[Federal Register: April 25, 2002 (Volume 67, Number 80)]
[Proposed Rules]
[Page 20468-20474]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25ap02-13]
[[Page 20468]]
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DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Parts 560, 590 and 591
[No. 2002-17]
RIN 1550-AB51
Alternative Mortgage Transaction Parity Act; Preemption
AGENCY: Office of Thrift Supervision, Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Alternative Mortgage Transaction Parity Act (Parity Act)
authorizes state-chartered housing creditors to make, purchase, and
enforce alternative mortgage transactions without regard to any state
constitution, law, or regulation. To rely on the Parity Act, certain
state-chartered housing creditors must comply with regulations on
alternative mortgage transactions issued by the Office of Thrift
Supervision (OTS). In today's rulemaking, OTS proposes to revise its
rule identifying the OTS regulations that apply to creditors under the
Parity Act. OTS would no longer identify its regulations on prepayment
and late charges for state housing creditors.
OTS is also proposing to revise existing limitations on the amount
of late charge that may be assessed on loans secured by first liens on
residential manufactured homes under part 590. Part 590 addresses the
preemption of certain state usury laws for federally-related
residential mortgage loans. In addition, OTS is proposing a minor
technical change to the definition of reverse mortgage in part 591,
which addresses the preemption of state due-on-sale laws.
DATES: Comments must be received on or before June 24, 2002.
ADDRESSES:
Mail: Send comments to Regulation Comments, Chief Counsel's Office,
Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552,
Attention: Docket No. 2002-17. Commenters should be aware that there
have been some unpredictable and lengthy delays in postal deliveries to
the Washington, DC area in recent weeks and may prefer to make their
comments via facsimile, e-mail, or hand delivery.
Delivery: Hand deliver comments to the Guard's Desk, East Lobby
Entrance, 1700 G Street, NW., from 9:00 a.m. to 4:00 p.m. on business
days, Attention: Regulation Comments, Chief Counsel's Office, Docket
No. 2002-17.
Facsimiles: Send facsimile transmissions to FAX Number (202) 906-
6518, Attention: Docket No. 2002-17.
E-Mail: Send e-mails to regs.comments@ots.treas.gov, Attention:
Docket No. 2002-17, and include your name and telephone number.
Availability of comments: OTS will post comments and the related
index on the OTS Internet Site at www.ots.treas.gov. In addition, you
may inspect comments at the Public Reading Room, 1700 G St. NW., by
appointment. To make an appointment for access, call (202) 906-5922,
send an e-mail to public.info@ots.treas.gov, or send a facsimile
transmission to (202) 906-7755. (Please identify the materials you
would like to inspect to assist us in serving you.) We schedule
appointments on business days between 10:00 a.m. and 4:00 p.m. In most
cases, appointments will be available the business day after the date
we receive a request.
FOR FURTHER INFORMATION CONTACT: Theresa Stark, Senior Project Manager,
Compliance Policy, (202) 906-7054; Karen Osterloh, Assistant Chief
Counsel, (202) 906-6639, Regulations and Legislation Division, Office
of Thrift Supervision, 1700 G Street NW., Washington, DC 20552.
SUPPLEMENTARY INFORMATION:
I. The Alternative Mortgage Transaction Parity Act Regulations
(Sec. 560.220)
A. Background
Congress enacted the Parity Act \1\ in 1982 to stimulate credit in
an unusually high interest rate environment by encouraging variable
rate mortgages and other creative financing. In hearings before the
Senate in 1981, mortgage bankers testified that statutes in 26 states
barred state-chartered mortgage bankers and lending institutions from
originating alternative mortgage loans, or imposed significantly higher
restrictions on such loans than applied to federally chartered lenders
operating under federal regulations. Congress wanted to make more
housing credit available by giving those state-chartered housing
creditors \2\ parity with federally chartered institutions and
eliminate the discriminatory impact of the state laws by authorizing
those creditors to make, purchase, and enforce alternative mortgage
loans.\3\
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\1\ 12 U.S.C. 3801 et seq.
\2\ A ``housing creditor'' is a depository institution, a lender
approved by the Secretary of Housing and Urban Development for
participation in certain mortgage insurance programs, ``any person
who regularly makes loans, credit sales or advances secured by
interests in properties referred to in [the Parity Act]; or . . .
any transferee of any of them.'' 12 U.S.C. 3802(2).
\3\ 12 U.S.C. 3801(b). See also National Home Equity Mortgage
Association v. Face, 64 F. Supp. 2d 584, 587 (E.D. Va. 1999), aff'd,
239 F.3d 633 (4th Cir. 2001), and cert denied 70 U.S.L.W. 3234 (U.S.
Oct. 1, 2001) (No. 00-1851).
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The Parity Act applies to loans with any ``alternative'' payment
features that vary from conventional fixed-rate, fixed term mortgage
loans, such as variable rates, balloon payments, or call features. It
allows state licensed and regulated housing creditors to engage in
``alternative mortgage transactions'' notwithstanding ``any State
constitution, law, or regulation,'' provided the transactions are in
conformity with regulations that would apply to a comparable federally
chartered housing creditor.\4\
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\4\ Id.; 12 U.S.C. 3803.
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To qualify as a state housing creditor and take advantage of
preemption, the Parity Act specifically provides that the creditor must
be ``licensed under applicable State law and [remain or become] subject
to the applicable regulatory requirements and enforcement mechanisms
provided by State law.'' \5\ Housing creditors, other than state-
chartered banks and state-chartered credit unions,\6\ that wish to make
an alternative mortgage transaction under the authority of the Parity
Act, must abide by designated OTS regulations. Those regulations are
enforced by each state housing creditor's applicable state regulator.
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\5\ 12 U.S.C. 3802(2).
\6\ State-chartered commercial banks and state-chartered credit
unions must comply respectively with regulations of the Office of
the Comptroller of the Currency (OCC) and the National Credit Union
Administration (NCUA).
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The Parity Act directed the Federal Home Loan Bank Board (Bank
Board), OTS's predecessor agency, to identify, describe, and publish
those portions of its regulations that were inappropriate for, and thus
inapplicable to, non-federally chartered, non-bank, non-credit union
housing creditors.\7\ In 1982, the Bank Board published a ``Notice to
Housing Creditors'' (1982 Notice).\8\ The 1982 Notice provided that
state housing creditors, other than commercial banks, credit unions or
federal associations, may make alternative mortgage loans subject to
the Bank Board's requirements on adjustments to rate, payment, balance
or term of maturity and disclosure.
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\7\ Section 807 of Pub. L. 97-320 (1982).
\8\ 47 Fed. Reg. 51733 (November 17, 1982).
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In 1983, the Bank Board published a final rule codifying a revised
Notice to Housing Creditors. The 1983 final rule identified three
provisions that were an integral part of, and particular to,
[[Page 20469]]
alternative mortgage transactions. These included provisions governing
the authority to make partially amortized or non-amortized loans and to
adjust the interest rate payment, balance or term of maturity;
limitations on adjustments on loans secured by borrower-occupied
property; and requirements for disclosures on loans secured by
borrower-occupied property that are not fixed-rated and fully
amortized.\9\
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\9\ 48 Fed. Reg. 23,032, 23053 (May 23, 1983). The notice was
codified as an appendix to part 545. In 1989, it was moved 12 CFR
545.33. See 54 FR 49492 (November 30, 1989).
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When the 1982 Notice was issued, federal savings associations had a
limited ability to impose prepayment penalties on alternative mortgage
transactions.\10\ While the ability of federal thrifts to impose
prepayment penalties was expanded in 1984,\11\ restrictions were not
removed completely until 1993. At that time OTS allowed prepayment
penalties at any time and in any amount authorized by the loan contract
for both adjustable rate and fixed-rate mortgages.\12\
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\10\ See 12 CFR 545.8-5(b)(1983).
\11\ See 12 CFR 545.34(c)(1984).
\12\ 58 FR 4308 (Jan. 14, 1993). Of course, federal thrifts must
disclose prepayment penalties and late charges under the Federal
Reserve Board's Regulation Z, which implements the Truth in Lending
Act (15 U.S.C. 1601 et seq.). See 12 CFR 226.18(k) and (l).
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In January 1996, OTS proposed to designate additional rules as
applicable under the Parity Act. Specifically, OTS proposed to
designate all of proposed part 560 (rules on the lending powers of
federal savings associations and safety and soundness-based lending
provisions applicable to all savings associations) and proposed
Sec. 563.99 (fixed and adjustable-rate mortgage loan disclosures,
adjustment notices, and interest rate caps).\13\ In the final rule, OTS
deleted the general reference to part 560, and specifically identified
applicable regulations, including new references to late charges and
prepayment provisions.\14\ The list of OTS regulations currently
applicable to state housing creditors now includes the following
sections:
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\13\ 61 FR 1162, at 1166, 1174, and 1181 (January 17, 1996).
\14\ 61 FR 50951, at 50955, and 50969 (September 30, 1996).
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Sec. 560.33. This reference permits state housing
creditors to impose late charges for any delinquent periodic payment
and sets out certain limitations on the assessment of such late
charges.
Sec. 560.34. This reference permits state housing
creditors to impose a prepayment penalty and indicates how prepayments
must be applied.
Sec. 560.35. This section addresses adjustments to
interest rate, adjustments to the payment and loan balance, and the use
of indices.
Sec. 560.210. This reference requires state housing
creditors to provide initial disclosures and adjustment notices for
variable rate transactions.
Housing creditors must comply with these requirements to obtain the
benefit of the Parity Act's preemption of state laws.
On April 5, 2000, OTS published an advance notice of proposed
rulemaking (ANPR) entitled ``Responsible Alternative Mortgage Lending.
65 FR 17811. The ANPR sought public comment on various questions in
connection with its review of mortgage lending regulations. OTS
specifically sought comment about possible amendments to Sec. 560.220.
To the extent that commenters addressed these issues, they are
discussed below.
B. Proposed Sec. 560.220
1. Comments on the ANPR
Consumer groups and states generally urged OTS to limit the
applicability of the Parity Act regulations to enable the states to
better regulate non-depository state housing creditors. These
commenters contended that state housing creditors are taking advantage
of OTS regulations on prepayment penalties and late fees by structuring
otherwise fixed-rate, fixed term loans with features to make them
alternative mortgages and thus avoid state restrictions on these
charges. These commenters specifically suggested removing prepayment
penalties and late fees provisions from the list of regulations
applicable to state housing creditors because those provisions apply to
all mortgage loans (not just alternative transactions), arguing that
they allow non-depository institutions to piggy back on federal
preemption and facilitate predatory practices.\15\
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\15\ OTS does not collect information on housing creditors that
take advantage of the Parity Act. Accordingly, OTS sought data on
the extent to which housing creditors taking advantage of the Parity
Act are engaged in predatory practices and the effect that the
Parity Act has the availability of credit. While commenters offered
anecdotal information, OTS received no comprehensive data in
response to the ANPR.
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Financial institutions and their trade organizations generally
supported the existing Parity Act rules as enhancing credit
availability and enabling lenders to develop new mortgage options. They
argued that if the scope of the Parity Act regulations were
significantly narrowed, state financial institutions potentially could
be required to comply with 51 sets of state requirements, and that this
would increase lending costs to consumers. Some commenters argued the
Parity Act does not limit the scope of regulations applicable to
housing creditors to those provisions concerning only alternative
mortgage transactions.
2. Proposed Revisions to Sec. 560.220
OTS has reviewed the designation of the regulations on prepayments
and late charges in light of the comments on the ANPR and the purposes
of the Parity Act, and is proposing to delete these rules from the list
of provisions that apply to state housing creditors under the Parity
Act.
The Parity Act directs the Bank Board (now OTS), OCC and NCUA to
identify, describe, and publish those regulations that are
``inappropriate for and inapplicable'' to state housing creditors. The
Parity Act, however, provides little guidance to the agencies in
determining which regulations are appropriate. As a result, NCUA, OCC,
OTS, and the Bank Board have taken substantially different approaches
to the designation of rules.
NCUA, for example, has identified all of its lending regulations as
applicable to alternative mortgage transactions by state-chartered
credit unions.\16\ These mortgage regulations address such matters as
the term of the loan, requirements governing security instruments,
notes, and liens, due-on-sale provisions, and assumptions and, as
required under the Federal Credit Union Act, specifically prohibit
prepayment penalties.
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\16\ 12 CFR 701.21(a) states ``[W]hile Sec. 701.21 generally
applies to Federal credit unions only, its provisions may be used by
state-chartered credit unions with respect to alternative mortgage
transactions in accordance with 12 U.S.C. 3801 et seq.''
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In contrast, OCC has designated as applicable to state-chartered
commercial banks its rules that directly relate to adjustable rate
mortgages.\17\ OCC's designated regulations define ARM loans, authorize
certain indexes and allow prepayment fees.
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\17\ 12 CFR 34.24, which applies 12 CFR part 34, subpart B.
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The Bank Board initially identified as appropriate and applicable
those regulations that ``describe and define'' alternative mortgage
transactions and not those regulations intended for the general
supervision of federal associations. Because agency rules on prepayment
penalties and late charges applied to loans generally (as distinguished
from rules that bear directly on the unique features of alternative
mortgage loans), the Bank Board's Parity Act regulation did not
identify these provisions.
In 1996, OTS took a different tack and added provisions on
prepayment and late charges to the list of designated
[[Page 20470]]
regulations. The designation occurred as part of a larger regulatory
project to update and reorganize all of its lending and investment
regulations. The proposed and final rules did not explain the reason
for OTS departure from its predecessor agency's standard.
The proposed rule merely stated in one sentence that OTS would
identify as appropriate and applicable to alternative mortgage
transactions all of part 560 and Sec. 563.99. The preamble to the final
rule, again in one sentence, merely stated that the rule was being
``revised to identify the appropriate sections with greater
specificity,'' and the rule itself then designated four particular
provisions.
Between publication of the proposed and final rules, OTS issued a
legal opinion to address a particular state law on prepayment
penalties.\18\ The opinion concluded that the application of the Parity
Act to a state prepayment provision fell into a gray area between laws
clearly preempted by the Act (those barring variable rate loans) and
those clearly not (those governing liens and foreclosures.) The opinion
recognized that the OTS prepayment provisions applied to all real
estate loans for federal thrifts not just alternative mortgage
transactions, but then simply stated that state housing creditors would
be ``disadvantaged vis-a-vis federal thrifts'' if they had to comply
with the state law restricting prepayment penalties and so concluded
that it was preempted.
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\18\ OTS Op. Chief Counsel (April 30, 1996).
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The purpose of the Parity Act was to enable all housing creditors
to provide credit with alternative mortgage vehicles and to preempt
state laws that would prevent that type of credit.\19\ The designation
of Sec. 560.35 and Sec. 560.210 is essential to enable state housing
creditors to continue to provide alternative mortgages. Accordingly, to
provide parity with federal thrifts, OTS's proposed rule continues to
designate these two provisions.
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\19\ It is of note that the Parity Act makes no reference to
fees or penalties nor does it direct the federal regulators to
consider their impact on alternative mortgages.
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On the other hand, the OTS prepayment and late fee provisions are
not intrinsic to the ability to offer alternative mortgages. We note
that credit unions are barred by statute from imposing prepayment
penalties on any loan, while OCC has specifically designated a
prepayment penalty provision as applying to alternative mortgages. As
for late fees, NCUA has designated its late fee provision as applying,
while OCC has not. As these various approaches illustrate, the agencies
have exercised broad discretion in their designations of appropriate
regulations under the Parity Act and have struck different balances
depending upon their statutory and regulatory scheme.
Certainly there are advantages and disadvantages to each charter
and licensing scheme for the various types of housing creditors.
Federal thrifts operate under a uniform system of safety and soundness
and compliance rules nationwide, with regular examinations and close
supervision. State thrifts have a somewhat similar system governing
operations within their own jurisdictions. Other types of housing
creditors are not bound by these restrictions and have more latitude in
their operations.
OTS is proposing to delete Sec. 560.34 and Sec. 560.33 from the
list of regulations designated for alternative mortgages. These two
regulations apply to real estate loans in general and are part of a
broader regulatory scheme governing the lending operations for federal
thrifts.
OTS recognizes that state housing creditors may view this proposal
as having a discriminatory impact on their ability to offer alternative
mortgages. States that restrict prepayment penalties and late fees
generally apply those restrictions to all real estate loans, not just
to alternative mortgage transactions. The states' laws in these areas
are not directed at restricting alternative mortgage transactions but
in regulating mortgage transactions in general.
One of the congressional findings underlying the Parity Act was
that OTS and the other federal regulators had adopted regulations
authorizing their federally chartered institutions to offer alternative
mortgages, and that the purpose of the Act was to eliminate the
discriminatory impact of those regulations.\20\ OTS regulations on
prepayment penalties and late fees, however, were not adopted to enable
federal thrifts to engage in alternative mortgage financing, but rather
to permit federal thrifts the flexibility to exercise their lending
powers under a uniform federal scheme. See 12 CFR 560.2(a). Therefore,
OTS does not believe that Congress intended that regulations such as
these would offer a basis for claiming discriminatory treatment or were
needed to provide parity with federally chartered institutions. Indeed,
OTS broadly allows federal thrifts to impose loan-related fees (e.g.,
initial charges and servicing fees) on any loan including alternative
mortgages, notwithstanding any state law to the contrary. OTS also
allows federal thrifts to process and originate any loan including
alternative mortgages, without regard to state law. There is no basis
for distinguishing prepayment penalties and late fees from these other
OTS rules that apply generally to loans.
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\20\ 12 U.S.C. 3801(a)(3) and (b).
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Accordingly, OTS proposes to delete the prepayment and late charge
regulations from the list of regulations that apply to state housing
creditors under the Parity Act. Under the proposed rule, OTS would
identify only Sec. 560.35 (adjustments to home loans) and Sec. 560.210
(disclosures for variable rate transactions) as appropriate and
applicable for state housing creditors.
OTS solicits comments on all aspects of this proposal and
specifically requests comments on the following questions:
1. Has OTS correctly identified the factors it must weigh in
determining whether a specific rule should be designated as applicable
for state housing creditors? If not, which factors should OTS consider?
2. Has OTS appropriately and fairly applied these factors? Should
OTS add any other regulations to the proposed list of designated
regulations? Should OTS delete any regulation from the proposed list?
3. The Parity Act requires OTS to designate regulations for state
housing creditors that include both depository institutions (state-
chartered savings associations) and non-depository institutions. By
contrast, OCC and NCUA designations, like the underlying regulations
themselves, apply only to depository institutions (i.e., state
chartered commercial banks and credit unions). Because state-chartered
savings associations are subject to a safety and soundness regulatory
scheme that is similar to that of federal thrifts and substantially
different from other types of state-housing creditors, should OTS treat
state-chartered savings associations differently under the Parity Act?
Should OTS, for example, designate Secs. 563.33 and 563.34 for state
housing creditors that are depository institutions, but not for other
types of state housing creditors? Does the Parity Act authorize OTS to
differentiate between state housing creditors on this basis?
4. Sections 560.33 and 560.34 can be viewed as helping to promote
safe and sound operations. For example, Sec. 560.34 permits federal
thrifts to moderate prepayment risk through the assessment of
prepayment penalties; Sec. 560.33 allows federal thrifts to encourage
the timely payment of loans and to recover costs associated with late
payments. In light of this, is it appropriate to apply these rules to
state-chartered housing
[[Page 20471]]
lenders that are depository institutions? Similarly, based on these
safety and soundness considerations, should OTS apply these rules to
all real estate loans made by state savings associations? What studies
or empirical data exist to support the need to apply these rules to
state savings associations?
C. Recommendations for Statutory Changes
The majority of consumer groups and some states commenting on the
ANPR advocated that OTS recommend that Congress repeal the Parity Act.
These commenters asserted that the Parity Act is no longer needed to
circumvent state restrictions on adjustable rate mortgages since nearly
all states now allow such transactions. These commenters contended that
state housing creditors are now using the Parity Act to defeat states'
attempts to impose reasonable consumer protection laws. Financial
institutions addressing this issue generally opposed repeal of the
Parity Act, because the Act enables financial institutions to offer
uniform loan products across state lines, thereby lowering credit costs
and increasing credit availability. These commenters contended that
other federal laws exist to address predatory lending and consumer
issues.
Legislative actions affecting the Parity Act are, of course, beyond
the scope of this rulemaking. OTS believes, however, that Congress
should revisit the Parity Act, possibly in the context of broader
mortgage reform legislation involving the Real Estate Settlement
Procedures Act (RESPA),\21\ the Home Ownership and Equity Protection
Act (HOEPA),\22\ or predatory lending. In contrast to the situation in
the late 1970s and early 1980s, state regulators tell us that all
states but one currently allow alternative mortgage transactions. If
Congress believes that alternative mortgage transactions merit special
treatment, it may want to consider whether it should enact a statute
that applies equally to all entities providing alternative mortgage
transactions, along the model of Regulation Z.
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\21\ Pub. L. No. 93-533, Sec. 2, (1974), 88 Stat. 1724, 12
U.S.C. 2601 et seq.
\22\ Pub. L. No. 103-325 (1994), 108 Stat. 2160, amending the
Truth in Lending Act, 15 U.S.C. 1601 et seq.
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OTS has two additional recommendations in the event of
Congressional review of the Parity Act. First, if the Act remains in
place, states should be permitted another opportunity to opt out of the
preemption provided by the Parity Act.\23\ Congress originally gave the
states a choice to opt out of the preemption provision so that housing
creditors in that state would be bound by the state's regulations with
respect to alternative mortgage transactions. Initially, the states had
three years from the effective date of the Parity Act, from 1982 to
1985, to opt out of the preemption provisions. At the time, only a
handful of states decided to reject preemption. However, today, with
credit more readily available, the acceptance of alternative mortgage
transactions by the states, and the rising incidence of potentially
predatory lending practices, additional states might possibly elect to
opt out of the Parity Act if given the opportunity.
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\23\ 12 U.S.C. 3804(a).
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Second, OTS recommends that state housing creditors lending under
the authority of the Parity Act be required to identify themselves to
the states. Currently, although the Parity Act provides the states with
a mechanism to remove its preemption benefits from certain housing
creditors, it is difficult for the states to do so without a reliable
means of knowing who is a Parity Act creditor. Housing creditors may
enjoy preemption benefits on alternative mortgage transactions only if
those transactions are in substantial compliance with applicable
federal regulations and the creditor timely cures any error. Loans made
under the aegis of the Parity Act lose the benefit of preemption and
therefore must comply with state law if the housing creditor fails to
cure any error within sixty days of discovery. The recommended
notification provision would permit the states to better monitor the
housing creditors taking advantage of the Parity Act preemption
benefits and those in particular that fail to timely cure any errors.
II. Preemption of State Usury Law (12 CFR Part 590)--Late Fees on
Federally-Related Residential Manufactured Housing Loans
Part 590 implements section 501 of the Depository Institutions
Deregulation and Monetary Control Act of 1980 (DIDMCA) (12 U.S.C.
1735f-7a),\24\ which provides for the permanent preemption of state
laws expressly limiting the rate or amount of interest, discount
points, finance charges, or other charges assessed in connection with
certain ``federally-related'' residential loans.\25\
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\24\ Pub. L. 96-221, 94 Stat. 161 (1980).
\25\ Loans are ``federally-related'' if the originator meets
certain lender criteria, or the loan is classified as a federal
agency loan, a federal housing program loan, or a loan eligible for
purchase by government sponsored enterprises. See 12 CFR 590.2(b).
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This preemption does not apply to loans secured by a first lien on
a residential manufactured home unless the terms and conditions of the
loan comply with consumer protections provisions specified in OTS
regulations at 12 CFR 590.4. These regulations address such matters as
balloon payments, prepayment penalties, late charges, deferral fees,
notice before repossession or foreclosure, and the refund of prepaid
interest. Section 590.4(f) specifically addresses late charges. Among
other requirements, this paragraph states: ``To the extent that
applicable state law does not provide for a lower charge * * * a late
charge on any installment * * * may not exceed the lesser of $5.00 or
five percent of the unpaid amount of the installment.''
Thus, unless the installment on a manufactured housing loan is less
than $100, OTS's rule permits a maximum $5.00 fee for late payments on
such loans. Over the years, OTS has received requests from
representatives of manufactured housing lenders seeking the revision of
this provision. These lenders argue that the $5 amount is too small to
deter late payments. They assert that the absence of a tangible penalty
has contributed to a run-up of delinquencies and repossessions, and to
increases to their costs of funds. Accordingly, these lenders have
sought the deletion of the $5.00 limit.
In today's rule, OTS is proposing to eliminate the $5.00 limit.
Under the proposed rule, the late fee would be limited to five percent
of the unpaid amount of the installment, unless applicable state law
imposes a lesser charge. OTS specifically requests comment whether this
five percent limitation should also be deleted from the final rule.
III. Preemption of State Due-on-Sale Laws (12 CFR Part 591)--
Definition of Reverse Mortgage
OTS regulations at 12 CFR 591 implement section 341 of the Garn St
Germain Depository Institutions Act of 1982 (12 U.S.C.A. 1701j-3).\26\
This part governs the permissibility of due-on-sale clauses in real
estate loans and the preemption of state prohibitions on such clauses.
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\26\ Pub. L. 97-320, 96 Stat. 1469 (1982).
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OTS is proposing a minor technical change to the definition of
reverse mortgage at 12 CFR 591.2(n). The rule would clarify that a
reverse mortgage is not limited to a loan that provides for periodic
payments, but also includes a loan that provides for a lump sum
[[Page 20472]]
payment. This change is consistent with OTS legal opinions.\27\
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\27\ OTS Op. Chief Counsel (June 2, 2000) (reverse mortgage
loans include those providing for a lump sum payment).
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IV. Solicitation of Comments Regarding the Use of Plain Language
Section 722 of the Gramm-Leach Bliley Act \28\ requires federal
banking agencies to use ``plain language'' in all proposed and final
rules published after January 1, 2000. OTS invites comments on how to
make this proposed rule easier to understand. For example:
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\28\ 12 U.S.C. 4809.
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(1) Have we organized the material to suit your needs? If not, how
could the material be better organized?
(2) Do we clearly state the requirements in the rule? If not, how
could the rule be more clearly stated?
(3) Does the rule contain technical language or jargon that is not
clear? If so, what language requires clarification?
(4) Would a different format (grouping and order of sections, use
of headings, paragraphing) make the rule easier to understand? If so,
what changes to the format would make the rule easier to understand?
V. Executive Order 12866
The Director of OTS has determined that this proposed rule does not
constitute a ``significant regulatory action'' for purposes of
Executive Order 12866.
VI. Unfunded Mandates Reform Act of 1995
Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L.
104-4 (Unfunded Mandates Act), requires that an agency prepare a
budgetary impact statement before promulgating a rule that includes a
federal mandate that may result in expenditure by state, local, and
tribal governments, or by the private sector, of $100 million or more
in any one year. If a budgetary impact statement is required, Section
205 of the Unfunded Mandates Act also requires an agency to identify
and consider a reasonable number of regulatory alternatives before
promulgating a rule. OTS has determined that the proposed rule will not
result in expenditures by state, local, or tribal governments or by the
private sector of $100 million or more. Accordingly, a budgetary impact
statement is not required under section 202 of the Unfunded Mandates
Act of 1995.
VII. Regulatory Flexibility Act
When an agency issues a rulemaking proposal, the Regulatory
Flexibility Act (RFA) requires the agency to ``prepare and make
available for public comment an initial regulatory flexibility
analysis'' which will ``describe the impact of the proposed rule on
small entities.'' 5 U.S.C. Sec. 603(a). Section 605 of the RFA allows
an agency to certify a rule, in lieu of preparing an analysis, if the
proposed rulemaking is not expected to have a significant economic
impact on a substantial number of small entities.
Parts 590 and 591. OTS has not prepared an initial regulatory
flexibility analysis (IRFA) for the proposed revisions to part 590 and
part 591. The proposed change to part 590 affects creditors making
federally-related loans secured by first liens on residential
manufactured housing. The proposed change would provide these creditors
with greater flexibility in charging late fees, while retaining the
benefits of preemption of state usury laws under section 501 of DIDMCA.
The current rule permits a limited late fee of $5, which has proven to
be too small to deter late payments. The proposed change permitting the
imposition of a more tangible penalty will benefit all creditors making
such loans, including small businesses. Part 591 permits all lenders,
whether federally- or state-chartered, to exercise due-on-sale clauses
in real property loans without regard to state law. OTS proposes a
clarifying change broadening the definition of reverse mortgage. Since
this change codifies an existing OTS interpretation of the term which
broadens the availability of preemption under part 591, any impact on
lenders should be beneficial. Accordingly, OTS certifies to the Chief
Counsel of Advocacy of the Small Business Administration that the
proposed changes to parts 590 and 591 will not have a significant
economic impact on a substantial number of small entities.
Section 560.210. OTS has performed an IRFA for the proposed
changes to Sec. 560.210.\29\ A description of the reasons why OTS is
considering the proposed change and a statement of the objectives of,
and legal basis for, this aspect of the proposed rule are included in
the supplementary material above. In addition, OTS has addressed the
following topics.
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\29\ OTS questions whether an IRFA is required. The RFA does not
require an agency to analyze the effects of a rule on entities that
it does not regulate. See American Trucking Association, Inc. v.
EPA, 175 F.3d 1027 (D.C. Cir. 1999) (The D.C. circuit held that EPA
was not required to perform a RFA for its national ambient air
quality standards (NAAQS). The NAAQS themselves imposed no
regulations on small entities. Instead, the several states regulated
small entities through the state implementation plans that they were
required to develop under the Clean Air Act. Because the NAASQ
regulated small entities only indirectly--that is, insofar as they
affected the planning decisions of the states--the EPA concluded,
and the D.C. circuit agreed, that small entities were not subject to
the rule.)
As revised, Sec. 560.210 imposes no restrictions or limitations
on any small entity's ability to impose prepayment penalties or late
charges. Rather, the proposed OTS rule would leave the regulation of
these matters entirely to the discretion of the individual states.
As a result, OTS believes that it may certify that the rule will not
have a significant impact on a substantial number of small entities.
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A. Small entities to which the proposed rule would apply
The proposed change to Sec. 560.220 would apply to state housing
creditors other than credit unions or commercial banks. OTS does not
compile data on the total number of state housing creditors that may
utilize Sec. 560.220. Moreover, except for state-chartered savings
associations, OTS does not have any authority to require state housing
creditors to identify themselves or submit other data to OTS.
Similarly, the Parity Act does not require state housing creditors to
notify the states that they are taking advantage of the Act. As a
result, OTS has little information regarding how many state housing
creditors may use Sec. 560.220 or how many of these creditors are small
businesses.
Nonetheless, OTS estimates that 6,386 small state housing creditors
may be affected by this regulation. United States Census data indicates
that 7,257 firms (excluding depository institutions) engage in real
estate credit. OTS estimates approximately 6,300 of these firms are
small businesses.\30\ Based on the most recent TFR data for thrifts,
OTS estimates that an additional 86 state-chartered savings
associations are small businesses.\31\ For the purposes of this
analysis, we have assumed that all 6,386 of these small businesses
engage in alternative mortgage transactions.
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\30\ OTS based this figure on firms engaged in real estate
credit and reported under NAICS 522292. A firm engaged in real
estate credit is considered to be small if it has total receipts of
$5 million or less per year. 13 CFR 121.201. OTS has used the
special tabulation of the 1997 economic census from the United
States Bureau of the Census to determine the number of these firms
and their annual receipts.
\31\ Based on December 2001 TFR data, OTS regulates 138 state
savings associations. Of these savings associations, 86 have assets
of $100 million or less. Small depository institutions are generally
defined, for RFA purposes, as those with assets under $100 million.
See 13 CFR 121.201.
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OTS believes that this number may overstate the number of small
businesses that may be affected by the changes to the proposed rule for
several reasons. First, the use of the Parity Act is solely at the
election of the state housing creditors. State housing creditors may,
for whatever reason,
[[Page 20473]]
decline to use the Parity Act for their alternative mortgage
transactions. Moreover, many small state housing creditors will conduct
alternative mortgage transactions that are governed by laws in states
that either:
Opted out of the Parity Act. State housing creditors
conducting alternative mortgage transactions governed by these laws
currently cannot use Sec. 560.220 to preempt state law; or
Enacted statutes that do not impose any substantive
prohibitions and restriction on prepayment penalties or late charges
for the loans. State housing creditors may continue to charge penalties
and fees on alternative mortgage transactions in these states,
notwithstanding the proposed changes to Sec. 560.220.
OTS's estimate of 6,386 small businesses is based on the best
information available to it. However, OTS encourages any commenter with
access to more complete and more accurate data to submit information
regarding the number of state housing creditors (other than credit
unions or commercial banks) that may be affected by this rule. OTS also
requests information regarding how many of these creditors that may be
small businesses.
B. Requirements of the Proposed Rule
The Parity Act permits certain state housing creditors to make,
purchase, and enforce alternative mortgage transactions without regard
to any state constitution, law or regulation, provided that they comply
with regulations designated by OTS. As described more fully in the
supplementary information section, the proposed rule would revise OTS's
designation of applicable regulations so that it would no longer
designate rules on prepayment and late charges. As a result, these
state housing creditors would be subject to state laws limiting
prepayment penalties and restricting late charges.
OTS is unable to quantify the impact of the proposed revision on
small state housing creditors for several reasons. Based on available
data, it is difficult to determine how many alternative mortgage
transactions were made under the OTS Parity Act regulations. Industry-
wide data is available only for one type of alternative mortgage
transaction--adjustable rate mortgages (ARMs). Other types of mortgages
with alternative features are generally reported as fixed rate
mortgages. The available data, however, indicates that all housing
lenders originated $243.6 billion and $256 billion in ARMs in 2001 and
2000 respectively.\32\ The most recent data available indicated that
state housing creditors (excluding commercial banks and thrifts)
account for approximately 56.3 percent of all lending or $137.1 billion
and $144.1 billion of ARMs in 2001 and 2000.\33\ OTS estimates that
$14.7 billion and $15.4 billion of these ARM loans were originated by
small state housing creditors in 2001 and 2000.\34\ This available
data, however, does not distinguish between transactions that are made
under the Parity Act, and those that are not. As noted above, OTS has
no authority to require state housing creditors that use Sec. 560.220
to provide this information.\35\
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\32\ Mortgage Bankers Association website at www.mbaa.org
indicates that the industry originated $2,030 billion in 1-to 4-
family mortgages in 2001, and $1,024 billion of these loans in 2000,
and that 12% and 25% of these loans were ARMs in 2001 and 2000.
\33\ This information was also obtained on the Mortgage Bankers'
Association's website, which indicates that its source was a HUD
Survey of Mortgage Lending Activity discontinued in 1998. This data
applies to all lending and is based on 1997.
\34\ OTS computed this figure using receipts by real estate
creditors as proxy for originations. Based on these figures, OTS
estimates that small creditors accounted for 10.7% of all ARM
originations by real estate creditors.
\35\ OTS does not currently collect data on the ARM originations
by the 86 small state savings associations. However, 2000 CMR data
indicates that these 86 thrifts hold approximately $815 million of
ARMs in their portfolios. Again, this data does not distinguish
transactions subject to the Parity Act regulations.
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In the ANPR, OTS attempted to obtain additional information on the
extent to which state housing creditors engage in alternative mortgage
transactions under the Parity Act. Commenters, however, provided no
reliable information on this subject.\36\ Nonetheless, OTS encourages
any commenter with access to more complete and more accurate data to
submit information regarding the extent to which small state housing
creditors engage in alternative mortgage lending under Sec. 560.220.
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\36\ Specifically, OTS asked for information regarding predatory
or abusive lending practices that would be contrary to State law but
for the Parity Act. One of the commenters, a trade association
representing a substantial segment of the real estate financing
community, including national and regional lenders, mortgage
brokers, mortgage conduits, and service providers stated that it
``does not have specific numbers regarding the extent to which
lenders are using the Parity Act to craft alternative mortgage
products that would otherwise be affected by state law. Furthermore
[it] knows of no reliable and comprehensive industry data from any
source.''
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OTS further requests information concerning the amount of late fees
and prepayment penalties generated by these alternative mortgage
transactions. OTS notes, however, that reliable estimates of the amount
of late fees and prepayment penalties would not accurately reflect the
impact of the deletion of the preemption of prepayment charge
provisions and late charge provisions. The 6,386 small state creditors
that may be affected by the proposed rule would become subject to a
broad range of state laws. For example, some of these laws would
continue to permit the imposition of prepayment penalties. Others may
prohibit or restrict prepayment charges. Still other laws would subject
prepayment penalties to a range of restrictions, such as prohibiting
penalties for a set period after execution of the note or mortgage or
limiting the amount of the prepayment penalty. Based on this wide
variety of restrictions and the fact that current state laws will
change over time, it is difficult to estimate how much of the income
would be lost by small state housing creditors under the proposed
rule.\37\
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\37\ See ``The Handbook of Mortgage-Backed Securities,'' 88-101
(Frank J. Fabozzi, ed. (5th ed. 2001)), which contains a compilation
of current state laws on prepayment penalties.
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Moreover, the impact of the loss of prepayment penalties may be
ameliorated somewhat through other techniques. For example, lenders
often impose a higher overall interest rate where prepayment penalties
are excluded from the loan agreement.\38\ In addition, some
commentators assert that the payment of points upon origination and the
imposition of a prepayment penalty are economically equivalent
transactions. Since a mortgage with points includes an implicit and
easily calculable prepayment penalty, state housing creditors may
substitute points where prepayment penalties are prohibited.\39\
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\38\ In April 2000, one large subprime lender indicated that it
lowered the interest rate on a loan by 75 basis points for those
borrowers who accepted a prepayment penalty. See Joint HUD/Treasury
Report on Recommendations to Curb Predatory Home Mortgage Lending
(April 20, 2000), citing information from the New Century Mortgage
Corporation website, www.newcentury.com.
\39\ Alan L. Feld & Stephan G. Marks, Legal Differences Without
Economic Distinctions: Points, Penalties, and the Market for
Mortgages, 77 B.U.L. Rev 405 (1977).
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OTS requests information quantifying the impact that the proposed
revision will have on small state housing creditors.
C. Significant Alternatives
Section 603(c) of the RFA requires OTS to describe any significant
alternatives to the proposed rule that accomplish the stated objectives
of the rule while minimizing any significant economic impact of the
rule on small entities. Section 603(c) lists several examples of
significant alternatives,
[[Page 20474]]
including: (1) Establishing different compliance or reporting
requirements or timetables that take into account the resources
available to small entities; (2) clarifying, consolidating, or
simplifying compliance and reporting requirements for small entities;
(3) using performance standards rather than design standards; and (4)
excepting small entities from coverage of the rule or a part of the
rule.
OTS considered retaining its current designation of regulations for
all state housing creditors. For the reasons noted in the preamble
above, OTS believes that this course is inappropriate. OTS also
considered whether it should continue to designate the existing
regulations for small state housing creditors, but not for other state
housing creditors. However, given its analysis of the purposes and
goals of the Parity Act, OTS has concluded that it is inappropriate to
distinguish between small and large state housing creditors. OTS
solicits comment from any other alternatives that would minimize the
burdens on small state housing creditors.
D. Other Matters
Various federal rules or statutes duplicate or overlap with the
proposed rule. NCUA has identified all of its lending regulations as
applicable to alternative mortgage transactions by state-chartered
credit unions. 12 CFR 701.21(a). These regulations address such matters
as the term of the loan, requirements governing security instruments,
notes, liens, due-on-sale provisions, and assumptions and, as required
under the Federal Credit Union Act, specifically prohibit prepayment
penalties. OCC, on the other hand, had designated as applicable to
state-chartered commercial banks, its rules that directly relate to
adjustable rate mortgages. OCC's designated regulations define ARM
loans, authorize certain indexes, and allow prepayment fees. 12 CFR
34.24. In addition, other federal statutes and rules may preempt the
application of state laws on prepayment penalties and late fees for
alternative mortgage transactions by state housing creditors. See e.g.,
12 CFR part 590 (preemption of state usury laws under section 501 of
DIDMCA ) and 12 CFR part 591 (preemption of state due on sale clauses
under section 341 of Garn St Germain Depository Institutions Act of
1982).
OTS is aware of no federal rules or statutes that conflict with the
proposed rule.
VIII. Federalism
Executive Order 13132 imposes certain requirements on an agency
when formulating and implementing policies that have federalism
implications or taking actions that preempt state law. In accordance
with those requirements, OTS has consulted with the Conference of State
Bank Supervisors and the National Association of Attorneys General
concerning this proposed change.
List of Subjects
12 CFR Part 560
Consumer protection, Investments, Manufactured homes, Mortgages,
Reporting and recordkeeping requirements, Savings associations,
Securities.
12 CFR Part 590
Banks, Banking, Loan programs--housing and community development,
Manufactured homes, Mortgages, Savings associations.
12 CFR Part 591
Banks, Banking, Loan programs--housing and community development,
Mortgages, Savings associations.
Accordingly, the Office of Thrift Supervision proposes to amend 12
CFR parts 560, 590, and 591 as set forth below:
PART 560--LENDING AND INVESTMENTS
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, 3801, 3802, 3803, 3806; 42 U.S.C. 4106.
2. Revise Sec. 560.220 to read as follows:
Sec. 560.220 Alternative Mortgage Transactions Parity Act.
(a) Applicable housing creditors. A housing creditor that is not a
commercial bank, a credit union, or a Federal savings association may
make alternative mortgage transactions by following the regulations
identified in paragraph (b) of this section, notwithstanding any state
constitution, law, or regulation. See 12 U.S.C. 3803.
(b) Applicable regulations. OTS designates Secs. 560.35 and 560.210
as appropriate and applicable for state housing creditors. All other
OTS regulations are not identified, and are inappropriate and
inapplicable to state housing creditors. State housing creditors
engaged in credit sales should read the term ``loan'' as ``credit
sale'' wherever applicable in applying these regulations.
PART 590--PREEMPTION OF STATE USURY LAWS
3. The authority citation for part 590 continues to read as
follows:
Authority: 12 U.S.C. 1735f-7a.
4. Revise the section heading and paragraph (f)(4) in Sec. 590.4 to
read as follows:
Sec. 590.4 Federally-related residential manufactured housing loans--
consumer protection provisions.
* * * * *
(f) * * *
(4) To the extent that applicable state law does not provide for a
lower charge or a longer grace period, a late charge on any installment
not paid in full on or before the 15th day after its scheduled or
deferred due date may not exceed five percent of the unpaid amount of
the installment.
* * * * *
PART 591--PREEMPTION OF STATE DUE-ON-SALE LAWS
5. The authority citation for part 591 continues to read as
follows:
Authority: 12 U.S.C. 1464 and 1701j-3.
6. Revise Sec. 591.2(n) to read as follows
Sec. 591.2 Definitions.
* * * * *
(n) Reverse mortgage means an instrument that provides for one or
more payments to a homeowner based on accumulated equity. The lender
may make payment directly, through the purchase of annuity through an
insurance company, or in any other manner. The loan may be due either
on a specific date or when a specified event occurs, such as the sale
of the property or the death of the borrower.
* * * * *
By the Office of Thrift Supervision.
James E. Gilleran,
Director.
[FR Doc. 02-10126 Filed 4-24-02; 8:45 am]
BILLING CODE 6720-01-P