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CUNA Regulatory Comment Call

October 9, 2006

EXECUTIVE SUMMARY

• The Federal financial institution regulators have requested comments on proposed disclosures, or illustrations, that financial institutions can provide to borrowers who are considering nontraditional loans. These include “interest only” mortgages in which the borrower has the option to pay no principal for a fixed period of time and “payment option” adjustable-rate mortgages in which the borrower has flexible payment options, including the option to pay less than the interest owed, resulting in negative amortization.
• These illustrations are intended to assist institutions in implementing the consumer protection provisions of the Interagency Guidance on Nontraditional Mortgage Products Risks (Guidance), which was recently issued in final form. Although the Guidance outlines the type of information that should be provided to consumers, the use of these specific disclosures will not be required. They are only intended to serve as illustrations of the information described in the Guidance.
• Comments on these proposed disclosures will be due by December 4, 2006. Please submit your comments to CUNA by November 27, 2006.

Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Senior Vice President and Deputy General Counsel Mary Dunn at mdunn@cuna.com and to Senior Assistant General Counsel Jeff Bloch at jbloch@cuna.com; or mail them to Mary and Jeff in c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, DC 20004-2601. You may also contact us at 800-356-9655, ext. 6032, if you would like a copy of the proposal, or you may access here.

BACKGROUND

In recent years, consumer demand has grown rapidly, particularly in high-priced real estate markets, for mortgage loans that allow borrowers to defer the payment of principal, as well as interest. These nontraditional mortgage loans, which include “interest only” and “payment option” adjustable mortgages, have been available in similar forms for many years. They allow borrowers to pay only the interest on the loan for a fixed period of time. The “payment option” loans, commonly referred to as “option ARMs,” also allow borrowers to pay less than the interest owed, resulting in negative amortization in which the loan balance increases. This allows borrowers to make lower payments during an initial period of time in exchange for higher payments later, as compared to traditional fixed-rate mortgages. These types of loans offer payment flexibility and can be an effective financial tool for certain borrowers.

As a result, the agencies proposed the Guidance earlier this year to clarify how financial institutions should offer these loans in a safe and sound manner and in a way that clearly discloses the potential risks that the borrower assumes. The Guidance was recently issued in final form, along with the proposed disclosures, or illustrations, of the information that should be provided to consumers, as outlined in the consumer protection portions of the Guidance.

BRIEF DESCRIPTION OF THE PROPOSED DISCLOSURES

The use of these proposed disclosures or illustrations is entirely voluntary and there is no expectation that institutions must use them in their communications with consumers. Institutions that follow the recommendations in the Guidance may choose to:

• Use or not use the illustrations
• Provide information based on the illustrations, but tailor the information as appropriate to reflect, for example:
  • The institution’s product offerings, which may differ than those outlined in the illustrations.
  • The consumer’s particular loan requirements.
  • Current market conditions that may reflect changes in loan amounts, interest rates, and payment amounts.
  • Other information, such as when prepayment penalties are imposed and the payment and loan balance information included in the monthly statements provided to borrowers who have “payment option” loans.

Regardless of whether the these illustrations are used, the Guidance recommends that the financial institution’s promotional materials and other product descriptions include information about the costs, terms, features, and risks of nontraditional loans to assist consumers with their loan product decisions. This includes information about possible, substantial increases in the monthly payments, negative amortization, prepayment penalties, and the costs of reduced documentation loans. This information can be provided in either a narrative form or in a chart.

Click here and refer to pages 11 through 17 for the three illustrations that could be used to provide this information, along with additional information that is specific with each of these illustrations.

• Will these illustrations help consumers understand the risk and terms of these nontraditional loans? Will they be useful to institutions that offer nontraditional loans? What changes should be made to make them more helpful to consumers and useful for institutions offering such loans?
  
  

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• Is the information in the illustrations set forth in a clear manner? Are there other illustrations that would be useful for consumers and financial institutions that could be used instead of or in addition to the ones proposed?
  
  

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• Other comments?
  
  

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