownership and Equity Protection Act.The goals of the amendments are to protect consumers in the mortgage market fromunfair, abusive, or deceptive lending and servicing practices while preserving responsiblelending and sustainable homeownership; ensure that advertisements for mortgage loans provide accurate and balanced information and do not contain misleading or deceptiverepresentations; and provide consumers transaction-specific disclosures early enough touse while shopping for a mortgage. The final rule applies four protections to a newly-defined category of higher-priced mortgage loans secured by a consumer’s principaldwelling, including a prohibition on lending based on the collateral without regard toconsumers’ ability to repay their obligations from income, or from other sources besidesthe collateral. The revisions apply two new protections to mortgage loans secured by aconsumer’s principal dwelling regardless of loan price, including a prohibition on abusiveservicing practices. The Board is also finalizing rules requiring that advertisements provide accurate and balanced information, in a clear and conspicuous manner, aboutrates, monthly payments, and other loan features. The advertising rules ban severaldeceptive or misleading advertising practices, including representations that a rate or  payment is “fixed” when it can change. Finally, the revisions require creditors to provideconsumers with transaction-specific mortgage loan disclosures within three business daysafter application and before they pay any fee except a reasonable fee for reviewing credithistory.
DATES:
Except as otherwise provided, these rules are effective on October 1, 2009.The requirement to establish an escrow account for taxes and insurance (§ 226.35(b)(3))for higher-priced mortgage loans is effective on April 1, 2010; for higher-pricedmortgage loans secured by manufactured housing, on October 1, 2010.
FOR FURTHER INFORMATION CONTACT:
Kathleen C. Ryan or Dan S.Sokolov, Counsels; Paul Mondor, Senior Attorney; Jamie Z. Goodson, Brent Lattin,Jelena McWilliams, Dana E. Miller, or Nikita M. Pastor, Attorneys; Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System,1
 
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. SUMMARY OF FINAL RULESA. Rules to Prevent Unfairness, Deception, and AbuseB. Revisions to Improve Mortgage AdvertisingC. Requirement to Give Consumers Disclosures EarlyII. CONSUMER PROTECTION CONCERNS IN THE SUBPRIME MARKETA. Recent Problems in the Mortgage MarketB. Market Imperfections That Can Facilitate Abusive and Unaffordable LoansIII. THE BOARD’S HOEPA HEARINGSA. Home Ownership and Equity Protection Act (HOEPA)B. Summary of 2006 HearingsC. Summary of June 2007 HearingD. Congressional HearingsIV. INTERAGENCY SUPERVISORY GUIDANCEV. LEGAL AUTHORITYA. The Board’s Authority Under TILA Section 129(l)(2)B. The Board’s Authority Under TILA Section 105(a)VI. THE BOARD’S PROPOSALA. Proposals to Prevent Unfairness, Deception, and AbuseB. Proposals to Improve Mortgage AdvertisingC. Proposal to Give Consumers Disclosures EarlyVII. OVERVIEW OF COMMENTS RECEIVEDVIII. DEFINITION OF “HIGHER-PRICED MORTGAGE LOAN”—§ 226.35(a)A. OverviewB. Public Comment on the ProposalC. General ApproachD. Index for Higher-Priced Mortgage LoansE. Threshold for Higher-Priced Mortgage LoansF. The Timing of Setting the ThresholdG. Proposal to Conform Regulation C (HMDA)H. Types of Loans Covered Under § 226.35IX. FINAL RULES FOR HIGHER-PRICED MORTGAGE LOANS AND HOEPALOANSA. OverviewB. Disregard of Consumer’s Ability to Repay—§§ 226.34(a)(4) and 226.35(b)(1)C. Prepayment Penalties—§ 226.32(d)(6) and (7); § 226.35(b)(2)D. Escrows for Taxes and Insurance—§ 226.35(b)(3)E. Evasion Through Spurious Open-end Credit—§ 226.35(b)(4)X. FINAL RULES FOR MORTGAGE LOANS—§ 226.36A. Creditor Payments to Mortgage Brokers—§ 226.36(a)B. Coercion of Appraisers—§ 226.36(b)C. Servicing Abuses—§ 226.36(c)2
 
D. Coverage—§ 226.36(d)XI. ADVERTISINGA. Advertising Rules for Open-end Home-equity Plans—§ 226.16B. Advertising Rules for Closed-end Credit—§ 226.24XII. MORTGAGE LOAN DISCLOSURESA. Early Mortgage Loan Disclosures—§ 226.19B. Plans to Improve DisclosureXIIII. EFFECTIVE DATESXIV. PAPERWORK REDUCTION ACTXV. REGULATORY FLEXIBILITY ANALYSIS
I. SUMMARY OF FINAL RULES
On January 9, 2008, the Board published proposed rules that would amendRegulation Z, which implements the Truth in Lending Act (TILA) and the HomeOwnership and Equity Protection Act (HOEPA). 73 FR 1672. The Board is publishingfinal amendments to Regulation Z to establish new regulatory protections for consumersin the residential mortgage market. The goals of the amendments are to protectconsumers in the mortgage market from unfair, abusive, or deceptive lending andservicing practices while preserving responsible lending and sustainable homeownership;ensure that advertisements for mortgage loans provide accurate and balanced informationand do not contain misleading or deceptive representations; and provide consumerstransaction-specific disclosures early enough to use while shopping for mortgage loans.
A. Rules to Prevent Unfairness, Deception, and Abuse
 The Board is publishing seven new restrictions or requirements for mortgagelending and servicing intended to protect consumers against unfairness, deception, andabuse while preserving responsible lending and sustainable homeownership. Therestrictions are adopted under TILA Section 129(l)(2), which authorizes the Board to prohibit unfair or deceptive practices in connection with mortgage loans, as well as to prohibit abusive practices or practices not in the interest of the borrower in connectionwith refinancings. 15 U.S.C. 1639(l)(2). Some of the restrictions apply only to higher- priced mortgage loans, while others apply to all mortgage loans secured by a consumer’s principal dwelling.Protections Covering Higher-Priced Mortgage LoansThe Board is finalizing four protections for consumers receiving higher-pricedmortgage loans. These loans are defined as consumer-purpose, closed-end loans secured by a consumer’s principal dwelling and having an annual percentage rate (APR) thatexceeds the average prime offer rates for a comparable transaction published by theBoard by at least 1.5 percentage points for first-lien loans, or 3.5 percentage points for subordinate-lien loans. For higher-priced mortgage loans, the final rules:
o
 
Prohibit creditors from extending credit without regard to a consumer’s ability torepay from sources other than the collateral itself;3
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