.21 Nontraditional and Higher-Priced Mortgage Loans.

A. In this regulation, the following terms have the meanings indicated:

(1) "Interest-only mortgage loan" means a mortgage loan on which, for a specified period of time, the borrower is required to:

(a) Pay only the interest due on the mortgage loan; and

(b) After the interest-only period ends, make payments that include both principal and interest.

(2) "Nontraditional mortgage loan" means any mortgage loan that allows the borrower to defer repayment of principal, interest, or both, including, but not limited to, all interest-only mortgage loans and payment-option ARMs.

(3) "Payment-option ARM" means an adjustable rate mortgage loan:

(a) That allows the borrower to choose from a number of different payment options, which may include, but are not limited to:

(i) A minimum payment option based on an introductory interest rate; or

(ii) A fully amortizing principal and interest payment based on a 15-year or 30-year loan term, plus any required escrow payments; and

(b) For which, at a certain point in the mortgage loan term, the monthly payment amount is required to be set at an amount that will fully amortize the outstanding balance of the loan over the remaining loan term.

(4) "Reduced documentation mortgage loan" means a mortgage loan for which the lender sets reduced or minimum documentation standards to substantiate the borrower's income and assets.

B. Marketing and Promotion.

(1) Licensee marketing and promotional communications and materials for nontraditional and higher-priced mortgage loans shall include information about the costs, terms, features, and risks of nontraditional and higher-priced loans that can assist consumers in their product selection, including, as applicable, information on the following:

(a) Payment shock resulting from potential interest rate increases, including how the new payment will be calculated when the introductory fixed-rate period expires;

(b) Negative amortization, including:

(i) That the effect of negative amortization is the increase in the principal mortgage loan amount and the decrease of home equity; and

(ii) Any other negative consequences, such as the possibility that a negatively amortizing mortgage loan could make it more difficult to refinance or to obtain cash upon a sale;

(c) Prepayment penalties that may be imposed if the mortgage, or any part of it, is paid off before maturity, including how any prepayment penalty may be calculated and when it may be imposed;

(d) Balloon payments, including:

(i) That a balloon payment is a scheduled lump sum usually due at the end of the mortgage loan term that is significantly larger than the other regularly scheduled periodic payments; and

(ii) That the inability to make a balloon payment could result in a foreclosure;

(e) Responsibility for taxes and insurance when:

(i) The borrower is required to make payments for real estate taxes and property insurance, in addition to the loan payment; and

(ii) The lender does not establish an escrow account for the collection and disbursement of these payments, including the fact that the cost of taxes and insurance may be substantial; and

(f) Cost of reduced documentation loans when there is a pricing premium attached to a reduced documentation or stated income mortgage loan.

(2) Illustrations.

(a) In complying with this regulation, a licensee may utilize the sample illustrations included in:

(i) The Illustrations of Consumer Information for Nontraditional Mortgage Borrowers issued by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the National Credit Union Administration as final guidance on June 8, 2007; and

(ii) Any consumer information for higher-priced or subprime mortgage lending that may be issued by the foregoing federal regulators or a similar interagency group as final guidance.

(b) A licensee may revise and adapt the illustrations described in §B(2)(a) of this regulation to make them applicable to the specific mortgage loan products offered by the licensee.

C. Risk Management Policies, Procedures, and Control Systems.

(1) A licensee acting as a lender offering nontraditional or higher-priced mortgage loans shall adopt risk management policies, procedures, and controls for these products.

(2) Policies and Procedures.

(a) A licensee acting as a lender that offers or originates nontraditional or higher-priced mortgage loan products shall train its lending personnel to convey information to consumers about the product terms and risks in a timely, accurate, and complete manner. If the lender offers new or additional nontraditional or higher-priced mortgage loan products, the lender shall provide lending personnel with additional training as necessary to enable the lending personnel to convey information to consumers in a timely, accurate, and complete manner. The lender shall monitor lending personnel to determine whether the personnel are conveying information in the manner required.

(b) A licensee acting as a lender shall review consumer complaints to identify potential noncompliance and other risks. The review shall include:

(i) A legal review as appropriate; and

(ii) A review to ensure that compensation programs do not improperly encourage lending personnel to direct consumers to particular products.

(c) A licensee acting as a lender that originates, invests in, or services nontraditional or higher-priced mortgage loan products using a mortgage broker, correspondent, or other third party shall take appropriate steps to ensure third-party practices are consistent with the policies of the lender, including, but not limited to:

(i) Conducting due diligence and establishing other criteria for entering into and maintaining relationships with a third party;

(ii) Designing third-party compensation incentives to avoid nontraditional or higher-priced mortgage loan product originations that are not consistent with the policies of the lender;

(iii) Setting requirements for agreements with a third party;

(iv) Establishing procedures and systems to monitor third-party compliance with applicable agreements, polices, and laws; and

(v) Implementing appropriate corrective actions if a third party fails to comply with applicable agreements, policies, or laws.

(d) A licensee acting as a lender shall establish written polices and procedures to implement the requirements set forth in this subsection.

(3) Control Systems.

(a) A licensee acting as a lender shall design and implement control systems, including quality control, compliance, and audit procedures to focus on mortgage lending activities that pose high risk.

(b) The procedures shall include controls to monitor compliance with underwriting standards and monitor exceptions to those standards.

(c) A licensee acting as a lender shall have systems and controls in place for establishing and maintaining relationships with third-party originators, including procedures for performing due diligence.

(d) Lender oversight of third parties shall involve monitoring the quality of originated nontraditional and higher-priced mortgage loans to ensure that the products:

(i) Reflect the lending standards of the lender; and

(ii) Comply with applicable laws and regulations.

(e) A licensee acting as a lender shall develop and use control systems to monitor whether the lender's actual practices are consistent with the policies and procedures of the lender relating to nontraditional and higher-priced mortgage loans.