PART 1004—ALTERNATIVE MORTGAGE TRANSACTION PARITY (REGULATION D) Authority: 12 U.S.C. 3802, 3803; 15 U.S.C. 1604, 1639b; Pub. L. No. 111-203, 124 Stat. 1376. Source: 76 FR 44242, July 22, 2011, unless otherwise noted. § 1004.1 Authority, purpose, and scope. (a) Authority. et seq., et seq. (b) Purpose. (c) Scope. § 1004.2 Definitions. For purposes of this part: Alternative mortgage transaction (1) That is secured by an interest in a residential structure that contains one to four units, whether or not that structure is attached to real property, including an individual condominium unit, cooperative unit, mobile home, or trailer, if it is used as a residence; (2) That is made primarily for personal, family, or household purposes; and (3) In which the interest rate or finance charge may be adjusted or renegotiated. Creditor Housing creditor (1) A depository institution, as defined in section 501(a)(2) of the Depository Institutions Deregulation and Monetary Control Act of 1980; (2) A lender approved by the Secretary of Housing and Urban Development for participation in any mortgage insurance program under the National Housing Act; (3) Any person who regularly makes loans, credit sales, or advances on an account secured by an interest in a residential structure that contains one to four units, whether or not the structure is attached to real property, including an individual condominium unit, cooperative unit, mobile home, or trailer, if it is used as a residence; and (4) Any transferee of a party listed in paragraph (c)(1), (2), or (3) of this section. State State law § 1004.3 Preemption of State law. Pursuant to 12 U.S.C. 3803, a State-chartered or -licensed housing creditor may make, purchase, and enforce alternative mortgage transactions in accordance with § 1004.4(a) through (c) of this part (as applicable), notwithstanding any provision of State law that restricts the ability of the housing creditor to adjust or renegotiate an interest rate or finance charge with respect to the 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. § 1004.4 Requirements for alternative mortgage transactions. (a) Mortgages with adjustable rates or finance charges and home equity lines of credit. (1) If the transaction is subject to 12 CFR 226.5b, the creditor must comply with 12 CFR 226.5b(f)(1). (2) For all other transactions, the creditor must use either: (i) An index to which changes in the interest rate are tied that is readily available to and verifiable by the borrower and beyond the control of the creditor; or (ii) A formula or schedule identifying the amount that the interest rate or finance charge may increase and the times at which, or circumstances under which, a change may be made. (b) Renegotiable rates for renewable balloon-payment mortgages. (1) Any action or inaction by the consumer materially and adversely affects the creditor's security for the transaction or any right of the creditor in such security; (2) There is a material failure by the consumer to meet the repayment terms of the transaction; (3) There is fraud or a willful or knowing material misrepresentation by the consumer in connection with the transaction; or (4) Federal law dealing with credit extended by a depository institution to its executive officers specifically requires that as a condition of the extension the credit shall become due and payable on demand, provided that the creditor includes such a provision in the initial agreement. (c) Requirements for high-cost and higher-priced mortgage loans. (2) If an alternative mortgage transaction is subject to 12 CFR 226.35, the creditor must comply with 12 CFR 226.35. (d) Other applicable law. (e) Reductions in interest rate or finance charge. 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. 2. Subsequent modifications and other actions. 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. 2. Examples of alternative mortgage transactions. 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. 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. See § 1004.3 Preemption of State Law 1. Scope of State laws. 2. Examples of State laws that are preempted. 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. 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. 2. Index beyond creditor's control. Wall Street Journal, 3. Publicly available. 4(c) Requirements for High-Cost and Higher-Priced Mortgage Loans 1. Prepayment penalties. See See 4(d) Other Applicable Law 1. Other applicable law.