AGENCIES: Office of the Comptroller of the Currency, Treasury (OCC);
Board of Governors of the Federal Reserve System (Board); Federal
Deposit Insurance Corporation (FDIC); Office of Thrift Supervision,
Treasury (OTS); and National Credit Union Administration (NCUA)
(collectively, the Agencies).
ACTION: Final guidance `` Illustrations of Consumer Information for
Nontraditional Mortgage Products.
SUMMARY: The Agencies are publishing three documents that set forth
Illustrations of Consumer Information for Nontraditional Mortgage
Products. The illustrations are intended to assist institutions in
implementing the consumer protection portion of the Interagency
Guidance on Nontraditional Mortgage Product Risks (Interagency NTM
Guidance) adopted on October 4, 2006. 71 FR 58609 (Oct. 4, 2006). The
illustrations are not model forms and institutions may choose not to
use them in providing information to consumers on nontraditional
mortgage products as recommended in the Interagency NTM Guidance.
EFFECTIVE DATE: June 8, 2007.
FOR FURTHER INFORMATION CONTACT:
OCC: Michael Bylsma, Director, Stephen Van Meter, Assistant
Director, or Kathryn Ray, Special Counsel, Community and Consumer Law
Division, (202) 874-5750.
Board: Kathleen C. Ryan, Counsel, or Jamie Z. Goodson,
Division of Consumer and Community Affairs, (202) 452-3667. For users
of Telecommunication Device for Deaf only, call (202) 263-4869.
FDIC: April Breslaw, Acting Associate Director, Compliance
Exam Support Branch, Division of Supervision and Consumer Protection,
(202) 898-6609; or Richard Foley, Counsel, Legal Division, (202) 898-
OTS: Montrice G. Yakimov, Assistant Managing Director,
and Consumer Protection Division, (202) 906-6173; or Glenn Gimble,
Senior Project Manager, Compliance and Consumer Protection Division,
NCUA: Cory Phariss, Program Officer, Examination and
On December 29, 2005, the Agencies published the Interagency
Guidance for comment. 70 FR 77249 (Dec. 29, 2005). After carefully
reviewing and considering all comments received, the Agencies published
the Interagency NTM Guidance (applicable to all banks and their
subsidiaries, bank holding companies and their nonbank subsidiaries,
savings associations and their subsidiaries, savings and loan holding
companies and their subsidiaries, and credit unions) in final form on
October 4, 2006. 71 FR 58609 (Oct. 4, 2006).
The Interagency NTM Guidance sets forth recommended practices
ensure that consumers have clear and balanced information about
nontraditional mortgages prior to making a mortgage product choice,
such as when lenders provide promotional materials about nontraditional
mortgages or during face-to-face meetings when consumers are shopping
for a mortgage. The guidance also recommends that any monthly
statements given with payment option adjustable rate mortgages (ARMs)
provide information to enable consumers to make informed payment
Several commenters on the proposed guidance, including
trade associations, encouraged the Agencies to include model or sample
disclosures or other descriptive materials as part of the Interagency
NTM Guidance. In response, the Agencies determined that illustrations
of consumer information would be useful to institutions as they seek to
implement the consumer information recommendations. Therefore, on the
same day the Interagency NTM Guidance was published in the Federal
Register, the Agencies published for comment proposed Illustrations of
Consumer Information for Nontraditional Mortgage Products (Proposed
Illustrations). 71 FR 58673 (Oct. 4, 2006).
The three Proposed Illustrations consisted of (1) A narrative
explanation of nontraditional mortgage products, (2) a chart comparing
interest only (IO)
loans and payment option ARMs to fixed rate and traditional adjustable
rate loans, and (3) a table that could be included with any monthly
statement for a payment option ARM providing information on the impact
of various payment options on the loan balance. The Agencies noted that
there would be no Agency requirement or expectation that institutions
use the illustrations in their communications with consumers. Instead,
the Agencies intended to illustrate the type of information that the
Interagency NTM Guidance contemplates. Institutions would be able to
determine whether or not to use the illustrations and whether and how
to tailor them to their own circumstances.
The Agencies requested comment on all aspects of the Proposed
Illustrations. Specifically, they requested commenters to address
whether the illustrations, as proposed, would be useful to
institutions, including community banks, seeking to implement the
``Communications with Consumers'' portion of the Interagency NTM
Guidance, or whether changes should be made. The Agencies also
encouraged specific comment on whether the illustrations, as proposed,
would be useful in promoting consumer understanding of the risks and
material terms of nontraditional mortgage products, as described in the
Interagency NTM Guidance, or whether changes should be made. Finally,
the Agencies sought comment on whether other illustrations relating to
nontraditional mortgages, in addition to those proposed, would be
useful to institutions and consumers.
After considering the comments received, the Agencies are now
issuing final illustrations of consumer information for nontraditional
mortgage products. The Interagency NTM Guidance recommends that
promotional materials and other product descriptions provide consumers
with information about the costs, terms, features, and risks of
nontraditional mortgage products that can assist consumers in their
product selection decisions. This includes information about potential
payment shock and negative amortization and, where applicable,
information about prepayment penalties and the costs of reduced
Institutions seeking to follow the recommendations set forth
Interagency NTM Guidance may, at their option, elect to: Use the illustrations; Provide information based on the illustrations, but
expand, abbreviate, or otherwise tailor any information in the
illustrations as appropriate to reflect, for example: The institution's product offerings, such as by deleting
information about loan products and loan terms not offered by the
institution and by revising the illustrations to reflect specific terms
currently offered by the institution; The consumer's particular loan requirements; Current market conditions, such as by changing the loan
amounts, interest rates, and corresponding payment amounts to reflect
current local market circumstances; Other information, consistent with the Interagency NTM
Guidance, such as the payment and loan balance information for
statements discussed in connection with Illustration No. 3 or
information about when a prepayment penalty may be imposed; and The results of consumer testing of such forms; or Provide the information described in the Interagency NTM
Guidance, as appropriate, in an alternate format.
To assist institutions that wish to use the illustrations,
Agencies will be posting each of the illustrations on their respective
websites in a form that can be downloaded and printed for easy
reproduction. In addition, in response to concerns that the interest
rates used in Illustration No. 2 may become outdated with changes in
market interest rates--and consistent with the Agencies' intention,
expressed above, that the illustrations may be modified to reflect,
among other things, current market conditions--the Agencies also will
be posting on their respective websites a template that can be used by
institutions that wish to modify the information presented in
Illustration No. 2 to reflect more current interest rates (and
corresponding payment amounts). Illustration No. 2 itself reflects
typical interest rates for prime borrowers in today's environment,
rounded to the nearest whole number to enhance simplicity.\1\
\1\ Illustration No. 2 also embodies assumptions about other
product features that are typical in the current market: for
example, the illustration assumes that the payment option ARM
provides for a cap on increases in the minimum monthly payment equal
to 7.5 percent per year for the first 5 years of the loan. Thus, the
illustration shows the minimum monthly payment increasing over this
time period from $739 (in Year 1) to $987 (in Year 5).
II. Overview of the Comments
Collectively, the Agencies received letters from over 30
on the proposal, including comments from two financial institutions, 12
consumer advocates and community organizations, 12 trade organizations,
two individuals, and three state regulatory organizations.
Most commenters generally approved of the illustrations and
expressed appreciation for the Agencies' efforts to demonstrate ways
lenders could advance the consumer communication goals outlined in the
Interagency NTM Guidance. Generally, commenters stated that the
proposed illustrations would be useful to financial institutions--
including community banks--seeking to develop their own disclosures to
help consumers understand the risks of nontraditional mortgage
products. Commenters also suggested that the illustrations provided
helpful guidance on the Agencies' expectations and would help reduce
Most financial institutions and trade organizations supported
voluntary nature of the illustrations. These commenters stated that the
flexibility afforded them by the Agencies would allow them to convey
information to their customers in a format most suited to customers'
needs. Additionally, having the flexibility to develop their own
disclosures would allow financial institutions to tailor their
disclosures to take into account specific product offerings and market
However, a smaller group of commenters that included 8
groups and one industry group disagreed, and suggested that consumer
education efforts should be mandatory. The trade group noted that
providing for voluntary use of the illustrations makes unclear the
degree to which the illustrations will be used, when they will be used,
and how they will assist consumers. This commenter suggested that the
Agencies propose model forms and provide lenders with a safe harbor
when they use the model forms.
Several financial institutions, trade organizations, and
organizations suggested that the illustrations should be made part of
the Board's revisions to Regulation Z, which implements the Truth in
Lending Act. These commenters suggested that making the illustrations
part of Regulation Z would ensure more widespread industry use.
Additionally, some commenters expressed concern that issuing guidance
on consumer information materials applicable only to federally-
supervised institutions would put those institutions at a competitive
disadvantage. The Conference of State Bank Supervisors (CSBS), the
American Association of Residential Mortgage Regulators (AARMR), and
the National Association of Consumer Credit Administrators (NACCA)
that they believe the illustrations also could be used by state-
licensed entities subject to state-issued guidance that parallels the
Interagency NTM Guidance.
A number of commenters expressed concern that the
were difficult to follow and would be confusing to consumers, and
should be simplified. A few industry trade groups and a consumer group
advised the Agencies to engage in consumer testing or hire consultants
to determine how to improve the illustrations. A number of commenters
provided very specific suggestions aimed at making the illustrations
easier to understand. Several industry commenters requested that the
Agencies add language explaining how a consumer could benefit from
nontraditional mortgage products. Further, one trade organization
stated that lenders should be able to implement the consumer
information recommendations of the Interagency NTM Guidance by
providing consumers with the interagency publication titled,
``Interest-Only Mortgage Payments and Payment-Option ARMs--Are They for
Finally, two commenters suggested that the Agencies include
these illustrations information about two additional products--2/28 and
3/27 adjustable rate mortgages. These are ``hybrid'' ARMs that start
with a fixed interest rate for two or three years, respectively, and
then reset to a variable rate, which generally will be higher than the
introductory fixed rate. Because the Interagency NTM Guidance does not
cover fully-amortizing mortgage products such as hybrid ARMs, the
Agencies are not including information on these products in the NTM
illustrations. However, when the Agencies finalize the ``Statement on
Subprime Mortgage Lending,'' which was proposed on March 8, 2007, and
which provides guidance concerning hybrid ARM products, we expect to
issue for public comment disclosure illustrations appropriate for that
After carefully considering all of the comments received, the
Agencies have decided to publish the proposed illustrations, with some
modifications. The Agencies have determined that illustrations of the
type of information contemplated in the Interagency NTM Guidance are
needed now. Additionally, the Agencies believe that issuing the
materials as nonmandatory illustrations will provide institutions with
the flexibility needed to tailor the materials to their own
circumstances and customer needs.
Some commenters asserted that use of the illustrations may
entities subject to the Interagency NTM Guidance at a competitive
disadvantage. In this regard, we note that the Interagency NTM
Guidance, which includes the consumer disclosure recommendations, is
already in effect for these entities, and also has been adopted for
state-regulated mortgage brokers and companies by over 30 state
agencies and the District of Columbia.\4\ The illustrations will be
helpful to those institutions that prefer not to incur the costs and
burdens of developing their own consumer information documents to
implement the recommendations in the Interagency NTM Guidance.
Additionally, as previously noted, CSBS, AARMR, and NACCA stated their
belief that the illustrations also could be used by state-licensed
entities subject to state-issued guidance that parallels the
Interagency NTM Guidance.
The Agencies agree with the commenters who urged
the Proposed Illustrations, particularly Proposed Illustration No. 2.
The specific changes made in response to these comments are detailed
below. The Agencies opted not to include additional text in the
illustrations that would discuss the benefits of nontraditional
mortgage products, to ensure that the materials focus on an objective
description of material terms, risks, and features of such products.
Institutions are not precluded, of course, from providing factual
information concerning the features of their products to consumers.
One commenter asked whether the consumer information brochure
entitled ``Interest-Only Mortgage Payments and Payment-Option ARMs--Are
They for You?'' could be used in place of the illustrations to provide
information to consumers. The information contemplated by the
Interagency NTM Guidance serve a different purpose than this brochure.
This detailed, multi-page publication includes valuable in-depth
information, but it does not represent the more concise and focused
consumer information contemplated by, and recommended in, the
Interagency NTM Guidance. Illustrations 1 and 2, by contrast, are
designed to be concise and focused so they can be quickly referenced by
consumers during the mortgage shopping process. While, as explained in
detail above, institutions are not required to use the illustrations,
and may elect to provide the information contemplated in the
Interagency NTM Guidance in a modified or alternate format, delivering
this more detailed publication to consumers would not serve this same
purpose or provide the information as recommended in the guidance.
The Agencies' changes to each Proposed Illustration are
A. Proposed Illustration No. 1
Although most commenters stated that Illustration No. 1 would
useful in helping consumers understand the risks of nontraditional
mortgage products, several suggested that the Agencies make the
illustration more user-friendly by using simpler language and larger
fonts. Most trade organization and financial institution commenters
generally agreed that Illustration No. 1 would be helpful. Consumer
groups, on the other hand, expressed their desire that the
illustrations strongly communicate the risks of nontraditional mortgage
products and add language clarifying that making the minimum payments
on a payment option mortgage could lead to a reduction in a borrower's
equity. Several consumer groups recommended that the illustration not
suggest that consumers should request information orally from a lender,
because consumers should be encouraged to review written information
rather than rely on oral representations.
To address the commenters' concerns, the Agencies have
Illustration No. 1, deleted text where possible to shorten the length
of the illustration, and made formatting changes to improve
readability. Additionally, the Agencies have included language
clarifying that making the minimum payments on a payment option
mortgage could lead to a reduction in a borrower's equity. The Agencies
have also added language advising consumers that if they do not
understand the terms of a particular loan, they should not sign any
loan contracts, and may want to consider other types of loans.
B. Proposed Illustration No. 2
Many commenters found proposed Illustration No. 2 confusing.
Specifically, several commenters said the footnotes and the explanation
of the minimum monthly payment row for years one through five of a
option ARM would confuse consumers. A few commenters suggested that
Illustration No. 2 would be most helpful to consumers if a loan officer
or credit counselor reviewed it with them. Additionally, one financial
institution suggested that Illustration No. 2 should emphasize the
risks of payment shock and negative amortization.
One industry trade group stated that assuming borrowers make
minimum payments is unrealistic. This commenter added that the interest
rates in the examples should represent a typical interest rate
environment in which a fixed rate loan would have a higher rate than an
adjustable rate loan. However, one financial institution suggested that
the illustration should use the same interest rates for all the
products to make comparison easier. One trade group stated that the
rates for interest-only and payment option ARM loans should be higher
to reflect the terms offered to non-prime borrowers. Two commenters
stated that the illustration should use a $100,000 loan amount that
would be easier for consumers to compare to their loan amounts than the
$180,000 amount used in the proposed illustration.
A few commenters warned against using any assumptions that
become dated. Instead, one industry group suggested that payment
amounts and interest rate information in Illustration No. 2 should be
left blank so that loan officers and consumers could fill out the
numbers themselves as they discuss and consider loan options. Another
commenter suggested that the Agencies create a Web site where consumers
could input their own specific information into different mortgage
structures and get accurate and easy-to-understand cost alternatives.
To address commenter concerns, and to maintain consistency
Interagency NTM Guidance, the Agencies have simplified Illustration No.
2 by reducing the number of products for which information is provided.
The simplified illustration eliminates the need for footnotes or
similar explanations. Additionally, the Agencies made formatting
changes to draw consumers' attention to the important points the chart
seeks to illustrate.
The Agencies agreed with commenters that a sample loan amount
$180,000 could make it more difficult for consumers to estimate their
own payment amounts. The Agencies, therefore, have adopted a
representative loan amount of $200,000, which is closer to the national
median price for a single family home than the $100,000 loan amount
suggested by some commenters.
C. Proposed Illustration No. 3
The Agencies received the fewest specific comments on
No. 3. Moreover, commenters did not express concern that consumers
would have difficulty understanding Illustration No. 3. Several
commenters, however, asked the Agencies to make clear that lenders will
have flexibility with regard to how and when to provide the information
contemplated by the third illustration. One trade group stated that the
third illustration could be burdensome for lenders that do not provide
monthly statements. Similarly, another trade group asked the Agencies
to state that lenders could provide the third illustration less
frequently than monthly, or through an explanation on the lender's Web
site. In contrast, another trade group stated that the Agencies should
encourage lenders to provide monthly statements.
One financial institution recommended that the illustration
the resulting loan balance with each payment choice so that the
consumer can see how their choice affects the loan on a monthly basis.
However, one financial institution and one trade group commenter stated
that providing specific payment information would be burdensome and
that lenders would require implementation time to make system changes.
After reviewing and considering the comments, the Agencies
not to make substantial changes to Illustration No. 3. The Interagency
NTM Guidance recommends that if institutions provide monthly statements
to consumers on payment option mortgages, those monthly statements
should provide information that enables consumers to make informed
payment choices, including an explanation of each payment option
available and the impact of that choice on loan balances. Illustration
No. 3 shows one way in which this information could be presented.
Financial institutions retain the flexibility to provide the
information in a format best suited to their customer's needs.
Moreover, it is important to note this illustration is not intended to
set forth all of the information lenders could provide that may be
useful, such as the current loan balance, an itemization of the payment
amount devoted to interest and to principal, and whether the loan
balance has increased.
The final illustrations appear below.
Dated: May 30, 2007.
John C. Dugan,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, May 29, 2007.
Jennifer J. Johnson,
Secretary of the Board.
Dated at Washington, DC, the 8th day of May, 2007.
By order of the Federal Deposit Insurance Corporation.
Robert E. Feldman,
Assistant Executive Secretary.
Dated: May 30, 2007.
By the Office of Thrift Supervision.
Dated: May 31, 2007.
By the National Credit Union Administration.
JoAnn M. Johnson,
[FR Doc. 07-2859 Filed 6-7-07; 8:45 am]