FTC Staff Comment Before the Federal Reserve Concerning Proposed Rule to Restrict Certain Mortgage Practices Under TILA

BEFORE THE
BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
In the Matter of
Request for Comments on Truth in Lending, Proposed Rule
Docket No. R-1305
Comments of the Staff of
the Bureau of Consumer Protection,
the Bureau of Economics,
and the Office of Policy Planning
of the Federal Trade Commission
April 8, 2008*
___________________________________________________________________
*These comments represent the views of the staff of the Bureau of Consumer
Protection, the Bureau of Economics, and the Office of Policy Planning of the
Federal Trade Commission. They do not necessarily represent the views of
the Federal Trade Commission or any individual Commissioner. The
Commission has, however, voted to authorize the staff to submit these
comments.
___________________________________________________________________

Truth In Lending, Proposed Rule, 73 Fed. Reg. 1672 (proposed Jan. 9, 2008), available	1
at http://a257.g.akamaitech.net/7/257/2422/01jan20081800/edocket.access.gpo.gov/2008/pdf/
E7-25058.pdf.
15 U.S.C. § 1601-1666j (requiring disclosures and establishing other requirements in	2
connection with consumer credit transactions).
15 U.S.C. § 1639 (amending TILA to provide additional protections for consumers who	3
enter into certain high-cost refinance mortgage loans).
15 U.S.C. § 45(a).	4
Materials on mortgage issues are available at the Commission’s For Consumers Credit	5
web page, at http://www.ftc.gov/bcp/menus/consumer/credit.shtm, under the category Mortgages/Real
Estate. The web page includes consumer education materials such as “Mortgage Payments Sending You
Reeling? Here’s What to Do,” “High-Rate, High-Fee Loans (HOEPA/Section 32 Mortgages),” and
“Reverse Mortgages: Get the Facts Before Cashing In On Your Home’s Equity.”
2
I. 	Introduction
On January 9, 2008, the Federal Reserve Board (“Board” or “FRB”) published a Proposed
Rule restricting certain mortgage practices under the Truth in Lending Act and the Home
Ownership Equity Protection Act. 	Staff of the Federal Trade Commission’s Bureau of1
Consumer Protection, Bureau of Economics, and Office of Policy Planning (“FTC Staff”)
appreciates the opportunity to file this comment on the Proposed Rule.
As the primary federal agency that enforces consumer credit laws with respect to non-
depository institutions, the Commission has wide-ranging responsibility regarding consumer
financial issues in the mortgage market, including those involving mortgage lenders, brokers, and
servicers. The FTC enforces a number of federal laws governing mortgage lending, including the
Truth in Lending Act (“TILA”) and the Home Ownership and Equity Protection Act2
(“HOEPA”). 	The Commission also enforces Section 5 of the Federal Trade Commission Act3
(“FTC Act”), which more generally prohibits unfair or deceptive acts and practices in the
marketplace. 	In addition, the Commission conducts research on mortgage lending and related4
topics, develops consumer and business education materials, responds to inquiries about these5
matters from consumers, industry and the media, and works with other federal and state law
enforcement entities to protect consumers from unfair or deceptive mortgage lending and
servicing practices.
The FTC staff recognizes that, in the past year, there has been a sharp increase in
delinquencies and foreclosures in the mortgage lending market, especially the subprime
mortgage market. In 2007, there were an estimated 2.2 million foreclosure filings in the United

See generally Foreclosure Aftermath: Preying on Senior Homeowners: Hearing Before	6
Senate Special Committee on Aging, 110 	Cong. 1 (2008) (Prepared Statement of the Federal Trade	th
Commission on Foreclosure Rescue Fraud), available at
http://www.ftc.gov/os/testimony/P064814foreclosure.pdf.
FTC v. Safe Harbour Found. of Fl., Inc., No. 08-1185 (N.D. Ill. 2008); FTC v.	7
Mortgages Para Hispanos.Com Corp., No. 06-00019 (E.D. Tex. 2006); FTC v. Ranney, No. 04-1065 (D.
Colo. 2004); FTC v. Chase Fin. Funding, Inc, No. 04-549 (C.D. Cal. 2004); United States v. Fairbanks
Capital Corp., No. 03-12219 (D. Mass. 2003); FTC v. Diamond, No. 02-5078 (N.D. Ill. 2002); United
States v. Mercantile Mortgage Co., No. 02-5079 (N.D. Ill. 2002); FTC v. Associates First Capital Corp.,
No. 01-00606 (N.D. Ga. 2001); FTC v. First Alliance Mortgage Co., No. 00-964 (C.D. Cal. 2000);
United States v. Action Loan Co., No. 00-511 (W.D. Ky. 2000); FTC v. NuWest, Inc., No. 00-1197 (W.D.
Wash. 2000); United States v. Delta Funding Corp., No. 00-1872 (E.D.N.Y. 2000); FTC v. Cooper
Props., No. 99-07782 (C.D. Cal. 1999); FTC v. Capitol Mortgage Corp., No. 99-580 (D. Utah 1999);
FTC v. CLS Fin. Serv., Inc., No. 99-1215 (W.D. Wash. 1999); FTC v. Granite Mortgage, LLC, No. 99-
289 (E.D. Ky. 1999); FTC v. Interstate Res. Corp., No. 99-5988 (S.D.N.Y. 1999); FTC v. LAP Fin. Serv.,
Inc., No. 99-496 (W.D. Ky. 1999); FTC v. Wasatch Credit Corp., No. 99-579 (D. Utah 1999); In re
FirstPlus Fin. Group, Inc., FTC Docket No. C-3984 (2000); In re Fleet Fin., Inc., FTC Docket No. C-
3899 (1999); FTC v. Capital City Mortgage Corp., No. 98-00237 (D.D.C. 1998).
3
States, a 75% increase from 2006. 	Given the recent problems in the marketplace, the FTC staff6
generally supports efforts to improve the mortgage lending process for consumers.
The following comments on the Proposed Rule are based on the staff’s consumer
protection experience in the mortgage market and its research on consumer mortgage disclosures.
First, the comment describes the unfair and deceptive practices challenged in the Commission’s
law enforcement actions and research on mortgage disclosure issues conducted by Commission
staff. Second, it assesses the Board’s proposals and concludes that the restrictions on appraisal,
servicing, and advertising practices, and the revised timing requirement for disclosures, would be
beneficial for consumers. The comment also notes that while the proposed restrictions for
higher-cost loans appear to strike a reasonable balance, staff encourages the Board to continue to
use its expertise to weigh the potential benefits and costs of the proposed restrictions and to
consider any empirical evidence submitted in response to its Notice of Proposed Rulemaking to
confirm that this balance is reasonable. Third, it assesses the Board’s proposal regarding broker
compensation disclosures and recommends an alternative approach.
II. 	Commission Law Enforcement Activity in Response to Unfair or Deceptive
Practices in the Mortgage Lending Market
The Commission’s law enforcement actions have targeted deception and other illegal
practices in the mortgage market, focusing in particular on the subprime market. In recent years,
the agency has brought 22 actions against companies and principals in the mortgage lending
industry, involving companies large and small in various regions of the country. 	Several of7
these cases have resulted in large monetary judgments, collectively returning more than $320

FTC v. Associates First Capital Corp., No. 01-00606 (N.D. Ga. 2001).	8
FTC v. Associates First Capital Corp., No. 01-00606 (N.D. Ga. Sept. 19, 2002) (Order	9
Preliminarily Approving Stipulated Final Judgment and Order). Defendants paid an additional $25
million to settle a concurrent class action.
Lew Sichelman, Loan Brokers Lose Share, But Still Rule the Market, REALTY T IM ES,	10
July 18, 2007, http://realtytimes.com/rtcpages/20070718_loseshare.htm; Press Release, Wholesale
Access, New Research About Mortgage Brokers Published (July 28, 2005), available at
http://www.wholesaleaccess.com/7_28_mbkr.shtml.
FTC v. Chase Fin. Funding, Inc., No. 04-549 (C.D. Cal. 2004); FTC v. Diamond, No.	11
02-5078 (N.D. Ill. 2002). Prepayment penalties on subprime loans are deceptive when originators lead
consumers to believe that their loans do not include prepayment penalties when in fact they do. For
example, a borrower who holds a 2/28 subprime loan with a 3-year prepayment penalty, and whose
creditor has misrepresented that the borrower could refinance without penalty before the loan is recast,
has been subject to a deceptive practice in loan marketing.
4
million to consumers. These enforcement actions have targeted deceptive or unfair practices in
all stages of mortgage lending – from advertising and marketing through loan servicing – by
mortgage lenders, brokers, and loan servicers. The insights from the Commission’s law
enforcement experience and research informs the FTC staff’s view of the Proposed Rule.
In most of its mortgage lending cases, the Commission has challenged alleged deception
in the advertising or marketing of subprime loans. For example, the FTC’s complaint against a
large subprime mortgage lender, Associates First Capital Corporation and Associates
Corporation of North America (“The Associates”), alleged that the defendants marketed
subprime mortgage loans through false and misleading statements about loan costs. 	The8
Associates represented that consumers would save money when consolidating their existing
debts, but these “savings” claims did not take into account the loan fees and closing costs the
company typically added to the consumers’ loan amounts. Further, the claims did not reveal that,
for certain Associates loans, consumers would pay only interest and would still owe the entire
principal amount in a “balloon” payment at the end of the loan term. The complaint also
challenged as deceptive the Associates’ practice of including single-premium credit insurance in
loans, without disclosing its inclusion to consumers. The defendants paid a record-setting $215
million in consumer redress to settle the FTC complaint. 9
In recent years, mortgage brokers have become an important part of the mortgage market,
originating between 58-70% of mortgage loans. 	The Commission has brought several10
enforcement actions against these entities for allegedly deceiving consumers about key loan
terms, such as the existence of a prepayment penalty 	or a large balloon payment due at the end11

FTC v. Diamond, supra note 7.	12
FTC v. Chase Fin. Funding, Inc., supra note 7; FTC v. Ranney, supra note 7; FTC v.	13
Diamond, supra note 7.
FTC v. Chase Fin. Funding, Inc., supra note 7.	14
FTC v. Mortgages Para Hispanos.Com Corp., supra note 7.	15
FTC v. Mortgages Para Hispanos.Com Corp., No. 06-00019 (E.D. Tex. Sept. 25, 2006)	16
(Stipulated Final Judgment and Order of Permanent Injunction).
Press Release, FTC, FTC Warns Mortgage Advertisers and Media That Ads May Be	17
Deceptive (Sept. 11, 2007), available at http://www.ftc.gov/opa/2007/09/mortsurf.shtm.
5
of the loan. 	Similarly, the Commission has charged brokers with falsely promising consumers12
low fixed payments and rates on their mortgage loans. 	For example, in June 2004, the13
Commission sued Chase Financial Funding (“CFF”), a California mortgage broker, and its
principals, in connection with sending unsolicited email and direct mail promising a “3.5% fixed
payment loan.” 	The FTC alleged that CFF did not offer any such loan and that the loan CFF14
falsely advertised was actually a “payment option” adjustable rate mortgage in which interest
accrued at a rate higher than advertised, the principal balance would increase if consumers made
payments at the advertised rates, and payments were not “fixed.”
In 2006, the Commission filed suit against a mortgage broker for allegedly deceiving
Hispanic consumers who sought to refinance their homes by misrepresenting numerous key loan
terms. 	The alleged conduct was egregious because the lender conducted business with his15
clients almost entirely in Spanish but then provided at closing loan documents in English
containing less favorable terms. In a settlement, the court entered a suspended judgment of
$240,000 against the broker, and the broker paid $10,000 in consumer redress based on a
documented inability to pay the full judgment amount. The court also entered a permanent
injunction prohibiting the broker from misrepresenting loan terms. 16
Recently, in September 2007, the Commission announced that it was warning mortgage
brokers and lenders, and media outlets that carry their advertisements for home mortgages, that
some advertising claims may violate federal law. 	In warning letters, the agency advised over17
200 advertisers and media outlets that certain mortgage ads may be deceptive in violation of
Section 5 of the FTC Act or may violate the TILA. The ads, including some in Spanish, were
identified in June 2007 during a nationwide review focused on claims for very low interest rates
or monthly payment amounts without adequate disclosure of other important loan terms. The
Commission will continue to monitor the claims made in mortgage advertising and take further
action in appropriate cases.

United States v. Fairbanks Capital Corp., No. 03-12219 (D. Mass. 2003); FTC v. Capital	18
City Mortgage Corp., No. 98-00237 (D.D.C. 1998).
United States v. Fairbanks Capital Corp., No. 03-12219 (D. Mass. Nov. 21, 2003)	19
(Order Preliminarily Approving Stipulated Final Judgment and Order as to Fairbanks Capital Corp. and
Fairbanks Capital Holding Corp.); United States v. Fairbanks Capital Corp., No. 03-12219 (D. Mass.
Nov. 21, 2003) (Stipulated Final Judgment and Order as to Thomas D. Basmajian). After the
Commission conducted a compliance review of the company in 2007, it filed a joint motion with
defendants to modify the 2003 consent order. The order provides substantial benefits to consumers
beyond those in the original order, including refunds of fees paid in certain circumstances. United States
v. Fairbanks Capital Corp., No. 03-12219 (D. Mass. Sept. 6, 2007) (Modified Stipulated Final Judgment
and Order).
FTC, BUREAU OF E CONOM ICS S TAFF REPORT , J AM ES M. L ACKO & J ANIS K.	20
P APPALARDO , IM PROVING CONSUM ER M ORTGAGE DISCLOSURES : AN E M PIRICAL ASSESSM ENT OF
CURRENT AND P ROTOTYPE DISCLOSURE F ORM S (2007), available at
http://www.ftc.gov/os/2007/06/P025505mortgagedisclosurereport.pdf (Mortgage Disclosure Study); and
FTC, BUREAU OF E CONOM ICS S TAFF REPORT , J AM ES M. L ACKO & J ANIS K. P APPALARDO , T HE E FFECT
OF M ORTGAGE BROKER COM PENSATION DISCLOSURES ON CONSUM ERS AND COM PETITION : A
CONTROLLED E XPERIM ENT (2004), available at
http://www.ftc.gov/os/2004/01/030123mortgagefullrpt.pdf (Mortgage Broker Compensation Study).
6
The Commission also has challenged allegedly deceptive and unfair practices in the
servicing of mortgage loans. 	For example, in November 2003, the Commission, along with the18
Department of Housing and Urban Development (“HUD”), announced a settlement with
Fairbanks Capital Corp. and its parent company. The Commission alleged that Fairbanks (now
called Select Portfolio Servicing, Inc.) failed to post consumers’ payments upon receipt, charged
unauthorized fees, used dishonest or abusive tactics to collect debts, and reported consumer
payment information that it knew to be inaccurate to credit bureaus. To resolve these charges,
Fairbanks and its former chief executive officer paid over $40 million in consumer redress,
agreed to halt the alleged illegal practices, and implemented significant changes to company
business practices.19
In addition to pursuing numerous law enforcement actions in the mortgage lending
market, Commission staff also has conducted research on mortgage lending issues, including two
recent studies of consumer mortgage disclosures. 	The studies were conducted, in part, because20
the Commission’s law enforcement experience has demonstrated that current mortgage
disclosures are often ineffective in preventing deception. This research builds on FTC staff’s
substantial experience evaluating the role of consumer information and disclosures in a wide
variety of markets.
One study, based on thirty-six in-depth interviews with recent mortgage customers and
quantitative testing with over 800 mortgage customers, examined whether current federal
mortgage disclosures effectively conveyed loan information to consumers and whether the

See FTC Staff’s Mortgage Disclosure Study, supra note 20.	21
See FTC Staff’s Mortgage Broker Compensation Study, supra note 20.	22
Truth in Lending, Proposed Rule, 73 Fed. Reg. at 1673.	23
7
disclosures could be improved. The study found that current mortgage disclosure forms fail to
convey key mortgage costs and terms to many consumers, even for relatively simple, fixed-rate,
fully-amortizing loans, and that it is possible to create significantly better disclosures that help
consumers understand the costs and terms their mortgages. 	The study found that, with current21
disclosures, both prime and subprime borrowers misunderstood key loan terms, and both groups
benefitted significantly from a prototype version of improved disclosures developed for the
study. Both groups had the most difficulty understanding the terms of more complex loans, for
which the improved disclosures provided the greatest benefit.
An earlier study used a controlled experiment with more than 500 recent mortgage
customers to examine the impact of mortgage broker compensation (“yield spread premium”)
disclosures proposed by HUD. 	The study found that the disclosures confused consumers,22
leading many to choose loans that were more expensive than the available alternatives, and
created a substantial consumer bias against broker loans, even when the broker loans cost the
same or less than direct lender loans.
III. 	The Proposed Rule
The Board proposes to use its authority to amend the TILA’s implementing regulations to
achieve several important goals. The FTC staff supports the Board’s goals of protecting
consumers in the mortgage market from unfair, abusive, or deceptive lending and servicing
practices while preserving responsible lending and sustainable home ownership; ensuring that
advertisements for mortgage loans are accurate and not false or misleading; and providing
consumers with transaction-specific disclosures early enough to use while shopping.
The Board’s proposal seeks to add: four restrictions on underwriting criteria and loan
terms for a newly-defined category of higher-priced mortgage loans; restrictions on appraisal
practices; restrictions on servicing practices; restrictions on mortgage advertising; a revised
timing requirement for mortgage loan disclosures in refinance loans; and a prohibition on lender
payments to mortgage brokers unless the payments do not exceed the amount of total
compensation that the broker has agreed to in advance with the consumer, less any amounts paid
directly by the consumer. 23
The Commission recognizes the need to proceed carefully in deciding whether any new
restrictions are needed on mortgage lending. The expansion of the subprime credit market has
benefitted many people by providing mortgages to purchase homes and opportunities to

See, e.g., E DWARD M. GRAMLICH , SUBPRIM E M ORTGAGES : AM ERICA ’ S L ATEST BOOM
	24
AND BUST 1-6, 35 (2007). About 55 percent of subprime borrowers in 2006 obtained refinance loans.
Press Release, Mortgage Bankers Association, Percentage of Subprime Loans Used by First-Time Home
Buyers Up During the Second Half of 2006 (July 3, 2007), available at
http://www.mortgagebankers.org/NewsandMedia/PressCenter/55453.htm.
15 U.S.C. § 1639(l).	25
H.R. Rep. 103-652 (1994) (Conf. Rep.).	26
Truth in Lending, Proposed Rule, 73 Fed. Reg. at 1679-80 (explaining federal and state	27
unfairness standards).
Id. at 1686-90.	28
Id. at 1690-93.	29
Id. at 1693-96.	30
Id. at 1696-97.	31
8
refinance. 	Thus, in considering any new regulations, it is important to assess whether such24
proposed restrictions would impede unduly individuals’ access to mortgage credit.
A. 	Protections for Higher-Priced Loans
The Board proposes to add new rules for higher-priced mortgages under Section
129(l)(2)(A) of HOEPA, which provides that it shall prohibit acts and practices in connection
with: (a) mortgage loans that the Board finds to be unfair, deceptive, or designed to evade
HOEPA; and (b) refinancing of mortgage loans that the Board finds to be associated with abusive
lending practices or that are otherwise not in the interest of the borrower. 	Consistent with25
HOEPA’s legislative history, 	the Board considered the current FTC Act standard for unfair and26
deceptive acts or practices, as well as standards applied under similar state statutes. 27
The proposal seeks to establish a new category of “higher-priced mortgages” that would
include virtually all subprime loans. For these loans, the proposal: prohibits a lender from
engaging in a pattern or practice of lending without considering borrowers’ ability to repay the
loan, 	prohibits a lender from making a loan by relying on income or assets that it does not28
verify, 	restricts prepayment penalties on adjustable rate mortgages, 	and requires that the lender29 	30
establish an escrow account for the payment of property taxes and homeowners’ insurance for at
least one year. 31
The Proposed Rule’s restrictions target practices that have resulted in harm to many
subprime mortgage borrowers. Of course, these limitations also may reduce the availability of

See, e.g., GRAMLICH , supra note 24, at 6-7, 17-18.	32
Statement on Subprime Mortgage Lending, 72 Fed. Reg. at 37,570; GRAMLICH , supra	33
note 24, at 6-7, 17-18, 33-35.
Truth in Lending, Proposed Rule, 73 Fed. Reg. at 1700-01.	34
See, e.g., Iowa ex rel. Miller v. Ameriquest Mortgage Co., No. 05771 EQCE-053090	35
(Iowa D. Ct. 2006) (Pls. Pet. 5) (cited by Truth in Lending, Proposed Rule, 73 Fed. Reg. at 1701)
(alleging, among other things, that Ameriquest improperly influenced and accepted inflated appraisals);
Ending Mortgage Abuse: Safeguarding Homebuyers: Hearing Before the Subcomm. on Housing,
Transportation and Community Development of the S. Comm. on Banking, Housing and Urban Affairs,
110th Cong. 2, 4-7 (2007) (testimony of Alan E. Hummel on behalf of the Appraisal Institute, American
Society of Appraisers, American Society of Farm Managers and Rural Appraisers, and National
Association of Independent Fee Appraisers).
9
credit or the choice of loan products for some subprime borrowers or impose costs or
inconveniences upon others. While the FTC staff believes that these restrictions appear to strike
a reasonable balance among these considerations, we encourage the Board to continue to use its
expertise to weigh the potential benefits and costs of the proposed restrictions and to consider
any empirical evidence submitted in response to its Notice of Proposed Rulemaking to confirm
that this balance is reasonable.
The FTC staff agrees with the Board that any restrictions adopted should be limited to
higher-priced loans. The practices appear to have been most prevalent and had the greatest
impact on consumers in the subprime market. 	When these practices cause financial difficulties32
for consumers, subprime borrowers typically have fewer resources to fall back on than do prime
borrowers, especially in the case of ARMs, prepayment penalties, and loans underwritten based
on initially-low teaser payments. 	We therefore believe that it is reasonable for the Board to33
focus on the impact of these practices only in the context of higher-priced loans.
B. 	Appraisal Protections
The Proposed Rule would prohibit lenders or brokers from coercing an appraiser to
inflate the value of a property. 	The FTC staff agrees with the Board that pressuring an appraiser34
to misrepresent the value of a property distorts the lending process and harms consumers. The
Commission staff believes that this is a reasonable regulation that will address a documented
consumer harm 	without imposing undue costs on consumers.35
C. 	Servicing Protections
The Proposed Rule would amend TILA’s implementing regulations to impose certain
restrictions on mortgage loan servicers. Specifically, the proposal provides that no servicer

Truth in Lending, Proposed Rule, 73 Fed. Reg. 1701-02.	36
FTC staff also notes that, to the extent the FRB narrows the proposed rule to address	37
partial payments, it should define “payment” as an amount that is equal to the scheduled monthly
principal and interest amount or one that is short of that amount by a nominal amount. In the
Commission’s law enforcement work, it has seen companies that have had a policy to reject “partial”
payments, when the only reason the payment was “partial” was because of default fees or charges for
ancillary products.
10
shall: (1) fail to credit a consumer’s periodic payment as of the date received; (2) impose a late
fee or delinquency charge if the only late fee or delinquency charge is due to a consumer’s failure
to include in a current payment a delinquency charge imposed on earlier payments; (3) fail to
provide a current schedule of servicing fees and charges within a reasonable time of request; or
(4) fail to provide an accurate payoff statement within a reasonable time of request. 36
Consumers generally have little or no choice as to which company services their
mortgage loans. To avoid a particular servicer, consumers may have to refinance or pay off their
loans, which they may find impossible or unduly costly. It therefore is particularly important to
protect consumers from the acts and practices of servicers that cause or could cause them harm.
As discussed above, the FTC has brought a number of cases challenging the conduct of servicers
as unfair or deceptive. The FTC staff believes that the proposed restrictions will protect
consumers from these practices without imposing undue costs on servicers and, therefore,
supports the proposed restrictions on loan servicing. Nevertheless, the FTC staff believes that it
is critical that the Board clarify that the servicing acts and practices that it has determined to be
unfair or deceptive for purposes of HOEPA do not limit the ability of the FTC to determine that
other acts and practices are unfair or deceptive under the FTC Act.
Although supportive of the servicing protections, FTC staff has concerns that the
proposed requirement to provide a current schedule of servicing fees and charges may not
adequately protect consumers. Providing a schedule of servicing fees and charges provides
consumers with some information, but it does not ensure that consumers get adequate notice of
each fee imposed on their accounts. In law enforcement investigations, FTC staff has seen
monthly statements that lump all fees together. In some cases, these fees are the largest single
amount on the statement other than the “Principal Balance.” Furthermore, servicer fee demands
may include – but not differentiate between – interest-bearing corporate advances (amounts paid
by the servicer on the consumer’s behalf, such as property taxes) and other, non-interest bearing
fees. Thus, the FTC staff believes that the Board should consider the costs and benefits of
requiring servicers to itemize each new fee assessed during a month or other reasonable period of
time. 37
D. 	Mortgage Advertising Regulations
The Proposed Rule introduces a new set of regulations governing advertisements for both

Truth in Lending, Proposed Rule, 73 Fed. Reg. at 1705-08.	38
Id. at 1708-15.	39
Id. at 1704-15; proposed rule §§ 226.16, 226.24.	40
11
open-end 	and closed-end home-secured loans; 	most importantly, it changes the advertising38 	39
requirements for closed-end mortgages. The Proposed Rule strengthens the “clear and
conspicuous” standard under TILA for disclosures in advertisements of open-end home equity
plans and closed-end mortgages. It also regulates the disclosure of introductory or “teaser” rates
or payments to require that they be accompanied by clear and conspicuous information about the
rates or terms throughout the loan’s duration. The Proposed Rule further prohibits seven specific
advertising practices that it identifies as “deceptive or misleading:” (1) advertising as “fixed” a
rate or payment that will change after a period of time unless the ad clearly and conspicuously
discloses that such rate or payment is “fixed” for only a limited period of time; (2) comparing
current rates or payments to the rates or payments under an advertised loan unless the ad
discloses the rates or payments that will apply over the full term of the advertised loan; (3) falsely
representing an advertised loan as being part of a government program or otherwise endorsed or
sponsored by a government entity; (4) falsely representing an advertised loan as affiliated with
the consumer’s current lender; (5) making any claim that an advertised loan will eliminate debt
or result in a waiver or forgiveness of a consumer’s existing loan terms with, or obligations to,
another creditor; (6) using the terms “counselor” or “financial advisor” in an advertisement to
refer to a for-profit mortgage broker or mortgage lender; and (7) advertising mortgages in a
language other than English while giving critical disclosures only in English. 40
As discussed above, the FTC staff has a long history of bringing law enforcement actions
to protect consumers from deceptive mortgage advertising. Based on its law enforcement
experience, the Commission staff believes that consumers are often deceived by the seven
advertising practices the Proposed Rule would prohibit. Moreover, prohibiting these practices is
not likely to prohibit truthful, non-misleading speech that could help consumers make better-
informed decisions concerning mortgage loans. Thus, the FTC staff supports the proposed
restrictions on advertising practices. Nevertheless, the FTC staff believes that it is critical that
the Board clarify that the mortgage advertising acts and practices that it has determined to be
unfair or deceptive for purposes of HOEPA do not limit the ability of the FTC to determine that
other acts and practices are unfair or deceptive under the FTC Act.
E. 	Revised Timing Requirement for Disclosures
Some of the current problems in mortgage markets may be attributable to consumers not
receiving information they need to make well-informed decisions. Information policies that
make mortgage characteristics and costs more transparent to consumers can help to prevent
deception and make markets more efficient.

Id. at 1713.	41
See FTC Staff’s Mortgage Disclosure Study, supra note 20.	42
HUD recently published a Notice of Proposed Rulemaking with modifications to the	43
mortgage disclosures required under the Real Estate Settlement Procedures Act (“RESPA”) and
Regulation X. Real Estate Settlement Procedures Act (RESPA): Proposed Rule to Simplify and Improve
the Process of Obtaining Mortgages and Reduce Consumer Settlement Costs, Proposed Rule, 73 Fed.
Reg. 14030 (proposed Mar. 14, 2008), available at
http://a257.g.akamaitech.net/7/257/2422/01jan20081800/edocket.access.gpo.gov/2008/pdf/08-1015.pdf.
12
The Board’s proposal seeks to ensure that the preliminary TILA disclosures are provided
to refinancing consumers early enough to give them the necessary information to shop for
mortgage loans and compare offers from various originators. The proposal would require that
good faith estimates of the TILA disclosures be delivered or placed in the mail not later than
three business days after the creditor receives the consumer’s written application. 	This proposal41
likely would help consumers shop for refinance mortgages, home equity loans, and reverse
mortgages because they would receive more information about the loans when they had time to
engage in further comparison shopping. Therefore, the FTC staff supports this proposal.
FTC staff also believes that, although consumers will benefit from improvement in the
timing of the disclosures, they also would benefit substantially from improvement in the content
and presentation of the disclosures. As noted above, the Commission recently announced the
results of a study, conducted by staff of its Bureau of Economics, that confirmed the need to
improve mortgage disclosures. 	The study, based on in-depth interviews with several dozen42
recent mortgage customers and quantitative testing with over 800 mortgage customers, found
that: (1) the current federally required disclosures fail to convey key mortgage costs to many
consumers, even for relatively simple, fixed-rate, fully-amortizing loans; (2) better disclosures
can significantly improve consumer recognition of mortgage costs; (3) both prime and subprime
borrowers failed to understand key loan terms when viewing the current disclosures, and both
benefitted from improved disclosures; and (4) improved disclosures provided the greatest benefit
for more complex loans, for which both prime and subprime borrowers had the most difficulty
understanding loan terms.
The results of the FTC staff study indicate that consumers in both the prime and
subprime markets would benefit substantially from a comprehensive reform of mortgage
disclosures that created a single, comprehensive disclosure of all key costs and terms of a loan,
presented in language consumers can easily understand and in a form they can easily use, and
provided early in the transaction to aid consumer shopping for the best loan. The study results
also are consistent with the FTC staff’s view that consumer testing often is critical in the
development and evaluation of consumer disclosures. Thus, the Commission staff also
recommends that the Board and HUD 	consider undertaking a more comprehensive effort to43

See Predatory Mortgage Lending Practices: Abusive Uses of Yield Spread Premiums:	44
Hearing Before the Senate Committee on Banking, Housing and Urban Affairs, 107 	Cong. 5 (2002)	th
(statement of Susan E. Woodward, Ph.D., Chairman of Sand Hill Econometrics, Inc.).
13
improve federal mortgage disclosures, including evaluating whether a single mortgage disclosure
document that consolidates information on the key costs and features of a mortgage would
benefit consumers. The FTC staff would be pleased to work with the Board and HUD in such an
effort to improve federal mortgage disclosures.
IV. 	Broker Compensation Proposal
The FTC staff supports the Board’s goal of making mortgage shopping easier but urges
the Board to re-consider the Proposed Rule’s provisions on broker compensation disclosures.
FTC staff research has shown that broker compensation disclosures are likely to harm consumers
and competition. Alternative disclosures that clarify the role of mortgage originators, applied
equally to all sectors of the market, would provide greater benefit to consumers and avoid
adverse effects on consumers and competition.
A. 	Background
A mortgage broker often receives compensation from a lender in the form of a yield
spread premium (“YSP”). A YSP is paid to a broker if the loan is originated at an interest rate
higher than the minimum rate necessary to obtain the loan, and it reflects the higher value of the
loan arising from the higher rate. Direct lenders that originate their own loans also earn
premiums from loans originated at higher rates. Premiums earned by direct lenders may be
passed on as compensation to the loan officers who made the loans or accrue as higher profits for
the lenders.
A potential benefit of YSPs, if passed on to the borrower, is that they can be used to
reduce up-front origination charges that otherwise would be paid by the borrower in cash at
closing. The up-front costs are spread over the life of the loan through the higher monthly
payments that arise from the higher interest rate. This option can be particularly beneficial for
borrowers who do not have sufficient savings to cover the up-front charges in cash or who prefer
to avoid a large up-front cash payment for other reasons. Borrowers who do not intend to hold
the mortgage for a long time – because they foresee moving in the near future, for example – will
be less impacted by future higher monthly payments and may wish to invest less cash up front.
Some experts also have noted that, in refinancing transactions, using YSPs to reduce up-front
costs can provide tax benefits to borrowers because the resulting higher interest payments are
tax-deductible, while closing costs paid in cash at settlement are not. 44

Truth in Lending, Proposed Rule, 73 Fed. Reg. at 1698-1700; proposed rule § 226.36(a).	45
Id. at 1699-1700.	46
FTC Staff’s Mortgage Broker Compensation Study, supra note 20. The FTC staff also	47
submitted a comment on the HUD proposal. FTC Staff Comment Before the Department of Housing and
Urban Development on Proposed Amendments to the Regulations Implementing the Real Estate
Settlements Procedures Act (Oct. 28, 2002) (Docket No. FR-4727-P-01), available at
http://www.ftc.gov/be/v030001.pdf.
14
The extent to which YSPs are passed along to consumers to reduce closing costs differs
across different brokers and consumers and depends, in part, on the level of competition in the
market and how well consumers negotiate for the best deal. Proposals to disclose broker
compensation are generally motivated by a concern that mortgage brokers are placing borrowers
in loans with higher rates than necessary and using the YSPs to increase their compensation
rather than reduce the up-front charges paid by the borrowers. When this occurs, borrowers pay
higher interest rates without receiving a compensating benefit of lower up-front costs. Broker
compensation disclosures are intended to help consumers more readily recognize the cost of a
loan (particularly, high-cost loans), more effectively shop for low-cost loans, and better negotiate
for lower loan costs.
B. 	Proposed Regulation of Broker Compensation Payments
The Proposed Rule would prohibit lenders from paying a YSP to a mortgage broker
unless the payment does not exceed the amount of total compensation that the broker has agreed
to in advance with the consumer. Lenders could demonstrate compliance by obtaining a copy of
the broker-consumer agreement and ensuring that their payment to the broker does not exceed the
amount stated in the agreement, reduced by any payments made directly by the consumer. 45
The broker’s agreement with the consumer also must state that the consumer will pay the
entire compensation even if all or part is paid directly by the lender, and that a lender’s payment
to a broker can influence the broker to offer the consumer loan terms or products that are not in
the consumer’s interest or are not the most favorable the consumer could obtain. The broker
must enter into this agreement before the consumer has paid any fee or submitted a written
application, whichever is earlier. Model language for these disclosures will be provided in FRB
staff commentary. The requirement applies to both prime and subprime loans but not to lender
payments to their own loan officers or other employees in connection with loans made directly to
consumers.46
C. 	Analysis and Recommendations
The FTC staff has conducted a study of broker compensation disclosures that were
proposed by HUD in 2002. 	In the study, FTC staff noted that the potential benefit of the47

Consumers, particularly those who intend to hold the mortgage for the full term, also	48
may find it useful to comparison shop on the annual percentage rate (“APR”). The APR states the total
credit cost of the loan, including interest and other finance charges, as a yearly rate, taking into account
the timing of the payments over the life of the loan.
Indeed, an FTC staff study, described in more detail below, found that broker	49
compensation disclosures led many consumers to choose loans that were more expensive than the
available alternatives and created a substantial consumer bias against broker loans. See infra note 51 and
accompanying text.
15
proposed compensation disclosures was not readily apparent. Seller compensation is rarely
disclosed in consumer markets. This is not surprising because consumers generally base their
purchase decisions on the price they must pay. Consumers comparison-shop on prices to find the
best deal, and retailers display and advertise their prices to attract consumers.
Consumers should shop in the same way when seeking the lowest cost mortgage that fits
their needs and circumstances. Consumers should comparison shop on the costs they must pay
for the loan – the interest rate, monthly payments (both current and future), and up-front costs –
not how much the broker is earning on the transaction. 48
Focusing consumers on the compensation that loan originators receive can confuse
consumers about the price of loans. 	This is particularly the case when some loan originators,49
but not others, are required to disclose their compensation. A broker and a direct lender may be
offering the same loan, at the same interest rate, with the same closing costs, and earning the
same compensation. However, under the Proposed Rule, only the broker would be required to
disclose its compensation and warn consumers that the compensation may lead them to offer loan
terms that are not in the consumer’s interest or the most favorable the consumer could obtain.
Such disclosures will make broker loans appear to be more expensive or less desirable than
identical, or even more costly, direct lender loans. This may lead some consumers to select more
expensive loans than they otherwise would have selected in the absence of the compensation
disclosure.
Compensation disclosures also could have adverse effects on market efficiency and
competition. A consumer focus on originator compensation rather than consumer costs might
distort consumer choice away from the lowest cost providers, leading to less efficient, rather than
more efficient outcomes. A consumer focus on compensation could reward less efficient, higher
cost originators and lead to less efficiency in the market, which ultimately could result in higher
prices for consumers. The asymmetric application of the proposed disclosures, which would
apply only to mortgage brokers but not direct lenders, will aggravate any anticompetitive effects.

See FTC Staff’s Mortgage Broker Compensation Study, supra note 20.	50
For example, in one part of the study, groups of participants were shown different cost	51
disclosures for two identical loans. In the two groups that were shown cost information that did not
include a broker compensation disclosure, 95 and 99 percent of the participants correctly recognized that
both loans cost the same. However, in the three groups shown cost information that included a broker
compensation disclosure for one of the loans, only 49-57 percent of the participants recognized that both
loans cost the same. Moreover, 41-50 percent of the participants in the latter groups mistakenly believed
that one of the two identical loans was less expensive than the other, with 75-90 percent of these
believing that the direct lender loan (which did not disclose compensation) was less expensive than the
broker loan (which did disclose compensation). The broker compensation disclosure induced an even
stronger bias against the broker loan when participants were asked which loan they would choose if
shopping for a mortgage. FTC Staff’s Mortgage Broker Compensation Study, supra note 20, at ES5-7,
25-27, 29-31.
HUD’s tests are available at its webpage, Testing HUD’s New Mortgage Disclosure	52
Forms With American Homebuyers (last visited Mar. 14, 2008), available at
http://www.huduser.org/publications/hsgfin/goodfaith.html.
Truth in Lending, Proposed Rule, 73 Fed. Reg. at 1699.	53
16
As noted above, in 2004 the FTC released a Bureau of Economics staff study that used a
controlled experiment with over 500 recent mortgage customers to examine how well consumers
could understand several variations of a broker compensation disclosure proposed by HUD.50
The study found that the compensation disclosures confused consumers, leading many to choose
loans that were more expensive than the available alternatives, and created a substantial
consumer bias against broker loans, even when the broker loans cost the same or less than direct
lender loans. 	The FTC staff concluded, based on the results of its study, that broker51
compensation disclosures were likely to harm both consumers and competition in the mortgage
market. 	Subsequent consumer tests of the disclosures conducted by HUD produced similar
results. 52
A key argument used to support broker compensation disclosures is that many consumers
purportedly view mortgage brokers as trusted advisors who shop for the best loan for the
consumer. 	But broker compensation disclosures, particularly ones that create consumer53
confusion, are not the appropriate response to this problem. A better remedy would be to require
a disclosure that clarified the role of brokers, alerting consumers to the fact that, just like direct
lenders, brokers seek to maximize their own profits and may not provide the least expensive loan
for which the consumer qualifies. This less restrictive remedy would address the problem
without creating consumer confusion or harming competition. Moreover, consumers would
benefit most if such a disclosure were required for all mortgage originators, lenders as well as
brokers. Indeed, in the study the Board cites on this issue, 52 percent of older borrowers with
lender-originated loans said that they had relied “a lot” on the lender to find the best mortgage for
them, which is not strikingly different from the 70 percent with broker-originated loans who

Kellie K. Kim Sum & Sharon Hermanson, Experiences of Older Refinance Mortgages	54
Loan Borrowers: Broker- and Lender-Originated Loans, 83 DATA DIGEST 3 (Jan. 2003) (AARP Public
Policy Inst.), available at http://assets.aarp.org/rgcenter/post-import/dd83_loans.pdf.
F ANNIE M AE , UNDERSTANDING AM ERICA ’ S HOMEOWNERSHIP GAPS , 2003 F ANNIE M AE
	55
NATIONAL HOUSING S URVEY 7 (2004), available at
http://www.fanniemae.com/global/pdf/media/survey/survey2003.pdf.
Indeed, the largest case of deceptive lending challenged by the Commission involved a	56
direct lender. See FTC v. Associates First Capital Corp., No. 01-00606 (N.D. Ga. 2001).
17
said the same. 	Similarly, in a Fannie Mae study, only 59% of respondents knew that housing54
lenders are not required by law to give them the best possible rates on loans. 	These55
misperceptions could harm borrowers obtaining loan prices from either brokers or lenders. 56
The FTC staff understands that the Board is conducting consumer research on the
proposed disclosures and believes that the results of this research are likely to be useful in
evaluating the effectiveness of the disclosures. Mortgage broker compensation disclosures
should not be adopted unless reliable, quantitative consumer research demonstrates that the
disclosures will provide benefits to consumers without imposing the adverse effects on
consumers and competition found in earlier studies. The FTC staff also suggests that, as the
Board evaluates alternatives, it consider, and possibly test, whether other disclosures, such as
those suggested above, would be more beneficial for consumers.
V. 	Conclusion
The FTC staff supports initiatives to improve the mortgage lending process for
consumers. These initiatives are particularly important in light of current problems that mortgage
borrowers, especially subprime borrowers, are experiencing. The FTC staff hopes that this
comment is useful to the FRB in its assessment of the impact of the Proposed Rule on
consumers.

18
Respectfully submitted,
__________________________
Lydia B. Parnes, Director
Peggy L. Twohig, Associate Director
Thomas B. Pahl, Assistant Director
Allison I. Brown
Julie G. Bush
Bureau of Consumer Protection
__________________________
Michael R. Baye, Director
James M. Lacko
Bureau of Economics
__________________________
Maureen K. Ohlhausen, Director
Christopher M. Grengs, Attorney Advisor
Office of Policy Planning