CUNA Regulatory Comment Call

October 9, 2006

Proposed Disclosures for Nontraditional Loans


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 and to Senior Assistant General Counsel Jeff Bloch at; 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.


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.


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:

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.

(The Fed has specifically requested comment on these issues.)

Eric Richard • EVP &General Counsel • (202) 508-6742 •
Mary Mitchell Dunn • SVP & Deputy General Counsel • (202) 508-6736 •
Jeffrey Bloch • Senior Assistant General Counsel • (202) 508-6732 •
Lilly Thomas • Assistant General Counsel • (202) 508-6733 •
Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 •