P. O. BOX 19999, RALEIGH, NC / 800/ / FAX: 919/ Regulatory Review RR MARCH 25, 2011

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1 FINAL RULE P. O. BOX 19999, RALEIGH, NC / 800/ / FAX: 919/ Regulatory Review RR MARCH 25, 2011 ***************IN THIS ISSUE*************** Truth-in-Lending Rate Threshold For Escrow Requirement...1 PROPOSED RULES Equal Credit Opportunity Model Notices...2 Fair Credit Reporting Risk-Based Pricing Regulations...3 Deposit Insurance Training and Coverage...4 FINAL RULE TRUTH-IN-LENDING RATE THRESHOLD FOR ESCROW REQUIREMENT * Summary/Details: In 1994, the Home Ownership and Equity Protection Act (HOEPA) amended the Truth-in-Lending Act to create special protections for consumers obtaining mortgage loans with annual percentage rates or total points and fees exceeding prescribed thresholds. In 2008, the Federal Reserve Board adopted rules pursuant to HOEPA which defined a class of higher-priced mortgage loans and prohibited certain lending and servicing practices in connection with such transactions. Among the changes made in 2008, the Board prohibited extending a higher-priced mortgage loan secured by a first lien unless an escrow account is established for payment of property taxes and premiums for mortgage-related insurance required by the creditor. A higher-priced mortgage loan is a consumer credit transaction secured by the consumer s principal dwelling with an APR that exceeds the average prime offer rate for a comparable transaction, as of the date the

2 Page 2 transaction s interest rate is set, by 1.5 or more percentage points for loans secured by a first lien, or by 3.5 or more percentage points for loans secured by a subordinate lien. The Dodd-Frank Wall Street Reform and Consumer Protection Act incorporates such thresholds into the Truth-in-Lending Act for loans that do not exceed the maximum original principal obligation for a mortgage to be eligible for purchase by Freddie Mac. For loans that exceed the applicable Freddie Mac maximum principal obligation, a new TILA section requires escrow accounts if the APR exceeds the applicable prime offer rate by 2.5 or more percentage points. Currently, the maximum principal obligation for a mortgage loan to be eligible for purchase in 2011 by Freddie Mac is $417,000 for a single family property that is not located in a designated high-cost area. Thus, if the original principal obligation for the mortgage loan secured by a single-family property in such an area is $415,000, the determination of whether the loan is subject to the escrow requirements would be made by using an APR threshold of 1.5 percentage points over the applicable average prime offer rate. If the original principal obligation is $420,000 (above the $417,000 threshold), the determination would be made using a threshold of 2.5 percentage points over the applicable average prime offer rate. Loans which are not eligible for purchase by Freddie Mac because their principal amount is too large are often referred to as jumbo mortgages. The Federal Reserve Board has adopted a final rule which amends Regulation Z to provide a higher APR threshold for determining whether jumbo mortgage loans secured by a first loan on a consumer s principal dwelling are higher priced mortgage loans for which an escrow account must be established. As revised, the threshold for coverage of the escrow requirement for jumbo loans is 2.5 percentage points (rather than 1.5 percentage points) in excess of the average prime offer rate for a comparable transaction. Such raising of the APR threshold applicable to jumbo loans eliminates mandatory escrow requirements for loans with an APR above the existing threshold but below the new threshold. However, creditors may elect to use the 1.5 percentage point threshold for jumbo loans. The final rule does not apply to certain open-end credit plans or to loans to finance the initial construction of a dwelling, temporary or bridge loans with a term of 12 months or less, or reverse mortgages. The final rule is effective April 1, 2011, for covered loans for which an application is received on or after that date. PROPOSED RULES EQUAL CREDIT OPPORTUNITY MODEL NOTICES

3 Page 3 * Summary/Details: The Equal Credit Opportunity Act makes it unlawful for creditors to discriminate with respect to a credit transaction on a prohibited basis (sex, race, color, religion, national origin, marital status or age). The Act also requires a creditor to provide a credit applicant a notice of adverse action taken with respect to an application for credit. Generally, an adverse action is the denial or revocation of credit, a change in the terms of an existing credit arrangement, or a refusal to grant credit in substantially the amount or on substantially the terms requested. The Fair Credit Reporting Act (FCRA) also requires that a notice be given when the adverse action is based in whole or in part on information in a consumer report. Both the Equal Credit Opportunity Act and the Fair Credit Reporting Act require that certain disclosures be given to consumers. Federal Reserve Board Regulation B, which implements the requirements of the Equal Credit Opportunity Act, sets forth certain model notices that include the content required by both the Equal Credit Opportunity Act and the Fair Credit Reporting Act. The Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Fair Credit Reporting Act to require creditors to disclose on FCRA adverse action notices a credit score used in taking any adverse action and information relating to that score. Such requirement becomes effective on July 21, The Federal Reserve Board proposes to amend the model adverse action notices in Regulation B to reflect the new requirements mandated by the Dodd-Frank Act. The revisions to the model notices, which are contained in Appendix C of Regulation B, are intended to facilitate uniform compliance with the regulation and Dodd-Frank amendments. Specifically, the Board proposes to amend the sample notification Forms C-1 through C-4 (sample notices of action taken) and Form C-5 (sample disclosure of right to request specific reasons for credit denial) to include the disclosure of credit scores and information relating to credit scores if a credit score is used in taking adverse action. Comments must be received on or before April 14, FAIR CREDIT REPORTING RISK-BASED PRICING REGULATIONS * Summary/Details: The Fair and Accurate Credit Transactions Act of 2003 (FACT Act) amended the Fair Credit Reporting Act (FCRA) to address risk-based pricing. Generally, risk-based refers to the practice of setting or adjusting the price and terms of credit offered to a particular consumer to reflect the risk of nonpayment by that consumer. Information contained in a consumer report is often used in evaluating the risk posed by the consumer. The FCRA requires that a creditor provide a risk-based pricing notice to a consumer when a consumer report is used in connection with an extension of credit and, based in whole or in part on the consumer report, extends credit to the consumer on terms that are

4 Page 4 materially less favorable than the most favorable terms available to a substantial portion of consumers. The Dodd-Frank Wall Street Reform and Consumer Protection Act amended the FCRA to require creditors to disclose in risk-based pricing notices a credit score used in making a credit decision and information relating to such credit scores. As required by the Dodd-Frank Act, the Federal Reserve Board proposes to amend its riskbased pricing rules to require the disclosure of credit scores and information relating to credit scores in risk-based pricing notices. Comments with respect to the proposed amendment to the risk-based pricing rules must be submitted to the Board on or before April 14, DEPOSIT INSURANCE TRAINING AND COVERAGE * Summary/Details: Noting that it receives thousands of communications annually from depositors and employees of insured depository institutions relating to deposit insurance coverage issues, the FDIC has published for comment a proposed rule intended to improve access to accurate information about FDIC insurance coverage of accounts at insured depository institutions (IDIs). The proposed rule would add a new section to the FDIC regulations that would require: certain IDI personnel to complete FDIC-provided training on the fundamentals of FDIC deposit insurance coverage, IDI employees to make certain inquiries of the customer when a new deposit account is opened, and IDIs to provide a link to the FDIC s Electronic Deposit Insurance Estimator ( EDIE ) on their Web site. The following is a brief explanation of the three proposed changes to the FDIC rules. IDI Deposit Insurance Coverage Training The proposed rule would require that employees of insured depository institutions who have authority to open deposit accounts and/or respond to customer questions about FDIC deposit insurance coverage complete a computer-based instructional program. The program would explain the fundamentals of deposit insurance coverage and would be provided to an insured depository institution by the FDIC. The FDIC estimates that it would take approximately two hours for most employees to complete the self-administered training program. All employees would be required to complete the training once during every 12-month period and new employees would be required to complete the training within 30 days of the commencement of their employment. Upon adoption of a final rule by the FDIC requiring such training, IDI employees would be required to take the training within 60 days of the effective date. Inquiry of Customer to Determine Insured Status The proposed rule requires that depository institutions implement procedures ensuring that employees opening new deposit accounts inquire whether the customer has an ownership interest in any other accounts at the institution. If the customer indicates that he or she does have other accounts at the institution, the employee must inquire whether the customer s aggregate ownership interest in deposit accounts, including the new account, exceeds the standard

5 Page 5 maximum deposit insurance amount (SMDIA). The SMDIA currently is $250,000. If the customer indicates that his or her aggregate ownership interest does exceed the SMDIA, the IDI employee must provide the customer with the FDIC s Deposit Insurance Summary publication. Where a deposit account is opened by mail or via the Internet, such inquiry can be included in the paper or electronic application form, with the link to the Deposit Insurance Summary publication provided. Link to EDIE The proposed rule would require that an insured depository institution provide a link to EDIE on any Web site it maintains for use by customers. A link to EDIE can be provided at no cost in two ways: via Online EDIE or Brandable EDIE. Online EDIE is available directly from the FDIC s Web site at Brandable EDIE can be accessed free from FDIC Connect. Edmund D. Aycock Senior Vice President and Regulatory Counsel Nathan R. Batts Associate Counsel *************** The Regulatory Review is intended to provide a concise summary rather than complete analysis of the regulations covered. Reference should be made to the regulation itself for a determination of its application to your particular circumstances.