Appendix A to Part 1004 - Official Commentary on Regulation D
12:8.0.2.1.5.0.1.5.13 : Appendix A
Appendix A to Part 1004 - Official Commentary on Regulation D §
1004.1 Authority, Purpose, and Scope 1(c) Scope.
1. Application received before July 22, 2011. This part
does not apply to a transaction if the creditor received the
application for that transaction before July 22, 2011, even if the
transaction was consummated or completed on or after July 22, 2011.
Whether 12 U.S.C. 3803(c) preempts State law with respect to such a
transaction depends on whether: (1) The transaction was an
alternative mortgage transaction as defined by the version of 12
U.S.C. 3802(1) in effect at the time of application; and (2) the
State housing creditor complied with applicable federal regulations
issued by the Office of the Comptroller of the Currency, the
National Credit Union Administration, the Office of Thrift
Supervision, or the Federal Home Loan Bank Board in effect at the
time of application.
2. Subsequent modifications and other actions. If
applicable regulations under 12 U.S.C. 3803(c) (including this
Part) preempted State law with respect to an alternative mortgage
transaction at the time the application was received, the following
actions with respect to that transaction are entitled to the same
degree of preemption under such regulations:
i. The subsequent consummation, completion, purchase, or
enforcement of the transaction by a housing creditor.
ii. The subsequent modification, renewal, or extension of the
transaction. However, if such a transaction is satisfied and
replaced by another transaction, the second transaction must
independently meet the requirements for preemption in effect at the
time the application for the second transaction was received.
§ 1004.2 Definitions 2(a) Alternative Mortgage Transaction
1. Alternative mortgage transaction. For purposes of this
Part, an alternative mortgage transaction that meets the definition
in § 1004.2(a) includes any consumer credit transaction that is
secured by a mortgage, deed of trust, or other equivalent
consensual security interest in a dwelling or in residential real
property that includes a dwelling. The dwelling need not be the
primary dwelling of the consumer. Home equity lines of credit and
subordinate lien mortgages are alternative mortgage transactions
for purposes of this part to the extent they meet the definition in
§ 1004.2(a).
2. Examples of alternative mortgage transactions.
Examples of alternative mortgage transactions include:
i. Transactions in which the interest rate changes in accordance
with fluctuations in an index.
ii. Transactions in which the interest rate or finance charge
may be increased or decreased after a specified period of time or
under specified circumstances.
iii. Balloon transactions in which payments are based on an
amortization schedule and a large final payment is due after a
shorter term, where the creditor makes a commitment to renew the
transaction at specified intervals throughout the amortization
period, but the interest rate may be renegotiated at renewal. For
example, a fixed-rate mortgage loan with a 30-year amortization
period but a balloon payment due five years after consummation is
an alternative mortgage transaction under § 1004.2(a) if the
creditor commits to renew the mortgage at five-year intervals for
the entire 30-year amortization period.
iv. Transactions in which the creditor and the consumer agree to
share some or all of the appreciation in the value of the property
(shared equity/shared appreciation).
However, this part preempts State law only to the extent
provided in § 1004.3 and only to the extent that the requirements
of § 1004.4(a) through (c) (as applicable) are met.
3. Examples of transactions that are not alternative mortgage
transactions. The following are examples of transactions that
are not alternative mortgage transactions:
i. Transactions with a fixed interest rate where one or more of
the regular periodic payments may be applied solely to accrued
interest and not to loan principal (an interest-only feature).
ii. Balloon transactions with a fixed interest rate where
payments are based on an amortization schedule and a large final
payment is due after a shorter term, where the creditor does not
make a commitment to renew the transaction at specified intervals
throughout the amortization period.
iii. Transactions with a fixed interest rate where one or more
of the regular periodic payments may result in an increase in the
principal balance (a negative amortization feature).
2(b) Creditor
1. Creditor. As defined in 12 CFR 226.2, “creditor”
includes federally and State-chartered banks, thrifts, and credit
unions, as well as non-depository institutions, such as
State-licensed lenders. The Official Staff Commentary to 12 CFR
226.2 contains additional guidance on the definition of the term
“creditor.” See 12 CFR 226.2, Supp. I.
§ 1004.3 Preemption of State Law
1. Scope of State laws. Regardless of whether a State law
applies solely to alternative mortgage transactions or applies to
both alternative mortgage transactions and other mortgage or
consumer credit transactions, that law is preempted by § 1004.3
only to the extent that it restricts the ability of a
State-chartered or -licensed housing creditor to adjust or
renegotiate an interest rate or finance charge with respect to an
alternative mortgage transaction or to change the amount of
interest or finance charges included in a regular periodic payment
as a result of such an adjustment or renegotiation.
2. Examples of State laws that are preempted. The
following are examples of State laws that are preempted by §
1004.3:
i. Restrictions on the adjustment or renegotiation of an
interest rate or finance charge, including restrictions on the
circumstances under which a rate or charge may be adjusted, the
method by which a rate or charge may be adjusted, and the amount of
the adjustment to the rate or charge. For example, if a provision
of State law prohibits creditors from increasing an adjustable rate
more than two percentage points or from increasing an adjustable
rate more than once during a year, that provision is preempted by §
1004.3 with respect to alternative mortgage transactions that
comply with § 1004.4(a) through (c), as applicable. Similarly, if a
provision of State law prohibits housing creditors from renewing
balloon transactions that meet the definition of an alternative
mortgage transaction in § 1004.2(a) on different terms, that
provision is preempted by § 1004.3 only to the extent that it
restricts a state housing creditor's ability to adjust or
renegotiate the interest rate or finance charge at renewal. See
also comment 1004.3-3.i.
ii. Restrictions on the ability of a housing creditor to change
the amount of interest or finance charges included in regular
periodic payments as a result of the adjustment or renegotiation of
an interest rate or finance charge. For example, if a provision of
State law prohibits housing creditors from increasing payments or
limits the amount of such increases with respect to both
alternative mortgage transactions and other mortgage or consumer
credit transactions, that provision is preempted by § 1004.3 to the
extent that it restricts a housing creditor's ability to adjust
payments as a result of the adjustment or renegotiation of an
interest rate on an alternative mortgage transaction. Other
restrictions on changes to payments are not preempted, including
restrictions on transactions in which one or more of the regular
periodic payments may result in an increase in the principal
balance (a negative amortization feature) or may be applied solely
to accrued interest and not to loan principal (an interest-only
feature).
iii. Restrictions on the creditor and the consumer sharing some
or all of the appreciation in the value of the property (shared
equity/shared appreciation).
iv. Underwriting requirements that address the adjustment or
renegotiation of interest rates or finance charges. For example, if
a provision of State law requires housing creditors to underwrite
based on the maximum contractual rate, that provision is preempted
by § 1004.3 with respect to alternative mortgage transactions,
regardless of whether the provision applies solely to alternative
mortgage transactions or to both alternative mortgage transactions
and other mortgage or consumer credit transactions.
3. Examples of State laws that are not preempted. The
following are examples of State laws that are not preempted by §
1004.3 regardless of whether the provision applies solely to
alternative mortgage transactions or to both alternative mortgage
transactions and other mortgage or consumer credit
transactions:
i. Restrictions on prepayment penalties or late charges
(including an increase in an interest rate or finance charge as a
result of a late payment).
ii. Restrictions on transactions in which one or more of the
regular periodic payments may result in an increase in the
principal balance (a negative amortization feature) or may be
applied solely to accrued interest and not to loan principal (an
interest-only feature).
iii. Requirements that disclosures be provided.
§ 1004.4 Requirements for Alternative Mortgage Transactions 4(a)
Mortgages With Adjustable or Renegotiable Rates or Finance Charges
and Home Equity Lines of Credit
1. Index values. A creditor may use any measure of index
values that meets the requirements in § 1004.4(a)(2)(i). For
example, the index may be either single values as of a specific
date or an average of values calculated over a specified
period.
2. Index beyond creditor's control. A creditor may
increase an adjustable interest rate pursuant to § 1004.4(a)(2)(i)
only if the increase is based on an index that is beyond the
creditor's control. For purposes of § 1004.4(a)(2)(i), an index is
not beyond the creditor's control if the index is the creditor's
own prime rate or cost of funds. A creditor is permitted, however,
to use a published prime rate, such as the prime rate published in
the Wall Street Journal, even if the creditor's own prime
rate is one of several rates used to establish the published
rate.
3. Publicly available. For purposes of § 1004.4(a)(2)(i),
the index must be available to the public. A publicly available
index need not be published in a newspaper, but it must be one the
consumer can independently obtain (by telephone, for example) and
use to verify the annual percentage rate applied to the alternative
mortgage transaction.
4(c) Requirements for High-Cost and Higher-Priced Mortgage Loans
1. Prepayment penalties. If applicable, creditors must
comply with 12 CFR 226.32, including 12 CFR 226.32(d)(6) and (d)(7)
which provide limitations on prepayment penalties. Similarly, if
applicable, creditors must comply with 12 CFR 226.35, including 12
CFR 226.35(b)(2), which also provides limitations on prepayment
penalties. However, under § 1004.3, State laws regarding prepayment
penalties are not preempted. See comment 1004.3-3.i.
Accordingly, creditors must also comply with any State laws
regarding prepayment penalties unless an independent basis for
preemption exists, such as because the State law is inconsistent
with the requirements of Regulation Z, 12 CFR part 226. See
12 CFR 226.28.
4(d) Other Applicable Law
1. Other applicable law. Section 1004.4(d) permits state
housing creditors that do not seek preemption under § 1004.3 and
federal housing creditors to make alternative mortgage transactions
consistent with applicable State or federal law other than §
1004.4(a) through (c). However, § 1004.4(d) does not exempt those
housing creditors from complying with the provisions of federal law
that are incorporated by reference in § 1004.4 and are otherwise
applicable to the creditor. Specifically, nothing in § 1004.4(d)
exempts a housing creditor from complying with 12 CFR 226.5b,
226.32, 226.34, or 226.35.