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1 June 2009
[Federal Register: June 1, 2009 (Volume 74, Number 103)] [Proposed Rules] [Page 26118-26130] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr01jn09-14] ======================================================================== Proposed Rules Federal Register ________________________________________________________________________ This section of the FEDERAL REGISTER contains notices to the public of the proposed issuance of rules and regulations. The purpose of these notices is to give interested persons an opportunity to participate in the rule making prior to the adoption of the final rules. ======================================================================== [[Page 26118]] ----------------------------------------------------------------------- FEDERAL TRADE COMMISSION 16 CFR Parts 321 and 322 [RIN 3084-AB18] Advance Notice of Proposed Rulemaking: Mortgage Acts and Practices AGENCY: Federal Trade Commission (FTC or Commission). ACTION: Advance Notice of Proposed Rulemaking; request for comment. ----------------------------------------------------------------------- SUMMARY: President Obama signed the 2009 Omnibus Appropriations Act on March 11, 2009. Section 626 of the Act directed the Commission to initiate, within 90 days of the date of enactment, a rulemaking proceeding with respect to mortgage loans. To implement the Act, the Commission has commenced a rulemaking proceeding in two parts. This Advance Notice of Proposed Rulemaking (ANPR), the Mortgage Acts and Practices Rulemaking, addresses activities that occur throughout the life-cycle of a mortgage loan, i.e., practices with regard to mortgage loan advertising and marketing, origination, appraisals, and servicing. Another ANPR, the Mortgage Assistance Relief Services Rulemaking, addresses the practices of entities (other than mortgage servicers) who offer assistance to consumers in dealing with owners or servicers of their loans to modify them or avoid foreclosure. The Commission is seeking public comment with regard to the unfair and deceptive acts and practices that should be prohibited or restricted pursuant to any rules adopted in these proceedings. Any rules adopted will apply to entities, other than banks, thrifts, federal credit unions, and non-profits, that are engaged in such unfair and deceptive acts and practices. DATES: Comments must be received by July 30, 2009. ADDRESSES: Interested parties are invited to submit written comments electronically or in paper form. Comments should refer to ``Mortgage Acts and Practices Rulemaking, Rule No. R911004'' to facilitate the organization of comments. Please note that comments will be placed on the public record of this proceeding--including on the publicly accessible FTC website, at (http://www.ftc.gov/os/ publiccomments.shtm)--and therefore should not include any sensitive or confidential information. In particular, comments should not include any sensitive personal information, such as an individual's Social Security Number; date of birth; driver's license number or other state identification number, or foreign country equivalent; passport number; financial account number; or credit or debit card number. Comments also should not include any sensitive health information, such as medical records or other individually identifiable health information. In addition, comments should not include any ``[t]rade secrets and commercial or financial information obtained from a person and privileged or confidential . . .,'' as provided in Section 6(f) of the FTC Act, 15 U.S.C. 46(f), and Commission Rule 4.10(a)(2), 16 CFR 4.10(a)(2). Comments containing material for which confidential treatment is requested must be filed in paper form, must be clearly labeled ``Confidential,'' and must comply with FTC Rule 4.9(c), 16 CFR 4.9(c).\1\ --------------------------------------------------------------------------- \1\ The comment must be accompanied by an explicit request for confidential treatment, including the factual and legal basis for the request, and must identify the specific portions of the comment to be withheld from the public record. The request will be granted or denied by the Commission's General Counsel, consistent with applicable law and the public interest. See FTC Rule 4.9(c), 16 CFR 4.9(c). --------------------------------------------------------------------------- Because paper mail addressed to the FTC is subject to delay due to heightened security screening, please consider submitting your comments in electronic form. Comments filed in electronic form should be submitted by using the following weblink: (https:// secure.commentworks.com/ftc-mortgageactsandpractices) (and following the instructions on the web-based form). To ensure that the Commission considers an electronic comment, you must file it on the web-based form at the weblink (https://secure.commentworks.com/ftc- mortgageactsandpractices). If this Notice appears at (http:// www.regulations.gov/search/index.jsp), you may also file an electronic comment through that website. The Commission will consider all comments forwarded to it by regulations.gov. You may also visit the FTC website at http://www.ftc.gov to read the Notice and the news release describing it. A comment filed in paper form should include the reference ``Mortgage Acts and Practices Rulemaking, Rule No. R911004'' both in the text of the comment and on the envelope, and should be mailed or delivered to the following address: Federal Trade Commission, Office of the Secretary, Room H-135 (Annex T), 600 Pennsylvania Avenue, NW, Washington, DC 20580. The FTC requests that any comment filed in paper form be sent by courier or overnight service, if possible, because U.S. postal mail in the Washington area and at the Commission is subject to delay due to heightened security precautions. The FTC Act and other laws administered by the Commission permit the collection of public comments to consider and use in this proceeding as appropriate. The Commission will consider all timely and responsive public comments received, whether filed in paper or electronic form. Comments received will be available to the public on the FTC website, to the extent practicable, at (http://www.ftc.gov/os/ publiccomments.shtm). As a matter of discretion, the Commission makes every effort to remove home contact information from comments filed by individuals before placing those comments on the FTC website. More information, including routine uses permitted by the Privacy Act, may be found in the FTC's privacy policy, at (http://www.ftc.gov/ftc/ privacy.shtm). FOR FURTHER INFORMATION CONTACT: Laura Johnson, Attorney, 202-326-3224, Division of Financial Practices, Federal Trade Commission, 600 Pennsylvania Avenue, NW, Washington, DC 20580. SUPPLEMENTARY INFORMATION: I. Background A. FTC Rulemaking Authority Pursuant to the Omnibus Appropriations Act of 2009 Section 626 of the Omnibus Appropriations Act of 2009 \2\ requires that, within 90 days of enactment, the FTC initiate a rulemaking proceeding [[Page 26119]] with respect to mortgage loans. Pursuant to the Act, the rulemaking proceeding will be conducted in accordance with the requirements of Section 553 of the Administrative Procedure Act.\3\ To implement the Omnibus Appropriations Act of 2009, the Commission has commenced a rulemaking proceeding in two parts. --------------------------------------------------------------------------- \2\ Omnibus Appropriations Act of 2009, Pub. L. No. 111-8, Sec. 626, 123 Stat. 524 (Mar. 11, 2009). \3\ 5 U.S.C. 553. Section 626 of the Omnibus Appropriations Act of 2009 authorizes use of these procedures in lieu of the procedures set forth in Section 18 of the FTC Act, 15 U.S.C. 57a. Note that, because this rulemaking is not undertaken pursuant to Section 18, 15 U.S.C. 57a(f), federal banking agencies are not required to promulgate substantially similar regulations for entities within their jurisdiction. Nonetheless, the Commission plans to consult with the federal banking agencies in this proceeding. --------------------------------------------------------------------------- This ANPR, the Mortgage Acts and Practices (MAP) Rulemaking, addresses activities that occur throughout the life-cycle of a mortgage loan, i.e., practices with regard to mortgage loan advertising and marketing, origination, appraisals, and servicing. Another ANPR, the Mortgage Assistance Relief Services (MARS) Rulemaking, addresses the practices of entities (other than mortgage servicers) who offer assistance to consumers in dealing with owners or servicers of their loans to modify them or avoid foreclosure. Although the Omnibus Appropriations Act of 2009 specifies neither the types of conduct nor the types of entities any proposed rules should address, the Commission has used its organic statute, the FTC Act, in establishing the parameters for this rulemaking.\4\ In particular, the types of conduct that the FTC proposes to cover include acts and practices that meet the FTC's standards for unfairness or deception under Section 5 of the FTC Act.\5\ In addition, the entities that the FTC intends to cover are those over which the FTC has jurisdiction under the FTC Act-- specifically, entities other than banks, thrifts, federal credit unions,\6\ and non-profits \7\ that engage in the conduct the rules would cover. --------------------------------------------------------------------------- \4\ The available legislative history is consistent with the Commission's determination as to the scope of the FTC's rulemaking. See 155 Cong. Rec. S2816-S2817 (2009). \5\ 15 U.S.C. 45(a)(1). For a comprehensive description of the FTC's application of its unfairness and deception authority in the context of financial services, see Letter from the FTC staff to John E. Bowman, Chief Counsel of the Office of Thrift Supervision (Dec. 12, 2007), available at (http://www.ftc.gov/os/2007/12/ P084800anpr.pdf). \6\ 15 U.S.C. 45(a)(2). \7\ 15 U.S.C. 44. Bona fide non-profit entities are exempt from the jurisdiction of the FTC Act. Sections 4 and 5 of the FTC Act confer on the Commission jurisdiction only over persons, partnerships, or corporations organized to carry on business for their profit or that of their members. See 15 U.S.C. 44, 45(a)(2). --------------------------------------------------------------------------- Based on its law enforcement experience and the limited scope of current federal regulation, the Commission believes that the servicing of mortgage loans is a topic on which proposed rules may be needed. The FTC, however, also recognizes that proposed rules also may be needed to address acts and practices related to mortgage loan advertising and marketing, origination, and appraisals. The Commission therefore is seeking public comment on whether proposed rules are needed concerning acts and practices throughout the life-cycle of mortgage loans. The Commission is seeking comments to determine whether certain acts and practices of non-bank financial companies related to mortgage loans are unfair or deceptive under Section 5 of the FTC Act and should be incorporated into a proposed rule. These acts and practices include conduct that the FTC currently could challenge in a law enforcement action as violating Section 5 of the FTC Act. However, the Commission is not seeking comments on statutes that have been enacted and rules that have been issued on these topics. The FTC also specifically is not seeking comments on the Federal Reserve Board's (Board) new rules concerning mortgage loans.\8\ --------------------------------------------------------------------------- \8\ See infra Part I.D. --------------------------------------------------------------------------- Pursuant to Section 626 of the Omnibus Appropriations Act of 2009, any violation of a rule adopted under that section will be treated as a violation of a rule promulgated pursuant to Section 18 of the FTC Act.\9\ Therefore, pursuant to Section 5(m)(1)(A) of the FTC Act,\10\ the Commission may seek civil penalties as a remedy for such rule violations. In addition, pursuant to Section 626(b) of the Omnibus Appropriations Act of 2009, a state may bring a civil action, in either state or federal court, to enforce the FTC mortgage loan rules and obtain civil penalties and other relief for violations. Before initiating an enforcement action, the state must notify the FTC, at least 60 days in advance, and the Commission may intervene in the action. --------------------------------------------------------------------------- \9\ 15 U.S.C. 57a. \10\ 15 U.S.C. 45(m)(1)(A). --------------------------------------------------------------------------- B. FTC Authority Over Mortgage Loans and Other Financial Services The Commission protects consumers from harmful acts and practices at every stage of the mortgage life-cycle--from the advertisement of mortgages to the collection of mortgage debts. At the early stages of the cycle, the FTC protects consumers from unfair, deceptive, or otherwise unlawful acts and practices of brokers, lenders, and others that advertise or offer mortgages, including entities that market loans on behalf of lenders. At the middle and later stages of the cycle, the agency protects consumers from the unlawful conduct of creditors, mortgage servicing agents, and debt collectors that collect payments from consumers. The Commission also protects consumers from the unlawful acts and practices of those that market credit repair or debt relief services, including entities (other than mortgage servicers) who offer assistance to consumers struggling with mortgage debt in dealing with the owners or servicers of their loans to modify their loans or avoid foreclosure. The Commission has law enforcement authority over a wide range of acts and practices throughout the consumer credit life-cycle. The agency enforces Section 5 of the Federal Trade Commission Act, which prohibits ``unfair or deceptive acts or practices in or affecting commerce.'' \11\ The Commission also enforces other consumer protection statutes that govern financial services providers. These include the Truth in Lending Act (TILA),\12\ the Home Ownership and Equity Protection Act (HOEPA),\13\ the Consumer Leasing Act,\14\ the Fair Debt Collection Practices Act (FDCPA),\15\ the Fair Credit Reporting Act (FCRA),\16\ the Equal Credit Opportunity Act (ECOA),\17\ the Credit Repair Organizations Act,\18\ the Electronic Funds Transfer Act,\19\ the Telemarketing and Consumer Fraud and Abuse Prevention Act,\20\ and the privacy [[Page 26120]] provisions of the Gramm-Leach-Bliley (GLB) Act.\21\ --------------------------------------------------------------------------- \11\ 15 U.S.C. 45(a)(1). \12\ 15 U.S.C. 1601-1666j (mandates disclosures and other requirements in connection with consumer credit transactions). \13\ 15 U.S.C. 1639 (provides protections for consumers entering into certain high-cost mortgage refinance loans). \14\ 15 U.S.C. 1667-1667f (requires disclosures, limits balloon payments, and regulates advertising in connection with consumer lease transactions). \15\ 15 U.S.C. 1692-1692p (prohibits abusive, deceptive, and unfair debt collection practices by third-party debt collectors). \16\ 15 U.S.C. 1681-1681x (imposes standards for consumer reporting agencies and information furnishers; places restrictions on the use of consumer report information). The Fair and Accurate Credit Transactions Act of 2003 amended the FCRA. Pub. L. No. 108- 159, 117 Stat. 1952 (2003). \17\ 15 U.S.C. 1691-1691f (prohibits creditor practices that discriminate on the basis of race, religion, national origin, sex, marital status, age, receipt of public assistance, or the exercise of certain legal rights). \18\ 15 U.S.C. 1679-1679j (mandates disclosures and other requirements in connection with credit repair organizations, including a prohibition against charging fees until services are completed). \19\ 15 U.S.C. 1693-1693r (establishes rights and responsibilities of institutions and consumers in connection with electronic fund transfer services). \20\ 15 U.S.C. 6101-6108 (provides consumer protection from telemarketing deception and abuse and requires the Commission to promulgate implementing rules). \21\ 15 U.S.C. 6801-6809 (requires financial institutions to provide annual privacy notices; provides consumers the means to opt out from having certain information shared with non-affiliated third parties; and safeguards customers' personally identifiable information). --------------------------------------------------------------------------- Notwithstanding the Commission's broad authority over acts and practices related to financial services, the FTC does not have jurisdiction over all providers of these services. The FTC Act specifically excludes banks, thrifts, and federal credit unions from the agency's jurisdiction.\22\ However, non-bank affiliates of banks, such as parent companies or subsidiaries, are subject to the Commission's jurisdiction.\23\ Likewise, the FTC has jurisdiction over entities that have contracted with banks to perform certain services on behalf of banks, such as credit card marketing and other services, but which are not themselves banks.\24\ As a result, non-bank entities that provide financial services to consumers are subject to Commission jurisdiction, even if they are affiliated with, or are contracted to perform services for, banking entities. --------------------------------------------------------------------------- \22\ 15 U.S.C. 45(a)(2). The FTC Act defines ``banks'' by reference to a listing of certain distinct types of legal entities. See 15 U.S.C. 44, 57a(f)(2). That list includes: national banks, federal branches of foreign banks, member banks of the Federal Reserve System, branches and agencies of foreign banks, commercial lending companies owned or controlled by foreign banks, banks insured by the Federal Deposit Insurance Corporation, and insured state branches of foreign banks. \23\ Congress clarified FTC jurisdiction when it enacted the GLB Act. Section 133(a) of the GLB Act states that an entity that is affiliated with a bank, but which is not itself a bank, is not a bank for purposes of the FTC Act. Section 133(a) of the GLB Act specifically provides: CLARIFICATION OF FEDERAL TRADE COMMISSION JURISDICTION. Any person that directly or indirectly controls, is controlled directly or indirectly by, or is directly or indirectly under common control with, any bank or savings association . . . and is not itself a bank or savings association shall not be deemed to be a bank or savings association for purposes of any provisions applied by the Federal Trade Commission under the Federal Trade Commission Act. Pub. L. No. 106-102, Sec. 133(a), 113 Stat. 1383; 15 U.S.C. 41 note (a). This section has been interpreted to apply to subsidiaries of banks that are not themselves banks. Minnesota v. Fleet Mortgage Corp., 181 F. Supp. 2d 995 (D. Minn. 2001). \24\ See, e.g., FTC v. CompuCredit Corp., Civil Action No. 1:08- CV-01976-BBM-RGV (N.D. Ga. 2008) (approving stipulated final order involving FTC action against entity that contracted to perform credit card marketing services for a bank); FTC v. Am. Standard Credit Sys., 874 F. Supp. 1080, 1086 (C.D. Cal. 1994) (dismissing argument that entity that contracted to perform credit card marketing and other services for a bank is not subject to FTC Act). --------------------------------------------------------------------------- As discussed above, the Commission intends that any rules that it issues in this proceeding would apply only to the same types of entities over which the Commission has jurisdiction under the FTC Act. C. Deceptive and Unfair Acts and Practices 1. Deceptive Acts and Practices Section 5 of the FTC Act broadly proscribes deceptive or unfair acts or practices in or affecting commerce. An act or practice is deceptive if there is a representation, omission of information, or practice that is likely to mislead consumers, who are acting reasonably under the circumstances, and the representation, omission, or practice is one that is material.\25\ Injury is likely if the misleading or omitted information is material to consumers, i.e., likely to affect a decision to purchase or use a product or service. --------------------------------------------------------------------------- \25\ Federal Trade Commission Policy Statement on Deception, appended to In re Cliffdale Assocs., 103 F.T.C. 110, 174-84 (1984) (Deception Policy Statement). --------------------------------------------------------------------------- To determine that an act or practice is deceptive, the Commission first must conclude that there is a representation, omission of information, or a practice that is likely to mislead consumers. A claim about a product or service may be either express or implied. An express claim generally is established by the representation itself. An implied claim, on the other hand, is an indirect representation, which must be examined within the context of other information that is either presented or omitted. Deception may occur based on what is stated or because of the omission of information that would be important to the consumer. In determining that an advertisement is deceptive, for example, the Commission considers whether the overall net impression of the ad (including language and graphics) is likely to mislead consumers.\26\ --------------------------------------------------------------------------- \26\ Disclaimers or qualifying statements are important to consider for deception analysis. Such disclaimers must be sufficiently clear, prominent, and understandable to convey the qualifying information effectively to consumers. The Commission recognizes that often ``reasonable consumers do not read the entirety of an ad or are directed away from the importance of the qualifying phrase by the acts or statements of the seller.'' Deception Policy Statement at 181. Thus, fine print disclosures at the bottom of a print ad or television screen are unlikely to cure an otherwise deceptive representation. --------------------------------------------------------------------------- Second, the Commission considers the act or practice from the perspective of a consumer acting reasonably under the circumstances.\27\ Reasonableness is evaluated based on the sophistication and understanding of consumers in the group to whom the representation or sales practice is directed. If a specific audience is targeted, the Commission will consider the effect on a reasonable member of that target group. A representation may be susceptible to more than one reasonable interpretation, and if one such interpretation is misleading, the advertisement is deceptive, even if other non- deceptive interpretations are possible.\28\ --------------------------------------------------------------------------- \27\ Deception Policy Statement at 177-81. \28\ Id. at 178. --------------------------------------------------------------------------- Third, to conclude that deception has occurred, the Commission must determine that the representation, omission, or practice is material, i.e., one that is likely to affect a consumer's decision to purchase or use a product or service. A deceptive representation, omission, or practice that is material is likely to cause consumer injury--that is, but for the deception, the consumer may have made a different choice.\29\ Express claims about a product or service, such as statements about cost, are presumed to be material. Claims about purpose and efficacy of a product or service are also presumed to be material.\30\ --------------------------------------------------------------------------- \29\ Id. at 182-83. \30\ Novartis Corp. v. FTC, 223 F.3d 783, 786-87 (D.C. Cir. 2000). --------------------------------------------------------------------------- 2. Unfair Acts and Practices Section 5(n) of the FTC Act also sets forth a three-part test to determine whether an act or practice is unfair.\31\ First, the practice must be one that causes or is likely to cause substantial injury to consumers. Second, the injury must not be outweighed by countervailing benefits to consumers or to competition. Third, the injury must be one that consumers could not reasonably have avoided. --------------------------------------------------------------------------- \31\ 15 U.S.C. 45(n). Section 5(n) of the FTC Act also provides that ``[i]n determining whether an act or practice is unfair, the Commission may consider established public policies as evidence to be considered with all other evidence.'' --------------------------------------------------------------------------- In analyzing whether injury is substantial, the Commission is not concerned with trivial, speculative, or more subjective types of harm. The substantial injury test may be met by small harm to a large number of consumers. In most cases, substantial injury involves monetary harm. Once it determines that there is substantial consumer injury, the Commission considers whether the harm is offset by any countervailing benefits to consumers or to competition. Thus, the Commission considers both the costs of imposing a remedy and any benefits that consumers enjoy as a result of the practice at issue. Finally, the injury must be one that consumers cannot reasonably avoid. If consumers reasonably could have made a different choice that would have avoided the injury, but did not do so, the practice is not deemed to be unfair under the FTC Act. [[Page 26121]] In applying its unfairness standard, the Commission takes the approach that well-informed consumers are capable of making choices for themselves. The agency therefore may prohibit or restrict acts and practices if they unreasonably create, or take advantage of, an obstacle to the ability of consumers to make informed choices, thus causing, or being likely to cause, consumer injury.\32\ --------------------------------------------------------------------------- \32\ See Letter from the FTC to Hon. Wendell Ford and Hon. John Danforth, Committee on Commerce, Science and Transportation, United States Senate, Commission Statement of Policy on the Scope of Consumer Unfairness Jurisdiction (December 17, 1980), reprinted in In re Int'l Harvester Co., 104 F.T.C. 949, 1070, 1073 (1984) (Unfairness Policy Statement). See also Trade Regulation Rule Concerning Cooling-Off Period for Sales Made at Homes or at Certain Other Locations, 16 CFR 429 (making it an unfair and deceptive practice for anyone engaged in ``door-to-door'' sales of consumer goods or services with a purchase price of $25 or more to fail to provide buyer with certain oral and written disclosures regarding buyer's right to cancel within three business days); Holland Furnace Co. v. FTC, 295 F.2d 302 (7th Cir. 1961) (seller's servicemen dismantled home furnaces then refused to reassemble them until consumers agreed to buy services or replacement parts). --------------------------------------------------------------------------- D. Federal Reserve Board's Rules Concerning Mortgage Loans In determining the restrictions on mortgage loans that should be included in an FTC proposed rule, it is important to consider the rules related to mortgage loans that the Board issued last year. On July 14, 2008, the Board announced new rules amending several aspects of Regulation Z, which implements TILA and HOEPA.\33\ TILA generally requires that creditors and certain advertisers make disclosures to consumers so that they can make better informed credit decisions, including decisions related to mortgages. HOEPA, which amended TILA, imposes substantive restrictions on certain high-priced loans, all of which are subprime loans.\34\ Section 105(a) of TILA gives the Board the authority to promulgate rules necessary or proper to carry out TILA's purposes.\35\ Section 129(l)(2) of TILA gives the Board the authority to promulgate rules to prohibit ``unfair'' or ``deceptive'' acts and practices in connection with mortgage loans generally. It also gives the Board the authority to promulgate rules to prohibit practices that are ``abusive'' or ``not in the interest of the borrower'' in connection with the refinancing of mortgage loans.\36\ The Board used its general authority under Section 105(a) to promulgate some of its new rules and its HOEPA authority under Section 129(l)(2) to promulgate other new rules.\37\ --------------------------------------------------------------------------- \33\ Truth in Lending, 73 FR 44522 (July 30, 2008). This ANPR summarizes the Board's rules, infra, but does not provide a full analysis because they are explained in detail in the supplementary information portion of the July 2008 final rule. See id. \34\ HOEPA applies to loans that are closed-end, non-purchase money mortgages (such as refinancings or home equity loans) secured by a consumer's principal dwelling (other than a reverse mortgage) where either: (a) the APR at consummation will exceed the yield on Treasury securities of comparable maturity by more than 8 percentage points for first-lien loans, or 10 percentage points for subordinate-lien loans; or (b) the total points and fees payable by the consumer at or before closing exceed the greater of 8 percent of the total loan amount, or $583. See 12 CFR 226.32; FRB Regulation Z Official Staff Commentary, 12 CFR 226.32(a), Supp. I (2008); see also definition of ``closed-end credit,'' infra note 45. \35\ 15 U.S.C. 1604(a). \36\ 15 U.S.C. 1639(l)(2). \37\ The FTC has the authority to obtain civil penalties for violations of the rules that the Board promulgates under its Section 129(l)(2) authority. See infra notes 53, 70, 97, and 101 and accompanying text; Omnibus Appropriations Act of 2009 Sec. 626(c); 15 U.S.C. 45(l), 45(m), 1607(c). The FTC does not have the authority to obtain civil penalties for violations of rules the Board promulgates under its Section 105(a) authority. See infra notes 46, 48, 55, 57, 81, and 84 and accompanying text. In contrast, the federal banking regulatory agencies may obtain civil penalties from entities under their jurisdiction for any violation of TILA, HOEPA, or Regulation Z. See 15 U.S.C. 1607(a); 12 U.S.C. 1786(k), 1818(I). --------------------------------------------------------------------------- The federal banking agencies and the FTC enforce TILA (including HOEPA) and Regulation Z. TILA specifically provides enforcement authority to the Board (for state member banks of the Federal Reserve System), the Office of the Comptroller of the Currency (OCC) (for national banks), the Federal Deposit Insurance Corporation (FDIC) (for other insured banks), the Office of Thrift Supervision (OTS) (for savings associations), and the National Credit Union Administration (NCUA) (for federal credit unions).\38\ TILA provides the FTC with enforcement authority as to all entities that are not specifically committed to another government agency.\39\ Thus, the FTC enforces TILA (including HOEPA) and Regulation Z for non-bank financial companies, such as non-bank mortgage companies, mortgage brokers, and finance companies.\40\ --------------------------------------------------------------------------- \38\ 15 U.S.C. 1607(a). \39\ 15 U.S.C. 1607(c). \40\ See Part I.B, supra, for discussion of FTC jurisdiction. --------------------------------------------------------------------------- The Board's final rules make changes to Regulation Z in what the FTC describes as essentially four parts of the mortgage life-cycle. The rules address acts and practices related to: (1) advertising and marketing; (2) origination (including underwriting, loan terms, and disclosures); (3) appraisals; and (4) servicing. Most of the new rules will take effect on October 1, 2009, although the rules related to escrows do not take effect until 2010. II. Mortgage Advertising and Marketing A. Overview The mortgage life-cycle begins when a consumer initially shops for a mortgage. The consumer may seek out mortgage loan information on his or her own, whether on the Internet or through oral or written contacts with a real estate broker, mortgage lender, mortgage broker, or other source. The consumer also may see or hear more widely disseminated mortgage advertisements through various sources, whether in print (including billboards, direct mailings, emails, and faxes), or through television, radio, the Internet, or other electronic media. The advertiser or marketer may be the creditor itself, or a mortgage broker, real estate broker, lead generator, rate aggregator, or another person or entity. B. Mortgage Advertising and Marketing Laws the FTC Enforces The FTC Act requires that claims in advertising and marketing, including claims about mortgage loans, be truthful and non- misleading.\41\ Mortgage advertisers are also subject to TILA (including HOEPA) and its implementing Regulation Z, among other laws.\42\ In general, TILA and Regulation Z contain four basic requirements for mortgage advertisements.\43\ First, an advertisement must reflect terms actually available to the consumer. Second, required disclosures must be made clearly and conspicuously in the advertisement. Third, any advertisement that includes any credit rate must state the annual percentage rate, or ``APR.'' The APR must be stated at least as conspicuously as any other stated rates. Fourth, if any major triggering loan term (e.g., a monthly payment amount) is advertised, other major terms, including the APR, must also be advertised. --------------------------------------------------------------------------- \41\ See 15 U.S.C. 45; see also Part I.C.1, supra. \42\ This discussion is not intended as a comprehensive list of all potentially applicable mortgage advertising and marketing laws. Marketers of credit products also may be subject to requirements under laws such as the FCRA--for example, regarding firm offers of credit. The Commission is not seeking comment on FCRA issues in response to this ANPR. \43\ See, e.g., 15 U.S.C. 1661-1665b; 12 CFR 226.16, 226.24. --------------------------------------------------------------------------- In July 2008, the Board issued rules under Regulation Z addressing mortgage advertising issues.\44\ Some of these rules apply to closed- end credit, and others apply to open-end home equity plans. The Board's rules take effect on October 1, 2009. --------------------------------------------------------------------------- \44\ See 73 FR at 44599-602 (to be codified at 12 CFR 226.16, 226.24). --------------------------------------------------------------------------- [[Page 26122]] 1. Closed-End Credit Closed-end credit includes a standard mortgage loan in which the proceeds are paid out in full at loan closing.\45\ Regarding closed-end credit, the Board made three significant changes to the advertising provisions in Regulation Z. First, the Board strengthened the ``clear and conspicuous'' Regulation Z standards for disclosures of information.\46\ The standards vary greatly depending on the type of media used for the advertisement, but generally disclosures about promotional rates and payments must be prominent and appear close to triggering terms.\47\ --------------------------------------------------------------------------- \45\ TILA Section 144 and Regulation Z Section 226.24 govern advertising of ``closed-end credit,'' which is defined as consumer credit other than open-end credit. 15 U.S.C. 144; 12 CFR 226.2(10), 226.24. Open-end credit is credit extended to a consumer under a plan in which: (1) the creditor reasonably contemplates repeated transactions; (2) the creditor may impose a finance charge from time to time on the outstanding unpaid balance; and (3) the amount of credit that may be extended to the consumer during the plan's term is generally made available to the extent that any unpaid balance is repaid. 12 CFR 226.2(20). \46\ See 73 FR at 44579-85, 44601-602, 44608-610. The Board promulgated these rules using its authority under TILA Section 105(a). \47\ For example, disclosures in the context of visual text advertisements on the Internet must not be obscured by graphic displays, shading, or coloring. See id. at 44581, 44608. --------------------------------------------------------------------------- Second, the Board addressed a variety of practices regarding advertising mortgage rates and payments.\48\ For example, mortgage advertisements must not state any rate other than the APR, except that the simple annual rate applied to an unpaid balance may be stated in conjunction with, but not more conspicuous than, the APR.\49\ If mortgage advertisements contain limited duration ``teaser'' rates or payment amounts, then the advertisements must also clearly and conspicuously disclose the duration of these rates or payment amounts.\50\ The rules prohibit advertisement of rates that are lower than the rate at which interest is accruing (referred to as ``payment rates,'' ``effective rates,'' or ``qualifying rates'') because consumers may not understand these rates.\51\ The rules also revise the requirements regarding the disclosures that must be made when any one of certain triggering terms is advertised by clarifying the meaning of the ``terms of repayment'' and adding a new disclosure requirement if a mortgage advertisement states the amount of any payment.\52\ --------------------------------------------------------------------------- \48\ See id. at 44581-585, 44601-602, 44608-610. The Board promulgated these rules using its authority under TILA Section 105(a). \49\ See id. at 44581, 44601, 44608. The rules prohibit advertisement of a periodic rate, other than the simple annual rate of interest, for credit secured by a dwelling. Id. \50\ See id. at 44583, 44601-602, 44609-610. \51\ See id. at 44581. Payment rates are often featured in option adjustable rate mortgages and various other non-traditional mortgages. A payment rate is used to calculate the consumer's monthly payment amount and is not necessarily the same as the interest rate. If the payment rate is less than the interest rate, the consumer's monthly payment amount does not include the full interest owed each month; the difference between the amount the consumer pays and the amount the consumer owes is added to the total amount due from the consumer. After a specified number of years, or if the loan reaches a negative amortization cap, the required monthly payment amount is recast to require payments that will fully amortize the balance over the remaining loan term, leading to sharply increased payments by the consumer. \52\ See, e.g., id. at 44582-585, 44601-602, 44608-610. --------------------------------------------------------------------------- Third, the Board prohibited the following seven specific mortgage advertising claims based on its conclusion that the claims are per se ``misleading or deceptive:'' \53\ --------------------------------------------------------------------------- \53\ See id. at 44586-590, 44602, 44610. The Board promulgated these rules using its authority under TILA Section 129(l)(2). --------------------------------------------------------------------------- 1. advertising as ``fixed'' a rate or payment that will change after a period of time unless the advertisement meets certain criteria, such as having an equally prominent and closely proximate disclosure that the rate or payment is ``fixed'' for only a limited period of time; 2. comparing actual or hypothetical rates or payments to the rates or payments on an advertised loan unless the advertisement discloses the rates or payments that will apply over the full term of the advertised loan; 3. misrepresenting an advertised loan as being part of a ``government loan program'' or otherwise endorsed or sponsored by a government entity; 4. using the name of the consumer's current lender unless the advertisement has an equally prominent disclosure of the person actually making the advertisement and includes a clear and conspicuous statement that the advertiser is not associated with the consumer's current lender; 5. making any misleading claim that an advertised loan will eliminate debt or result in a waiver or forgiveness of a consumer's existing loan terms with, or obligations to, another creditor; 6. using the term ``counselor'' in an advertisement to refer to a for-profit mortgage broker or mortgage lender; and 7. advertising mortgages in a language other than English while giving critical disclosures only in English. 2. Open-End Home Equity Plans The Board's new mortgage rules also addressed the advertising of open-end home equity plans,\54\ such as home equity lines of credit (HELOCs). Regarding open-end home equity plans, the Board made two significant changes. First, the rules modify Regulation Z's ``clear and conspicuous'' standard.\55\ The standards vary greatly depending on the type of media used for the advertisement, but generally disclosures about promotional rates and payments must be prominent and appear close to triggering terms.\56\ Second, the rules address a variety of practices regarding advertising rates and payments.\57\ Most significantly, the rules add new disclosure requirements for the advertisement of promotional rates and payments.\58\ The standards vary greatly depending on the type of media used for the advertisement.\59\ --------------------------------------------------------------------------- \54\ Open-end home equity plans are open-end credit secured by a consumer's dwelling. See 12 CFR 226.5b; see also definition of ``open-end credit,'' supra note 45. \55\ See 73 FR at 44574-79, 44599-600, 44605-606. The Board promulgated these rules using its authority under TILA Section 105(a). \56\ For example, disclosures in the context of visual text advertisements on the Internet must not be obscured by graphic displays, shading, or coloring. See id. at 44575, 44605. \57\ See id. at 44575-579, 44599-600, 44606. The Board promulgated these rules using its authority under TILA Section 105(a). \58\ See id. at 44576-579, 44600, 44606. \59\ See id. --------------------------------------------------------------------------- C. FTC Mortgage Advertising and Marketing Law Enforcement The FTC has brought numerous enforcement actions challenging the conduct of lenders, brokers, and other advertisers of mortgage loans in violation of the FTC Act or the TILA.\60\ In most of its mortgage lending cases, the Commission has challenged alleged deception in the advertising or marketing of mortgage loans, with a focus on subprime and non-traditional loans. For example, the Commission has brought actions against mortgage lenders or brokers for alleged deceptive marketing of loan costs\61\ or other key loan terms, such as misrepresenting the absence of or failing to adequately disclose the existence of a prepayment penalty \62\ or a large balloon payment due at the end of the loan.\63\ Most [[Page 26123]] recently, in February 2009, the Commission announced settlements with three mortgage companies charged with advertising low interest rates and low monthly payments, but allegedly failing to disclose adequately that the low rates and payment amounts would increase substantially after a limited period of time.\64\ --------------------------------------------------------------------------- \60\ See, e.g., FTC v. Mortgages Para Hispanos.Com Corp., No. 06-00019 (E.D. Tex. 2006); FTC v. Ranney, No. 04-1065 (D. Colo. 2004); FTC v. Chase Fin. Funding, No. 04-549 (C.D. Cal. 2004); FTC v. OSI Fin. Svcs., Inc., No. 02-C-5078 (N.D. Ill. 2002); United States v. Mercantile Mortgage Co., No. 02-5079 (N.D. Ill. 2002); FTC v. Associates First Capital Corp., No. 01-00606 (N.D. Ga. 2001); FTC v. First Alliance Mortgage Co., No. 00-964 (C.D. Cal. 2000). \61\ See, e.g., FTC v. Associates First Capital Corp., No. 01- 00606 (N.D. Ga. 2001); FTC v. First Alliance Mortgage Co., No. 00- 964 (C.D. Cal. 2000). \62\ FTC v. Chase Fin. Funding, No. 04-549 (C.D. Cal. 2004); FTC v. OSI Fin. Svcs., Inc., No. 02-C-5078 (N.D. Ill. 2002). \63\ E.g., FTC v. OSI Fin. Svcs., Inc., No. 02-C-5078 (N.D. Ill. 2002); FTC v. Associates First Capital Corp., No. 1:01-CV-00606 (N.D. Ga. 2001). \64\ See, e.g., In the Matter of American Nationwide Mortgage Company, Inc., FTC Dkt. No. C-4249 (Feb.17, 2009); In the Matter of Shiva Venture Group, Inc., FTC Dkt. No. C-4250 (Feb. 17, 2009); In the Matter of Michael Gendrolis, FTC Dkt. No. C-4248 (Feb. 17, 2009). --------------------------------------------------------------------------- III. Mortgage Origination--Underwriting, Loan Terms, and Disclosure Issues A. Underwriting and Loan Terms 1. Overview For many years, consumers purchased homes with traditional, fully documented, 30-year, amortizing, fixed-rate or adjustable rate mortgages (ARMs), under which the borrower pays principal and interest each month for the life of the loan. However, over the past decade, there has been an increase in the use of increasingly complex non- traditional, or alternative, mortgage products.\65\ Several of these products offer consumers the option of making lower initial monthly payments in the early years of the loan, which makes it easier for some consumers to purchase homes, or to purchase more expensive homes than they might otherwise buy at the time. After the introductory period ends, however, the monthly payments can increase significantly, and some consumers can no longer afford their loans. For example, payment option ARMs do not require that the consumer's initial payments cover the accruing interest. The remaining interest is added to the loan balance, resulting in negative amortization and larger subsequent payments. Interest-only loans require the borrower to pay only the monthly interest due during an initial period, causing the principal balance to remain unchanged. When the initial period expires, the consumer's payments increase to include both principal and interest. In addition, some consumers who use these products are subject to prohibitive prepayment penalties if they refinance their loans. --------------------------------------------------------------------------- \65\ These products include 2/28 and 2/27 ARMs, fixed- and adjustable-rate interest-only loans, payment option ARMs, 40-year fixed-rate mortgages, and 50-year hybrid ARMs. In May 2006, to explore the financial benefits and risks of several alternative mortgage products, the Commission sponsored a day-long public workshop, ``Protecting Consumers in the New Mortgage Marketplace.'' See 71 FR 15417 (Mar. 28, 2006) and (http://www.ftc.gov/bcp/ workshops/mortgage/index.html). --------------------------------------------------------------------------- The growth of these products coincided with the rise of independent brokers originating loans and the ``originate-to-distribute'' model under which lenders immediately sell loans to the secondary market instead of holding them in their portfolios. Because these brokers and lenders are compensated early on in the loan transaction, the incentives do not facilitate diligent underwriting or interest in the long-term performance of loans.\66\ --------------------------------------------------------------------------- \66\ See Ben Bernanke, Chairman, Board of Governors of the Federal Reserve System, ``Housing, Housing Finance, and Monetary Policy,'' Remarks at Federal Reserve Bank of Kansas City's Economic Symposium, Jackson Hole, Wyo. (Aug. 31, 2007) available at (http:// www.federalreserve.gov/newsevents/speech/bernanke20070831a.htm). --------------------------------------------------------------------------- 2. Mortgage Origination Laws the FTC Enforces Mortgage loan originators are subject to numerous federal laws that the FTC enforces.\67\ Section 5 of the FTC Act prohibits unfair or deceptive acts or practices in or affecting commerce, including unfair or deceptive mortgage loan origination activities. In addition, mortgage loan originators are subject to disclosure, and other requirements under the TILA (including HOEPA) and its implementing Regulation Z. In July 2008, the Board issued rules under Regulation Z addressing certain mortgage origination issues, including substantive restrictions on underwriting and loan terms.\68\ Most of the Board's rules take effect on October 1, 2009, although the rules concerning escrows do not take effect until 2010. --------------------------------------------------------------------------- \67\ This discussion is not intended as a comprehensive list of all potentially applicable mortgage origination laws. Mortgage originators also are subject to requirements under laws such as ECOA. See, e.g., FTC v. Gateway Funding Diversified Mortgage Servs. L.P., No. 08-5805 (E.D. Pa. 2008). The Commission is not seeking comments on discrimination and fair lending issues in response to this ANPR. \68\ 73 FR at 44602-604 (to be codified at 12 CFR 226.32, 226.34, 226.35). See note 34, supra, for definition of HOEPA loans. --------------------------------------------------------------------------- The Board's rules establish a new category of ``higher-priced mortgage loans,'' which effectively includes HOEPA loans and virtually all subprime loans.\69\ The Board added four new provisions to Regulation Z that apply to these higher-priced loans, three of which also specifically apply to HOEPA loans.\70\ First, creditors are prohibited from making higher-priced loans or HOEPA loans without regard to the borrower's ability to repay the loans.\71\ Second, for higher-priced loans or HOEPA loans, creditors must verify the income and assets of borrowers using reliable third-party documents.\72\ Third, prepayment penalties are restricted on higher-priced loans and HOEPA loans. If mortgage payments can change during the first four years of the loan, creditors cannot impose a prepayment penalty. If mortgage payments will not change during the first four years of the loan, creditors can charge a prepayment penalty only if borrowers prepay during the first two years of the loan.\73\ Finally, creditors must establish an escrow account for property taxes and homeowner's insurance for first-lien higher-priced mortgage loans.\74\ ---------------------------------------------------------------------------